The nature and characteristic of Value Added Tax (VAT) is that it is a “business tax levied on the value added on certain goods, properties and services in the domestic market and/or importer of goods”
The case of Tolentino v. Secretary of Finance shows the nature of Value Added Tax. In this case, what was assailed was the constitutionality of the Value Added Tax law on the ground that it was contrary to the progressive tax system as mandated in the Constitution.
VAT was regressive in character due to the fact that it is an indirect manner of taxation. The Supreme Court answered this by saying that in the power of congress is plenary, it is not limited to choose which form of taxation to undertake. The directive to undertake a progressive tax system is merely a directive.
What is Value Added Tax?
The first instance of VAT can be found in Presidential Decree No. 1158, Section 99. This lead to the second instance of VAT in the tax code reform of 1986. The promulgation of Executive Order No. 273 formally brought about the VAT into the national internal revenue code.
While VAT in itself has remained fairly constant throughout the years, the manner in which VAT refunds have been acquired has all but been static. To understand the nature of VAT, a little explanation is required. VAT, being an indirect tax, is a tax which is passed on the buyer from the seller.
As stated in Section 105 of the National Internal Revenue Code (NIRC), Value Added Tax is an indirect tax. By being an indirect tax, the amount may be passed on or shifted to the customer.
Under the VAT system, one acquires Input tax and Output tax. Input tax is the VAT paid by a person or entity in a transaction which is subject to VAT. Output tax is the tax shifted to the purchaser in a transaction subject to VAT. Since VAT is an indirect tax, there is a system allowed to redeem excess paid VAT. A VAT-registered entity may use his Input tax to offset his Output tax as allowed in the NIRC provided that his Input is greater than his Output.
Types of Value Added Tax Transactions
VAT has three types of transactions: those that are subject to VAT, those, which are exempt from VAT, and those, which are considered VAT, zero-rated. Under the current law, the persons liable for VAT are found under Section 105 of the NIRC. The biggest difference between VAT exempt transactions and VAT zero-rated is the fact that VAT zero-rated allows the taxpayer to claim input tax thus there is total relief to the taxpayer as opposed to VAT exempt transactions where any Input tax cannot be claimed by the taxpayer because the transaction is VAT exempt.
If A sells to B an item for 100 pesos in a VAT taxable transaction with 12% VAT total selling price is 112 pesos. B subsequently sells the item to C for 150 pesos with 12% VAT. Total selling price is 168 pesos.
In this scenario B paid A’s VAT worth 12 pesos however he was able to pass the VAT to C worth 18 pesos thus he was able to recover the VAT he paid. B’s Input was 12 and his Output was 18. His Output tax is greater by 6 pesos than his Input tax. He is not entitled to a refund for excess payment.
If A sells to B an item for 100 pesos in a VAT taxable transaction with 12% VAT total selling price is 112 pesos. B subsequently sells the item to C for 150 pesos in a VAT exempt transaction. Total selling price is 150
In this scenario B paid A’s VAT worth 12 pesos however because the subsequent transaction was VAT exempt B could not pass on the VAT he paid. He will have to deduct the VAT paid as a cost.
If A sells to B an item for 100 pesos in a VAT taxable transaction with 12% VAT total selling price is 112 pesos. B subsequently sells the item to C for 150 pesos in a VAT zero-rated transaction. Total selling price is 150 pesos.
In this scenario, B paid A’s VAT worth 12 pesos. However, the subsequent transaction was VAT zero-rated thus, he was not able to pass the VAT he paid. Since the transaction was VAT zero-rated he can claim the Input tax that he paid which is 12 pesos since his Output tax was 0 and subsequently apply for a refund.
Not knowing this, a layman might argue that the best transaction would be Value Added Tax exempt. Such a misconception would be gravely erroneous and could lead to economic losses.
Thus, when choosing between VATable or VAT exempt or VAT zero-rated transactions, it is always important to determine the nature of the business and any of its transactions. Properly tracking VAT related transactions might allow a taxpayer to discover that he is entitled to VAT refunds or that he might be able to mitigate the payment of any VAT due.