Reverse Charge – A Comparison Walkthrough

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Reverse charge

Under UAE VAT, the buyer of goods or services is responsible to pay tax to the Government for specified list of supplies under reverse charge mechanism (‘RCM’), as per the regulations defined and clarified by the Zakat, Tax and Customs Authority (‘ZATCA’), in accordance with the Common VAT Agreement of the States of the Gulf Cooperation Council and KSA VAT Law.

Considering the global phenomena of RCM in tax application, it becomes interesting to check and deliberate different scenarios in other countries vis-à-vis UAE, to have an understanding what could be the possible approaches which Government may leverage from other regions.

 Scenario 1 - Supply of services by non-resident person to registered person

a) UAE

Under UAE VAT law, when a non-resident supplier supplies to the registered person, the registered person is liable to pay tax under RCM. Under UAE VAT norms, it is deemed that the registered person has paid VAT and claimed credit of the same (subject to fulfilment of conditions of availment of credit). There is no specific requirement of payment of tax under RCM in UAE VAT norms. 

b) India

Under India Goods and Service Tax law (‘India GST’), an importer of services is required to pay due GST on import of services in India under RCM mechanism, however, unlike UAE, Indian importers are required to pay RCM in cash and subsequently, avail credit of the same upon payment.

 c) Bahrain

Under Bahrain VAT norms, in alignment with UAE VAT laws, it is deemed that the registered person had paid tax under RCM and input VAT credit of the same is availed, without the requirement to discharge RCM liability in cash first.

 Derivation

Considering that there is no cash outflow requirement in regions like UAE and Bahrain, it shall be interesting to see if a country like India can also get away with the cash discharge of RCM tax in future. The impact of such requirement is directly related to the cash position of Revenue in respective regions. As there’s an enormous funds of Government which are flowing from sources of VAT / GST paid under reverse charge, it shall be relevant to the economical status if the decision of self-accounting of RCM gets introduced on a global level.

This not only would have a potential impact on the tax cycle but also on the liquidity of funds of Revenue department, as there shall not be any inflow of cash from RCM tax to the Government.

 Scenario 2 - Supply of electronic goods for resale or further manufacture  - Electronic sector

a) UAE

Under UAE VAT law, when a specified electronic device or accessory thereof is sold to registered person for further sale or manufacture, the registered person is liable to pay tax under RCM.

b) India

Under India GST, currently sale of electronic goods is within the ambit of forward charge mechanism and the sellers charge GST on their bills and recover from customers.

c) Bahrain

Under Bahrain VAT as well, sale of electronic goods is not under reverse charge, and the sellers are charging GST on their bills and recovering from customers.

 Derivation

Considering that specified electronic goods purchase is currently under RCM in UAE, it becomes crucial for the electronics sector to analyse the implications of applicability of RCM vis-à-vis other regions where tax is still charged by sellers only under forward charge and this is recovered from customers (in case of B2B supplies). This aspect can also have an impact on final pricing decisions of electronic items considering the variation of tax components.

 Scenario 3 – Local supplies subject to reverse charge – Advertising sector

a) UAE

Under UAE VAT law, specified services when provided by local registered seller to registered person are subject to reverse charge. These services primarily include legal services, membership services and advertising services.   

b) India

Under India GST as well, domestic reverse charge applies, i.e., local services are subject to payment of GST by service recipient. Currently, these services include legal services, goods transport services, director services, etc. Advertising services are currently under forward charge mechanism only.

c) Bahrain

Under Bahrain VAT as well, advertising services are not subject to reverse charge, however, electronic services or e-goods or e-services are subject to VAT. If a registered person sells digital services or e-services, they are required to apply VAT on the same (considering other conditions are met) and such VAT is recovered from customers and paid to the Government.

 Derivation

The dynamic and enormous industry of electronic services or digital goods is also not unimpacted with ever changing VAT / GST norms. As it can be clearly derived that in some regions, advertisement through online or offline mode is subject to reverse charge, whereas in some regions, the digital goods are subject to VAT under forward charge. It becomes crucial to analyse the impact for this sector before taking any country specific existence or expansion considering the reverse charge norms.

Disclaimer: The content on this website is provided for general informational purposes only. It is not intended as professional advice and should not be construed as such. The information is based on the knowledge and experience available at the time of writing and is subject to change