ISU MODULE TEMPLATE
Subject: BUSINESS TAXATION
Title of the Module
Chapter 1: Introduction to Value-Added Tax
Background of VAT
The value-added tax became effective in the Philippines on January 1, 1988, by virtue of Executive
Order No. 273.
Reforms introduced by VAT
The imposition of value-added tax has effected the following reforms:
1. Simplification of the business tax system
2. Improvement of equity; and
3. enhancement of efficiency in tax administration
Nature and Characteristics of VAT
The value-added tax is 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 in the Philippines. The seller is
the one statutory liable for the payment of tax, but the amount of the tax may be shifted or passed
on to the buyer, transferee or lessee of the goods, properties or services.
Scope of VAT
The following transactions entered into by any person are subject to VAT:
Any sale, barter, or exchange of goods and properties (including real properties), or similar
transactions, in the course of trade or business;
Any sale of services, or similar transactions, in the course of trade of business;
Any lease of goods and properties, or similar transactions, in the course of trade or business;
and
Any importation of goods, whether in the course of trade or business or not.
“persons” refers to any individual, trust estate, partnership, corporation, joint venture,
cooperative, or association.
“Taxable person” refers to any person liable for the payment of value-added tax, whether or not
registered in accordance with the provisions of National Internal Revenue Code.
The phrase “in the course of trade or business” means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a non-stock, non-profit private
organization (irrespective of the disposition of its net income and whether or not it sells exclusively to
members or their guest), or government entity (Sec 105, NIRC)
However, any business or businesses pursued by an individual where the aggregate gross sales or
receipts do not exceed P100,000 during any 12-month period shall be considered principally for
subsistence or livelihood and not in the course of trade or business
Generally, the person subject to VAT are those whose gross annual sales or receipts during any year
or in any 12-month period exceeds P3,000,000 (Train Law), or those whose sales or receipts do not
exceed this amount but registered under the value-added tax system.
Illustration: 1
Mr. Christian, operates a business, during the year, his gross receipts amounted to P1,200,000
1. If Mr. A is a VAT registered person, is he liable to pay value-added tax?
2. How about if he is not VAT-registered but his annual gross receipt is P4,800,000?
3. Supposing he is not VAT- registered and he will just commence business. Will he be subject to tax
upon the start of business operations?
4. Assuming that Mr. A is not a VAT registered and his gross receipts in a 12-month period is
approximately P60,000 only. Is he subject to value-added tax?
Application of the Threshold
For purposes of the threshold of P3,000,000 the husband and the wife shall be considered as separate
taxpayers.
Illustration: 2
Philip and Christine, husband and wife, not registered under the VAT system, have the following data
during the immediately preceding year.
Source of Gross
Receipts Philip Christine
from profession 300,000.00 520,000.00
2,200,000.0
from business 0 -
from exempt sale 245,000.00 -
Is Philip subject to VAT? How about Christine?
Government and its political subdivisions
The term government consisting of the three branches, namely: the executive, legislative and
judiciary which undoubtedly are performing essential government function are not subject to tax
because the government should not tax itself.
However, a government entity is taxable if it sells goods and services in the course of busines, thus,
government entities and instrumentalities, including government-owned and controlled corporations,
are subject to VAT
Excise tax, value-added tax, and other percentage taxes
Persons, transactions, or goods may be subject to value-added tax and excise tax at the same time
There is no situation, however, where a person or transaction can be subject to value-added tax and
other percentage tax at the same time.
Thus, persons and transactions that are subject to the other percentage taxes are no longer subject
to the value-added tax but may, however, be subject to excise tax.
