Input VAT
Difficulty: A
- Memorize Sources of Input VAT
- Differentiate between VAT transaction, Zero-rated VAT, and VAT Exempt
-
Required prior skills: VATable Transactions, VAT Exempt Transactions, Output VAT
Hardest topics: Input VAT on depreciables, Allocation of Input VAT
Concept of Value Added Tax
Value Added Tax is the tax imposed on the value added to a product.
A product goes through multiple stages of processing before it is finally consumed. The stages of processing may
occur across different businesses. The issue, therefore, is how much value is added by a business.
See the illustration below:
Sells ore Sells steel
for P100 bars for P500
As can be seen, the same material originally sold for P100. After conversion, it sold for P500. It can be presumed,
therefore, that the value added to the material was P400.
Every business subject to VAT must impose the Value Added Tax on the transaction. This is done by charging the VAT
against the customer (i.e. the customer will pay the purchase price + the VAT). Accordingly:
Sells ore for P100 Sells steel for P500
Collects 12% VAT Collects 12% VAT
from customer from customer
The VAT collected from the customer must ordinarily be remitted to the BIR. Notice, however, the middle business
above (the factory). The factory pays 12% VAT to the mine, such VAT being remitted to the BIR. At the same time,
the factory charges 12% VAT against the construction company. However, the factory does not keep any of the VAT
collected; it must remit the amount to the BIR. In the end, it will essentially have a loss of P12 (the VAT paid to the
mine, which was the factory’s money).
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The VAT system allows for a method of relief for this issue. The VAT collected from customers is called Output VAT.
The VAT paid to suppliers is called Input VAT. The Tax Code allows the taxpayer to deduct the Input VAT as a form
of advance payment or tax credit.
Output VAT of factory (500 x 12%) 60
Input VAT of factory (100 x 12%) (12)
VAT payable 48
The factory will only pay P48 in VAT to the BIR. In effect, its total payments should equal the output VAT (12 VAT
paid to the mine + 48 VAT remitted from collections by the factory to the BIR = 60 Output VAT).
Another way of looking at the situation is this:
New selling price 500
Purchase price (100)
Value added by factory 400
Multiply: 12%
VAT payable by factory 48
Input VAT
Input VAT is so called because it is the VAT paid on the inputs of the product. These inputs include raw materials and
overhead.
A business must purchase the products and services of other businesses in order to operate. The most common
example is the purchase of raw materials. The other businesses, which are suppliers of materials, may also be VAT
registered. On the supplier’s side, the VAT charged is their Output VAT; it can be an input VAT of another business.
Since the input VAT paid to the supplier is eventually remitted to the BIR, it is treated as an “advance payment” of
the VAT. Thus, the VAT Payable is as follows:
Output VAT – Input VAT = VAT Payable
Only a VAT registered business can avail of the input VAT. Output VAT is charged by a VAT-registered business.
Thus, even a non-VAT registered business can be made to pay the VAT to another business. However, in such an
instance, the VAT paid by the non-VAT registered business cannot be used as “input VAT”. Instead, the VAT would
have be treated as a cost of the good; the non-VAT registered business cannot claim it as a deduction against other
taxes.
On the other hand, a VAT registered business will have different treatments on Input VAT as will be seen below.
Sources of Input VAT
There are multiple sources of Input VAT for a business.
“Regular” VAT – a VAT of 12% is imposed on the sale. The VAT is paid by the taxpayer to the seller, then
remitted to the BIR
2% Transitional VAT
4% Presumptive VAT
VAT on Importations
VAT on Depreciable assets
12% VAT
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The 12% VAT is the default rate of VAT. In the case of sales of goods, it is imposed on the gross selling price. In the
case of sales of services, it is imposed on the gross receipts.
As previously mentioned, the amount of VAT collected on the transaction must be separately indicated on the
official receipt. If it is not separately indicated, then the whole amount received is presumed to be inclusive of VAT.
Illustration
The taxpayer had the following data for the month, net of any VAT:
Beginning Inventory 500,000
Purchases from VAT registered suppliers 1,000,000
Goods available for sale 1,500,000
Ending Inventory 900,000
Cost of Goods Sold 600,000
The input VAT is computed as follows:
Purchases from VAT registered suppliers 1,000,000
VAT rate 12%
Input VAT 120,000
Only VAT-registered suppliers can impose the VAT. Thus, the 12% Input VAT will come only from VAT-registered
suppliers. The supplier must be VAT registered in order for the taxpayer to avail of the input VAT. A supplier that is
not under the VAT system would not impose VAT on the sale. Thus, if there is no VAT paid to suppliers, the taxpayer
cannot claim any input VAT.
The input VAT is computed based on the purchases and not on the amount of goods sold. The Input VAT is already
paid at the time of purchase and remitted to the BIR in the same month or quarter. It would not be feasible to have
to keep track of which Input VAT should be allowed to be deducted when the actual Input VAT has already been
remitted.
Illustration
The taxpayer had sales of P1,000,000 net of VAT. It made the following purchases during the period, net of any VAT,
from a VAT registered supplier:
Potatoes 60,000
Packaging 50,000
Cooking Oil 150,000
Other ingredients 250,000
The input VAT is computed as follows:
Packaging 50,000
Cooking Oil 150,000
Ingredients 250,000
Total 450,000
VAT rate 12%
Input VAT 54,000
Output VAT 120,000
Input VAT 54,000
VAT Payable 66,000
Potatoes are agricultural food products in original state, and therefore VAT Exempt. Thus, the supplier imposes no
VAT on the sale, and the taxpayer pays no input VAT.
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Illustration
The taxpayer had the following purchases for the month, net of any VAT:
Bananas VAT registered 200,000
Potatoes Not registered 500,000
Packaging VAT registered 400,000
Raw Material A VAT registered 1,600,000
Raw Material B Not registered 1,500,000
The Input VAT is as follows:
Packaging 400,000
Mat’l A 1,600,000
Total 2,000,000
VAT rate 12%
Input VAT 240,000
The supplier for Raw Material B is not VAT registered. No VAT is paid on the purchase and no Input VAT can be
claimed.
2% Transitional VAT
A business can register for VAT in the following cases:
1. VAT registration is mandatory in the following cases:
a. Where the business is newly commenced and it expects to exceed the 3,000,000 threshold within 12
months. The taxpayer will register for VAT at the same time as it registers its business.
b. Where the business actually exceeds the 3,000,000 threshold, the taxpayer must register in the
month after the threshold was reached.
c. Franchise grantees of radio and television broadcasting with annual gross receipts exceeding
P10,000,000. They must register within 30 days from the end of the calendar year.
2. Franchise grantees of radio and television broadcasting may register for VAT even without exceeding the
threshold. However, the registration shall be irrevocable.
3. Taxpayers who are below the 3,000,000 threshold may opt to be VAT registered. They can only be registered
within 10 days before the beginning of the taxable quarter.
Except for item 1a, the VAT registration tends to happen in the middle of the business’ life. However, even if the
taxpayer is not VAT registered, he must still pay VAT if the suppliers are VAT registered. Despite paying the VAT, a
non-registered taxpayer cannot claim the paid VAT as a tax credit against any tax.
As a result, the Tax Code provides for a method of relief for taxpayers who newly transition to the VAT system. This
is called the transitional VAT. This is applicable only for the first month and first quarter that the taxpayer becomes
VAT registered.
The taxpayer can claim an input VAT of the higher of 2% of the beginning inventory or the actual VAT paid on such
inventory. This way, the taxpayer can still benefit to a small extent on VAT paid on goods purchased prior to VAT
registration.
Illustration
The taxpayer opted to register for VAT in April 2021. As of April 1, 2021 the taxpayer had the following inventory:
VAT exempt raw materials 150,000
Mat’l from VAT suppliers 840,000
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Mat’l from nonVAT suppliers 300,000
Purchases from VAT suppliers amounted to 1,000,000 and sales amounted to P2,500,000, both net of VAT.
The transitional input VAT is computed as follows:
VAT exempt raw materials 150,000
From VAT suppliers (net of VAT: 840/1.12) 750,000
From nonVAT suppliers 300,000
Total inventory 1,200,000
2%
Presumed VAT 24,000
From VAT suppliers 840,000
Divide 112%
Inventory net of VAT 750,000
VAT rate 12%
Actual VAT paid 90,000
The taxpayer claims the higher as the Transitional Input VAT. Thus, the taxpayer can use the P90,000 actual VAT paid
as an input VAT.
Output VAT (2,500,000 x 12%) 300,000
Input VAT from purchases (1M x 12%) 120,000
Transitional Input VAT 90,000 210,000
VAT Payable 90,000
4% Presumptive VAT
Certain firms use a lot of materials that are VAT exempt to process and manufacture goods that are not VAT exempt.
The result is that these businesses have very little Input VAT that can be claimed.
To alleviate their situation, the Tax Code provides for what is called the presumptive input VAT. Although no actual
input VAT is paid on certain materials, a presumed input VAT can be claimed as if the taxpayer paid input VAT.
The presumptive input VAT is 4% of the value of primary agricultural products purchased. The presumptive input
VAT is allowed only for firms producing the following:
a. Sardines
b. Mackerel
c. Milk
d. Refined Sugar
e. Cooking Oil
f. Packed Noodle based instant meals
Illustration
The taxpayer is a manufacturer of cooking oil. It had the following purchases during the period, net of any VAT (all
from VAT registered suppliers):
Coconuts 500,000
Plastic bottles 50,000
Sodium Carbonate 100,000
Other raw materials 250,000
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The total input VAT that can be claimed is as follows:
Plastic Bottles 50,000
Sodium Carbonate 100,000
Other Raw Materials 250,000
400,000
Actual Input VAT 12% 48,000
Coconuts 500,000
Presumptive Input VAT 4% 20,000
Input VAT 68,000
VAT on Importations
Except for VAT-exempt importations, all persons must pay VAT on items imported into the Philippines. The VAT will
form part of the amounts due to the Bureau of Customs before the goods can be released.
It does not matter whether the importer is a business or not, or if the items imported are to be used in business.
However, since in effect the taxpayer would be paying VAT on the items, the VAT can be claimed as Input VAT if the
taxpayer is a VAT registered business.
The VAT on Importations is 12% of the landed cost of the items imported. The landed cost is comprised of the
following:
A. Dutiable Value. This is the value used by the Bureau of Customs for computing customs duties on the
importation.
B. Customs duties
C. Excise tax
D. Bank charges
E. Brokerage fees
F. Arrastre charge
G. Wharfage due
H. Documentary Stamp Tax due
I. Import processing fees
VAT on depreciable assets
Companies that manufacture depreciable assets, such as machines, vehicles, and equipment, must also impose the
VAT on their sales. Accordingly, since their customers pay for VAT, the customers can also claim as input VAT what is
paid on these assets. The input VAT is claimable even if the customers’ business is not selling depreciable assets in
the regular course of business, since depreciation still forms part of the cost of the final product.
However, the input VAT on depreciable assets is considerably large due to the usual value of such assets. The Tax
Code limits the claimable input VAT on these assets.
If the total cost of depreciable goods acquired by the taxpayer during the month exceeds P1,000,000, the input VAT
must be amortized over a period of 5 years or the asset’s useful life, whichever is shorter. Otherwise, the total input
VAT can be claimed in the month of purchase.
Illustration
The company purchased the following depreciable assets (net of VAT) during January:
Asset Cost Useful life
Dump truck 480,000 4 years
Road roller 1,500,000 5 years
Crane 900,000 6 years
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The claimable input VAT on all these items must be amortized, because the total cost of acquired depreciable assets
exceeds P1,000,000. The threshold is not computed item by item but by total purchases in a month.
Truck Roller Crane
Cost 480,000 1,500,000 900,000
VAT rate 12% 12% 12%
Input VAT paid 57,600 180,000 108,000
Divide: years 4 5 5*
14,400 36,000 21,600
Divide: months 12 12 12
Monthly Input VAT 1,200 3,000 1,800
*The Crane is amortized over 5 years instead of 6 because the useful life is longer.
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Under TRAIN, the amortization rule will no longer apply for depreciable assets purchased after January 1, 2022 (as
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explained by RR 13-2018).
Illustration (lifted from RR 13-2018)
Computation of the VAT Payable
In general, the VAT payable is obtained simply by deducting the Input VAT from the Output VAT.
The key problem lies in that a business may have multiple transactions that are subject to different business taxes,
such as Zero-Rated VAT, VAT exempt, or even OPT. Against VAT exempt or OPT subject transactions, the Input VAT
cannot be claimed because there is no Output VAT to be matched against. A Zero-Rated VAT transaction is still under
the VAT system, therefore while Input VAT can be claimed, there is also no output VAT to match the transaction
against.
First, the effects of any paid Input VAT on each transaction alone:
VAT exempt or OPT subject transactions
A taxpayer may register for the VAT although he has transactions which are VAT exempt. Additionally, since the
imposition of VAT on his purchases depends on the status of the supplier, a taxpayer with VAT exempt sales may still
have to pay VAT on his purchases.
Input VAT on items purchased that will be used for VAT exempt or OPT subject transactions will instead be claimed
as part of the cost of the goods, and therefore is deductible for income tax purposes as cost of goods sold.
Illustration
The taxpayer made P1,000,000 VAT exempt sales to senior citizens. Purchases on materials used to create the goods
sold had Input VAT of P30,000. The cost of goods sold amounted to P500,000.
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The Gross Income is computed as follows:
Sales 1,000,000
Cost of Sales (500,000)
Input VAT on VAT exempt sales (30,000)
Gross Income 470,000
Zero-Rated Sales
Zero-Rated Sales are subject to the VAT system, although the rate of VAT imposed is 0. The input VAT on Zero-Rated
Sales can be either (at the option of the taxpayer):
1. Applied for a tax refund.
2. Applied for a Tax Credit Certificate (TCC)
Thus, the input VAT on zero-rated sales cannot be applied as input VAT against regular Output VAT.
Illustration
The taxpayer made sales of P2,000,000 to domestic sources, and P1,000,000 as exports, both net of VAT. Because
the company sells different items between domestic sources and exports, the company can specifically trace which
materials are used in each finished good, and therefore which Input VAT is applicable. Input VAT applicable to
domestic sales is P100,000 while to exports is P50,000.
The VAT payable is computed as follows:
Output VAT (2M x 12%) 240,000
Input VAT (100,000)
VAT Payable 140,000
The Input VAT on goods sold as exports cannot be claimed as a deduction against other Output VAT. The taxpayer
must either file for a tax credit certificate or apply for a tax refund.
Sales to Government
Prior to January 1, 2021:
The Input VAT on sales to government cannot be claimed as a deduction against other Output VAT.
After January 1, 2021
Under the TRAIN Law, starting January 1, 2021 sales to government will shift from a Final System to a Creditable
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System.
Illustration
A VAT-registered taxpayer made sales of P1,000,000 to the government. The applicable input VAT on the sale is
P60,000. The amount to be paid to the seller will be as follows:
Sale 1,000,000
Output VAT (1M x 12%) 120,000
Total 1,120,000
Less: withheld (1M x 50,000
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5%)
Amount paid to seller 1,070,000
Using the Final System:
Output VAT 120,000
Cost of Sales 10,000
Input VAT 60,000
Withheld final VAT 50,000
The 5% withheld VAT is treated as the final VAT payable. The taxpayer need not remit the P10,000 (because the VAT
Payable should have been P120,000 – 60,000 Input = P60,000).
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Using the Creditable System:
Output VAT 120,000
Input VAT 60,000
VAT Due 60,000
Less: withheld (1M x 50,000
5%)
VAT Payable 10,000
The taxpayer now must remit the P10,000.
Multiple Sales Types
When there are multiple sales subject to different business taxes, the Input VAT must be apportioned to each type of
sale.
1. The business should be able to specifically trace what materials or services were used to produce the goods
sold. Input VAT on those specifically traced materials will be applied against the output VAT on those goods.
2. For any other input VAT that cannot be specifically traced to any good, they are applied prorata based on the
gross sales.
Illustration
A VAT-registered company made the following purchases net of VAT:
Material/ Applicable Output Seller Status
Service Gross Purchase
Material A VAT Exempt Sales VAT registered 200,000
Material B Domestic Sales Not Registered 250,000
Material C Domestic Sales VAT registered 400,000
Material D Export Sales VAT registered 500,000
Material E Sale to Gov’t VAT registered 150,000
Material F All products VAT registered 1,000,000
The company makes the following gross sales net of any VAT:
Sales Amount
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VAT Exempt 800,000
Domestic 1,400,000
Exports 800,000
Sale to Gov’t 1,000,000
The computation of the VAT Payable is as follows:
Output VAT computation
Sales Amount Output VAT
VAT Exempt 800,000 0
Domestic 1,400,000 168,000
Exports 800,000 0
Sale to Gov’t 1,000,000 120,000
Input VAT computation
Material/Service Seller Status Gross Purchase Input VAT
Material A VAT registered 200,000 24,000
Material B Not Registered 250,000 XXX
Material C VAT registered 400,000 48,000
Material D VAT registered 500,000 60,000
Material E VAT registered 150,000 18,000
Material F VAT registered 2,500,000 120,000
Prorate the Input VAT that cannot be traced to any specific sale:
Sale Amount Prorate Input VAT
VAT Exempt 800,000 20% 24,000
Domestic 1,400,000 35% 42,000
Exports 800,000 20% 24,000
Sale to Gov’t 1,000,000 25% 30,000
Total 4,000,000 100% 120,000
On VAT Exempt Sales:
Mat’l A 24,000
Mat’l F 24,000
Input VAT part of 48,000
cost
On regular VATable Sales
Mat’l C 48,000
Mat’l F 42,000
Input VAT 90,000
On Zero-Rated Sales
Mat’l D 60,000
Mat’l F 24,000
Input VAT 84,000
On sale to gov’t
Mat’l E 18,000
Mat’l F 30,000
Input VAT 48,000
Treatment Before January 1, 2021
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Sale to Gov’t
Output VAT 120,000
Input VAT 48,000
VAT “Payable” 72,000
Less: withheld (1M x 50,000
5%)
Adjustment to COGS 22,000
VAT Payable on Regular VATable Sales
Output VAT 168,000
Input VAT 90,000
VAT Payable 78,000
Treatment After January 1, 2021
VAT Payable on Regular VATable Sales and Sales to Gov’t
Output VAT (168 + 120) 288,000
Input VAT (48 + 90) 138,000
VAT Due 150,000
VAT Withheld (1Mx5%) (50,000)
VAT Payable 100,000
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SEC. 110. Tax Credits. -
A. Creditable Input Tax. –
XXX
Provided, that the input tax on goods purchased or imported in a calendar month for use in trade or business for
which deduction for depreciation is allowed under this Code shall be spread evenly over the a month of acquisition
and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT
component thereof, exceeds One million pesos (P1,000,000): Provided, however, That if the estimated useful life of
the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over
such a shorter period: Provided, further, That the amortization of the input VAT shall only be allowed until
December 31, 2021 after which taxpayers with unutilized input VAT on capital goods purchased or imported shall
be allowed to apply the same as scheduled until fully utilized:…
Depreciable goods purchased prior to December 31, 2021 will still have their applicable input VAT be amortized even
after December 31, 2021. However, goods purchased after December 31, 2021 will no longer have any amortization.
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SEC. 114. Return and Payment of Value-Added Tax. –
XXX
(C) Withholding of Creditable Value-added Tax. - The Government or any of its political subdivisions, instrumentalities
or agencies, including government-owned or -controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold the value-added tax imposed in Sections 106 and 108 of this Code, deduct
and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That
beginning January 1, 2021, the VAT withholding system under this Subsection shall shift from final to creditable
system: Provided, further, That the payment for lease or use of properties or property rights to nonresident owners
shall be subject to ten percent (12%) withholding tax at the time of payment. Xxx
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The BIR issued RMC 36-2021 to clarify the effect of the shift to Creditable System.
It provided the below information:
A. Monthly and Quarterly VAT Returns BIR Form Nos. 2550M and 2550Q). - The following
changes/adjustments shall be effected to the following forms, in relation to VAT withholding, until
a new version of the forms have been developed and prescribed for use:
BIR Form No. Line/ Description Remark
Schedule
Affected
2550M (v. 20B Input tax on sale to Not to be filled out/To be
February 2007) Govt. closed to deactivated from the Electronic
expense (Sch. 4) Payment and Filing System (eFPS)
23C VAT withheld on Where the creditable VAT
Sales to Government withheld will be reflected
(Sch. 8)
Schedule 4 Input Tax Not to be filled out/To be
Attributable to Sale deactivated from the eFPS
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to Government
Schedule 8 VAT withheld on Where the details of the creditable
Sales to Government VAT withheld will be reflected
23B Input tax on sale to Not to be filled out/To be
Govt. closed to deactivated from the eFPS
expense (Sch. 4)
26D VAT withheld on Where the creditable VAT
Sales to Government withheld will be reflected
2550Q (v.
(Sch. 8)
February 2007)
Schedule 4 Input Tax Not to be filled out/To be
Attributable to Sale deactivated from the eFPS
to Government
Schedule 8 VAT withheld on Where the details of the creditable
Sales to Government VAT withheld will be reflected
Take note of Line 20B and 23C above.
The BIR Form for VAT can be seen below:
The items related to sales to government will be highlighted:
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Line 16B: Total Output VAT
Line 19: Total Input VAT: all input VAT even for vat exempt or zero-rated sales.
Line 21: Only Input VAT that can be claimed against Regular Output VAT
To illustrate, under the Final System, the form would look like as follows:
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Under the withholding System, Line 20B on input tax closed to expense is no longer used. As a result:
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