VALUE-ADDED TAX (VAT)

 Value-added tax (Vat) is a form of sales tax.

 It is a tax on consumption levied on the sale, barter, exchange or lese of goods
or properties and services in the Philippines and on importation of goods into the
Philippines.
 It is an indirect tax, which may be shifted or passed on to the buyer, transferee or
lessee of goods, properties or services.
 Value Added Tax (VAT), also known as Goods and Services Tax (GST).
 Is a consumption tax that is assessed on products at each stage of the
production process – from labor and raw materials to the sale of the final product.

Value Added Tax (VAT) – Advantages and Disadvantages

Advocates of VAT argue that adopting a regressive tax system, such as VAT,
gives people a stronger incentive to work and earn higher salaries, as they get to keep
their income (i.e., they are not taxed more for earning more, which is true with
progressive taxes, such as income taxes) and are only taxed when purchasing goods.
VAT also makes it harder to evade taxes, as the tax is already embedded in the
purchase of goods and services.
However, critics of VAT argue that, unlike the income tax rate, which varies at
different levels of income, VAT is a fixed rate for everyone, and thus the poor end up
paying a greater VAT rate than the rich, relative to their respective incomes. With VAT,
goods and services become more expensive, and the entire tax is passed on to the
consumers. It reduces the purchasing power of consumers and may make it difficult for
low-income individuals and households to purchase necessities.
Another disadvantage of VAT is that businesses are faced with increased costs
due to the administrative burden of calculating taxes at each stage of production. It can
be especially challenging for global firms and multinational corporations with global
supply chains spanning multiple tax regimes.
Despite the arguments against VAT, it offers some important benefits. The
regressive tax can provide strong incentives to work, which can boost the overall gross
domestic product (GDP) of an economy. It can also increase government revenues by
reducing tax evasion and providing a more timely and efficient framework for collecting
taxes.

WHO REQUIRED TO FILE VAT RETURNS?

  Any person or entity who, in the course of his trade or business, sells, barters,
exchanges, leases goods or properties and renders services subject to VAT, if
aggregate amount of actual gross sales or receipts exceed Three Million Pesos
(3,000,000.00).
 A person required to register as VAT taxpayer but failed to register.
 Any person, whether or not made in the course of his trade or business, who
imports goods.

How, when and where to File VAT Returns?

Documentary Requirements
1. Duly issued Certificate of Creditable VAT Withheld at Source (BIR Form No.
2307), if applicable
2. Summary Alphalist of Withholding Agents of Income Payments Subjected to
Withholding Tax At Source (SAWT), if applicable
3. Duly approved Tax Debit Memo, if applicable
4. Duly approved Tax Credit Certificate, if applicable
5. Authorization letter, if return is filed by authorized representative.

Procedures
1. Fill-up BIR Form No. 2550M (for monthly VAT declaration) or 2550Q (for
quarterly VAT declaration) in triplicate copies (two copies for the BIR and one
copy for the taxpayer)

2. If there is payment:
File the Monthly VAT declaration, together with the required attachments,
and pay the VAT due thereon with any Authorized Agent Bank (AAB) under the
jurisdiction of the Revenue District Office (RDO)/Large Taxpayers District Office
(LTDO) where the taxpayer (head office of the business establishment) is
registered or required to be registered.
The taxpayer must accomplish and submit BIR-prescribed deposit slip,
which the bank teller shall machine validate as evidence that payment was
received by the AAB. The AAB receiving the tax return shall stamp mark the
word “Received” on the return and machine validate the return as proof of filing
the return and payment of the tax.
In places where there are no duly accredited agent banks, file the Monthly
VAT declaration, together with the required attachments and pay the VAT due
with the Revenue Collection Officer (RCO) or duly authorized Treasurer of the
 Municipality where such taxpayer (head office of the business establishment) is
registered or required to be registered.
The RCO or duly authorized Municipal/City Treasurer shall issue a
Revenue Official Receipt upon payment of the tax.

3. If there is no payment:
File the Monthly VAT Declaration, together with the required attachments
with the RDO/LTDO/Large Taxpayers Assistance Division, Collection Agent or
duly authorized Municipal/ City Treasurer of Municipality/City where the taxpayer
(head office of the business establishment) is registered or required to be
registered.

Deadline
Monthly VAT returns BIR Form 2550M:
Not later than the 20th day following the end of each month (manual filing)

Quarterly VAT returns BIR Form 2550Q:

Within twenty five (25) days following the close of taxable quarter (manual filing)
For EFPS filing, please visit the BIR website for detailed and updated dates of
deadlines.

Reference:
BIR Tax information on Value Added Tax
Sections 105 to 115 of the National Internal Revenue Code of 1997, as amended

TERMINOLOGIES:

OUTPUT TAX
Means the VAT due on the sale, lease or exchange of taxable goods or properties or
services by any person registered or required to register under Section 236 of the Tax
Code.

INPUT TAX
Means the VAT due on or paid by a VAT-registered on importation of goods or local
purchase of goods, properties or services, including lease or use of property in the
course of his trade or business.
It shall also include the transitional input tax determined in accordance with Section 111
of the Tax Code, presumptive input tax and deferred input tax from previous period.
TOTAL VATABLE PURCHASES

Are your total purchases from VAT registered suppliers? This should be supported with
VAT receipts.

Value Added Tax Payable is normally computed as follows:

 Computing Net VAT Payable on VAT “exclusive” Sales/Receipts. Total Output
Tax Due or Total Vatable Sales/Receipts x 12%
 Computing Net VAT Payable on VAT “inclusive” Sales/Receipts. Total Output
Tax Due or Total Vatable Sales / 1.12 x 12%.

Let’s assume that,

Total Vatable Sales (VAT exclusive) = P100,000

Total purchases with VAT receipts (VAT exclusive) = P70,000

P100,000 x 12% or P12,000

– P70,000 x 12% or P8,400
VAT Payable = P3,600

Computing Net VAT Payable on VAT “inclusive” Sales/Receipts

Total Output Tax Due or Total Vatable Sales / 1.12 x 12%

Less: Total Allowable Input Tax or Total Vatable Purchases / 1.12 x 12%
Equals: VAT Payable

Sample Computation of VAT Payable:

Example based on the above assumption:

Total Vatable Sales (VAT inclusive) = P112, 000

Total purchases with VAT receipts (VAT inclusive) = P78, 400

P112, 000 /1.12 x 12% or P12, 000

– P78,400 /1.12 x 12% or P8,400
VAT Payable = P3,600
Or an alternative computation:

P112, 000 /9.333 or P12, 000

– P78, 400 /9.333 or P8, 400
VAT Payable = P3, 600

Note:
VAT exempt sales, zero rated sales, purchases not qualified for input tax, and other
input taxes (if any) should also be shown in the VAT returns. See BIR Forms.

How to compute for the following VAT:

1. Both are VAT-registered

2. The sale is Zero-rated
3. The sale is VAT-exempt
4. VAT exclusive. Half of the sales are regular sales while the other half is VAT-
exempt.

Illustrative problem: Case 1

ABC company sold 112,000.00 on account inclusive vat to XYZ company both are
VAT-registered. ABC company purchases in cash for the quarter is 78, 400.00, Vat
inclusive.

To record the purchase with input Vat:

Purchases/Inventory 70,000.00
Input VAT 8,400.00
Cash 112,000.00

To record the sale with output VAT:

Accounts Receivable 78,400.00

Sales 100,000.00
Output VAT 12,000.00
To compute VAT Payable:

Output VAT 12,000.00

Less: Input Vat 8,400.00
Vat Payable 3,600.00

To record VAT payable:

Output VAT 12,000.00
Input VAT 8,400.00
VAT payable 3,600.00

Illustrative Problem: Case 2

ABC Company, a VAT-registered entity, sold 100,000.00 on account. The sale is Zero
rated. XYZ Company’s purchases in cash for the quarter is 78,400. Vat inclusive.

To record the purchase with input Vat:

Purchases/Inventory 70,000.00
Input VAT 8,400.00
Cash 78,400.00

To record the zero-rated sale:

Accounts Receivable 100,000.00

Sales 100,000.00

To compute VAT Payable:

Output VAT -
Less: Input Vat 8,400.00
Creditable input Vat 8,400.00

Creditable input vat (like input VAT) is considered a temporary asset

To record the creditable input VAT:

Creditable input VAT 8,400.00

Input VAT 8,400.00
Illustrative Problem: Case 3

ABC Company, a VAT-registered entity, sold 100,000.00 on account. The sale is VAT
exempt. XYZ Company’s purchases in cash for the quarter is 78,400. Vat inclusive.

To record the purchase with input Vat:

Purchases/Inventory 70,000.00
Input VAT 8,400.00
Cash 78,400.00

To record Vat exempt sale:

Accounts Receivable 100,000.00

Sales 100,000.00

To compute VAT payable:

Output VAT -
Less: Input VAT -
VAT Payable -

The unused input VAT on purchases of goods, properties or service related to the
exempt sales shall be considered as part of the cost. It shall then be closed to an
expense account or income summary.

To close unused input VAT:

Income summary 8,400.00
Input VAT 8,400.00
Illustrative Problem: Case 4

ABC Company, a VAT-registered entity, sold 100,000.00 on account. VAT exclusive.

Half of the sales are regular sales while the other half is VAT-exempt. XYZ Company’s
purchases in cash for the quarter is 78,400. Vat inclusive.

To record the purchase with input Vat:

Purchases/Inventory 70,000.00
Input VAT 8,400.00
Cash 78,400.00

To record the regular & VAT-exempt sales:

Accounts Receivable 106,000.00

Sales-Regular 50,000.00
Sales-VAT exempt 50,000.00
Output VAT (50,000x12%) 6,000.00

To compute VAT payable:

Output VAT 6,000.00
Less: Input VAT 4,200.00
VAT Payable 1,800.00

To record VAT payable & close unused input VAT:

Output VAT (Regular sales) 6,000.00

Income summary (unused input VAT) 4,200.00
Input VAT 8,400.00
VAT payable 1,800.00
 Institutional Assessment for VAT Computation

Directions: Compute the following transaction based on how the VAT is being
computed.

Both Buyer and Seller are VAT-Registered

1. Company A (a VAT-registered supplier) sells ₱120,000 worth of computer parts
to Company B (a VAT-registered business). Company B also purchased office
supplies for ₱30,000 (VAT-inclusive).

2. A VAT-registered electronics store sells computers for ₱1,120,000 (VAT-

inclusive) to a VAT-registered buyer. The store also purchases parts for
₱560,000 (VAT-exclusive).

The Sale is Zero-Rated

1. A software development company exports services worth ₱250,000 to a client in
the US (zero-rated). Locally, the company purchased office equipment worth
₱50,000 (VAT-inclusive).

2. A logistics company provides international shipping services, earning ₱2,240,000

(VAT-exclusive, zero-rated). It incurs expenses of ₱560,000 (VAT-exclusive) on
office rent and supplies from VAT-registered suppliers.

The Sale is VAT-Exempt

1. A company sells internet security software to a government agency, which is
VAT-exempt. The contract price is ₱180,000. The company also purchases raw
materials worth ₱50,000 + VAT for its operations.

2. A non-profit organization earns ₱1,680,000 (VAT-exclusive but VAT-exempt)

from donations and grants. It purchases supplies worth ₱336,000 (VAT-
exclusive) from VAT-registered suppliers.

VAT Exclusive – Half Regular Sales, Half VAT-Exempt

1. A tech retailer sold ₱200,000 worth of laptops. Half (₱100,000) was sold to a
VAT-registered company (VATable at 12%), while the other half (₱100,000) was
sold to a VAT-exempt entity. The retailer also purchased ₱80,000 worth of
inventory (VAT-inclusive).
2. A grocery store records ₱1,120,000 (VAT-exclusive) in total sales, of which
₱560,000 comes from VATable goods and ₱560,000 from VAT-exempt food
items. The store also has ₱448,000 (VAT-exclusive) in purchases.