Consumption Tax

Consumption Tax
• Consumption occurs when one acquires goods or services by
purchase, exchange or other means.
• A consumption tax is a tax upon the utilization of goods or services by
consumers or buyers. It is a tax on the purchase or consumption of
the buyer and not on the sale of the seller.
Rationale of Consumption Tax
Consumption tax promotes savings information.
• Income is inherently destined toward consumption.
• A tax on consumption is therefore important to limit consumption to
shift part of the income to savings information.
Rationale of Consumption Tax
Consumption tax helps redistribute wealth to the society.
• Rich people buy more and spend more since they can afford
expensive lifestyles. A tax on consumption will make them pay more
tax.
• Therefore, consumption tax supports the redistribution of wealth
from the rich to the less privileged members of the society.
Rationale of Consumption Tax
Consumption tax supports the Benefit Received Theory
• Those who receive benefit from the government shall pay taxes.
• Everyone in the state receives benefits from the government; hence,
everybody should be taxed.
Types of Consumption
1. Domestic consumption – refers to consumption or purchases of
Philippine residents.
2. Foreign consumption – refers to consumption or purchases of non-
residents.

Because taxation is inherently territorial, only domestic consumption

can be subjected to Philippine taxation. Foreign consumption cannot be
taxed.
Tax Rules on Consumption
• The Philippines follows the destination principle.
• Destination principle – Goods and services destined for use or
consumption in the Philippines are subject to consumption tax
whereas those destined for use or consumption abroad are not
subject to consumption tax.
• Hence, goods that cross the border which are destined toward foreign
territories should not be charged with consumption taxes. This is the
cross-border doctrine of consumption tax.
Tax Rules on Consumption
The seller is a Domestic consumption Foreign consumption
(Buyer is a resident) (Buyer is a nonresident)
Non-resident Taxable No tax
Resident Taxable Effectively no tax
Types of Taxable Domestic
Consumption
1. Importation – Purchase of residents of goods or services from non-
residents abroad.
2. Sale – Purchase of residents of goods, properties or services from
resident sellers.