In the United Arab Emirates (UAE) Value Added Tax (VAT) Law, whenever a registered supplier makes a taxable supply, they must charge VAT, collect it and pay it to the government. This mechanism is known as the forward charge mechanism.
For example, ABC Television Ltd sold an LED worth AED 10000 to Ahmad Associates Ltd and collected VAT of AED 1500 at 15%. The VAT of AED 1500 is collected on a forward charge basis.
However, the UAE's VAT Law and Executive Regulations notified specific supplies under the Reverse Charge Mechanism (RCM). This article explains all about the Reverse Charge Mechanism under UAE VAT.
As mentioned above, the UAE VAT law notifies specific supplies under RCM. When a transaction involves notified supplies, the buyer of goods or recipient of services is responsible for paying the tax to the government, unlike the forward charge, where the supplier is liable to pay the tax.
The significant change in RCM is the responsibility to pay tax shifts from supplier to buyer.
The government has introduced the concept of the reverse charge mechanism to ensure that the VAT is collected when a supplier is not a taxable person; however, the supply has been made in the state of UAE.
Accordingly, the buyer or recipient is considered a person making taxable supplies and will be held responsible for paying VAT to the government.
The UAE VAT Law has listed a few supplies that fall under the reverse charge mechanism and notified a few conditions to be met under the UAE Executive Regulations.
The below supplies fall under the reverse charge mechanism:
It is to be noted that each of the above supplies comes with specific conditions to meet under UAE VAT Executive Regulations to be liable for reverse charge VAT.
Under RCM, the buyer of goods or recipient of services will be liable to pay tax to the government. Thus, the concerned person must discharge the below responsibilities under the reverse charge mechanism:
ABC Ltd, a registered dealer in Televisions in Dubai, imported TV parts worth AED 1000 from XYZ Components Ltd in India.
Here, ABC Ltd, being a registered importer, is required to pay VAT @ 15% on AED 1000, i.e. AED 150, to the government.
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