When importing to UAE, the Reverse Charge Mechanism is applicable if the goods or services are imported from outside the GCC countries.
Normally, if a registered supplier makes a taxable supply then he needs to charge VAT and pay the same to the government. But, in case of reverse charge mechanism the responsibility of paying taxes is shifted from the supplier to the buyer.
Reverse charge mechanism was introduced in order to ensure that VAT is being collected on the supply of goods and services whose supplier is not a VAT registrant in UAE, but the supply has been made in UAE. Thus, the recipient or the buyer will be responsible to pay VAT to the government.
Following supplies will be liable to pay VAT on reverse charge mechanism according to the UAE VAT law:
- Imports of concerned goods or services for business purpose
- Taxable supply of unprocessed or processed natural gas, any crude or refined oil, or any hydrocarbons to resell or to produce and distribute any form of energy by registered supplier to registered buyer in the State of UAE
- Supply of goods or services by a supplier who does not have a place of residence in the state to a taxable person who is a resident of UAE.
Reverse charge and forward charge mechanisms
The difference between reverse charge and forward charge can be better explained with the following illustrations: FIG 1: FORWARD CHARGE MECHANISM
In Fig 1:
- Firm A collects VAT of 5% from the supplier that is Firm B
- Firm B can claim the input tax and can adjust against the output tax liability
FIG 2: REVERSE CHARGE MECHANISM
In Fig 2:
- Firm A does not charge VAT since they are not registered in UAE
- Firm B has to pay 5% VAT to the government
- Firm B can also claim input tax and can adjust against the output tax liability
Thus the concept of reverse charge mechanism helps to ease the difference between local and international suppliers.
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