CHAPTER 1: INTRODUCTION TO CONSUMPTION TAXES CONSUMPTION ABROAD are not subject to

consumption tax.
The Concept of Consumption and Consumption Taxes
Consumption- acquisition or utilization of goods or services by
any person.
Utilization of goods or services- may be through purchase,
exchange, or other means. This is subject to a tax called
consumption tax.
 Cross-boarder doctrine- goods that cross the boarder
destined for foreign countries are not charged
consumption taxes. THEREFORE, THE NIRC EITHER
EXEMPTS EXPORTS OR SUBJECT THEM TO A 0% TAX
RATE.
Types of Domestic Consumption AS TO SOURCE

Rationale of Consumption Tax 1. Domestic sales- purchases from resident sellers

2. Importation- purchases from abroad by non-
1. Savings formation residents
Savings- income less consumption. 1. Consumption tax on DOMESTIC SALES
- A capital that is useful in funding projects crucial to purchase- domestic consumptions of RESIDENT BUYERS TO
economic activites that could spur further economic RESIDENT SELLERS.
development.
- Subject to a consumption tax called BUSINESS TAX.
Tax on consumption promotes savings formation BY LIMITING - Business tax is an INDIRECT TAX because the
THE LEVEL OF CONSUMPTION. consumption tax is indirectly imposed upon sellers
which are businesses.
2. Rationalization of the Benefit Received Theory - Object of taxation: purchase of buyers. Obligation to
Benefit received theory- those who receive more benefit from pay: sellers.
the govt. should pay more taxes. 2. Consumption tax on IMPORTATION
Every person consumes goods and services as a normal part Importation- domestic consumption of goods or services from
of life, even if they do not earn income. A tax on consumption non-resident sellers.
will effectively render everybody taxable. Therefore,
consumption tax is a practical rationalization of the Benefit - Subject to a consumption tax called VAT on
Received Theory in taxation. importation.
- DIRECT TAX because VAT is directly levied upon the
3. Wealth distribution to society buyer-importer. Because the seller is non-resident
Redistribute wealth to society so everyone in the State could and is out of reach of the PH’s taxing power.
enjoy the same. Business Tax vs. VAT on IMPORTATION
Rich people buy or spend more than poor people. A tax on VAT on Importation Business Tax
consumption will effectively make the rich pay more taxes for Scope of tax Imports from BUSINESS or
NON-BUSINESS
Purchases from BUSINESSES
ONLY
the govt. Type of consumption tax Pure form Relative form
Statutory taxpayer Buyer Seller
Economic taxpayer Buyer Buyer
A Caveat to Consumption Tax (limitation) Nature of imposition Direct Indirect
Basis of tax Total purchase cost Sales or receipts
Consumption tax shall not be levied upon BASIC NECESSITIES Business- habitual engagement in a commercial activity.
such as food, education, health and shelter.
 The VAT on importation is not impasse to
Income Tax vs. Consumption Tax administrative feasibility as the govt. has placed a
Income tax Consumption Tax border control managed by the Bureau of Customs
Nature Tax upon RECEIPT of income Tax upon USAGE of income or
capital.
(BOC).
Scope/ average A tax to the CAPABLE A tax to ALL
Theoretical basis Ability to pay theory Benefit received theory Bureau of Customs (BOC)- tasked to collect tax in behalf of
Types of Consumption the BIR. Thus, the VAT on importation is conveniently
Types of Consumption Purchaser Status
collectible through this.
1. Domestic consumption Resident Taxable
2. Foreign consumption Non-resident Exempt/ effectively non-  Being a business is very essential to business taxation
taxable
while it is not the case with importation. So long as
 Because taxation is INHERENTLY TERRITORIAL, the
there is importation of goods or service, the VAT
govt. can only impose tax upon DOMESTIC
generally applies.
CONSUMPTION.
 Destination principle- only goods and services Types of Consumption Taxes
destined for CONSUMPTION IN THE PH are subject to
CONSUMPTION TAX while those destined for
 1. Percentage Tax- a tax of various rates from .60% to - services specifically subject to percentage tax
30% are taxable consumption of services but subject only to
2. Value Added Tax- a consumption tax of 12%
a specific percentage tax rate set by NIRC. Not subject to
3. Excise Tax- an ad valorem or specific tax, which is
imposed in addition to VAT or percentage tax, only in VAT.
certain goods or services.
3. VATABLE IMPORTATION OR SALES
Types of Domestic Consumption as to Taxability
- all other importation or sales of either goods
1. Exempt consumption- consumption of or services that are not exempted or specifically
goods/services not subject to consumption taxes. imposed a percentage tax is vatable.
2. Consumptions specifically subject to percentage
tax- consumption of services that are not subject to The Structure of the VAT on Importation
VAT but are imposed with a specific percentage tax.
3. Vatable consumption- consumption that are neither Import of service
VAT on Importation
Import of goods
exempted or subject to percentage tax. Exempt Exempt Exempt
% tax Percentage tax -
Importation Domestic sales/receipts VAT Final withholding VAT VAT on importation
Exempt consumption
Services subject to a % tax
exempt importation
Service specifically subject
Exempt sales/receipt
Services specifically subject
Import of services
to a % tax to a % tax
Vatable consumption Vatable importation Vatable sales or receipt The import of service is either:
1. EXEMPT CONSUMPTION
a. Exempt
- neither subject to percentage tax nor VAT.
b. Subject to percentage tax
-sourced from abroad- exempt from VAT c. Subject to final withholding VAT
 The import of services by certain VAT-exempt
-sourced from within- exempt from business tax
person is exempt from VAT.
Basis of exemption from consumption tax
Basis of exemption
Human necessity
VAT on Importation
Goods imported is a
Business Tax
The goods, services or
Import of goods
HUMANA NECESSITY property sold is a HUMAN

Out of scope of tax The importation DOES NOT

NECESSITY
The seller is NOT engaged in
The import of goods is either:
constitute a domestic business.
consumption a. Exempt
Tax incentive The importation is exempted The sales or receipt is
as a tax incentive to CERTAIN exempted as a tax incentive b. Subject to VAT importation
IMPORTERS. to CERTAIN SELLERS.
International comity The importation is exempted The sales or receipt is
by treaty exempted by treaty. The Structure of the Business Tax
Human necessity- certain basic necessities such as natural Business Tax
agricultural or marine food products, agricultural inputs, Sales of services sales of goods
Exempt Exempt receipt Exempt
books, newspapers and magazines, residential properties; and % tax Receipts specifically subject -
essential services. These consumables are not taxable. to a % tax
VAT Vatable receipts Vatable sales

Out of scope of the consumption tax- Sales of services

VAT on Importation
The bringing of goods to the Ph which
Business Tax
Domestic consumption from businesses only.
The receipt from the sale of service is either:
represents current domestic consumption.
Scope of the VAT on importation- applies to current purchase a. Exempt
or acquisition of goods and services by a resident person from b. Specifically subject to a percentage taxe
non-resident persons. Importation that do not reflect c. Vatable
CURRENT acquisition are exempt.
Sales of goods
Scope of business taxes- only sales or persons engaged in
business is subject to business tax. The sales from the sale of goods is either:
Tax incentives- certain institutions and objects are not subject a. Exempt
to business taxes to encourage actions that are beneficial to b. Vatable
the country.
VAT on Importation vs. VAT on Sales in Business Tax
International comity- importation or sales of goods/service
that are agreed to be exempted in an international VAT on importation- is directly computed on the landed
agreement. costs of importation without any deduction or tax
credit.
2. SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX
VAT on Sales in Business Tax- is unique as it is
theoretically imposed on the value added (the amount
of mark-up imposed by sellers on their purchase costs).
It 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.
The tax due is computed as:
Output VAT (12% of sales & receipts) xxx
Less: Input VAT (12% VAT paid on xxx
purchases
VAT due xxx
Input VAT- tax credit against output VAT when due or
paid not when goods are sold.
- Not imposed on the gross profit.
 This feature of the VAT on sales and receipt is
unique compared to the percentage taxes which
is merely computes as a fixed percentage of
sales or receipts.
The Excise Tax
Excise tax- an additional imposition to VAT or
percentage tax.
- Is normally imposed before the goods are sold
by domestic producers or upon their
importation by importers.
It is imposed on the consumption commodities such as:
a. Sin products such as alcohol and cigarettes
b. Non-essential commodities such as automobile
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.