Reverse charge is a mechanism where the buyer of the goods or recipient of services is obligated to pay the tax. In KSA, tax is imposed on all goods or services received by taxable persons in the kingdom.
A reverse charge mechanism is a mechanism in which a taxable customer is obligated to pay the tax due on behalf of the supplier and is liable for all the obligations related to the payment of such tax.
For e.g., AI Kiasa, a multinational company with various business dimensions across apparel and electronics, have given a contract to Indian software company Dymphy for making a specialised antivirus for securing its systems. The quote was for SAR 10000. As AL Kiasa is importing services from a supplier outside KSA, a reverse charge will apply. Being a taxable person in KSA, AL Kiasa will be liable to report and pay tax.
The reverse charge mechanism is only applicable on services given by a non-resident to a taxable customer in the territory of GCC states. In addition to this, a reverse charge will apply if a taxable person receives goods or services from any other person in the member states of GCC and that goods and services are subject to tax.
Some examples of services where a reverse charge applies are legal and professional services, membership services and advertising services.
Reverse charge is not applicable on:
The unified VAT agreement contains rules that help determine the VAT liability in general cases (cases of one time supply) and special cases (continuous supplies).
General case- In such a case, the taxable person has to make tax payment earliest of the following dates.
Here the date of supply might be earlier than the date when the actual delivery of goods is done in cases where the invoice is issued beforehand (before actual delivery of goods).
These rules are also applicable in cases of reverse charge mechanisms.
The reporting of the VAT liability should be done in the period in which the date of supply falls, and the payment for the same should be made in the subsequent periods. VAT should be mandatorily reported in the tax period in which the date of supply falls, and payment should be made in subsequent periods.
In the case of the reverse charge mechanism, the VAT account should be entered in field 9 of the VAT return form. The VAT return form automatically assumes the input tax is fully deductible on the supplies, and therefore, the same amount is entered in the input and output tax column.
In general cases, a taxable person deducts Input tax in the period in which supply takes place, i.e. the date when goods or services are received, and a tax invoice is issued to the taxable person.
In the case of the reverse charge mechanism, the input tax can only be deducted if the customer has a valid tax invoice or any relevant documents for non-resident suppliers.
The taxable customer need not sell the goods or services purchased to deduct input tax.
Suppose the purchased goods and services by a taxable person are used by them in making further supplies. In that case, they are also eligible for input tax deduction provided he has reported reverse charged VAT.
According to the regulations, the obligation to pay the tax in case of supplies received from non-resident suppliers lies on the taxable customer himself. Failure to pay the tax and comply with obligations in the correct period can lead to heavy penalties.
According to the regulations, the taxable person can deduct input tax after the period in which the date of supply falls. However, the tax cannot be deducted after five years following the supply period.