Value Added Tax
The Value Added Tax (VAT) is an ad valorem tax imposed on the incremental market value that was added to a certain product. VAT is imposed on every step of the production process of a good, unlike sales tax which is only imposed upon “sale” of the final good.
It is also an indirect tax, which can be passed on to the buyers of goods and services.
VAT is a form of consumption tax since it can only be paid upon consumption of goods and services. VAT is also a kind of regressive tax since the effective tax rate being paid by the people in lower income bracket is higher than those who are in the higher income level.
Who are subject to VAT?
- Those who sell, exchange or barter goods or properties in the normal course of trade or business
- Those who sell services in the normal course of trade or business
- Those who import goods, regardless whether done in the course of trade or business or not.
In addition, a person or an entity engaged in business may be required to file as a VAT taxpayer if gross sales is P1.5 million and above.
The rate of the Value Added Tax in the Philippines is currently 12%. Computation of VAT Payable: VAT payable is computed as: Net VAT payable = Output VAT – Input VAT
Output VAT is the VAT payable based on the selling price. There are two kinds of selling price prevalent in the Philippines: one whose prices are VAT-inclusive, and the other VAT-exclusive.
Prices in grocery stores normally are VAT inclusive, which means, the price in the tag is the final price to be paid by the consumer. If price tag indicates P112.00, then the output VAT payable is P12 (P112/112% x 12%)
Some restaurants show prices that are still VAT exclusive. In which case, the buyer should add 12% to the price of the goods being bought. If menu shows a food which is P200, VAT exclusive, the total price to be paid is P224 (P200 x 112%)
Input VAT is deducted against output VAT in order to arrive at a certain VAT payable in a specific time period.
A grocery store has a sale amounting to P112,000 for the month of September with purchases amounting to P95,200. Net VAT payable is P1,800 (P12,000 - P10,200).
Input VAT can only be claimed if purchases were made from VAT-registered entity. It should also be incurred under the normal course of business in order to be deductible.
VAT exempt sales are not subject to VAT. Input tax related to such sales are not allowed as a deduction.
Examples of business/transactions are exempt from VAT:
- Services subject to percentage tax
- Sale or importation of fertilizers, seeds, livestock and poultry
- Importation of personal and household effects
- Private schools accredited by CHED, DepEd, TESDA and public schools
- Services rendered by an employee to an employer
- Export sales by non-VAT registered persons
Zero-rated VAT Sales
Zero rated Sales are not subject to output VAT, however, input VAT relating to a zero-rated VAT sales can be claimed.
Examples of zero-rated VAT sales:
- Processing/ repackaging of goods for export sale
- Services rendered to persons engaged in international shipping or air transport operations
- Rendering of services to a foreign entity (performed in the Philippines), in which consideration will be received in acceptable foreign currency denomination.
- Foreign currency denominated sales
- Export sales
- Six Sale to persons or entities who are tax-exempt under Philippine special laws.