INTRODUCTION TO CONSUMPTION TAXES

Consumption refers to the acquisition or utilization of goods or services by any person. The utilization
of goods or services may be through purchase, exchange or other means.

Rationale of Consumption Tax

1. Savings formation
2. Rationalization of the Benefit Received Theory
3. Wealth redistribution to society

Income tax VS Consumption tax

Income Tax Consumption Tax
Nature Tax upon receipt of income Tax upon usage of income or
capital
Scope A tax to the capable A tax to all
Theoretical basis Ability to pay theory Benefit received theory

Types of consumption Purchaser Status

Domestic Resident Taxable
Foreign Non-resident Exempt

Our government can only impose tax upon domestic consumption because?
Taxation is inherently territorial and this adheres to the “Destination principle”. Only goods and
services destined for consumption in the Philippines are subject to consumption tax.

TYPES OF DOMESTIC CONSUMPTION AS TO SOURCE

1. DOMESTIC SALES- purchases from resident sellers
2. IMPORTATION – purchases from abroad by non-residents

VAT on importation Business tax

Scope of tax Imports from business or non- Purchases from business only
business
Type of consumption tax Pure form Relative form
Statutory taxpayer Buyer Seller
Economic taxpayer Buyer Buyer
Nature of imposition Direct Indirect
Basis of tax Total purchase cost Sales or receipts

Business tax rules on domestic sales

The seller is The buyer is Subject to business tax?
Business Business YES
Business Not Business YES
Not Business Business NO
Not Business Not Business NO
Value Added Tax rules on importation
The seller is The buyer is Subject to VAT on
importation?
Business Business YES
Business Not Business YES
Not Business Business YES
Not Business Not Business YES

TYPES OF CONSUMPTION TAXES

1. Percentage tax – tax of various rates from 0.60% to 30%
2. Value added tax – a consumption tax of 12%
3. Excise tax – an ad valorem or specific tax, which is imposed in addition to VAT or percentage
tax, only on certain goods or services

IMPORTATION DOMESTIC
SALES/RECEIPTS
Exempt consumption Exempt importation Exempt sales/receipts
Services subject to % tax Service specifically subject to a Service specifically subject to a
% tax % tax
Vatable consumption Vatable importation Vatable sales/receipts

BASIS OF EXEMPTION FROM CONSUMPTION TAX

BASIS OF EXEMPTION VAT ON IMPORTATION BUSINESS TAX
Human necessity The goods are imported is a The goods, services or property
human necessity. sold is a human necessity
Out of scope of tax The importation does not The seller is not engaged in
constitute a domestic business.
consumption.
Tax incentive The importation is exempted as The sales or receipts is
a tax incentive to certain exempted as a tax incentive to
importers. certain sellers.
International comity The importation is exempted by The sales or receipts is
treaty. exempted by treaty.

STRUCTURE OF THE VAT ON IMPORTATION

VAT on importation
Import of service Import of goods
Exempt Exempt Exempt
% tax Percentage tax None
VAT Final withholding VAT VAT on importation

STRUCTURE OF THE BUSINESS TAX

Business Tax
Sales of services Sales of goods
Exempt Exempt Exempt
% tax Receipts specifically subject to a None
% tax
VAT Vatable receipts Vatable sales

Terminology Meaning
Exempt sales or receipts Exempt to VAT and % tax
Services specifically subject to % tax Subject to a particular percentage tax and is
exempt from VAT
Vatable sales or receipts Subject to either VAT or 3% percentage tax

VAT on importation VS VAT on Sales in Business Tax

The VAT on importation is directly computed on the landed costs or total purchase costs of
importation without any deduction or tax credit.

The VAT imposed on sales or receipts in business taxation is unique as it is theoretically imposed on
the value added – the amount of mark-up imposed by sellers on their purchase costs. The VAT on
sales or receipts follows a tax credit method wherein a VAT of 12% is imposed on sales and is
reduced by VAT paid by the business on its purchases.

Proforma computation for tax due:

Output VAT (12% sales of receipts) P xxx
Input VAT ( 12% VAT paid on purchases) xxx
VAT due P xxx

EXCISE TAX
This is imposed on the consumption of commodities such as:
a. Sin products such as alcohol and cigarettes
b. Non-essential commodities such as automobiles and jewelry
c. Non-essential services such as cosmetic surgery
d. Products which are environmentally degrading in their production or consumption, such as
petroleum and minerals

Excise tax is an additional imposition to VAT or percentage tax. Unlike business taxes such as
percentage taxes and VAT on sales or receipts which are levied at the point of sales, excise tax levied
at the point of production or importation.

The excise tax on excisable goods is normally imposed before the goods are sold by domestic
producers or upon their importation by importers.

“Huwag mong sabihin na wala akong alam kung ikaw lang naman ang nilalaman ng utak
ko.”

Reference: BUSINESS AND TRANSFER TAXATION 2019 edition by Rex Banggawan CPA MBA

Note: DO NOT REPRODUCE