All entrepreneurs must familiarize themselves with the different types of taxes their business needs to pay to the Bureau of Internal Revenue (BIR).
A form of sales tax, the Value Added Tax (VAT), is defined by the BIR as “a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines.”
The BIR imposes a sales tax on registered Philippine businesses and is computed based on the business’ gross sales or gross receipts. The tax rate used for the computation on Sales Tax depends on whether the business is VAT or Non-VAT. The range falls between 3% – 12%.
VAT vs non-VAT sales
VAT and non-VAT Sales Tax differ in terms of the type of business, nature of the business, annual sales, tax rate, the responsibility of payment, and deductibility of the tax on purchases and payments.
Type of Business
•Business ownership determines if the company will be registered as VAT or non-VAT. Sole proprietors can either be VAT or non-VAT, depending on the nature and size of their business.
•Partnerships and corporations are usually VAT registered—unless their business is VAT Exempt or Zero-Rated.
Nature of Business
•The nature of the business’ products and services will also help determine if it should be registered as VAT or non-VAT. Some industries such as export sales or those with BOI Certificates are VAT Exempt or Zero-Rated and are not required to pay VAT.
•Zero-Rated, however, is different from non-VAT.
Annual Sales or Gross Receipts
•BIR rules state that businesses earning an aggregate amount of actual gross sales or receipts exceeding one million nine hundred nineteen thousand five hundred pesos (PHP 1,919,500.00) are subject to VAT.
•VAT registered businesses are subject to sales tax referred as VAT or Output Tax. A 12% VAT is imposed on gross sales or receipts.
•On the other hand, non-VAT businesses are subject to sales tax known as Percentage Tax, which is computed at the rate of 3% on gross sales or receipts.
Responsibility of Payment
•VAT is an indirect tax, which means that it can be passed on to the customers.
•Payment of the percentage tax, on the other hand, is the sole responsibility of the business and cannot be passed on to the customers.
Deductibility of Tax on Purchases and Payments
•Businesses can use input Tax, which is the VAT due on sale, lease, or exchange of taxable goods or properties in the computation of their VAT. Businesses with a significant amount of VAT inclusive purchases or payments (Input Tax) can use those as a deduction from its computed Output Tax.
•The difference is called the VAT Payable, which is the remaining amount to be paid by the business. Non-VAT businesses are not allowed to make this type of deductions.
These are the factors that differentiate VAT from Non-VAT transactions. Understanding them is a must to ensure proper compliance with the rules and regulations set by the BIR.