of consumption tax. An IS or jal to your understanding and ic ines taxes. This chapter provides an overview of consumption tax. After this chapter, readers are expected to comprehend: == . The concept of a consumption tax ‘Types of consumption and consumption taxes The destination principle The nature of the VAT on importation The nature and types of business tax The characteristics of the VAT on sales The characteristics of percentage tax ~ ™ St yh THE CONCEPT OF CONSUMPTION AND CONSUMPTION TAX 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. This utilization is subject to a tax called consumption tax. Consumption is levied without regard to the purpose of the purchaser or consumer whether it is for business, personal or charity use. Rationale of Consumption Tax 1. Savings formation 2. Rationalization of the Benefit Received Theory 3. Wealth redistribution to society Consumption tax promotes savings formation. Income is normally destined toward consumption. Income less consumption is savings. Savings is a capital that is useful in funding projects crucial to economic activities that could spur further economic development. A tax on consumption promotes savings formation by limiting the level of consumption. Consumption tax rationalizes the Benefit Received Theory. The Benefit Received Theory proposes that those who receive more benefit from the government should pay more taxes. It is undeniable that, in one way or another, every resident or citizen, whether rich or poor, benefits — ‘eee 5:Consumption tax helps redistribute wealth to society, aa 5 It is a basic state policy to redistribute wealth to society so every State could enjoy the same. ct b off On the individual level, there's no question that rich. people buy or g more than poor people. With bigger income and wealth, the rich can expensive lifestyles. A tax on consumption will effectively make the rici more taxes for the government. ba In effect, consumption tax supports the redistribution of wealth from th rich people to the less privileged members of our society. A caveat to consumption tax There is one important caveat to consumption tax however. It should not b levied upon basic necessities such as food, education, health, and shelter o housing. Doing so would be tantamount to killing the goose that lays golden egg. Our current tax system observes this with qualifications. Income tax vs. consumption tax Income tax Consumption tax Nature Tax upon receipt of Tax upon usage of incomt income or capital Scope/coverage A tax to the capable A tax toall Theoretical basis Ability to pay theory __| Benefit received theo Note to readers: Your keen appreciation of the following section is highly critical to your understanding of rules on consumption taxes in future chapters.to the inherent difficulty of collecting tax from numerous buyers compared C Types of consumption Purchaser Status | 1. Domestic consumption Resident Taxable 2. Foreign consumption _| Non-resident | Exempt/Effectively non-taxable_| Because taxation is inherently territorial, our government can only impose tax upon domestic consumption. In observing this, our tax laws adhere to the “Destination principle.” Only goods and services destined for consumption in the Philippines are subject to consumption tax while those destined for consumption abroad are not subject to consumption tax. Following the cross-border doctrine, goods that cross the border destined for foreign countries are not charged consumption taxes. Due to this, the government do not impose taxes on exports. The NIRC either exempts exports or subject them to a 0% tax rate. TYPES OF DOMESTIC CONSUMPTION AS TO SOURCE 1. Domestic sales - purchases from resident sellers 2. Importation - purchases from abroad by non-residents CONSUMPTION TAX ON DOMESTIC SALES The domestic consumption of resident buyers from resident sellers commonly known as purchase is subject to a consumption tax called a business tax. It is called business tax because the consumption tax is indirectly imposed upon sellers which are businesses. ‘This does not mean, however, that the sellers are the ones being subjected to the tax burden. The object of taxation is the purchase of buyers but owingCONSUMPTION TAX ON IMPORTATION _ The domestic consumption of goods or services from non-resident s commonly known as importation is subject to a consumption tax calle _ VAT on importation.” The VAT is directly levied upon the buyer - importer. The principle of administrative feasibility cannot be applied in this case because seller js. non-resident and is out of reach of Philippine’s taxing power. It must recalled that taxation is territorial; hence, tax obligations can only be enforced and demanded upon residents - in this case, the buyer. BUSINESS TAX VS. VAT ON IMPORTATION: A DIFFERENTIATION i VAT on Importation Business Tax. Scope of tax Imports from business | Purchases from ornon-business _| _ businesses onl} Type of consumption tax | Pureform _|_ Relative form Statutory taxpayer x Buyer = Seller The economic taxpayer Buyer Buyer, Nature of imposition | Direct Indirect Total purchase cost Sales or receipts The business tax is imposed only if the seller is a business and is based upon the sales of goods or receipts from rendering of services of the seller. That's why this consumption tax came to be known as a “business” tax but it is not actually a tax upon the business because the tax burden is shifted by the business to the buyer who will actually shoulder the tax burden. Business refers to hal ual engagement in a commercial activity. It connotes” _ Tegularity of transaction involving sale of goods or services for a profit. "The VAT on importation is i i imposed upon the total cost of importation regardless of whether or not the non-resident seller is a business. It re a pure form of consumption tax as it does not relatively ap] Sasa 2H sllValue Added Tax rules on importation [[theselleris | __The buyeris | Subject to Business Business YES Business Not business YES Not business Business YES Not business Not business YES It must be noted that being in business is very essential to business taxation while it is not the case with importation. So long as there is importation of goods or services, the VAT generally applies. 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 TYPES OF DOMESTIC CONSUMPTION AS TO TAXABILITY 1, Exempt consumption - These are consumption of goods or consumption taxes. 2. Consumptions specifically subject to percentage tax - This includes consumption of services that are not subject to VAT but are imposed with a specific percentage tax. 3. Vatable consumption - This includes all other consumption that are neither exempted nor subject to percentage tax. services that are not subject to 5ortation applies to current purchase or s by a resident person from non-resident persons. Importation not reflect current acquisition of goods or services are therefore An example is when a non-resident person imports to the Philippines his personal, household and professional instruments or effects. This is not a domestic consumption because he is not acquiring these goods. They are already his even before he brought (imported) the goods into the Philippines. It is therefore exempt from VAT on importation. Scope of Business Taxes Only sales or receipts of persons engaged in business is subject to business tax. Hence, if the seller of goods or services is not a business, there is no business tax. Tax incentives Certain importations are not subjected to the VAT on importation for some reasons. Example is the exemption on the importation of vessels or aircraft in an effort of the government to assist or improve domestic air or sea transport or assist tourism in the Philippines. Certain institutions are not subjected to business taxes for some reasons. Example is the exemption of cooperatives in a bid for the government to promote cooperative undertaking as it is instrumental in economic developments benefiting most rural poor. International comit Importation or sales of goods or services that are agreed to be exempted in an international agreement to which the Philippine government is a signatory are exempt from the VAT on importation and business tax, respectively. SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX Services specifically subject to percentage tax are taxable consumption of services but subject only to a specific percentage tax rate set by the NIRC. Consumption of these services are not subject to VAT. 7Service specifically subject to a % tax Vatable importation “EXEMPT CONSUMPTION Exempt consumptions are neither subject to percentage tax nor value ad de tax. If they are sourced from abroad, they are exempt from VAT. importation. If sourced from within, they are exempt from business tax. Basis of exemption from consumption tax | Basis of exemption VAT on Importation Business Tax The goods imported isa | The goods, services or Human necessity human necessity. property soldisa human necessity. The importation does The seller is not Out of scope of tax not constitute a engaged in business. domestic consumption. The importation is The sales or receiptis Tax incentive exempted as a tax exempted asa tax incentive to certain incentive to certain importers. sellers. International comity The importation is The sales or receiptis exempted by treaty. exempted by treaty. it Certain basi necessities such as na products, agricultural inputs, books, properties; and essential service: services of schools; and medical service: shall not result in Killing the goose that these consumables are not taxable, Note te the consumption tax a Scope of the following consumption taxes: tural agricultural or marine food newspapers and magazines, residentia S such as residential rentals, educationa s of hospitals are exempt. Taxation t lays the golden egg. In principle:Percentage tax Final withholding VAT Import of services The import of service is either: a, Exempt b. Subject to percentage tax ¢. Subject to final withholding VAT The import of services by certain VAT-exempt person is exempt from VA’ Currently, there is only one import of service that is subject to a percentage tax. The import of other services is subject to VAT called the ‘fi withholding VAT.” The VAT is computed as 12% of the contract price of the services and is paid to the BIR. Import of goods The import of goods is either: a. Exempt b. Subject to VAT on importation Ifthe import of goods is not exempted, the importation is subject to VA importation. The VAT on importation is computed as 12% of the landed of the goods and is paid to the BOC. Business Tax _ Sales of services Sales of goods — Exempt receipt Exempt salesoe gorivas 916 doidw eube Hislotieg hue nome eNesOy ashe eslee ro. T7 5 suka pgntig ae Hoye ieanlae @ b s or receipts are subject to 12% VAT if the taxpayer Is a ayer and to a 3% general percentage tax if the taxpayer is a non-VAT taxpayer. To sum up, readers must note the following: a. Exemptsales or receipts_| Exempt to VAT and percentage tax b. Services specifically Subject to a particular percentage tax and subject to % tax 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. or receipt in business taxation is unique as it is added - the amount of mark-up imposed ‘The VAT on sales or receipt follows a tax 1% is imposed on sales and is reduced by The VAT imposed on sales theoretically imposed on the value by sellers on their purchase costs. credit method wherein a VAT of 12' VAT paid by the business on its purchases. The tax due is computed as: Output VAT (12% of sales or receipts) Po XXX,XXX Less: Input VAT (12% VAT paid on purchases) XXXXX VAT due Input VAT i when goods are sold. The approach; hence, it is not impose 's claimed as tax credit against output VAT when due or paid not e VAT does not require a perfect matching .d on the gross profit. T on sales or receipts is unique compared to This feature of the VA’ a fixed percentage of sales or percentage taxes which is merely computed as receipts. oSano afd yo ie: sential commodities, such as automobiles and jewelry ssential services, such as cosmeticsurgery da cts which are environmentally degrading in their prodi 4 consumption, such petroleum and minerals : Excise tax is an additional imposition to VAT or percentage tax. Unli business taxes such as percentage taxes and VAT on sales or receipts whi are levied at the point of sales, excise tax levied at the point of production importation. 4 The excise tax on excisable goods is normally imposed before the goods an sold by domestic producers or upon their importation by importers.5. Enumerate ature of each type of business 6, Compare th tet tion tothe business tax. — “7, Discuss the characteristics of the VAT on sales. 4 Compare the direct method to the tax credit method in Discuss the characteristics of the percentage tax. 10. Discuss the nature of excise tax. 11. Compare VAT on sales, percentage tax, and excise tax. VAT computation. True or False 1 4, Consumption tax is a tax levied upon businesses. 2. Apurchase isa form of consumption. 3. A tax on consumption will effectively causes all residents of the state to pay tax. 4, Consumption is the acquisition or utilization of goods and services. 5. Income tax is based on the taxpayers’ capacity to sacrifice for the support of the government. 6. Consumption tax is more consistent with the “ability to pay” theory rather than the “benefit received” theory. 7. Atax on consumption would support savings initiative. 8 Consumption taxes should not apply to basic necessities. 9, Both domestic consumption and foreign consumption are subject to consumption tax. 10, Non-resident sellers are exe sales. 11. Resident sellers shall p 12. The sale by non-resi consumption tax. 13. The utilization or consum country of origin. 14, The sale by non-resident persons in the Philippines is exempt from consumption tax. 45. The sale by resident in the Philippines is subject to c pt from consumption taxes on their domestic n tax on foreign consumption. ay consumptio! is subject to Philippine dent persons abroad i ption of goods or services shall be taxable in their -onsumption tax. True or False 2 n tax for purchases of goods or services from foreign 1, The consumptiol sources shall be payable by the buyer. 2. Business taxis a form of consumption tax. 3. Consumption tax is a form of business tax. 1- a o! ae subject to spe 1. When che impact and incidence of taxation rests upon. differ tax is an indirect tax. 12. Domestic pay consumption tax to domestic sellers. tax to non-resident sellers. 13. Importers pay consumption tax 14. Domestic sellers pay consumption tax to the government, 15. Exporters pay consumption tax to the government. Multiple Choice - Theory: Part 1 Which type of consumption will pay consumption tax? a. Domestic consumption b. Foreign consumption . Both domestic and foreign consumption d. Neither domestic nor foreign consumption 1. 2, Which is a tax upon the usage of income? a Savings tax c. Consumption tax b. Investment tax d, Business tax 3, Which is subject to the VAT on importation? a. Foreign consumption from resident sellers b. Foreign consumption from foreign sellers c. Domestic consumption from resident sellers d. Domestic consumption from foreign sellers 4, Which is subject to business tax? a. Foreign consumption from resident sellers b. Foreign consumption from foreign sellers c. Domestic consumption from resident sellers d. Domestic consumption from foreign sellers Which is an incorrect statement regarding consumption taxes? a. They are always indirect in nature. b. They effectively tax everyone in the state. 1210. 11. 12. 13. 14. The she t ue na? i stic consumption is taxable when theselleris a, anon-resident. inetd” s b. aresident. n afetibat c. either aresident or a non-resident. d. both aresident and anon-resident. Foreign consumption shall a. pay consumption tax if the seller is a resident. b. pay consumption tax if the seller is a non-resident. c. not pay consumption tax if the seller is a non-resident. d. not pay consumption tax regardless of the residency of the seller. The tax on domestic consumption is referred to as a. VAT on importation. c. Either A or B b. Business tax. d. Neither A nor B The tax on domestic consumption from foreign suppliers is a. VATonimportation. — c.Either Aor B b. Business tax. d. Neither A nor B The tax on domestic consumption from resident suppliers is a. VATonimportation. — c.Either Aor B b. Business tax. d, Neither A nor B Which is not a business tax? a. VATonimportation _ c. Percentage tax b. VAT onsales d. Excise tax The percentage tax is generally a. 3%ofsales orreceipts c.3% of mark-up b. 3% of purchases d. 12% of mark-up The VAT as a business tax is a. 12% ofsales or receipts c. 12% of mark-up b. 12% of purchases , 3% of mark-up 134 In 17. As to incidence of tax, the VAT on importation is aform of a. Direct tax c.Ad valorem tax b. Indirect tax d. Specific tax 18. Which of these import consumptions is tax-free? a. Importation from a seller not engaged in trade or business b. Importation from a seller engaged in trade or business 4 P c. Both AandB d. Neither AnorB 19. Which importation is subject to the VAT on importation? a. Importation by a person engaged in business b. Importation by a person not engaged in business c. BothAorB 1 d. Neither A nor B 4 20. Who is the statutory taxpayer to the VAT on importation? a. Foreign seller c. Both Aand B b. Domestic buyer d. None of these Multiple Choice - Theory: Part 2 1. Generally, the tax basis of business tax is a. sales or receipts c. Either A or B b. purchase cost d. Both A andB 2. Who is the statutory taxpayer of business taxes? The seller who must be engaged in trade or business The seller, whether or not engaged in trade or business The buyer who must be engaged in trade or business The buyer, whether or not engaged in trade or business Roop 3. The economic taxpayers of consumption taxes are a. Sellers who are engaged in trade or business "i b. Sellers, whether or not engaged in trade or business c. Buyers who are engaged in trade or business d. Buyers, whether or not engaged in trade or business 14ata ot aay 6. Which is nae a. The sales to foreigners must include a business iad b. The sales to residents must include a business tax. c. The purchase from abroad must include a business tax. d. Allofthese 7. The deduction from Output VAT is called a. Percentage tax c Input VAT b. VATdueand payable d. VAT on importation 8 Which isa pure form ofa sales tax? a. Percentage tax c.Both Aand B b. Value Added Tax d. Neither A nor B 9. Statement 1: A business which pays VAT normally does not pay percentage tax. Statement 2: A business which pays percentage tax also pays VAT. Which statement is correct? a. Statement 1 c. Both statements b. Statement 2 d. Neither statement 10. Which of the following business taxes applies only for domestic consumption? a. VATonsales c. Excise tax b. Percentage tax d. All of these 11. Excise tax is paid by a. Sellers b. Buyers c. Importers or manufacturers d. Seller or buyer depending on who agreed to pay the excise tax 12. Export sale is (select the incorrect one) a. Exempt from percentage tax b. Exempt from VAT 1sPESTO; oliqinuenas erage . Which is imposed with a tax of zero percent (0%)? a. All export sales + b. Export sales of VAT-registered taxpayers c. Import sales of’ VAT-registered taxpayers d. Export sales of non-VAT registered taxpayers only T 15. Which is not subject to excise tax? a. Sin products b. Non-essential commodities c. Food products d, Mineral products 16. The tax basis of consumption tax on foreign purchase is a. sales or receipts c. Either A or B b. purchase costs d. Both A and B 17. The consumption tax on domestic purchases is imposed upon the a. sales or receipts c. Either A or B b. purchase cost d. Both A and B 18. Technically, the excise tax on the manufacture of certain articles is paya only when the article is intended for a. Domesticconsumption c. Both AandB b. Foreignconsumption d. Neither A nor B 19. Which is correct with the VAT on importation? a. Payable only when the importer is engaged in business b. Payable only when the foreign seller is engaged in business ¢. Payable regardless of the purpose of the importation d. Payable only when the resident seller is not engaged in business 20. Bevan domestic sales is an example of a. adirect tax. c.a regulatory tax. b. anindirect tax. da specific tax.onimporation * m2U8 ni hagigis “noe te 4 pany, % eres business, purchased Company, a resident business. Which will pay theconsmption tax on this transaction? a, Cauayan Company c.Both A and B b. Baliwag Company d. Neither A nor B / 3. Heidenberg Corporation, a resident business, purchased P 100,000 goods from Kiwi Company, a non-resident business. Identify the statutory taxpayer and the type of consumption tax, a. Heidenberg Company ~ Business tax b. Kiwi Company - business tax ¢. Heidenberg Company - VAT on importation d. Kiwi Company - VAT on importation 4, Mr. Cedric, an employee, sold his residential lot to Mrs, Corneto, a real property dealer. Who is subject to consumption tax with respect to this transaction? a. Mr.Cedric c.AandB b. Mrs. Corneto d. Neither A nor B 5. Mr. Porma made a casual sale involving a car to Mrs, Tutyal, a resident buyer. Mr. Porma is not a car dealer. Who is subject to consumption tax? a. Mr. Porma c. Both Mr. Porma and Mrs, Tutyal b. Mrs. Tutyal d. Neither Mr. Porma nor Mrs. Tutyal 6. Mr, Llama, an employee, imported a pair of shoes from Hongkong. Which consumption tax is he liable to pay? a Business tax c, Both b. VATonimportation d.None 7. Kapederasyon, a charitable non-profit corporation, imports various office supplies from XG Manufacturing Industries in China. Which is correct? a. Kapederasyon is exempt from VAT on importation, b. Kapederasyon is subject to VAT on importation. . XG Manufacturing Industries is subject to business tax. d. XG Manufacturing Industries shall pay the VAT on the importation. 177 eh eal ti 4 i : thse oie 10, TAX, 3% ate A person in business is subject to usiness tax. eat SSG een in his possession costing P77,600 which he "sell to earn a mark-up of 25% of cost net of the 3% business tax. He invoice the sale of the P77,600 goods at a. 100,000 c.P-97,000 b. P103,000 d.P 110,000 i from the sale of an inventor 10. A business wants to make a 10,000 profit costing P30,000. The business is subject to 39% percentage tax. At wi amount shall the business invoice the sale? a, P 41,237 c. P 40,000 b. P 41,200 d. P 38,800 11, Aperson who imports goods or properties will more likely pay a. a3% percentage tax on the importation b. a12%VAT on the importation ¢. either 3% or 12% tax on the importation d. no consumption tax 12. A person who is not regularly engaged in trade or business made a casta sale ofa property for P100,000. What will be the invoice price of the sale? a. P100,000 c.P112,000 b. 103,000 d. Either Bor C 13. Alison is regularly engaged in the sales of goods. He will pay a. Value added tax only. _c. Either A or B b. Percentage tax only. d. Neither A nor B 14, Mr. Ventura is subject to 3% percentage tax. He made a total collection 0 206,000 during a month and paid P103,000 in purchases. Compute his percentage tax. a PO c. P6,180 b. P3,000 d.P12,000 15. A business taxpayer purchased : goods worth P120,000 from non-residen and sold goods worth P140,000 for P180,000. What is the concept of “ added” for VAT purposes? a. P200,000 P80, b. P140,000 aP Saas 18feponed 000 equipment for business use a for personal use, What is the amount subject to the ~¢.P1,200,000 d.P 1,500,000 Multiple Choice - Problem Part 2 Basic Case 1 1, Abusiness taxpayer had the following purchases and receipts: Import of goods or services P 190,000 Domestic purchase of goods or services 100,000 Domestic sales of goods and services 150,000 Export sales of goods or services 50,000 Compute the total amount subject to consumption tax to the business. a. 500,000 c. P350,000 b. 400,000 d. P340,000 In the immediately preceding problem, determine the amount subject to 2 consumption tax ifthe taxpayer is not engaged in business a. P490,000 cc. P200,000 b. 390,000 d.P190,000 Basic case 2 3. A VAT-registered taxpayer recorded the following sales and purchases, exclusive of VAT, during the month: Sales P 300,000 Purchases 200,000 What would be the output VAT? a. P 48,000 c. P24,000 b. P36,000 d. P12,000 4, Whatis the input VAT? a. P48,000 c, P24,000 b. P36,000 d.P12,000 | 19Pr seegiups O00,00E9 hamogent Higa yer recorded the following transactions during uli Abroad P350,000 P 200,000 —150,000 — _ 100,000 2500000 P.300,000 Assuming the taxpayer is a VAT-registered taxpayer 7. Compute the output VAT. a PO c. P 36,000 b. P24,000 dP 42,000 8. Compute the VAT on importation. a PO c. P18,000 b._ P 12,000 d.P32,000 Assuming the taxpayer is a non-VAT taxpayer 9. Compute the percentage tax. a PO c.P-9,000 b. P6,000 d.P10,500 10. Compute the VAT on importation. a PO c. P12,000 b. P3,000 d. P18,000 Basic Case 4 Sindangan Company, a VAT-registered taxpayer, purchased P400,000 worth goods and sold the same for P800,000. 11. Assuming. that the business operation of Sindangan Company is limite Philippine residents, what is the total business tax it will report on its sa a. P96,000 cP 24,000 b. P 48,000 d.PO 12. Assuming that the Purchases were imports and the sales were © compute respectively the business tax and t tion tax. a P96000;P144,000 P2so00;Praae b. P24,000;P144,000 —d.P0; p48,000 20