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Business Tax is a form of consumption tax.

I.

Supporting Tax
Theory

CONSUMPTION TAX

-occurs when one acquires goods or services by purchase,


exchange or other means.
-tax upon the utilization of goods or services by consumers
or buyers.
-it is a tax on the purchase or consumption of the buyer
and not on the sale of the seller.
Rationale (Basis) of Consumption Tax:
1. It promotes savings formation.
-Income is to consumption; residual income is
savings; savings promotes capital formation and
investment which are crucial to economic
development.
Therefore, tax consumption is important to limit
consumption to shift part of the income to
savings formation.
2. It helps in wealth redistribution society.
-It is a basic state policy to redistribute wealth
to society so everyone in the State could enjoy
the same. When rich buy more and spend more
the pay more tax.
Therefore, consumption tax supports the
redistribution of wealth from the rich to the
less privileged members of society.
3. It supports Benefit Received Theory
-Those who receive benefit from the government
shall pay taxes.
Therefore, a tax on consumption will effectively
make everyone contributes to the support of
the government. It is a practical application of
the theory.
Income Tax and Consumption Tax Distinguished:
Nature

Income Tax
Tax upon receipt
of income

Scope

Consumption Tax
Tax upon usage of
income or capital

A tax to the
capable
Ability to Pay
Theory

A tax to all
Benefit Received
Theory

Types of Consumption:
1. Domestic Consumption consumption or purchases of
Philippine Residents
2. Foreign Consumption consumption or purchases of
non-residents.
Destination Principle: goods and services destined for use or
consumption in the Philippines are subject to consumption
tax whereas those destined for use or consumption abroad
are not imposed with consumption tax.
Cross-border Doctrine: goods that cross the border which are
destined toward foreign territories should not be charged
with consumption taxes.
Summary of tax rules on consumption:
The seller
is:

Domestic
Consumption
(Buyer is Resident)

NonResident
Resident

Taxable

Foreign
Consumption
(Buyer is nonresident)
No Tax

Taxable

Effectively no Tax

Types of Taxable Domestic Consumption:


1. Importations - purchase of residents of goods or
services from non-residents abroad.
2. Sale purchase of residents of goods, properties or
services from resident sellers, on a sellers
perspective.
II.

CONSUMPTION TAX ON IMPORTATION

-these taxes are payable without regard of whether the


foreign seller or the resident buyer is engaged or not
engaged in the business or whether the importations is
for business or personal consumption.
A. Importation of goods : Value Added Tax (VAT)
on importation
-every importer of goods shall pay consumption
tax on his importation
-12% of the total import cost of the goods
prior to the withdrawal of the goods from
the warehouse of the Bureau of Customs

B. Purchaser of service (import of service) :


Withholding VAT
-every purchaser of service from non-residents
shall likewise pay VAT on importation of the
service.
-12% of the contract price of the service
III.
CONSUMPTION TAX ON DOMESTIC
CONSUMPTION FROM RESIDENT SELLERS
-the consumption tax on the purchases of Philippine residents
from resident sellers is collected from the seller.
-the tax law imposed consumption tax upon the sales
of the sellers of goods or receipts of sellers of
services.
-the sellers are the statutory taxpayers: the buyers are the
real taxpayers or economic taxpayers.
Consumption tax on resident buyers applies to regularly
engaged businesses only (sellers). That is why
consumption tax is called a business tax.
-in law, sellers are made directly liable for the payment of the
consumption tax. Business would suffer penalties for noncompliance.

-business tax is made to appear as tax on privilege to do


business, so as a result it is also viewed as privilege
taxes but the rule is merely intended to enforce
compliance.
Table of Comparison
VAT on
Importation
Acquisition
cost
All
Consumption

Basis of tax
Scope of tax

Nature of consumption
of tax
Statutory taxpayer
Economic taxpayer
Nature of imposition

Business Tax
Sales or receipts

Pure form

Consumption
from businesses
only
Relative form

Buyer
Buyer
Direct

Seller
Buyer
Indirect

Table Summary: Consumption Tax Rules on Domestic


Consumption
Seller
Domestic Sellers
- Business
- Business
- Nonbusiness
- Nonbusiness
Foreign Sellers
- Business

Resident Buyer

Applicable
consumption tax

Business
Non-business
Business

Business tax
Business tax
None

Non-business

None

Business

VAT on
importation
VAT on
importation
VAT on
importation*

Business

Non-business

Nonbusiness

Business

NonNon-business
VAT on
business
importation*
*The VAT on importation consistently applies regardless of
whether or not the seller or buyer is engaged in business.

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IV.

Methods of computing VAT

TYPES OF BUSINESS TAXES

Business taxes are based on sales and receipts.


Sales the total amount agreed as
consideration for the sale of goods whether collected or
uncollected.
Receipts the
collections from sale or service.
A. Value added tax (VAT) on sales
-consumption tax that is imposed upon the sale of
goods, properties or services or lease of properties.
Characteristics of VAT on sales
1. Tax on value added is a tax on the value added by
the seller (mark-up) on its purchases in making
sales.

Top-up on sales
Tax credit method
An explicit consumption tax
Quarterly tax

1. Direct method
2. Tax credit Method
a. Special features of tax credit method
Invoice-based crediting
The perfect matching of costs or
expenses with sales is not observed