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Chapter 1 Tax 2

This document discusses consumption taxes including value added tax (VAT) and business tax. It defines consumption tax as a tax on the acquisition or use of goods and services. Consumption taxes are based on the benefit received theory and aim to tax all consumption regardless of purpose. The key types of consumption taxes are the 12% VAT and percentage taxes of various rates from 0.6-30%. Imports are subject to VAT on importation while domestic sales face business tax. Exempt items, services with their own percentage tax rates, and VATable items are outlined. The structure of VAT on importation versus business tax is compared, noting business tax uses a tax credit method.

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Hazel Jane Esclamada
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2K views5 pages

Chapter 1 Tax 2

This document discusses consumption taxes including value added tax (VAT) and business tax. It defines consumption tax as a tax on the acquisition or use of goods and services. Consumption taxes are based on the benefit received theory and aim to tax all consumption regardless of purpose. The key types of consumption taxes are the 12% VAT and percentage taxes of various rates from 0.6-30%. Imports are subject to VAT on importation while domestic sales face business tax. Exempt items, services with their own percentage tax rates, and VATable items are outlined. The structure of VAT on importation versus business tax is compared, noting business tax uses a tax credit method.

Uploaded by

Hazel Jane Esclamada
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER 1-INTRODUCTION TO CONSUMPTION TAXES

THE CONCEPT OF CONSUMPTION AND CONSUMPTION TAX


 A tax upon acquisition or utilization of goods or services by any person. The utilization of goods or services may be
through purchase, exchange or other means. This utilization is subject to a tax called consumption tax.
 Consumption is levied without regard to the purpose of the purchaser or consumer whether it is for business, personal or
charity use.

Rationale of Consumption Tax


 Savings formation
 Rationalization of the Benefit Received Theory
 Wealth redistribution to society

Income tax vs. consumption tax

Income tax Consumption


Nature Tax upon receipt of income Tax upon usage of income or capital
Scope/coverage A tax to the capable A tax to all
Theoretical basis Ability to pay theory Benefit received theory

Types of consumption Purchaser Status


1. Domestic consumption Resident Taxable
2. Foreign consumption Non-resident Exempt/Effectively non-taxable

*Destination principle- only goods and services destined for consumption in the Philippines are subject to consumption tax while
those destined for consumption abroad are not subject to consumption tax.
TYPES OF DOMESTIC CONSUMPTION AS TO SOURCE
1. Domestic sales - purchases from resident sellers
2. Importation - purchases from abroad by non-residents

CONSUMPTION TAX ON DOMESTIC SALES


 The domestic consumption of resident buyers from resident sellers commonly known as purchase is subject to a
consumption tax called a business tax. It is called business tax because the consumption tax is indirectly imposed upon
sellers which are businesses.

BUSINESS TAX VS. VAT ON IMPORTATION: A DIFFERENTIATION

VAT on importation Business Tax


Imports from business or non- Purchases from businesses
Scope of tax business only
Type of consumption tax Pure form Relative form
Statutory taxpayer Buyer Seller
The economic taxpayer Buyer Buyer
Nature of imposition Direct Indirect
Basis of tax Total purchase cost Sales or receipts

 Border control on goods is managed by the Bureau of Customs (BOC). Goods have to be cleared through the BOC first
before they are allowed to enter the Philippines. With this in-placed control mechanism, the VAT on importation is
conveniently collectible through the BOC. Thus, the law tasked the BOC to collect the tax in behalf of the BIR.

Business tax rules on domestic sales


 The seller must be engaged in business to be subject to business tax.

Value Added Tax rules on importation


 The vat on importation is imposable whether the buyer (importer) or seller is engaged or not engaged in business.
TYPES OF CONSUMPTION TAXES
1. Percentage Tax - tax of various rates from 0.60% to 30%
2. Value Added Tax - a consumption tax of 12%
3. Excise Tax - an ad valorem or specific tax, which is imposed in addition to VAT or percentage tax, only on certain goods
or services

TYPES OF DOMESTIC CONSUMPTION AS TO TAXABILITY


1. Exempt consumption
These are consumption of goods or services that are not subject to consumption taxes.
2. Consumptions specifically subject to percentage tax
This includes consumption of services that are not subject to VAT but are imposed with a specific percentage tax.

3. Vatable consumption
This includes all other consumption that are neither exempted nor subject to percentage tax.

Types of Consumption Per Type of Domestic Consumption

Importation Domestic Sales/Receipts


Exempt consumption Exempt importation Exempts sales/receipt
Service specifically subject to a Services specifically subject to a %
Services subject to a % tax % tax tax
Vatable consumption Vatable importation Vatable sales or receipt

Exempt Consumption
 Exempt consumptions are neither subject to percentage tax nor value added tax. If they are sourced from abroad, they
are exempt from VAT on importation. If sourced from within, they are exempt from business tax.

Basis of exemption from consumption tax

Basis of exemption VAT on importation Business Tax


The goods imported is a human The goods, services or property
Human necessity necessity sold is a human necessity
The importation does not
constitute a domestic The seller is not engaged in
Out of scope of tax consumption business
The importation is exempted as
a tax incentive to certain The sales or receipt is exempted
Tax incentive importers as a tax incentive to certain sellers
The importation is exempted by The sales or receipt is exempted
International comity treaty by treaty

SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX


 Services specifically subject to percentage tax are taxable consumption of services but subject only to a specific
percentage tax rate set by the NIRC. Consumption of these services are not subject to VAT.

VATABLE IMPORTATION OR SALES

All other importation or sales of either goods or services that are not exempted or specifically imposed a percentage tax is vatable.

The structure of the VAT on Importation


VAT on importation
Import of service Import of goods
Exempt Exempt Exempt
% tax Percentage tax -
VAT Final withholding VAT VAT on importation

 The import of services by certain VAT-exempt person is exempt from VAT. Currently, there is only one import of service
that is subject to a percentage tax. The import of other services is subject to VAT called the "final withholding VAT." The
VAT is computed as 12% of the contract price of the services and is paid to the BIR.

 If the import of goods is not exempted, the importation is subject to VAT on importation. The VAT on importation is
computed as 12% of the landed cost of the goods and is paid to the BOC.

The Structure of the Business Tax


Business Tax
Sales of services Sales of goods
Exempt Exempt receipt Exempt sales
Receipt specifically
% tax subject to a % tax -
VAT Vatable receipts Vatable sales

 Vatable sales or receipts are subject to 12% VAT if the taxpayer is a VAT taxpayer and to a 3% general percentage tax if
the taxpayer is a non-VAT taxpayer.

To sum up, readers must note the following:


Terminology Meaning
Exempt to VAT and percentage
a. Exempt sales or receipts tax
Subject to a particular
percentage tax and is exempt
b. Services specifically subject to % tax from VAT
Subject to either VAT or 3%
c. Vatable sales or receipts percentage tax

VAT on Importation vs. VAT on Sales in Business Tax


 The VAT on importation is directly computed on the landed costs or total purchase costs of importation without any
deduction or tax credit.
 The VAT imposed on sales or receipt in business taxation is unique as it is theoretically imposed on the value added -
the amount of mark-up imposed by sellers on their purchase costs. The VAT on sales or receipt follows a tax credit
method wherein a VAT of 12% is imposed on sales and is reduced by VAT paid by the business on its purchases.

The tax due is computed as:


Output VAT (12% of sales or receipts) P xxx,xxx
Less: Input VAT (12% VAT paid on purchases) xxxxxxx
VAT due Pxxxxxx

Input VAT is claimed as tax credit against output VAT when due or paid not when goods are sold. The VAT does not require a
perfect matching approach; hence, it is not imposed on the gross profit.

This feature of the VAT on sales or receipts is unique compared to Percentage taxes which is merely computed as a fixed
percentage of sales or receipts.

The Excise Tax


Excise tax is imposed on the consumption of commodities such as:
a. sin products such as alcohol and cigarettes
b. non-essential commodities, such as automobiles and jewelry
c. non-essential services, such as cosmetic surgery
d. products which are environmentally degrading in their production or consumption, such petroleum and minerals
 Excise tax is an additional imposition to VAT or percentage tax. Unlike business taxes such as percentage taxes and VAT
on sales or receipts which are levied at the point of sales, excise tax levied at the point of production or importation. The
excise tax on excisable goods is normally imposed before the goods are sold by domestic producers or upon their
importation by importers.

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