In a normal supply transaction, an organization is required to pay value added tax (VAT) to the government on the supplies made to its customers.
In the context of the UAE, reverse charge is only applicable when purchases are made outside the UAE.
If all purchases are made locally, the reverse charge mechanism is not applicable. it applies when imports are made from outside UAE and the seller is from another country, which may or may not have a business in the UAE.
Since a seller does not have business in UAE, it will be difficult for the tax authorities to track these sellers or suppliers. Reverse Charge Mechanism eliminates the obligation for the overseas seller to register for VAT in the UAE. Hence, the buyers who are residents of UAE are made responsible to charge VAT on a reverse charge basis.
In the UAE VAT, the Reverse Charge Mechanism is applicable while importing goods or services from outside the GCC countries. Under this, the businesses will not have to physically pay VAT at the point of import.
The responsibility for reporting of a VAT transaction is shifted from the seller to the buyer; under Reverse Charge Mechanism. Here the buyer reports the Input VAT (VAT on purchases) as well as the output VAT (VAT on sales) in their VAT return for the same quarter.
The reverse charge is the amount of VAT one would have paid on that goods or services if one had bought it in the UAE. The importer has to disclose the amount of VAT under both Input VAT as well as Output VAT categories of the VAT return of that quarter.
So, this is the mechanism under which the recipient of goods or services is required to pay VAT instead of the supplier, when the supplier is not a taxable person in the member state where the supply has been made. The Reverse Charge moves the responsibility for the recording of a VAT transaction from the seller to the buyer of a good or service. Normally, the supplier pays the tax on supply (i.e.it is a sale order for the supplier) however in certain cases (IMPORTS), the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed, which is why it is called reverse charge. The receiver (I,e, the buyer, will later sell on the goods to the end customer and will charge VAT on that sales value and will reclaim the VAT is has paid on import.
