Reverse Charge Mechanism- Accounting Entries

Reverse Charge Mechanism is a system in which the responsibility of paying tax to Government shifts from seller to buyer. In forward charge mechanism, the supplier is liable to pay the tax. This mechanism of reverse charges applies on the import of goods and services into UAE as well. The importer or the receiver of goods and services will have to pay tax to the government.

Let us first see the accounting entry of a simple purchase

In books of taxable person
Business buys goods for cash:
Cost of Goods for AED: 3000
Vat @5% AED 150

Entry:

Purchase a/c Dr. 3000
Input Tax a/c Dr. 150
To cash a/c Cr. 3150

In case of sale of goods for cash:

Cost of Goods AED 3000
VAT @5% AED 150

Entry: Cash A/c Dr. 3150

To output tax 150
To Sales a/c 3000

Article (48) Reverse Charge - Specific Obligations to Account for VAT Tax

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.

So according to Article (48) - Import shall be treated as making a Taxable Supply to himself. Let's try attempting self supply in book entry (i.e. sales)

Self Account Dr. 3,150
To Output Tax Credit 150
To Stock Account 3,000

Since supply is made to self, let us bring the stock back (i.e. Purchase)

Stock A/c Dr. 3000
Input Tax Dr. 150
Self Account 3150

Final entry to be made under Reverse Charge:

Purchase Account 3,000
Input Tax (Under RCM) 150
To Output Tax (Under RCM) 150
To Payable Account Credit 3,000

The self account and stock account are equally debited and credited leading to nil effect. The output tax on sale is credited while sale to self and input tax while bringing stock back is debited. In this way the accounting entries for reverse charge mechanism are passed.

To view the Reverse Charge Mechanism Accounting entries video, please click here

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax