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.
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.
The goods covered under this scheme are:
- Products where the principal component is gold or diamonds. For example: Jewelry
Conditions for applying the reverse charge scheme on supply of gold and diamonds
- The recipient should be registered under VAT on the date of supply.
- The recipient purchases the goods for the purpose of resale or to produce or manufacture them into another product, where the principal component is gold or diamonds
- The recipient accounts for VAT on the goods supplied
Obligations on the supplier
Before applying the mechanism, the supplier needs to:
- Obtain a written declaration from the recipient (template shall be provided by FTA).
- Confirm that the recipient is registered for VAT as per the validation checks provided by the FTA.
Cases in which Reverse Charge scheme is not applicable
Gold and diamond products will be subject to VAT at 0% on forward charge
In case of the following supplies of gold and diamonds, VAT @ 0% will be applicable, which has to be reported by the supplier in the VAT return
- Exports of gold, diamonds and products where the principal component is gold or diamonds
- Supplies of investment precious metals
Gold and diamond products will be subject to VAT at 5% on forward charge
Gold, diamonds and products of gold and diamonds shall be subject to 5% in any of the following cases which has to be collected and reported by the supplier in the VAT return:
- Where the recipient of such goods is not registered for VAT at the date of supply.
- Where the recipient’s purpose of purchasing such goods is not to resell, produce or manufacture goods or diamonds or products where the principal component is gold or diamonds.
- Where the supply is of a product where gold and diamonds are not the principal component