Valuing the VAT
Recently, most of you have heard of the government’s decision to expand the number of individuals covered by the Value Added Tax (VAT) system. Aside from registered taxpayers such as corporations and sole proprietorships, it now covers professionals such as actors, doctors and accountants to name a few. What really is VAT? And how does it affect your business? Here’s a lowdown on the issue.
When VAT was implemented in our country last 1987 under the term of former President Corazon Aquino, it created much confusion among tax payers. Suddenly, they found themselves paying 10% more in almost everything they bought. Even eating out became more expensive as restaurants dutifully slapped diners with 10% VAT on top of the 10% service charge. That’s 20% of the total bill on tax alone! But believe it or not, VAT lessens the taxes that we pay. How? Unlike an income tax, a VAT is collected from a limited number of registered taxpayers, usually commercial enterprises, similar to the existing broad-based income tax system. Under a VAT, the problem of tax pyramiding and non-neutrality that occurs under the previous taxation is avoided. Pyramiding occurs because goods and services that are inputs into higher stages of production are taxed multiple times as they move through the production or service chain. By comparison, a VAT taxes only the value that is added by an enterprise to the goods and services it sells, not its gross value. By avoiding pyramiding, the VAT subjects all final goods and services to the same level of taxation, thereby achieving greater neutrality and greater fairness.
To illustrate, in the production and sale of wood cabinets, there are several stages in the process, each of which is often performed by a different enterprise. One enterprise harvests the timber, another mills the lumber, a third manufactures the cabinets, and a final enterprise sells the cabinets to the ultimate consumer at the retail stage. Other enterprises, such as wholesalers, may also be in the chain.
Value-Added Tax is a business tax imposed and collected from the seller in the course of trade or business on every sale of properties (real or personal) lease of goods or properties (real or personal) or vendors of services. It is an indirect tax, thus, it can be passed on the buyer.
Under the previous system, the total value of a good is taxed when it is sold from one enterprise to another in the production chain. This total value includes the value of intermediate products along the way.
The value of the timber is embedded in the value of the lumber, the value of the lumber is embedded in the manufactured cabinets, and so on. The gross value of the product at each stage includes taxes paid on intermediate products, so the tax accumulates (pyramids) as it moves through the production chain. Under a VAT, the taxable base is the value added at each stage of production. In the above example, the lumber mill pays tax on the value it adds by milling raw timber into lumber, and the manufacturer pays tax on the value it adds by turning lumber into cabinets. The value of the timber embedded in the value of lumber is not taxed again as lumber sales, nor is the value of lumber embedded in the cabinet taxed again as cabinet sales, and so on. Value added is taxed once at every stage, but not more than once, so the total effect is equivalent to taxing just once the full value of final goods and services sold to ultimate consumers. In short, the value-added tax results in lower productions costs and lower prices and therefore should not be viewed as an added burden to the consumers.
In short, you don’t own the 10% VAT; you are only a keeper of it. Most small businesses fail to realize that the 10% VAT is not part of their profit but should be remitted back to the government.
Frequently asked Questions on VAT
Who are required to file VAT returns?
Originally, VAT was imposed on every person or entity who in the course of trade or business, sells or leases goods, properties and services if the aggregate amount of actual gross sales or receipts exceed Five Hundred Fifty Thousand Pesos (P 550,000.00) for any twelve month period. Now, it has expanded to include professionals such as actors, accountants, engineers, lawyers, professional athletes and even financial institutions such as banks, to name a few.
How do I calculate my monthly VAT PAYABLE?
To calculate your monthly VAT payable, you need to know the necessary output and input taxes incurred during each month in the course of doing your business.
What is OUTPUT TAX?
Output tax means the VAT due on the sale, lease or exchange of taxable goods or properties or services, by any person registered or is required to register as VAT.
To calculate your output tax:
Total invoice amount P 10,000.00
Sales net of 10% VAT 9,090.91
(divide invoice amount by 1.1)
Output Tax 909.09
(deduct net of VAT from invoice amount)
What is INPUT TAX?
Input tax means the VAT paid on the purchase or lease of goods, properties or services. It shall include the transitional input tax determined in accordance with Section III of the Tax Code. In the course of a sale, you also incurred expenses in which your suppliers gave you an invoice that also included a 10% VAT.
To calculate your input tax:
Color Separation P 3,500.00
Net of VAT 3,181.82
(divide amount of sale by 1.1)
Input Tax 318.18
(multiply net of VAT by 10%)
To arrive at your VAT payable:
Output Tax - P 909.09
Less:Input Tax - 318.18
VAT Payable - 590.91
When do I file my monthly VAT Return?
On or before the 20th of the following month. So you file your VAT return for February on or before March 20.
How do I file my VAT returns?
Fill-out the BIR Form 2550M form for monthly VAT Declaration and BIR Form 2550Q for Quarterly VAT Return. You can file it at any Authorized Agent Bank (AAB) in the place where the taxpayer is registered. In cases of no-payment or refundable return, the return shall be filed with the Revenue District Office (RDO) where there are no AABs, it shall be filed with the Revenue Collection Officer or duly Authorized City or Municipal Treasurer of the place where the RDO is located.
Source: Business Line Vol. 1 No. 1 2003