Consumption arises when one acquires goods or services by purchases, exchange

and other means.

Consumption tax is a tax levied upon utilization of goods or services by consumers or

buyers.
Purchase,
Goods or exchange and
Consumption
services other
disposition

Rationale (set of
reasons/logical bases) of consumption tax:

1) It promotes savings formation;

2) It helps in wealth distribution; and
3) It supports the benefit received theory

Note: Consumption tax cannot be imposed on basic necessities.

C o n s u m p tio n

Domestic - refers to
consumption or
purchases of
residents

Foreign - refers to
consumption or
purchases of non-
residents.

Destination principle – goods and services destined for consumption or use in the
Philippines are subject to consumption tax.

Cross-border doctrine – goods and services destined for consumption or use in

abroad are not subject to consumption tax.
D o m e s t ic c o n s u m p t io n

Importation - purchase
of goods or services by
resident from non-
resident/foreign sellers.

Sale - purchase of goods

or services by resident
from a resident sellers.
Importer --- Imported goods --- VAT on importation 12% --- Bureau of Customs

Importer --- imported services --- Withholding VAT 12% --- BIR

Reminder: These consumption taxes on importation is payable

regardless of whether the foreign seller or the resident buyer is not
engaged or engage in business/whether the importation is for personal
or business consumption or use.

Illustration 1

Mr. Francis del Rosario, a Philippine resident, imported several goods from a foreign
seller. He incurred the following costs before withdrawal of the goods from the
warehouse of the Bureau of Customs.

Total costs of importation for personal use 1,000,000

Total costs of importation for business use 2,000,000

Computation

Total costs of importation for personal use 1,000,000

Total costs of importation for business use 2,000,000
Total costs of importation 3,000,000
Multiply by: 12%
VAT on importation 360,000

Mr. Francis shall pay the 360,000 to the Bureau of Customs prior to the release of
his goods from the Custom’s warehouse.

Illustration 2

Mr. Francis hired the services of a foreign power solutions company to install a solar
power in his home in the Philippines for 500,000

Computation
Withholding VAT (500,000 x 12%) 60,000

Illustration 3

A Philippine firm contracted the services of a foreign web-developer for 2,000,000.

80% of the service was rendered abroad while 20% was rendered in the Philippines.

Computation
Withholding VAT (2,000,000 x 12%) 240,000

Consumption tax on domestic consumption from resident seller

Economic taxpayers – these are the real taxpayers, buyers, who shoulder the tax
burden.

Statutory taxpayers – these are the ones, sellers, named by law to pay tax.
 Note: The consumption tax levied on the sales/receipts of a resident
seller is applicable only when the seller is regularly engaged in
business. “Business tax”

Table of comparison
VAT on importation Business tax
Basis of tax Acquisition cost Sales or receipts
Scope of tax All consumption Consumption from
businesses only
Nature of consumption tax Pure form Relative form
Statutory taxpayer Buyer Seller
Economic taxpayer Buyer Buyer
Nature of imposition Direct Indirect

Classifications of business taxes

I. VAT on sales

Characteristics
1) Tax on value added
2) Top-up on sales
3) Tax credit method
4) An explicit consumption tax
5) Quarterly tax

Methods of computing VAT

a. Direct method

Selling price x
Less: Purchase price x
Difference (desired profit + tax) x
Multiply by: Business tax x
VAT x

b. Tax credit method

Output VAT (VAT on purchases) x

Less: Input VAT (VAT paid on purchase) x
VAT x

VAT entries:
Purchases xx
Input VAT xx Output VAT xx
Cash/Accounts payable xx Input VAT xx
# VAT due and payable xx
Cash/Accounts receivable xx #
Sales xx VAT due and payable xx
Output VAT xx Cash xx
 II. Percentage tax – is a sales tax of various rates, generally 3%, imposed upon
the gross sales or gross receipts of non-VAT taxpayers.

Characteristics of the percentage tax

1) Tax on sales or gross receipts
2) An expensed tax
3) An implicit consumption tax
4) Monthly or quarterly tax

Illustration

During the month, Mr. Anthony purchased P80, 000 worth of goods. P56, 000 of this
was purchased from a VAT supplier inclusive of P6, 000 VAT while P24, 000 was
purchased from non-VAT taxpayers. Mr. Anthony, a percentage taxpayer, sold and
invoiced the goods for P100, 000.

Purchases 80,000
Cash 80,000
#to record the purchase of goods

Cash 100,000
Sales 100,000
#to record the sales

Percentage tax expense 3,000

Cash 3,000
#to record the remittance of the
percentage tax to the gov’t

III. Excise tax

Excise tax is imposed, in addition to VAT or percentage tax, on a certain goods

manufactured, produced or imported in the Philippines for domestic sale or
consumption.

Excise tax is levied on the production or importation of:

a. Sin products, such as tobacco products and alcohol products;

b. Petroleum products;
c. Automobiles;
d. Essential and non-essential commodities like jewelry, perfumes, toilet water,
yachts and sports car.
e. Metallic and non-metallic minerals, mineral products and quarry resources
such as coal, coke, gold, chromite and silver.
Illustration

Fortunate Corporation, a business subject to VAT, manufactures machine-packed

cigarettes which sell for P20 per pack, excluding VAT. During the month, it produced
11,000 packs out of which it sold 10,000 packs. It also paid P16, 000 VAT on various
purchases.

Note: Under the NIRC, the sale of cigarettes at a price above P10 per
pack shall be subject to an excise tax of P12 per pack.

Computation:

Excise tax due at the point of production

Excise tax (11,000 produced packs x P12 tax per pack) P132, 000

Excise tax due and payable at the point of sale

Excise tax (10,000 sold packs x P12 tax per pack) P120, 000

Value-added tax on sale

Output VAT (10,000 packs x P20) x 12% P24, 000
Less: Input VAT (16, 000)
VAT due and payable P 8, 000

Note: The various excise tax rates are enumerated in Section 141 – 151
of the National Internal Revenue Code (NIRC)

Classifications of business taxpayers

1) VAT taxpayers – those mandatorily registered as VAT taxpayers because their
sales exceed the 3M VAT threshold in any 12 month period.
2) Non-VAT taxpayers – those whose sales do not exceed the 3M VAT threshold.
- Has an option of either to voluntarily register as VAT
taxpayer or to pay the percentage tax.