CHAPTER 6

INTRODUCTION TO THE VALUE ADDED TAX

Chapter Overview and Objectives

This chapter provides an overview of the VAT on sales. It is intended to provide users with
a broader understanding of the VAT and to provide an integration of the concepts
discussed in previous chapters. The succeeding chapters of the book discuss details of the
VAT on sales.

After this chapter, readers are expected to comprehend:

1. The scope of VAT on sales
2. Mandatory registration and optional registration
3. Registration requirements
4. VAT threshold application
5. The VAT model
6. Sources and treatment of output and input VAT and different types of sales
7. Other vatable sales and invoicing requirements

THE VALUE ADDED TAX

The VAT covers all vatable sales of goods, properties, services, or lease of properties by
VAT tax payers.

Vatable sales or receipts are from sources other than:

1. Exempt sales
2. Receipts from services specifically subject to percentage tax

Who are VAT taxpayers?

a. VAT registered persons
b. VAT registrable persons

A VAT registered person will be subject to VAT even if its annual sales do not exceed the
VAT threshold. A registrable person or those who sales or receipts exceed the VAT
threshold without registering as VAT taxpayers are subject to VAT without the benefit of
an input tax credit.

The VAT threshold

VAT Threshold
General Threshold
Special Threshold
Amount Covered taxpayers
Applicable to all taxpayers
P3,000,000 other than franchise
grantees of radio or
television
Applicable only to franchise
P10,000,000 grantees of radio or
television
Illustration 1: Taxpayers with mixed transactions
Cipeda Department Store had the following sales for the last 12-month period:

Fertilizers, seeds, poultry, and hog feeds P 1,200,000

Fruits and vegetables 800,000
Groceries 800,000
Clothes, shoes, and other apparels 600,000
Furniture 400,000
Total P 3,800,000

Note that the sales of fertilizers, seeds, poultry, hog feeds, fruits and vegetables are exempt
sales.

The vatable sales are:

Groceries P 800,000
Clothes, shoes, and other apparels 600,000
Furniture 400,000
Total P 1,800,000

Since the total of the vatable sales are below the VAT threshold, the Cipeda Department
Store is not required to register as VAT taxpayer. Consequently, it may continue paying the
3% percentage tax on these vatable sales until it exceeds the threshold.
Illustration 2: Individual with multiple proprietorship businesses
As of September 2020, Mr. Tabaco had the following gross receipts from his professional
practice and his other businesses in the immediately preceding 12 months:

Gross receipts from restaurant business P 2,200,000

Gross receipts from barbeque stand 200,000
Gross receipts from taxi cab operations 1,500,000
Gross receipts from professional practice 900,000
Total P 4,800,000

The following sales and receipts are exempt:

Barbeque stand sales - exempt P 200,000
Taxi cab receipts – subject to OPT 1,500,000
Total VAT- exempt sales P 1,700,000

Barbeque stand is a seller of goods not service. Since the goods underwent simple
processing, it is exempt from business tax. Taxi cab is subject to common carrier’s tax.

The vatable sales and receipts are:

Gross receipts from restaurant business P 2,200,000
Gross receipts from exercise of profession 900,000
Total P 3,100,000

Since the vatable sales and receipts exceeded P3M, Mr. Tabaco shall pay VAT starting
October 2020 for the restaurant and professional practice. Mr. Tabaco shall pay 3%
common carrier’s tax on the taxi cab.

Illustration 3: Corporation with subsidiaries and branches

Petronicus Corporation had the following subsidiaries and branches and their
corresponding recorded 12-months sales:

Subsidiaries:
Branus Corporation – 55% owned P 3,200,000
Alexus, Inc. - 70% owed 1,800,000
Total subsidiary sales P 4,000,000

Branches:
Dagupan City branch office P 800,000
San Fernando City branch office 700,000
Total branch sales P 1,500,000

Petronicus Corporation reported the following sales:

Sales to San Fernando branch office P 400,000
Sales to Branus Corporation 300,000
 Sales to other customers 900,000
Total parent company sales P 1,600,000

Each corpopration is a separate taxable person. Branus, Alexus and Petronicus Corporation
are separate corporation that should be separately registered. Branus should be registered
as a VAT taxpayer. Alexus should be registered as a non-VAT taxpayer.

A branch is not a separate entity with their head office. Hence, Dagupan Branch and San
Fernando branch are not separate entities with Petronicus.

The vatable sales of Petronicus should be computed as follows:

Sales to Branus Corporation P 300,000
Sales to other customers 900,000
Sales of Dagupan Branch 800,000
Sales of San Fernando City Branch 700,000
Total vatable sales of Petronicus P 2,700,000
Corporation

Illustration 4: Married Individual taxpayers

Mr. And Mrs. Crocs had the following sales and gross receipts from their respective
businesses during the last 12-month period:

Mr. Crocs Mr. Crocs Total

Gross receipts from P 2,200,000 P 1,700,000 P 3,900,000
profession
Sales from sari-sari 1,350,000 1,350,000
store
Total P 2,200,000 P 3,050,000 P 5,250,000

Each individual is a taxable person and is separately subject to business tax. The
aggregation shall be made for each individual spouse. Hence, Mr. Crocs will pay the 3%
percentage in the upcoming month, but Mr. Crocs shall pay VAT because she exceeded the
VAT threshold.

If any sales or receipts cannot be directly attributed to or identified as exclusively earned

or realized by either spouse, the same shall be divided equally between them for the
purpose of determining their respective sales or receipts for purposes of the threshold.

Optional VAT Registration

Taxpayers below the threshold can voluntarily register as VAT taxpayers. Such option is
subject to the 3-year lock-in period. The taxpayer is precluded to have his VAT registration
revoked until the lapse of 3 years.
VAT Taxpayers with Mixed Transactions

It must be noted that despite the VAT registration, VAT shall apply only to the vatable sales
or receipts. His non-vatable sales or receipts remains exempt from VAT. The exempt sales
remain to be exempt while the receipts specifically subject to percentage tax are subject to
their specific percentage tax rates. The only exception to this is when the taxpayer opted to
have the VAT apply to this non-vatable sales or receipts.

Recall that the option to subject to exempt sales to VAT is not permanent. It can be revoked
by the taxpayer after the lapse of the 3-year lock in period.

THE VALUE ADDED TAX MODEL

The VAT payable of a VAT taxpayer is computed as:

Output VAT P xxx,xxx
Less: Input VAT xxx,xxx
VAT due P xxx,xxx
Less: Tax credits xxx,xxx
VAT still due P xxx,xxx

OUTPUT VAT
Output VAT is the VAT on the vatable sales or receipts. The output VAT is presumed passed
on by the seller on his sales or receipts.

Illustration
Assume that a ABC Company, a VAT taxpayer, made a P100,000 vatable sales on account.
The taxpayer shall bill the following to the customer:

Selling Price P 100,000

Add: VAT (12% x P100,000) 12,000
Total invoice price P 112,000

This shall be recorded by the taxpayer in its books as follows:

Accounts receivable P 112,000
Sales P 100,000
Output VAT 12,000
Types of Output VAT
1. Regular Output VAT – 12% VAT imposed on domestic sales or receipts
2. Zero Output VAT – 0% VAT imposed on export and other zero-rated sales

The detailed rules on output VAT will be discussed in Chapter 7 and Chapter 8.

INPUT VAT
Input VAT is the VAT paid by the taxpayer on the domestic purchase from VAT suppliers or
on the importation of goods or services in the course of business.

Despite absence of actual payment of VAT on purchase or import, input VAT may also be
allowed by law as incentives to the taxpayer such as in the case of presumptive input VAT.

Input VAT has the rules on creditability. Not all paid input VAT is creditable against output
VAT. Those allowed to be deductible against output VAT is called “claimable input VAT”,
“allowable input VAT”, or “creditable input VAT”.

Illustration
Assume ABC company in the previous illustration purchased goods from a VAT supplier.
The supplier billed at P78,400, inclusive of VAT.

The VAT should be checked on the invoice. If not indicated therein, It can be computed
from the invoice as follows:
Invoice Price P 78,400
Divide by: VAT-inclusive rate (100% + 112%
12%)
Purchase price P 70,000
Multiply by: VAT rate 12%
VAT on purchase P 8,400

This shall be recorded by the taxpayer in its book as follows:

Purchases P 70,000
Input VAT 8,400
Accounts Payable P 78,400

The detailed rules on output VAT will be discussed in Chapter 9.

VAT DUE
At the end of each month, the input VAT is offset with the output VAT. A positive VAT due is
paid to the BIR. A negative VAT is normally non-refundable but is carried over to the next
succeeding months or quarter.

Illustration
Continuing the two preceding two illustrations, ABC company shall compute its VAT due as
follows:
Output VAT P 12,000
Less: Input VAT 8,400
VAT due P 3,600

At the end of the month, ABC Company close its VAT accounts as follows:
Output VAT P 12,000
Input VAT P 8,400
VAT payable 3,600

VAT REPORTING
Recall that VAT is paid quarterly but is paid monthly as follows:

Period covered BIR Form Deadline

First month of the quarter 2550M 20 days from end of month
Second month of the 2550M 20 days from end of month
quarter
For the quarter 2550Q 25 days from end of quarter

Illustration 1
A VAT taxpayer had the following purchases and sales, exclusive of VAT:
January February March
Cash purchases P 700,000 P 320,000 P 375,000
Cash sales 650,000 580,000 500,000

Accounting Entries:
The following are recorded by the taxpayer:

January
Purchases P 700,000
Input VAT 84,000
Cash P 784,000

Cash P 728,000
Sales P 650,000
Output VAT 78,000

Output VAT P 78,000

Input VAT P 78,000

There will be no VAT payable since the input VAT exceeds the output VAT. The P6,000 (i.e.,
P84,000 – P78,000) unutilized input VAT remains on the book.

In VAT reporting, the January 2550M would look like:

 Output VAT P 78,000
Less: Input VAT 84,000
VAT due P 6,000

This is not VAT refundable. It is called “input VAT carry-over”.

February
Purchases P 320,000
Input VAT 38,000
Cash P 358,400

Cash P 649,600
Sales P 580,000
Output VAT 69,600

Output VAT P 69,600

Input VAT * P 44,400
VAT payable 25,200

VAT payable P 25,200

Cash P 25,200
To record payment of VAT due
*(P38,400 from February + P6,000 January
carry over)

In VAT reporting, the February 2550M would look like:

Output VAT P 69,600
Less: Input VAT 44,400
VAT due P 25,200

March
Purchases P 375,000
Input VAT 45,000
Cash P 420,000

Cash P 560,000
Sales P 500,000
Output VAT 60,000

Output VAT P 60,000

Input VAT P 45,000
VAT payable 15,000

VAT payable P 15,000

Cash P 15,000
 To record payment of VAT due

In VAT reporting, the Quarterly 2550Q in March would look like :

Output VAT P 207,600
Less: Input VAT 167,400
VAT due P 40,200
Less: Tax credit
Estimated monthly VAT payments 25,200
VAT still due P 15,000

If the quarterly tax due is negative, it is non refundable. The unutilize input VAT remains in
the books and is carried over as input VAT in the following month of the next quarter.

Illustration 2
A VAT taxpayer using the calendar year had the following output VAT and input VAT
during the months starting January to April 2016:
January February March April
Output VAT P 80,000 P 90,000 P 85,000 P 75,000
Input VAT 60,000 80,000 65,000 70,000

The VAT due and payable shall be reported and computed as follows:
January February March April
Output VAT P 80,000 P 90,000 P 255,000 P 75,000
Less: Input VAT 60,000 80,000 205,000 70,000
Monthly VAT P 20,000 P 10,000 50,000 P 5,000
due
Less: VAT paid 30,000
in prior months

Quarterly VAT P 20,000

 due

Note:
1. The monthly VAT return (BIR Form 2550M) for the first two months of the quarter
reports only output VAT input VAT for the month.
2. The quarterly VAT return (BIR Form 2550Q) for the third month of the quarter covers
output VAT and input VAT from January to March. Any VAT paid in prior two months is
deducted in the quarterly balance.
3. April is the first month of the second quarter. Reporting will be monthly for April and
May and cumulative for the quarter ending June.

Illustration 3
A VAT taxpayer had the following sales and purchases, Exclusive for any VAT, In the second
quarter of the calendar year:
Sales April May June Total
Sales P 625,000 P 400,000 P 800,000 P 1,825,000
Input VAT P 60,000 P 54,000 P 50,400 P 164,400

The VAT due and payable shall be:

April May June

Sales P 625,000 P 400,000 P 1,825,000
Multiply by 12% 12% 12%
Output VAT P 75,000 P 48,000 P 219,000
Less: Input VAT 60,000 54,000 164,400
VAT due P 15,000 (P 6,000) P 54,6000
Less: VAT paid in 15,000
prior months
Quarterly VAT due P 39,600

Note:
1. A negative VAT payable in a month means no VAT is to be paid
2. A negative VAT payable in the first month of the quarter or at the end of the quarter may
be carried over to the succeeding month or quarter as the case may be. This will be
discussed in detail under input VAT carryover in Chapter 9.

The foregoing discussion covers the normal accounting procedures of VAT compliance for
regular vatable sales.

Sales subject to special VAT rules

There are sales or receipts that are subject to special or unique tax rules, such as the
following:
a. Sales to the government
b. Zero-rated sales
c. Exempt sales

The following table show a summary of the unique tax rules:

Types of sales What is unique?
Sales to the government Limited claimable input VAT
Zero-rated sales No output VAT but with claimable input
VAT
Exempt sales No output VAT and no claimable input VAT

Sales to the government including GOCCs

The sales to the government and the GOCCs is vatable at 12% normal rate but the law
requires government agencies GOCCs to withhold a 5% final VAT on their purchases. The
invoice sales or billing to the government or GOCCs will be deducted 5% final VAT based on
sales or receipts. The taxpayer will only collect the balance.

The 5% withheld tax shall be presumed as the actual VAT due of the taxpayer on the sale.
There would be no more VAT payable. Thus the taxpayers has to adjust his claimable input
VAT on that sale because the input VAT is effectively fixed or standardized by the
government at 7%:

Output VAT 12% of sales or receipts

Less: Input VAT ( Limited to 7% )
Final VAT due 5% of sales or receipts

The 7% claimable input VAT on sales to the government or GOCCs is referred to as the
standard input VAT.

Illustration

During the month, a VAT-registered person made a single sale of goods to a government
agency for P448,000, inclusive of P48,000 output VAT. These goods were purchased or
P336,000 , including P36,000 input VAT.

The taxpayer shall record the following in his books:

Inventory/Purchases P 300,000
Input VAT 36,000
Cash P 336,000
To record the purchase of goods
 Cash (P448K – P20K) P 428,000
Withheld final VAT (P400K x 5%) 20,000
Sales P 400,000
Output VAT 48,000
To record the sales to the government
and the final withholding VAT

Cost of sales P 300,000

Inventory/Purchases P 300,000
To record the cost of sales to the
government

Output VAT P 48,000

Cost of sales 8,000
Input VAT P 36,000
Withheld final VAT 20,000
To close the output VAT and
withheld final VAT at month end.

Note:
1. There is no VAT due and payable on sales to the government.
2. The difference between the actual input VAT and the P28,000 (P400,000 x 7%)
presumed input VAT is closed to cost of sales or expenses, as the case may be.
3. The P8000 (P36,000 – P28,000) excess actual input VAT is a loss which is added to cost
of sales. If the 7% of sales exceeds the actual input VAT, a reduction to cost or expenses
(i.e., gain) will occur.

In reporting, form 2550M would look like:

Output VAT P 48,000

Less: Standard input VAT (7% x P400,000) 28,000
VAT due 20,000
Less: Tax credit – 5% withholding VAT 20,000
VAT due and payable P 0
Zero-rated sales
In principle, foreign consumption like export sales are non-vatable. In our current tax laws,
they are subject to 0% VAT to VAT taxpayers. With a 0 output VAT and they claimable input
VAT, the VAT due would be negative.

As such, The law allows taxpayer the privilege to claim the input VAT as a:
a. tax refund, or
b. tax credit against

If claimed as tax refund, the taxpayer will be paid back in cash. If claimed as tax credit, the
taxpayer can use it to reduce other Internal Revenue tax obligations to the BIR.

If the input VAT on zero-rated sales is not applied with refund or a tax credit, the claimable
input VAT would be added to creditable input VAT deductible against output VAT on other
vatable sales.

Illustration
A VAT registered person exported goods for $8,000 (equivalent to P400,000). These goods
were purchased for P200,000, before P24,000 input VAT.

The taxpayer shall record the following in his books:

Inventory/Purchases P 200,000
Input VAT 24,000
Cash P 224,000
To record the purchase of goods

Cash P 400,000
Sales P 400,000
To record the export sales

Cost of salers P 200,000

Inventory/Purchases P 200,000
To record the cost of export sales

If claimed as tax refund:

Cash P 24,000
Input VAT
To record receipt of input VAT P 24,000
refund

If claimed as tax credit certificate (TCC):

Prepaid tax P 24,000

 Input VAT
To record receipt of tax credit P 24,000
certificate

Note: The prepaid tax (TCC) can be used to settle any internal revenue tax obligation of the
taxpayer such as income tax, excise tax, donor’s tax, documentary stamp tax and others.

If not claimed as refund or TCC:

The input VAT is simply deducted against output VAT at the end of the month.

Output VAT P 24,000

Input VAT
To close input VAT to Output VAT P 24,000
at month-end

Note that this is the default treatment of input VAT on zero-rated sales. If the input VAT is
not claimed as TCC or tax refund, it will be credited against ouput VAT.

Other zero-rated sales

Not only export sales are subject to 0% VAT. There are domestic sales or local sales of
goods or services that are considered export sales such as sales to economic zones and
persons engaged international transport operations.

Local sales to persons with indirect tax exemption such as International Rice Research
Institute and Asian Development Bank are effectively subject to 0% VAT. This is referred to
as effectively zero-rated sale.

The 0% VAT is applied to these types of sales similar to the treatment and procedures
discussed. Detailed discussion of this exceptional sales will be discussed in Chapter 8.

Exempt sales
For purpose of the VAT, exempt sales are non-vatable sales such as:
a. Exempt sales of goods, services or properties
b. Services specifically subject to percentage tax

Exempt sales will not be subject to output VAT. Consequently, the seller is also not allowed
to credit input VAT. The input VAT traceable to exempt sales is part of costs or expenses of
the seller and is deductible against gross income subject to income tax.

Illustration
During the month, a VAT registered person sold unprocessed agricultural food products for
P400,000 which he brought for P150,000. He also purchased P100,000 worth of supplies,
exclusive of P12,000 input VAT, which were all used in connection with this sales.
The taxpayer should record the following in his books:

Inventory/Purchases P 150,000
Supplies 100,000
Input VAT 12,000
Cash P 262,000
To record the purchase of goods and
supplies

Cash P 400,000
Sales P 400,000
To record exempt sale

Cost of sales P 150,000

Supplies expense 112,000
Inventory/Purchase P 150,000
Supplies 100,000
Input VAT 12,000
To record the cost of the exempt
sales and supplies used

Note:
1. No output VAT is allowed to be charge on exempt sales. However, If the taxpayer
charged VAT and exempt sales, the same shall be considered taxable for purposes of the
VAT.
2. The P12,000 input VAT is included in the supplies expense and is not claimable as tax
credit.

Comparison of Zero-rated sales and Exempt sales

Zero-rated sales Exempt sales
Output VAT None None
Input VAT Creditable Non-creditable (expense)
Types of Sales Export or domestic sales Domestic sales
Taxpayers involved VAT taxpayers only VAT or non-VAT taxpayers

Zero-rating is applicable on VAT taxpayers only. Hence, zero-rated sales apply only to VAT
taxpayers whereas exempt sales can occur for both VAT and none-VAT taxpayers.
However, that taxpayers may not have exempt sales if he opted to subject exempt sales to
VAT.

Classification of sales or receipts for VAT purposes

Owing to the differences in the rules, there are four types of sales or receipts for purposes
of the VAT:
1. Sales to the government
2. Zero rated sales
3. Exempt sales
4. Regular sales

Regular Sales are subject to 12% VAT and are allowed full credit of actual input VAT. It
covers all sales of goods, properties or services other than:
a. Sales the government or GOCCS
b. Zero rated sales
c. Exempt sales

Summary of VAT rules for each type of sales

Types of sales Output VAT Claimable Input VAT due
VAT
Exempt sales None None None
Zero-rated sales Zero Actual if not claimed Negative
as credit or refund
Sales to 12% of 7% of sales/receipts None
government sales/receipts
Regular sales 12% of Actual input VAT Positive or negative
sales/receipts paid

Classification Rules
1. The sale of goods destined a non-resident buyer abroad is a zero rated sale even if it
involves exempt goods.
2. The sale of vatable goods or services in the Philippines is normally a regular vatable sale,
except when the sale is:
a. Made to the government or GOCC - subject to final withholding VAT
b. Considered an export or effectively zero-rated such as sales to VAT - exempt persons -
subject to 0% VAT.
3. The sale of exempt goods and services to the government or GOCC is still exempt sales.

Summary of Rules on Sales of Goods:

Domestic Sales Export sales
VAT-exempt
 Taxable persons* Any person
persons

Sales of exempt goods 12% VAT 0% VAT 0% VAT

Sales of vatable goods 12% VAT 0% VAT 0% VAT

*These are persons with indirect tax exemption

Illustration 1
A VAT registered person sold and exported the following goods during the quarter:

Philippines Abroad
Banana Fruit P 500,000 $ 10,000
Tobacco 800,000 20,000
Total P 1,300,000 $ 30,000

The P500,000 sale of exempt goods banana fruit in the Philippines is an exempt sale. The
P800,000 sale of vatable non-food tobacco in the Philippines is a regular sale. The $30,000
export sale id zero-rated sales.

Illustration 2
A VAT registered taxpayer made the following domestic sale of goods to the following
entities:

D.A. IRRI Private clients

Sale of rice seeds P 500,000 P 700,000 P 1,800,000
Sale of pesticides 400,000 300,000 3,200,000
Total P 900,000 P 1,000,000 P 4,000,000

DA- Department of Agriculture; IRRI- International Rice Research Institute

Rice sales are exempt goods while pesticides are vatable. IRRI is a VAT-exempt person
while indirect tax exemption.

The following domestic sales are exempt sales:

D.A. IRRI Private clients

Sale of rice seeds P 500,000 P 0 P 1,800,000
Sale of pesticides 0 0 0
Total P 500,000 P 0 P 1,800,000

The following are zero-rated sales:

D.A. IRRI Private clients

Sale of rice seeds P 0 P 700,000 P 0
 Sale of pesticides 0 300,000 0
Total P 0 P 1,000,000 P 0

The P400,000 sale of pesticides (i.e., vatable goods) to the Department of Agriculture is a
vatable sale to the government. The P3,200,000 sale of pesticides to private clients is a
regular sale.

Other sales subject to VAT

1. Sales of registrable persons

The sales of registrable persons are subject to VAT despite their non-registration as VAT
taxpayers but no input VAT credit is allowed.

2. Sales of non-VAT taxpayers who issues VAT invoice ore receipt

The sale of non-VAT taxpayers who illegally charge VAT on their sales shall be subject to
VAT without the benefit of input VAT plus the 50% surcharge and the usual 3% percentage
tax.

3. Exempt sales billed by VAT taxpayers as regular sales

Exempt sales that are billed through a VAT invoice or VAT receipts will be considered as
regular sales. Furthermore, exempt sales which are not so clearly indicated as “Exempt” in
the VAT invoice or VAT receipts shall be considered as regular sales subject to VAT.

Illustration
Assume a taxpayer sold goods for P1,000,000. He purchased the goods for P800,000
exclusive of P96,000 VAT.

If the taxpayer is a registrable person, he will pay:

Output VAT (P1M x 12%) P 120,000

Less: Input VAT 0
VAT due and payable P 120,000

If the taxpayer is a non-VAT person who issues a VAT invoice, he will pay:

Output VAT (P1M x 12%) P 120,000

Surcharge on output VAT 60,000
(P120,000 x 50%)
Percentage tax (P1M x 3%) 30,000
Total taxes due P 210,000

If the taxpayer is a VAT taxpayer who failed to identify sales as exempt, he will pay:
 Output VAT (P1M x 12%) P 120,000
Less: Input VAT 96,000
VAT due and payable P 24,000

CHAPTER 6: SELF-TEST EXERCISE

Discussion Questions
1. Describe the scope of vatable sales.
2. Enumerate those VAT exempt transactions under the NIRC
3. Discuss the applicability of the VAT on sales.
4. What are the two VAT thresholds? Discuss the rule on registration for each threshold.
5. Illustrate the application of the VAT threshold to persons who exceed the VAT threshold
during the year.
6. Enumerate other instances of vatable sales.
7. What are the classifications of vatable sales? How do they compare in terms of treatment
of output VAT and input VAT?
8. Illustrate the reporting of the value added tax in each taxable quarter.
9. Discuss the invoicing requirement of VAT registered taxpayers.

Drill Exercise
For each of the following items, indicate the following:

Exempt - For entity exempt from business tax

% tax - For those specifically subject to percentage tax
Vatable - For those subject to either VAT or general percentage tax

1. Seller of agricultural food products

2. Furniture shop
3. Vegetable trader
4. A private high college
5. A private hospital
6. A dentist
7. Hospital drug store
8. A nonprofit elementary school
9. A government college
10. Restaurant
11. Bus operator
12. Hotel
13. Operator of domestic sea vessel
14. Life insurance company
15. Mall
16. Domestic airliner
17. Lessor vessels or aircraft
18. Banks
 19. Operator of taxi
20. International carriers
21. Keepers of the garage
22. Book publishers
23. Quasi-banks
24. Dealer of household appliances
25. Dealer of commercial lot
26. Insurance agent
27. Employee
28. Contractor
29. Processor of sardines
30. Auto parts dealer
31. Manufacturer of hog feeds
32. Seller of fertilizer and seeds
33. Fisherman
34. Fish vendor
35. Textile manufacturer

True or False 1
1. A person who exceeded the VAT-threshold in any 12-month period must register as a
VAT-taxpayer.
2. The VAT applies on receipt or sales other than those exempted and those specifically
subject to percentage tax.
3. A person with vatable sales or receipts not exceeding the VAT-threshold may register as
a non-VAT taxpayers.
4. A person with vatable sales or receipts not exceeding the VAT-threshold may register as
a VAT-taxpayer.
5. A person who commences business with an expectation to exceed theVAT threshold
must register as a VAT taxpayer.
6. A registrable person is exempt from VAT.
7. A VAT-registered person is exempt from VAT on VAT-exempt sales.
8. A non-VAT taxpayer shall not bill VAT on his sale
9. A VAT-registered person is liable to VAT on exempt sales and services specifically subject
to percentage tax.
10. The threshold for franchise grantees of electricity is P10,000,000.
11. The VAT threshold for sellers of goods or services is P3,000,000.
12. The VAT threshold for franchise grantees of gas and water is P10,000,000.
13. The VAT threshold applicable to professional practitioners is P3,000,000.
14. Exempt sales shall not be billed with an output VAT.
15. A sale to the government shall not be billed with an output VAT since it is exempt from
VAT.

True or False 2
1. Export sales shall be billed with output VAT.
2. The export sale of a VAT-taxpayer is an exempt sale.
3. A non-VAT registered person who invoiced VAT on his sale shall be subject to 12% VAT
without the benefit of an input VAT 3% percentage tax, and 25% surcharge.
4. Exempt sales which are billed as regular sales shall be considered as regular vatable
sales.
5. The VAT payable of a VAT registrable person is the output VAT without benefit of input
VAT plus 3% percentage tax.
6. No input VAT traceable to exempt can be claimed sales as tax credit.
7. No input VAT traceable to government sales is claimable as tax credit.
8. A VAT registered person shall be subject to a final withholding VAT of 12% on sales to
the government.
9. The VAT payable of any person is always 3% of the value added on the sales of goods.
10. The claimable input VAT and the government sales is 7% of the sales.
11. The VAT payable on zero- rated sales is always zero.
12. There is no way VAT payable could be negative in a particular month or quarter.
13. VAT is paid in three monthly installments similar to the percentage tax.
14. Exempt sales must be indicated as such; otherwise, they will be regarded as regular
sales.
15. The standard input VAT is 5% of government sales.

Multiple choice – Theory: Part 1

1.All of this are vatable, except
a. Engineering contractors
b. Lawyers
c. employee
d. Brokers

2. Which is not VAT exempt?

a. Importation of agricultural or marine food products
b. Gross receipts of professional practitioners
c. Receipts from taxi cabs
d. Gross receipts of hospitals

3. Which is vatable?
a. Sale of fertilizers
b. Sales of fruit
c. Sale of bamboo handicrafts
d. Sale of vegetables

4. All of these businesses are vatable, except

a. Non life insurance business
b. Banks
c. Security dealers
d. Merchandisers

5. Which is vatable?
a. Fruit dealer
b. Department store
c. Cooperative
d. Meat vendor

6. Which of the following will pay VAT?

a. Farmer
b. Food processor
c. Rice or corn Miller
d. Fruit dealer

7. Which will not pay VAT?

a. International carrier
b. Domestic air carrier
c. Domestic sea carrier
d. All of these

8. Which of the following is vatable?

a. An operator of cockpits
b. A disco
c. A bowling alley
d. An operator of a race truck

9. Which is vatable?
a. Local water districts
b. gasoline stations
c. Internet service providers
d. Schools

10. Which is vatable?

a. Sale of buses and jeepneys
b. Sale of vessels
c. Sale of aircraft
d. Lease of vessels or aircraft

11. Which will not pay VAT on its receipts?

a. Hospitals
b. Real property dealers
c. Book stores
d. Taxi cab operators

12. Which is vatable?

a. Sales of agricultural or marine food products
b. Gross receipts of medical practitioners
c. Sales of books
d. Sales of fertilizers, seeds and seedlings
13. Which statement is correct?
a. Husband and wife are considered separate taxpayers for business tax purposes.
b. For purposes of VAT threshold, both exempt sales and receipts from services subject to
percentage tax must be included.
c. A VAT registered taxpayer must pay VAT on services subject to percentage tax
d. all of these

14. What is the general lock-in period for those who voluntarily registered as VAT
taxpayers?
a. Three years
b. Five years
c. One year
d. Perpetual

15. To franchise grantees of radio or television, the VAT registration shall be

a. Revocable in three years
b. Irrevocable in three years
c. Revocable in one year
d. Irrevocable perpetually

16. Which is not Vatable as a separate entity?

a. A branch
b. A subsidiary company
c. A spouse
d. A parent company

17. Statement 1: Sellers of services are subject to VAT on gross receipts.

Statement 2: Sellers of goods are subject to VAT on grass selling price.

Which statement is correct?

a. Both statements
b. Neither statement
c. Statement 1
d. Statement 2

18. Statement 1: As a rule, percentage tax is paid monthly.

Statement 2: VAT is paid monthly and quarterly.

Which is false?
a. Both statements
b. Neither statement
c. Statement 1
d. Statement 2

19. Statement 1: “Gross receipts” means collections and advances by clients.

Statement 2: “Gross selling price” means gross sales including delivery charges and excise
tax on the sales if any.

Which is correct?
a. Both statements
b. Neither statement
c. Statement 1
d. Statement 2

20. Statement 1: Discounts that are contingent to a future event are the deductible from
gross selling price.
Statement 2: Expenses of the service provider that are reimbursed by the client forms part
of the gross receipt.

Which is incorrect?
a. Both statements
b. Neither statement
c. Statement 1
d. Statement 2

Multiple choice – Theory: Part 2

1. Which is non vatable?
a. Exempt sales billed as regular sales by VAT persons
b. Export sales of VAT registered persons
c. Regular sales of registrable persons
d. Export sales of non VAT registered persons

2. Statement 1: Input VAT is creditable only by VAT registered taxpayers

Statement 2: Input VAT is deductible by non VAT taxpayers against their gross income for
purposes of income tax

Which is correct?
a. Statement 1
b. Statement 2
c. Both statements
d. Neither statement

3. Statement 1: A VAT taxpayer who purchases goods from non VAT suppliers will
effectively pay a VAT equivalent to the output VAT.
Statement 2: No output VAT shall be billed on export sales and exempt sales.

Which is incorrect?
a. Statement 1
b. Statement 2
c. Both statements
d. Neither statement

4. What is the tax payable by a non VAT taxpayer who issues a VAT invoice or VAT official
receipt?
a. Output VAT plus 3% percentage tax
b. Output VAT less input VAT, plus 3% percentage tax and 50% surcharge
c. Output VAT plus 3% percentage tax and 50% surcharge
d. 3% percentage tax

5. What is the business tax payable by a person who is VAT registrable?

a. The output VAT
b. The input VAT
c. Output VAT less input VAT
d. Output VAT plus 3% percentage tax

6. The claimable input VAT is 12% of purchases from

a. VAT registered taxpayer
b. non VAT registered taxpayer
c. A or B
d. none of these

7. Which is a source of input VAT?

a. Purchases of agricultural or marine food products from VAT sellers
b. Purchases of agricultural or marine food products from non VAT sellers
c. Purchases of vegetable goods or services from non VAT suppliers
d. Purchases of vegetable goods or services from VAT suppliers

8. Which is not a sales category for VAT taxpayers?

a. Exempt sales
b. Zero rated sales
c. Sales to the government
d. Sales to non profit institutions

9. What is the VAT due and payable in regular sales?

a. Output VAT less Input VAT
b. Output VAT less input VAT plus 3% percentage tax
c. Output VAT + 3% percentage tax
d. Output VAT + 3% percentage tax plus surcharge

10. Which is subject to withholding VAT?

a. Regular sales of real properties
b. Zero rated sales
c. Sales to the government
d. Exempt sales

11. A VAT taxpayer cannot claim input VAT credit on

a. Regular sales
b. Zero rated sales
c. government sales
d. Exempt sales

12. Which is a possible source of input VAT?

a. Importation
b. Purchase from VAT sellers
c. Purchase from non VAT sellers
d. A and B

13. A VAT taxpayer can claim the actual input VAT credit on
a. Regular sales
b. Zero rated sales
c. government sales
d. A and B

14. A VAT taxpayer may claim only partial or full input VAT credit on
a. Regular sales
b. Zero rated sales
c. government sales
d. A and B

15. The output VAT on government sales is

a. 12% of sales
b. 0% of sales
c. None
d. 12% of value added

16. The output VAT on export sales is

a. 12% of sales
b. 0% of sales
c. None
d. 12% of value added

17. The output VAT on exempt sales is

a. 12% of sales
b. 0% of sales
c. None
d. 12% of value added

18. No input VAT is creditable on

a. Government sales
b. Regular sales
c. Export sales
d. Exempt sales
19. The claimable input VAT on government sales is
a. 12% of purchases from VAT suppliers
b. 12% of purchases from non VAT suppliers or VAT suppliers
c. 7% of purchases from VAT suppliers
d. 7% of sales

20. Statement 1: The VAT due and payable on regular sales is always positive.
Statement 2: The VAT due and payable on export sales is always negative.

Which statement is generally correct?

a. Both statements
b. Neither statement
c. Statement 1
d. Statement 2

21. Statement 1: Sellers always pay VAT on government sales

Statement 2: Sellers will not pay VAT on export sales

Which is incorrect?
a. Statement 1
b. Statement 2
c. Both statements
d. Neither statement

22. Which is a correct statement regarding the VAT?

a. The taxable quarter of any taxpayer must be aligned to the calendar year
b. The taxable quarter of an individual taxpayer must be aligned to the calendar year
c. The taxable quarter of a corporate taxpayer must be aligned to the calendar year
d. All of these

23. Statement 1: The VAT returns for the first two months of the quarter are prepared on a
monthly basis
Statement 2: The VAT returns for the first third month of the quarter reflects a monthly
balance

Which is incorrect?
a. Statement 1
b. Statement 2
c. Both statements
d. Neither statement

24. Statement 1: VAT paid in the first two months of the quarter is deductible against the
output VAT for the entire quarter.
Statement 2: The VAT paid in a quarter is deductible against the output VAT of future
quarters of the taxable year.
Which is correct?
a. Statement 1
b. Statement 2
c. Both statements
d. Neither statement

25. The monthly VAT return is referred

to as
a. BIR Form 2551M
b. BIR Form 2550M
c. BIR Form 2551Q
d. BIR Form 2559Q

Multiple Choice – Problems: Part 1

1. An agricultural supplier had the following sales during the last 12-month period:
Sales of fertilizers and corn seeds P 1,200,000
Sales of seedlings 400,000
Farm equipment 700,000

What is the business tax liability of this taxpayer?

a. VAT on all these categories of sale
b. VAT on equipment and seedlings
c. Percentage tax on equipment and seedlings
d.Percentage tax on farm equipment

2. Mrs. Escala had the following sources of income in the past 12 months:
Salaries P 1,200,000
Professional fees 800,000

Which is correct?
a. She shall be subject to VAT on the salaries and professional fees
b. She shall be subject to percentage tax on the salaries and professional fees
c. She shall pay percentage tax on the professional fees only
d. She shall pay VAT on the professional fees only

3. Aciga Corporation had the following sales in the past 12-month period:

Home office sales P 2,000,000

Branch 1 sales 1,200,000
Branch 2 sales 1,000,000
Total company sales P 4,200,000

Which is correct?
a. Home office shall pay VAT
b. Branch 1 and 2 shall pay percentage tax
c. The home office and branches shall all pay VAT
d. A and B

4.Assuming Aciga Corporation is a parent corporation with two subsidiaries with the
following sales in the past 12-month:

Aciga Corporation P 2,000,000

Subsidiary 1 sales 1,200,000
Subsidiary 2 sales 1,000,000
Total group sales P 4,200,000

Which is incorrect?
a. Aciga Corporation shall pay VAT
b. Subsidiary 1 and subsidiary 2 shall pay percentage taxes
c. All companies in the group shall pay VAT
d. A and B

5. Mr., and Mrs. Lallo had the following sales in the past 12 months:

Mr. Lallo Mrs. Lallo Total

Fruits and P 1,400,000 P - P 1,400,000
vegetables sales
Fish and meat sales - 1,200,000 1,200,000
Grocery sales 800,000 600,000 1,400,000
Total P 2,200,000 P 1,800,000 P 4,000,000

Which is correct?
a. Both Mr. And Mrs. Lallo shall pay VAT
b. Both Mr. And Mrs. Lallo shall pay percentage tax
c. Mr. Lallo shall pay VAT, but Mrs. Lallo shall pay percentage tax
d. Mrs. Lallo shall pay VAT, but Mr. Lallo shall pay percentage tax

6. Mr. Vegetta, a VAT registered taxpayer, owns a mini store with the following sales in the
past 12 months:

Sales of meat and vegetables P 1,800,000

Sales of cooked rice and viands 1,200,000
Sales of snacks and soft drinks 500,000
Total sales P 3,500,000

Which is correct?
a. Mr. Vegetta shall pay percentage tax on the sales of rice, viands, soft drinks and snacks
b. Mr. Vegetta shall pay VAT on the sales of rice, viands, soft drinks and snacks
c. Mr. Vegetta shall pay VAT on all sales
d. Mr. Vegetta shall pay percentage tax on all sales
7. A non VAT realty lessor had the following receipts during a month:

Bed spacers room with P2,000 monthly P 120,000

rental each
Houses for rent with P10,000 monthly 1,000,000
rental each
Commercial spaces with P5,000 monthly 900,000
rental each

Which is correct?
a.The taxpayer shall pay VAT on all receipts
b. The taxpayer shall pay VAT on the commercial spaces
c. The taxpayer shall pay percentage tax on all receipts
d. The taxpayer shall pay percentage tax on the commercial spaces

8.A service provider had the following data during the month:

Revenue, including VAT P 268,800

Gross receipts, including VAT 180,000
Input VAT 12,000

Assuming the taxpayer is VAT registered, compute the VAT payable

a. P7,283
b. P9,600
c. P16,800
d. P19,286

9. Assuming the taxpayer is a VAT registrable person, compute the VAT payable a. P7,283
a. P7,283
b. P9,600
c. P16,800
d. P19,286

10. A seller of goods had the following data during the month:

Sales invoice (total billed prices) P 436,800

Total cash collections 380,800
Sales returns and allowances, billed price 11,200
Input VAT 14,000

Assuming the taxpayer is VAT registered, compute the VAT payable

a. P0
b. P26,800
c. P31,600
d. P35,600

11. Assuming the taxpayer is a VAT registrable person, compute the VAT payable
a. P0
b. P26,800
c. P31,600
d. P35,600

12. The following sales and purchases were taken from the books of accounts of a VAT
taxpayer:
Sales April May June
Sales P 625,000 P 400,000 P 600,000
Purchases 400,000 420,000 200,000

What is the VAT payable in April?

a. P75,000
b. P48,000
c. P27,000
d. P0

13. What is the VAT payable in June?

a. P72,600
b. P72,000
c. P48,000
d. P45,600

A VAT taxpayer had the following sales and purchases during the month:

Sales, excluding VAT P 300,000

Purchases, inclusive of P14,000 VAT 280,000

Compute the gross income under each of the following independent cases:
14. The sale is VAT exempt
a. P20,000
b. P34,000
c. P50,000
d. P57,000

15. The sale is made to the government

a. P20,000
b. P34,000
c. P41,000
d. P41,000

16. The sale is made to regular customers

a. P20,000
b. P34,000
c. P41,000
d. 50,000

17. The sale is made by a registrable person

a. P20,000
b. P34,000
c. P41,000
d. P50,000