CHAPTER 6

INTRODUCTION TO THE
VALUE ADDED TAX
Prepared by: Carl Justine T. Maniago, CPA
  The VAT covers all the vatable sales of goods, properties, services or lease of
properties by VAT taxpayers.

 Vatable sales or receipts are from sources other than:

 Exempt sales
 Receipts from services specifically subject to % tax

THE VALUE
 VAT taxpayers
ADDED TAX  VAT-registered persons
 VAT-registrable persons

 VAT threshold
 General – P3M
 Special – P10M – franchise grantees of radio or television
  Assessment of VAT threshold
 Tax with mixed transactions
 Individual with multiple proprietorship businesses
 Corporations with subsidiaries and branches
 Married individual taxpayers

THE VALUE  Taxpayers below the threshold can voluntarily register as VAT taxpayers. Such
option is subject to the 3-year lock-in period.
ADDED TAX
 The Valued Added Tax Model
Output VAT P xxx,xxx
Less: Input VAT xxx,xxx
VAT due P xxx,xxx
Less: Tax credits xxx,xxx
VAT still due Pxxx,xxx
  VAT on the vatable sales or receipts. It is the presumed passed on by the seller on his
sales or receipts.

 Types of Output VAT

 Regular Output VAT – 12% VST imposed on domestic sales or receipts
 Zero Output VAT – 0% VAT imposed on export and other zero-rated sales

 Illustration: Assume that ABC Company, a VAT taxpayer, made a P100,000 vatable sales
on account.
OUTPUT VAT The taxpayer shall bill the following to the customer:
Selling price P 100,000
Add: VAT (12% * P100k) 12,000
Total invoice price P112,000
This shall be recorded by the taxpayer in its books as follows:
Accounts receivables P 112,000
Sales P 100,000
Output VAT 12,000
  VAT paid by the taxpayer on the domestic purchases from VAT suppliers or on the
importation of goods or services in the course of business.
 Despite the absence of actual payment of VAT on purchase or import, input VAT may
also be allowed by law as incentives to the taxpayer such as in the case of presumptive
input VAT.
 Not all paid input VAT is creditable against output VAT. Those allowed to be deductible
against output VAT is called claimable input VAT, allowable input VAT or creditable
input VAT.

 Illustration: Assume ABC Company in the previous illustration purchased goods from a
VAT supplier. The supplier billed at P78,400, inclusive of VAT.
INPUT VAT The VAT shall be checked on the invoice. If not indicated therein, it can be
computed from the invoice as follows:
Purchase price (P78,400/112%) P 70,000
Multiply by: VAT rate 12%
VAT on purchase P 8,400
This shall be recorded by the taxpayer in its books as follows:
Purchases P 70,000
Input VAT 8,400
Accounts payable P 78,400
  At the end of each month, the input VAT is offset with the output VAT. A positive
VAT due is paid to the BIR. A negative VAT is normally non-refundable but is carried
over to the next succeeding months or quarter.

 Illustration: Continuing the preceding illustrations, ABC Company shall compute

its VAT dues as follows:
Output VAT P 12,000
VAT DUE Less: Input VST 8,400
VAT due P 3,600
At the end of the month, ABC Company shall close its VAT accounts as follows:
Output VAT P 12,000
Input VAT P 8,400
VAT payable 3,600
  SALES TO THE GOVERNMENT INCLUDING GOCCS

 The sales to the government and GOCCs is vatable at 12% normal rate but
the law requires government agencies or GOCCs to withhold a 5% final VAT
on their purchases.
 The 5% withheld tax shall be presumed as the actual VAT due of the
SALES SUBJECT taxpayer on the sale.
 There would be no more VAT payable. Thus the taxpayer has to adjust his
TO SPECIAL VAT claimable input VAT on that sale because the input VAT is effectively fixed or
standardized by the government at 7%.
RULES
Output VAT 12% of sales or receipts
Less: Input VAT Limited to 7%
Final VAT due 5% of sales or receipts
 The 7% claimable input VAT on sales to the government or GOCCs is referred
to as the standard input VAT.
  Illustration:

During the month, a VAT-registered person made a single sale of goods to a

government agency for P448,000, inclusive of P48,000 output VAT. These
goods were purchased for P336,000, including P36,000 input VAT.
SALES SUBJECT
TO SPECIAL VAT Make the journal entries to record the:
RULES A. Purchase of goods
B. Sales to the government and the final withholding VAT
C. Cost of sales to the government
D. To close the output VAT and withheld final VAT at month end
  ZERO-RATED SALES

 In principle, foreign consumption like export sales are non-vatable. In our

current tax laws, they are subject to 0% VAT to VAT taxpayers.
 With a zero output VAT and a claimable input VSAT, the VAT due would be
negative.
SALES SUBJECT  The law allows the taxpayer the privilege to claim the input VAT as a:
TO SPECIAL VAT  Tax refund, or
 Tax credit
RULES  If claimed as tax refund, the taxpayer will be paid back cash. If claimed as
tax credit, the taxpayer can use it to reduce other internal revenue tax
obligations to the BIR.
 If the input VAT on zero-rated sales is not applied with refund or tax credit,
the claimable input VAT would be added to creditable input VAT deductible
against output VAT on other vatable sales.
  Illustration:

A VAT-registered person exported goods for $8,000 (equivalent to P400,000).

These goods were purchased for P200,000, before P24,000 input VAT.

Make the journal entries to record the:

SALES SUBJECT A. Purchase of goods
TO SPECIAL VAT B. Export sales
RULES C. Cost of export sales
D.1. Receipt of input VAT refund, if claimed as tax refund
D.2. Receipt of tax credit certificate (TCC), if claimed as tax credit
certificate
D.3. To close the output VAT and withheld final VAT at month end, if not
claimed as refund or TCC
  EXEMPT SALES

 For the purpose of VAT, exempt sales are non-vatable sales such as:
SALES SUBJECT  Exempt sales of goods, services or properties
TO SPECIAL VAT  Services specifically subject to percentage tax
 These are not subject to output VAT. Consequently, the seller is not allowed
RULES to credit input VAT.
 Input VAT traceable to exempt sales is part of 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. He also purchased
P100,000 worth of supplies, exclusive of P12,000 input VST, which were all used
SALES SUBJECT in connection with these sales.
TO SPECIAL VAT
RULES Make the journal entries to record the:
A. Purchase of goods and supplies
B. Exempt sale
C. Cost of exempt sales and supplies used
  Four types sales or receipts for purposes of the VAT:
 Sales to the government
 Zero-rated sales
CLASSIFICATION  Exempt sales
 Regular sales
OF SALES OR
RECEIPTS FOR  Regular sales are subject to 12% VAT and are allowed full credit of actual input
VAT PURPOSES VAT. It covers all of sales of goods, properties or services other than:
 Sales to the government or GOCCs
 Zero-rated sales
 Exempt sales
 Types of sales Output VAT Claimable input VAT due
VAT
Exempt sales -none- -none- -none-
SUMMARY OF Zero-rated sales Zero Actual if not Negative
VAT RULES FOR claimed as credit or
refund
EACH TYPE OF
Sales to 12% of 7% of sales/receipts -none-
SALES government sales/receipts
Regular sales 12% of Actual input VAT Positive or
sales/receipts paid negative
  The sale of goods destined to a non-resident buyer abroad is zero-rated sale even
if it involves exempt goods.

 The sale of vatable goods or services in the Philippines is normally a regular

vatable sale, except when the sale is:
CLASSIFICATION  Made to the government or GOCC – subject to final withholding VAT
 Considered an export or effectively zero-rated such as sales to VAT-
RULES exempt persons – subject to 0% VAT

 The sale of exempt goods and services to the government or GOCC is still exempt
sales.
  Sales of registrable persons
 Sales are subject to VAT despite their non-registration as VAT taxpayers
but no input VAT credit is allowed.

 Sales of non-VAT taxpayers who issues VAT invoice or receipt

 Illegal charging of VAT on sales by non-VAT taxpayers shall be subject
OTHER SALES to VAT without the benefit of input VAT plus the 50% surcharge and the
usual 3% percentage tax.
SUBJECT TO VAT
 Exempt sales billed by VAT taxpayers as regular sales
 Exempt sales that are billed through a VAT invoice or VAT receipts will
be considered as regular sales. Furthermore, exempt sales which are
not so clearly indicated as “Exempt” in the VAT invoice or VAT receipts
shall be considered as regular sales subject to VAT.