CONSUMPTION TAXES Supporting tax Ability to Benefit received

1. Business Tax is a form of consumption tax. theory pay theory Theory

2. Consumption occurs when one acquires goods and services
by purchase, exchange or other means. 7. Types of consumption
3. Consumption tax is a tax upon utilization of goods and a. Domestic consumption refers to
services by consumers or buyers. tax upon purchase or consumption or purchases of Philippine
consumption of the Buyer and not on the sale of the seller. residents.
4. Rationale of Consumption b. Foreign consumption refers to
a. It promotes SAVINGS FORMATION. consumption or purchases of non-residents
b. It helps in WEALTH REDISTRIBUTION to 8. SUMMARY OF TAX RULES ON DOMESTIC CONSUMPTION
society. The seller is Domestic Foreign
c. It supports the BENEFIT RECEIVED consumption consumption
THEORY. (Buyer is a (Buyer is non-
5. Savings is the residual income that remains after resident) resident)
consumption. It promotes capital formation and investment Non- Taxable No tax
which are considered crucial to economic development. resident
6. Income Tax and consumption tax, distinguished Resident Taxable Effectively no
Income tax Consumption tax tax
Nature Tax upon Tax upon usage 9. Types of taxable domestic consumption
receipt of of income or 1. Importation is a purchase of residents of
income capital goods or services from non-residents
Scope A tax to the A tax to all abroad.
capable

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 2. Sale on the sellers perspective is a 5. The indirect imposition of tax is necessitated by
purchase of residents of goods, properties administrative feasibility.
or services from resident sellers. 6. Export sales are foreign consumptions not subject to
Philippine consumption tax.
CONSUMPTION TAX ON IMPORTATION
1. Value Added Tax (VAT) on importation is a consumption Consumption tax on resident buyers applies to businesses
tax on importation. The VAT on importation is 12% of the total only
import cost of goods prior to the withdrawal of the goods BUSINESS TAX applies only when the seller is regularly
from the warehouse of the Bureau of Customs. engaged in business. 3%. This term is a misnomer.
2. Withholding VAT is a VAT on importation of service, 1. Businesses are not real taxpayers.
computed as 12% of the contract price of the service. 2. Businesses would suffer penalties for non-compliance.
3. Business tax is made to appear as tax on the privilege to do
CONSUMPTION TAX ON DOMESTIC CONSUMPTION FROM business.
RESIDENT SELLERS 4. Business tax is often viewed as a privilege taxes.
1. Seller is from whom he or she collected the consumption 5. Table of Comparison
tax on the purchases of Philippine residents from resident VAT on Business Tax
sellers. Importation
2. Tax law on consumption tax Basis of tax Acquisition Sales or
Sales of sellers of goods cost receipts
Receipts of sellers of services Scope of tax All Consumption
3. Sellers are the statutory taxpayers; are the ones named by consumption from
law to pay the tax. businesses
4. Buyers are the real taxpayers or economic taxpayers. only

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Nature of Pure form Relative form business
consumption Foreign
tax sellers
Statutory Buyer Seller -Business Business VAT on
taxpayer importation
The economic Buyer Buyer -Business Non-business VAT on
taxpayer importation
Nature of Direct Indirect -Non- Business VAT on
imposition business importation*
-Non- Non-business VAT on
6. Table summary: Consumption tax rules on domestic business importation*
consumption *The VAT on importation consistently applies regardless of
Seller Resident Applicable whether or not the seller or the buyer is engaged in business.
Buyer consumption tax BASIS OF BUSINESS TAXES
1. Sales are for businesses which sells goods or properties.
Domestic Pertain to the total amount agreed as consideration for the
sellers sale of goods whether collected or uncollected.
2. Receipts are for businesses that sells services.
-Business Business Business tax
Pertain to collections from the sale of service.
-Business Non-business Business tax
-Non- Business None TYPES OF BUSINESS TAXES
business 1. Value Added Tax (VAT) on sales
-Non- Non-business None 2. Percentage Tax

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3. Excise Tax 4. The tax credit method is the computation method used in
TYPES OF BUSINESS TAXPAYERS The Philippines.
1. VAT Taxpayers are those required to pay VAT 5. Special features of the tax credit method
2. Non-VAT Taxpayers are those who pay the percentage tax a. Invoice-based crediting, entitlement for
input VAT is to be substantiated with
Excise tax is an addition to either VAT or percentage tax, if invoices.
the taxpayer produces certain excisable goods such as alcohol b. Non-observance of the matching of costs
or cigarettes. or expenses and sales, Output VAT is
recorded when a sale is made. Input VAT is
THE VALUE ADDED TAX (VAT) ON SALES recorded whenever a purchase is made and
1. The VAT on sales is a consumption tax imposed upon the not when the goods were sold. The output
sale of goods, properties or services or lease of properties. VAT and input VAT accounts are simply
2. Characteristics of the VAT on sales closed at the end of each month; are
a. Tax on value added specifically monitored by VAT taxpayers on
b. Top-up on sales separate accounts.
c. Tax credit method 6. VAT ACCOUNTING ENTRIES (sample)
d. An explicit consumption tax a. To record the purchase of goods.
e. Quarterly tax Inventories/Purchases xx
3. Methods of computing VAT Input VAT xx
a. Direct method Accounts Payable/Cash xx
VAT= Selling Price (SP) Purchase (P) b. To record the sales of goods
b. Tax credit method Cash/Accounts Receivable xx
VAT Due=Output VAT (OV; VAT% X SP or Receipt) - Input VAT (IV) Sales xx

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 Output VAT xx A registrable taxpayer is one who exceeded
c. To close the VAT accounts and set-up the VAT payable the P1, 919,500 threshold in any 12-month
Output VAT xx period but did not register as VAT taxpayer.
Input VAT xx Even if not so registered, they are still
VAT due and payable xx subject to VAT.
d. To record the payment of the VAT to the government
VAT due and payable xx PERCENTAGE TAX
Cash xx 1. Percentage tax is a sales tax of various rates, generally 3%,
imposed upon the gross sales or gross receipts of non-VAT
VAT Taxpayers taxpayers.
The following businesses pay VAT: 2. Characteristics of the percentage tax:
1. VAT- registered taxpayers a. Tax on sales or gross receipts, the total
2. VAT- registrable taxpayers amount due from the buyer (invoice price).
Businesses which exceeded P1, 919,500 in b. An expensed tax; in income tax,
sales or receipts in any 12-month period are percentage tax is presented an expense
mandatorily required to register as VAT deductible against the sale or gross receipts.
taxpayers. Smaller businesses with smaller c. An implicit consumption tax; percentage
annual sales or receipts may opt voluntarily tax is inherently factored by sellers in the
register as VAT taxpayers. A VAT registered pricing of their goods or services. The
taxpayer is required to pay VAT even if their percentage tax passes to the buyer by
annual sales fall below P 1,919, 500 VAT inclusion to the selling price but the same is
threshold. not separately presented in the invoice;
hence, not specifically disclosed to the

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 buyer. Percentage tax is actually a
consumption tax in the form of a privilege
tax. It is an indirect tax in the form of a
direct tax.
d. Monthly or quarterly tax, percentage tax
is payable monthly for most percentage
taxpayers and quarterly for certain
percentage taxpayers.
To record the remittance of the percentage tax to the
government.
Percentage tax expense xx
Cash xx
3. The concept of invoice price and selling price to a
Percentage taxpayer is the same. The invoice price is
recorded as sales.
4. The percentage tax and the input VAT paid on purchases
are not separately recognized.
5. The percentage tax is computed directly on the sales and
Is reported as an expense.
6. The percentage taxes expense is presented as part of
taxes and licenses and is presented as a deduction against
gross income under income taxation.
7. Who pays percentage tax?
a. Non-VAT taxpayers, are those with sales
or receipts not exceeding the P1,919,500
VAT registration threshold and who did not
opt to register as VAT-taxpayers.
b. Taxpayers who sells services specifically
subject to percentage tax.
8. Important points to consider in Percentage Tax:
a. The concept of sales
Percentage Taxpayers
Sales or Gross Receipts=Invoice Price (S or GR=IP)
VAT Taxpayers
Sales or Gross Receipts plus the 12% VAT composes the
invoice
Price (S or GR + 12% VAT=IP)
b. VAT and percentage tax are mutually
exclusive.
Businesses pay VAT do not pay the percentage tax.
Businesses which pay percentage tax do not pay VAT.
VAT-registered taxpayer may pay both VAT and percentage
tax
when it engages in activities which are specifically designated
by the law as subject to percentage tax.
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Business taxpayers will pay VAT if they erroneously or 4. The excise tax is an addition to VAT or percentage
intentionally use a VAT invoice or official receipt to bills its VAT tax. As such businesses manufacturing excisable
exempt sales. articles are either subject to VAT and excise tax or
EXCISE TAX percentage tax and excise tax.
1. Excise tax is imposed , in addition to VAT or Percentage Tax, VAT and Excise Tax apply onto to domestic
percentage tax, on certain goods manufactured, consumption
produced or imported in the Philippines for domestic 1. The export sale of non-VAT registered taxpayers is
sale or consumption. exempt from percentage tax. (no consumption tax)
2. Excise tax is levied on the production or 2. The export sale of a VAT-registered taxpayers is
importation of: imposed by the law with a 0% VAT. (no consumption
a. Sin products, such as tobacco products and tax)
alcohol products Imposable Tax per Types of Consumption
b. Petroleum products
c. Automobiles Buyer/Consumer
Seller of goods Resident Non-resident
d. Non-essential commodities like jewelry,
Domestic
perfumes, toilet waters, yachts and sports business
cars. VAT- registered 12 % VAT on gross 0% VAT on gross
e. Metallic or non-metallic minerals, mineral business sales selling price
products, and quarry resources such as coal, Non-VAT registed 3% Percentage tax on Exempt
coke, gold, chromite and silver. business Gross Sales
Foreigners 12% VAT on Exempt
3. Under the NIRC, the sale of cigarettes at a price
landedcost of
above P10.00 per pack shall be subject to P12.00 importation
per pack *Under the law, the services must be rendered in the

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 Philippines to besubject to 0-rated VAT. It is exempt if the Export Subject to Exempt Exempt (Tax
services is rendered abroad. sales 0% VAT is
**This apply regardless of the place where the service is reimbursable)
rendered. The various excise tax rates are enumerated in Section 141 to
Section 151 of the National Internal Revenue Code (NIRC).
Comparison of the Business Taxes Excisable articles produced for foreign markets are also
VAT PERCENTAGE EXCISE TAX exempt
TAX from excise tax.
Tax rate 12% Generally Various ad
3% valorem tax
rates and
specific taxes
Basis Mark-up Sales or Sales value or
or value receipts per unit of
added excisable
goods or
articles
Timing of Upon Upon sales Upon
impositio sales or or collection production or
n collection importation
Generally Bigger Smaller Both big or
paid by businesse businesses small
s businesses

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