Value Added Tax

Chapter Objectives:
• To understand the scope of VAT on sale
• To understand the VAT threshold application
• To understand the VAT model
 Topics to be discussed:
• The scope of VAT on sales
• The VAT threshold
• The VAT model
• Output VAT and its types
• Input VAT
 Scope of the VAT

The Scope of the VAT on Sales

The VAT covers all sales of goods, properties, services
or lease of properties other than:
a. VAT exempt sales
b. Services specifically subject to percentage tax
Provided, however, that the seller must be a VAT-registered
person or a VAT-registrable person.
 Illustration

Dingalan Company is a VAT-registered taxpayer with a

totals sales of P2,500,000 during the period.

Compute the VAT on sales.

P2,500,000 x 12% = P300,000

 Illustration

Mr. Subic, a non-VAT registered taxpayer, exceed the VAT

threshold on August 2019. He reported a P200,000 sales in
September 2019.

Compute the VAT on sales.

P200,000 x 12% = P24,000

 VAT Exempt Transactions

VAT Exempt Transactions under NIRC

1. Exempt importations
2. Exempt sales
3. Services specifically subject to percentage tax
4. Export sales of non-VAT taxpayers
 VAT Threshold

The VAT Threshold

General threshold - P3,000,000 - Applicable to all tax
payers other than franchise grantees of radio or television.
Specific threshold - P10,000,000 - Applicable only to
franchise grantees of radio or television.

 Only vatable sales are considered for purposes of the

VAT threshold.
 Illustration

A department store that is a nonVAT taxpayer had the

following sales for the last 12-month period:
Fertilizers, seeds, poutry and hog feeds 1,200,000
Fruits and vegetables 800,000
Groceries 800,000
Dress, clothes, shoes and other apparels 600,000
Furniture 400,000
TOTAL 3,800,000

Compute the VATable sales

P0
 Illustration

As of Sepember 2019, Mr. Tabaco, a nonVAT taxpayer, had

the following gross receipts from his professional practice
and his other business:
Gross receipts from restaurant business 2,200,000
Gross receipts from barbershop 300,000
Gross receipts from taxi cab operations 1,500,000
Gross receipts from professional practice 600,000
TOTAL 4,600,000
Compute the VATable sales
P0
 Illustration

The head office and branches of Pretentious Corporation

had the following sales in the year 2019:
Baguio City head office 1,400,000
Dagupan City branch office 1,200,000
San Fernando City branch office 1,000,000
TOTAL 3,600,000
Is the business subject to VAT?

Yes
 Illustration

Minor Corporation and its wholly owned subsidiaries:

Midget Corp. and Small Corp had the following sales for the
period:
Minor Corporation P 1,800,000
Midget Corporation 1,600,000
Small Corporation 1,400,000
TOTAL P 4,800,000
Is the business subject to VAT?

No
 VAT Model

The Value Added Tax Model

The VAT payable of a VAT taxpayer is computed as:
Output VAT P XX
Less: Input VAT XX
Net VAT payable P XX
Less: tax credits or payments XX
Tax still payable or (overpayment) P XX
 Output VAT

Output VAT
Output VAT is the VAT passed on by a VAT taxpayer
on his sales to customers or clients.

Types of Output VAT

1. Regular Output VAT - for domestic sales
2. Zero Output VAT - for export and other zero-rated sales
 Regular Output VAT

The regular output VAT is computed as 12% of the

following:
a. Sellers of goods or properties - Gross selling price
b. Sellers of services or lease of properties - Gross receipts
 Zero Output VAT

Zero Output VAT arises from:

a. Export sales by VAT taxpayers
b. Transactions considered export sales
c. Those granted with zero-rating treatment under
special laws or international agreements to which the
Philippines is a signatory.
 Zero Rated Sales vs. Exempt Sales

Zero Rated Sales vs. Exempt Sales

• Both will not have output VAT
• The input VAT in the case of exempt sales is noncreditable
and nonrefundable. It can only be claimed as deductions in
the income tax return.
• In the case of zero-rated, the taxpayer will fully recover the VAT
he paid on his domestic purchases and on importation either by
credit to any tax liability of the taxpayer with the government or
by tax refund.
 Input VAT

Input VAT
• Input VAT is the VAT paid on the domestic purchases or VAT
paid on the importation of goods or services by the taxpayer.
• Input VAT also arises from incentives provided by law such as
the transitional input VAT and the presumptive input VAT.
 Transitional Input VAT

TIV is allowed on the inventory on hand (goods,

materials and supplies) of a person who, for the first time
becomes liable to VAT or elects to be VAT-registered.

Rate: 2%
 Presumptive Input VAT

PIV is an amount allowed by the Tax Code as input tax

on purchases of a VAT-registered peron despite that there
is no actual VAT payment made on VAT-xempt transactions.

Rate: 4%
 Classification of Sales for VAT Purposes

Types of Sales Description Taxation

a. Exempt sales Sales of EXEMPT goods or services Exempt from VAT

b. Zero-rated sales Export sales, sales to nonresident Subject to 0%

persons and those granted zero- Output VAT
rating treatment
c. Sales to Sales to any govenrment agencies or Subject to 5% final
government any of its instrumentalities, including withholding VAT
GOCCs
d. Regular sales Sales to domestic or resident private Subject to 12%
entities and individuals Output VAT
 Illustration - VAT Exempt Sales

During the month, a VAT-registered person sold for

P400,000 unprocessed agricultural food products which he
bought for P150,000. He also purchased P100,000 worth of
supplies, exclusive of P12,000 inpt VAT, which were all
used in connection with these sales.
 Journal Entries

The taxpayer shall record the following in his books:

Inventory P150,000
Supplies 100,000
Input VAT 12,000
Cash P262,000
To record the purchase of goods and supplies
 Journal Entries
Cash P400,000
Sales P400,000
To record the exempt sale

Cost of sales P150,000

Supplies expense 112,000
Inventory P150,000
Supplies 100,000
Input VAT 12,000
To record the cost of exempt sales and supplies used
 Treatment of VAT in Exempt Sales
• Exempt sales will not be subject to output VAT.
• Consequently, the seller is not allowed to credit input VAT.
• The 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 - Zero Rated Sales

A VAT-registered person exported goods for P400,000.

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

The taxpayer shall record the following in his books:

Inventory P200,000
Input VAT 24,000
Cash P224,000
To record the purchase of goods
 Journal Entries
Cash P400,000
Sales P400,000
To record the export sales

Cost of sales P200,000

Inventory P200,000
To record the cost of export sales
 Journal Entries
If claimed as tax refund:
Cash P24,000
Input VAT P24,000
To record receipt of input VAT refund
If claimed as tax credit certificate (TCC):
Prepaid tax P24,000
Input VAT P24,000
To record receipt of tax credit certificate

Note: The prepaid tax (TCC) can be used to settle any internal revenue tax
obligation of the taxpayer such as income tax, excise tax, donor's tax, DST and
others.
 Journal Entries
If not claimed as refund or TCC:
Output VAT P24,000
Input VAT P24,000
To close input VAT to output VAT at month-end

Note that this is the default treatment of input VAT on zero-rated sales. If the
input VAT is not claimed as TCC or tax refund, it will be credited against output
VAT.
 Treatment of VAT in Zero-Rated Sales
• Zero-rated sales shall not result to an output VAT but the input
VAT on zero-rated sales is creditable to the zero output VAT.
• VAT payable is inherently negative on zero-rated sales.
• The input VAT on zero-rated sales can be alternatively claimed
through tax refund or tax credit certificate.
• If claimed as tax refund the taxpayer will recover cash.
• If claimed as TCC, the TCC can be used as tax credit against any
other internal revenue taxes aside from VAT.
• If the input VAT on zero-rated sale is not claimed through tax
refund or TCC, it is credited against output VAT at the end of the
month.
 Illustration - Sales to Government and GOCCs

A VAT-registered person sold goods to a government

agency for P400,000. These goods were purchased for
P336,000, including P36,000 input VAT.

The taxpayer shall record the following in his books:

Inventory P300,000
Input VAT 36,000
Cash P336,000
To record the purchase of goods
 Journal Entries
Cash (P448K - P20K) P428,000
Withheld final VAT (400K x 5%) 20,000
Sales P400,000
Output VAT 48,000
To record the sales to the government and the final withholding tax

Cost of sales P300,000

Inventory P300,000
To record the cost of sales to the government
 Journal Entries
Output VAT P48,000
Cost of sales 8,000
Input VAT P36,000
Withheld final VAT 20,000
To close the output VAT and withheld final tax at month end