Reverse Charge Mechanism is a mechanism under which the recipient of goods or services is required to pay VAT instead of the supplier. It is applied as per Article 48 of Federal decree-law no. (8) Of 2017 on value added tax.
It applies to the following:-
- If the Taxable Person imports Concerned Goods or Concerned Services for the purposes of his Business, then he shall be treated as making a Taxable Supply to himself, and shall be responsible for all applicable Tax obligations and accounting for Due Tax in respect of these supplies with an exception specified by the Executive Regulation of this Decree-Law.
- If a Registrant makes a Taxable Supply in the State to another Registrant of any crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons, and the Recipient of these Goods intends to either resell the purchased Goods as crude or refined oil, unprocessed or processed natural gas, or any hydrocarbons, or use these Goods to produce or distribute any form of energy, the following rules shall apply:
- The Registrant making the Supply shall not charge Tax on the value of the supply of the Registrant making the Supply shall not charge Tax on the value of the supply of the Goods referred to in this paragraph.
- The Recipient of the Goods shall calculate the Tax on the value of the Goods supplied thereto and shall be responsible for all applicable Tax obligations and for calculating the Due Tax in respect of such supplies.
- If the supplier mentioned in (5) above is not aware that the Recipient of Goods was not registered at the Date of Supply, the supplier and the Recipient of Goods shall be jointly and severely liable for any Due Tax and relevant penalties in respect of the supply.
Reverse charge is applicable to (1) in above except when final destination of imported goods is another Implementing State. It is also applicable to (2) in above except when supply is taxable at 0%, supply of goods or services other than the goods in (2) above, no written confirmation by recipient for resale and no written confirmation by recipient that he is registrant.
In order to make the concept of Reverse charge mechanism clearer, let us understand this with an example: B-One Spare Ltd, a registered dealer in spare parts and accessories in Dubai imported spare parts worth AED 5500 from Fast Motors Ltd, located in India.