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UAE VAT Reverse Charge Mechanism: How It Works?

UAE VAT Reverse Charge Mechanism: How it Works?

Consider a situation in which there is a bulk buyer who is about to buy something from a bulk seller. The later can be a retailer of even the manufacturer himself. In this case, the seller is bound to pay the government a certain percentage which is calculated in the form of Value Added Tax (VAT). The impact generated by the latest VAT returns in UAE have given an enormous boost to the economy.

After foreseeing the wonders UAE VAT returns can do in future, several companies are registering under VAT. During all these transactions, there arises a situation where a business registered in UAE, has to buy something from a company outside of it. What happens then? Let’s find out!

VAT Reverse Charge Mechanism (VAT RCM)

What happens when the seller is not registered in the UAE and the deal is still going on? At this point, there arises a conflict between the buyer and the government. In order to resolve this conflict, there’s been introduced another procedure known as the Reverse Charge Mechanism. According to Reverse Charge Mechanism, it’s not the seller who will be filed under the VAT returns in UAE, rather the VAT will have to be paid by the buyer.

Soon after the implementation of RCM UAE, it garnered tremendous appreciation and now it’s a part of every VAT and GST based regime on a global scale. In some parts of the world, it is also referred to as the offset tax of the self-assessed taxation. The sole condition which must be understood here is that the seller’s business should not in any way be traced to UAE and its entire periphery is situated elsewhere.

Let’s find out why exactly the VAT can’t be charged from the seller when his business is outside of UAE:

  • The seller’s business is not registered in UAE so he or his organization doesn’t fall under UAE VAT returns.
  • The taxation authorities can’t reach out to the seller asking him for paying tax by reaching out on a foreign soil.

What is Reverse Charge Mechanism UAE?

It so happens that buyer is charged with a responsibility to report the VAT on purchases and VAT on sales to the tax authorities. These terms can also be referred to as the Input VAT and Output VAT respectively. Once the authorities receive the numbers for a certain quarter, they reply by sending a detailed document mentioning the tax amount to the buyer.

The background of Reverse Charge Mechanism leads back to the point when VAT returns in UAE were being given serious thoughts. Mostly, UAE’s only export comprise oil and there are a lot of items both in raw material and in the form of products which the constituent countries need to import. In order to facilitate the economy, VAT was introduced and now is being implemented. The implementation of UAE VAT returns could’ve jeopardized the imports if it wasn’t for Reverse Charge Mechanism. Now with both the systems working side by side, economy is booming and business is flourishing.

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