The introduction of VAT in UAE has been a major change for almost every kind of business in UAE. However, for the gold and diamonds sector, which is one of the vital national economic sectors, the introduction of VAT has hit the sector badly. Under VAT, businesses purchasing gold and diamonds were required to pay VAT at the time of purchase. This VAT paid could be recovered by them only at the time of filing of returns. Due to this, businesses dealing in gold and diamonds were facing severe cash flow and liquidity issues. The FTA, having recognized these issues, has decided to apply the reverse charge mechanism on the purchase of gold and diamonds by registered businesses. Let us understand more about VAT applicability on supply of gold and diamonds in UAE.

VAT on gold and diamonds

When a business supplies gold and diamonds to a person registered under VAT, who is purchasing the goods for resale, or to produce or manufacture gold and diamond-based products, the supplier is not required to charge VAT on the supply. Instead, the recipient has to account for the VAT due on the supply and report this VAT due in their VAT return. The recipient can also recover VAT on the supply in the same VAT return, provided it meets the conditions for input tax recovery. 

For example: A One Gold and Diamonds LLC supplies gold for value of AED 10,000 to a registrant, Razzaq Jewellery, who is purchasing the gold for resale purpose.

Here, A One Gold and Diamonds is not required to charge VAT @ 5% on the supply. Instead, Razzaq Jewellery has to account for the VAT due, i.e. AED 500 and report the same in their VAT return. Razzaq Jewellery can also recover this VAT in the same VAT return. This means that in effect, Razzaq Jewellery does not have to incur any cash outflow on account of the purchase of gold.

New rule for VAT on gold and diamonds

Previously, when a business registered under VAT supplies gold and diamonds to another registrant, the supplier was liable to collect VAT on the supply from the recipient. The recipient was eligible to recover input tax on the supply only at the time of filing of VAT return. This led to cash flow issues for registered businesses purchasing gold and diamonds.

Which goods will be covered under this scheme?

The goods covered under this scheme are:

• Gold
• Diamonds
• Products where the principal component is gold or diamonds. For example: Jewellery

Hence, the change in VAT applicability on supply of gold and diamonds among registered businesses is certainly a relief to the sector. The earlier applicability of VAT on forward charge, wherein, VAT is collected by the supplier at the time of supply, led to cash blockage for businesses purchasing gold and diamonds. This has now been changed to reverse charge, wherein, the supplier will not collect VAT on the supply and the recipient can report the VAT due on the supply as well as recover input tax on the supply in the same VAT return. This ensures that in effect, there is no cash blockage on account of VAT for businesses purchasing gold and diamonds. In our next article, we will learn about the conditions to be satisfied to be eligible for this scheme and the exceptional scenarios where this scheme is not applicable.

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