The EU created the concept of Reverse Charging VAT in order to simplify trade within the Single Market. The Reverse Charge moves the responsibility for the reporting of a VAT transaction from the seller to the buyer of a good or service. This reduces the requirement for sellers to register for VAT in the country where the supply is made.
When a transaction is subject to Reverse Charge, the recipient of the goods or services reports both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return. These two declarations offset each other from a cash payment point of view, but the authorities have full visibility of the transactions.
Most sales between EU member states will be subject to a reverse charge and there are also many instances where a domestic reverse charge rule exists within specific EU member states.
What is VAT Reverse Charge Mechanism?
Under reverse charge mechanism, on certain notified supplies, the recipient or the buyer of goods or services is responsible to pay the tax to the Government, unlike in the forward charge, where the supplier is liable to pay the tax. The key change is the shift in the responsibility of paying tax, which is moved from the supplier to the buyer.
When is reverse charge applicable?
Reverse charge is applicable on both goods and services. If a taxable person in one GCC member state receives a supply from a business owner who resides in another GCC member state, then the receiver will have to pay VAT under the reverse charge mechanism. If a taxable person receives a supply from a person outside the GCC, he will have to pay VAT according to the reverse charge mechanism. Situations where the Reverse Charge will apply can be simply pointed as:
1. Services supplied by an Electronic Commerce Operator will attract reverse charge and they will be liable to pay GST. If the assessee has no physical presence in the taxable area, then the representative of such e-commerce operator will be liable to pay tax. If there is no representative, then the assessee has to appoint one who will be liable to pay GST.
2. If the registered dealer is buying goods or services from an unregistered dealer then, the registered dealer will be liable to pay tax on supply.
3. All other categories of supplies will be notified by Central or State government that will fall under reverse charge.
Why VAT Reverse Charge Mechanism?
In order to ensure that the VAT is collected on the supply of goods or service where the supplier is not a taxable person and the supply has been made in the state of UAE, the government has introduced the concept of reverse charge mechanism. Due to this, the recipient or the buyer is treated as a person making taxable supplies to himself and will be responsible to pay VAT to the government.
What are the supplies liable for Reverse Charge VAT in UAE?
In UAE VAT, broadly the import of concerned goods or services and supply of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons for resale or to produce and distribute any form of energy are under reverse charge VAT. The UAE VAT Law has listed the following supplies which will be liable for VAT on reverse charge mechanism, provided the applicable conditions are met as prescribed in UAE Executive Regulations:
1. Imports of concerned goods or concerned services for business purpose
2. Taxable supply of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons for resale or to produce and distribute any form of energy by registered supplier to registered buyer in the State of UAE
3. Supply of goods or services by a supplier who does not have a place of residence in the state to a taxable person who has a place of residence in the State of UAE. All of the above mention supplies are liable to reverse charge mechanism. However, for each of the above supplies, specific conditions are mentioned in the UAE VAT Executive Regulations which need to be full filled, to be liable for reverse charge VAT.
What are the Requirements under the reverse charge mechanism?
1. The receiver of goods and/or services must be registered under the GST.
2. Wherever reverse charge applies, the supplier of the goods or services must clearly mention on their invoice that the tax for that transaction is payable through reverse charge.
3. The time of supply under reverse charge will be the earliest of the following dates:
. date of receipt of goods
. date of payment
4. 30 days from the invoice date (for goods) or 60 days from the invoice date (for services).
If none of the above dates apply, the time of supply is the date of entry into the books of the receiver.