BM1903

VALUE-ADDED TAX (VAT)

The Scope of VAT on Sales

The VAT covers all sales of goods, properties, services, or lease of properties other than:
1. VAT-exempt sales; and
2. Services specifically subject to percentage tax.
VAT is a consumption tax imposed on:
1. Sale, barter, exchange, or lease of goods, properties, and services in the course of trade or business in the
Philippines; and
2. Importation of goods into the Philippines, whether or not in the course of trade or business.
Provided, however, that the seller must be a VAT-registered person or a VAT-registrable person. A registrable
person or those who exceed the VAT threshold are subject to VAT even if not registered as VAT-taxpayer. On
the other hand, a VAT-registered person will be subject to VAT even if its annual sales do not exceed the VAT
threshold.
According to an advisory released by BIR, All VAT-registered taxpayers which includes self-employed
individuals and/or professionals whose total gross sales/receipts and other non-operating income do not exceed
the new VAT threshold of P3,000,000 in the preceding year, may elect to change his/her status from VAT to
Non-VAT by filing a duly accomplished BIR Form No. 1905, Application for Registration Information Update, to
the Revenue District Office (RDO) having the jurisdiction of the Head Office of the concerned taxpayers on or
before March 31, 2018, following the existing procedures on updates of registration (Bureau of Internal
Revenue, Tax Reform for Acceleration and Inclusion (TRAIN), 2019).
Illustration:
a. ABC Company is a VAT-registered taxpayer with sales not exceeding the VAT threshold in any 12-month
period. The company shall pay VAT on its VATable sales or receipts regardless if it is below the threshold
because it is a VAT-registered taxpayer.
b. Mr. X, a non-VAT registered taxpayer, exceeded the VAT threshold in August 2x19. He reported a P200,000
sales in September 2x19. Mr. X shall pay VAT on his sales effective September 2x19.

The VAT Threshold - A Comprehensive Application

Taxpayers with Mixed Types of Sales

A department store had the following sales for Fertilizers, seeds, poultry, and hog feeds P 1,200,000
the 12-month period: Fruits and vegetables 800,000
Groceries 800,000
Clothes, shoes, and other apparels 600,000
Furniture 400,000
Total P 3,800,000
Note that the sales of fertilizers, seeds, poultry, hog feeds, fruits, and vegetables are exempt sales. The VATable
sales are:
Groceries P 800,000 Since the total of the VATable sales is below the
Clothes, shoes, and other apparels 600,000 VAT threshold, the department store is not required
Furniture 400,000 to register as a VAT taxpayer. Consequently, it may
Total P 1,800,000 continue paying the 3% percentage tax on these
VATable sales until it exceeds the threshold.

Taxpayers with Multiple Businesses

Gross receipts from the restaurant P 2,200,000
As of September 2x19, Mr. Jose had the
Gross receipts from the barbershop 800,000
following gross receipts from his professional
Gross receipts from taxi cab operations 1,500,000
practice and his other businesses in the
Gross receipts from professional practice 1,000,000
immediately preceding 12 months.
Total P 5,500,000

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The VATable sales are: Gross receipts from the restaurant business P 2,200,000
Gross receipts from the barbershop 800,000
Gross receipts from the exercise of a profession 1,000,000
Total P 4,000,000
Note that common domestic carriers by land such as taxis are specifically subject to percentage tax and are
VAT-exempt. The taxpayer shall pay VAT starting October 2x19 for the restaurant, barbershop, and exercise of
the profession because these VATable sales exceeded the threshold. Mr. Jose shall still pay the 3% common
carrier’s tax on the taxi cab, but not VAT.
[VAT-exempt transactions and Other Percentage Taxes will be discussed in the succeeding handouts]

The VAT Model

The basic computation to arrive at a taxpayer’s net VAT payable is computed as:
Output VAT P xxxx
Less: Input VAT xxxx
Net VAT payable P xxxx
Less: Tax credits or payments xxxx
Tax still payable or (overpayment) P xxxx

Output VAT and Its Types

The output VAT is the VAT passed on to customers or clients by a VAT taxpayer on his sales to customers. It
is collected and treated as current tax liability of the seller taxpayer (Banggawan, 2015).

The output VAT can only be imposed and recognized when:

1. There is a sale (actual or deemed sale); and
2. The seller-taxpayer is VAT-registered.

The output VAT may be subject to different rates, as follows:

1. Regular Output VAT – This is computed as 12% on domestic sales, which includes:
• Sellers of goods or properties – Gross selling price; and
• Sellers of services or lease of properties – Gross receipts.

2. Zero-rated Output VAT – This arises from the export sales, zero-rated sales, and effectively zero-rated
sales (Sec. 106, NIRC).

Input VAT

Input VAT is the VAT paid on the local purchases of goods or services, including the lease or use of property
from a VAT-registered person. It also includes VAT paid on the importation of goods or services by the taxpayer.
This may also arise from incentives provided by law, such as the transitional input VAT and the presumptive
input VAT (Banggawan, 2015).

If the output VAT is treated as current liability, note that the input VAT is to be treated as a current asset of the
taxpayer-seller because it is an advance payment of VAT.

The input VAT is usually applied as tax credit against the output VAT to compute the net VAT payable.

Classification of Sales for VAT Purposes

The classification of sales is important due to the differences in the treatment of output VAT and input VAT
(Banggawan, 2015).

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VAT Exempt Sales

Exempt sales of VAT taxpayers refer to sales of (a) exempt goods, services, or properties, and (b) services
specifically subject to percentage tax. These sales will not be subject to output VAT. Consequently, the seller
will not be allowed to credit input VAT.
Further, the input VAT traceable to exempt sales is part of the costs or expenses of the seller and is deductible
against gross income subject to income tax.
Illustration: During the month, a VAT-registered person sold unprocessed agricultural food products for
P400,000, which he bought for P150,000 (i.e., a VAT-exempt transaction). He also purchased P100,000 worth
of supplies, exclusive of P12,000 input VAT, which was all used in connection with these sales. The following
are recorded in the taxpayer’s books:
Accounts Debit Credit
Inventory 150,000
Supplies 100,000
Input VAT (100,000*12%) 12,000
Cash 262,000
To record the purchase of goods and supplies.

Cash 400,000
Sales 400,000
To record exempt sales.

Cost of Sales 150,000

Supplies Expense 112,000
Inventory/Purchases 150,000
Supplies 100,000
Input VAT 12,000
To record the cost of the exempt sales and supplies used.
Note:
a. No input VAT is recorded on the purchase of unprocessed agricultural food products since the seller of VAT
exempt transaction could not impose output VAT on sale of goods. Therefore, no input VAT is recorded
with regard to VAT-exempt transactions. Thus, such input VAT is not allowed to be credited against output
VAT but shall be treated as expense or Input VAT Expense for the taxpayer to recover the same.
b. No output VAT can be charged on exempt sales. If the taxpayer charged VAT on exempt sales, the same
shall be considered taxable for the purpose of VAT.
c. The P12,000 input VAT is included in the supplies expenses and is not claimable as a tax credit. Since the
cost for the unprocessed agricultural food products is related to VAT-exempt transactions, the input VAT is
recorded as part of the Expenses/Cost of Sales.

Zero-Rated Sales
Zero-rated sales are the sale of goods or services to non-residents. These include (Banggawan, 2015):
a. Export sales of goods or services; and
b. Other sales conferred with zero-rating status by law.
A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes but shall
not result in any output tax. However, the input tax on purchases of goods, properties, or services related to
such zero-rated sale shall be available as tax credit or refund in accordance with the Tax Code.
If claimed as tax refund, the taxpayer will recover cash. If claimed as tax credit, a Tax Credit Certificate will be
issued, which can be used as tax credit against any other internal revenue taxes aside from VAT (Banggawan,
2015).
If the input VAT on zero-rated sales is not claimed through any of the two (2) alternatives, it is credited against
output VAT at the end of the month (Banggawan, 2015).

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Illustration: A VAT-registered person exported goods for P400,000. These goods were purchased for P200,000,
exclusive of P24,000 input VAT. The following are recorded in the taxpayer’s books:
Accounts Debit Credit
Inventory 200,000
Input VAT 24,000
Cash 262,000
To record the purchase of goods.
Cash 400,000
Sales 400,000
To record export sales.
Cost of Sales 200,000
Inventory/Purchases 200,000
To record the cost of export sales.

If claimed as tax refund:

Cash 24,000
Input VAT 24,000
To record receipt of input VAT refund.

If claimed as a tax credit certificate (TCC):

Prepaid Tax 24,000
Input VAT 24,000
To record receipt of tax credit certificate.

If not claimed as refund or TCC: (This is the default treatment of input VAT on zero-rated sales)
Output VAT 24,000
Input VAT 24,000
To close input VAT to output VAT at the end of the month.

Sales to Government and Government-Owned and Controlled Corporations (GOCCs)

The sale to government and government-owned and controlled corporations (GOCCs) is subject to a 5% final
withholding VAT at source, on sales. Please note that government agencies are required to withhold 5% VAT
on VATable transactions.

Section 114(C) of the Tax Code, as amended, provides the following:

"(C) Withholding of Value-added Tax. – The Government or any of its political subdivisions, instrumentalities
or agencies, including government-owned or -controlled corporations (GOCCs) shall, before making
payment on account of each purchase of goods and services which are subject to the value-added tax
imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of
five percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties
or property rights to nonresident owners shall be subject to twelve percent (12%) withholding tax at the time
of payment: For purposes of this Section, the payor or person in control of the payment shall be considered
as the withholding agent.“
The 5% final withholding VAT is presumed the VAT payable of the seller. Consequently, the seller need not pay
further VAT on the sale. Because of this, the claimable input VAT of the seller is effectively set by the law at
only 7% (12%-5%) of gross sale to the government or GOCCs.

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Illustration: A VAT-registered person sold goods to a government agency for P400,000. These goods were
purchased for P336,000, including P36,000 input VAT. The following are recorded in the taxpayer’s books:
Accounts Debit Credit
Inventory/Purchases 300,000
Input VAT 36,000
Cash 336,000
To record the purchase of goods.
Cash (P448,000 – P20,000) 428,000
Creditable Withholding VAT (P400,000 x 5%) 20,000
Sales 400,000
Output VAT (400,000 x 12%) 48,000
To record the sales to the government and the final withholding VAT.
Cost of Sales 300,000
Inventory/Purchases 300,000
To record the cost of sales to the government.
Output VAT 48,000
Cost of Sales 8,000
Input VAT 36,000
Creditable Withholding VAT 20,000
To close the output VAT and withheld final VAT at the end of the month.
Note:
a. There is no VAT payable on sales to the government since the VAT due is conclusively presumed at 5%,
which is withheld at source.
b. The difference between the actual input VAT (P36,000) and the P28,000 presumed input VAT is closed to
Cost of Sales or Expenses.
c. The P8,000 excess from the actual input VAT is a loss, which is added to the cost of sales. If 7% of sales
exceeds the actual input VAT, a reduction to cost or expenses will occur.

The VAT on sales to the government is computed as follows:

Output VAT (400,000 x 12%) P 48,000
Less: Standard input VAT (7% x 400,000) 28,000
Withheld final VAT (5% x 400,000) 20,000
Total input VAT 48,000
VAT due and payable P 0

Regular Sales
Regular sales pertain to sales other than exempt sales, sales to the government or GOCCs, and export sales.
Illustration: A taxpayer made sales of P1,000,000 exclusive of P120,000 output VAT, and purchases of
P800,000 exclusive of P96,000 input VAT. The following are recorded in the taxpayer’s books:
Accounts Debit Credit
Inventory/Purchases 800,000
Input VAT 96,000
Cash 896,000
To record the purchase of goods.
Cash 1,120,000
Sales 1,000,000
Output VAT 120,000
To record regular sales.
Cost of Sales 800,000
Inventory/Purchases 800,000
To record the cost of regular sales.

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Output VAT 120,000

Input VAT 96,000
VAT Payable 24,000
To close VAT accounts and set-up, the VAT due and payable.
VAT Payable 24,000
Cash 24,000
To record payment of VAT to the government.
The VAT payable on regular sales may be computed as follows:
Output VAT (1,000,000 x 12%) P 120,000
Less: Input VAT 96,000
VAT Payable 24,000

Table Summary: Comparison of Output VAT and Input VAT

Types of Sales Output VAT Claimable Input VAT VAT Payable
a. Exempt Sales -none- -none- -none-
b. Zero-rated Sales Zero Actual Negative
c. Sales to Government 12% of sales/receipts 7% of sales/receipts -none-
d. Regular Sales 12% of sales/receipts Actual Positive
Source: Banggawan, R. B. (2015). Business & transfer taxation (Laws, principles, and applications with tax
remedies), pp. 190

Other VATable Sales

• Sales of Registrable Persons – These sales are subject to VAT even with non-registration as VAT
taxpayers, but no input VAT credit is allowed.
• Sales of Non-VAT Taxpayers Issuing VAT Invoice or Receipt – These are sales illegally charged with
VAT by non-VAT taxpayers. These sale transactions shall be subject to VAT without the benefit of input
VAT plus the 50% surcharge and the usual 3% percentage tax.
• Exempt Sales Billed by VAT Taxpayers as Regular Sales – These are exempt sales that are billed
through a VAT invoice or VAT receipts, which are considered regular sales. Also, exempt sales which are
not clearly categorized as ‘exempt’ in the VAT invoice or VAT receipts shall be considered as regular sales
subject to VAT.

References
Banggawan, R. B. (2015). Business & transfer taxation (Laws, principles, and applications with tax remedies). Manila: Real
Excellence Publishing.
Bureau of Internal Revenue. (2017, July 24). Republic Act No. 10963. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/images/bir_files/internal_communications_1/TRAIN%20matters/RA-10963-RRD.pdf
Bureau of Internal Revenue. (2019). Excise Tax. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/tax-information/excise-tax.html
Bureau of Internal Revenue. (2019). Tax Information (Value-added Tax). Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/tax-information/value-added-tax.html#vt_desc
Bureau of Internal Revenue. (2019). Tax Reform for Acceleration and Inclusion (TRAIN). Retrieved from Bureau of Internal
Revenue: https://www.bir.gov.ph/index.php/train.html
Chavez, J. J. (2018). The new Tax Code of the Philippines: For practitioners, entrepreneurs, and Bar candidates. Manila:
REX Book Store.
Dascil, R. T. (2018). NIRC of the Philippines. Manila: REX Book Store.
De Leon, H. S. & De Leon, Jr., H. M. (2013). The law on transfer and business taxation. Manila: REX Book Store.
JuanTax exclusive: A closer look on percentage tax (2551Q). (2019). Retrieved from JuanTax: https://juan.tax/blog/juantax-
exclusive-a-closer-look-on-percentage-tax-2551q/
National Tax Research Center. (2019). Guide to Philippine taxes. Retrieved from National Tax Research Center:
http://www.ntrc.gov.ph/images/Publications/guide-to-philippine-taxes-2016/documentary-stamp-tax.pdf
SGV & Co. (2018). Tax Reform for Acceleration and Inclusion (TRAIN). Makati: SGV & Co.
Valencia, E. G. & Roxas, G. F. (2017). Transfer and business taxation (Principles and laws with accounting applications).
Baguio: Valencia Educational Supply.

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