Under what conditions is reverse charge applicable?

• Reverse charge is applicable on both goods and services, provided they are purchased from outside the UAE. Reverse charge is not applicable on domestic purchases.
• Reverse charge is applicable when a business owner in the UAE purchases goods or services that are imported from outside the UAE. The seller must be located in another country, and they may or may not have a business in the UAE.
• The buyer must be registered under the VAT regime.

To understand these conditions, let us look into the procurement process of a textile company owned by Ms. Aafiya.

Case 1:

• Ms. Aafiya owns a textile retail shop in the UAE and is a VAT registrant. She sometimes procures pashmina (which is subject to VAT) from a retailer in Kashmir, India. Mr. Aboud, the retailer who sells pashmina to Ms. Aafiya, is not registered for VAT in the UAE, so he doesn’t have to file taxes for the supply. Ms. Aafiya will have to file taxes through reverse charge for the pashmina because the supply is from outside the UAE.

Case 2: 

• Sometimes, Ms. Aafiya uses the services of a freelance accountant, Mr. Aadil, who is a resident of Abu Dhabi. The supply of services from a non-resident of the UAE is subject to VAT under reverse charge, so Ms. Aafiya will have to pay the VAT for the services provided by Mr. Aadil.