Get Adobe Reader

In order to view PDF files, you need to install Adobe Reader. Please click here to download a free copy of Adobe Reader.

The value added tax on sales to government

The value added tax on sales to government by: Paraluman Diaz Andres

Value-added tax (VAT) is a tax on consumption. It is imposed on every sale of goods or services, or importation of goods. As its name suggests, it is a tax limited to the value added. Therefore, VAT applies only to the value added by the seller at each stage as the goods or services pass along the distribution chain.

VAT is also an indirect tax since the seller who is directly and legally liable for the payment of VAT is not necessarily the person who ultimately bears the burden of the tax. By adding or including the tax to the selling price, the seller shifts the burden of the tax to the immediate buyer and, ultimately, the final consumer.  Hence, it is actually the final purchaser or consumer of such goods and services who bears the burden of tax.

The current VAT rate is 12 percent which applies to all transactions subject to VAT, including sales to the government.

Although subject to 12 percent VAT, what makes the VAT on sales to government unique is the requirement under Revenue Regulations (RR) No. 16-2005 for the government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs), to withhold 5 percent VAT on its payments for purchases of goods and services. 

It may be noted that while the usual manner of collecting VAT is through tax credit method where the input VAT (i.e., the VAT paid on purchases) is credited against the output tax (i.e., VAT on sales) to arrive at the net VAT payable (effectively the tax on value added), in case of sales to government, the 5 percent final withholding VAT represents already the net VAT payable of the seller.

Therefore, the effect of this 5 percent final withholding VAT essentially limits the amount of input tax that the seller may credit against the 12 percent output VAT to only 7 percent (12 percent output - 5 percent net VAT payable = 7 percent standard input VAT). 

The difference between the actual input VAT related to sales to government and the 7-percent standard input VAT shall be adjusted to the seller’s cost or expense.  Hence, the seller may incur additional cost if the actual input VAT exceeds the 7-percent standard input VAT.   On the other hand, if actual input VAT is less than the said standard input VAT, the seller, in effect, recognizes additional income. 

To illustrate: If the seller sells goods at P 100, the total invoice price inclusive of 12 percent output tax is P112.  If the seller incurred a cost of P100.80, inclusive of VAT,  to purchase the goods sold, the actual input tax that he may claim is P10.80.  However, the revenue regulation limits the input tax to 7 percent to arrive at the 5 percent final withholding VAT (P12 output tax - P7 input tax = P5 withholding vat) which is essentially the net VAT payable of the seller. The difference between the actual input tax of P10.80 and the standard input tax of P7, which is P 3.80, shall be recorded as a cost or expense account.  On the other hand, if the actual cost incurred by the seller for the purchase of the goods is P56, inclusive of VAT, the input tax therein is P6. In this case, the standard input tax is greater than the actual input tax.  Hence, the difference of P1 (P7 - P6) must be credited against cost or expense which effectively results in additional income.

Since not all input taxes can be claimed against the output tax related to the sales to government, it is important to evaluate the costs incurred related to such sales. In this respect, it is worthy to note the timing in recognizing input VAT on sales of goods to the government and withholding of VAT therein. For sales of goods, VAT is reported as of the time of sale while the withholding of VAT will be made upon payment.  Under such scenario, when should the seller properly claim the VAT credit? Is it at the time of sale or time of receipt of payment?

In practice, the VAT on sales to government is reported at the time of sale of goods. This is consistent with the Tax Code provision where sale of goods is required to be reported at the time of sale. Effectively, when the seller reports the sales to government at the time of sale, the VAT due on the seller must be zero since the law provides for the standard allowable input tax.  Hence, the net VAT payable of the seller must equal the VAT withheld by the government.

However, timing issue arises when the payment of the government happens on a different quarter, and accordingly, the VAT will be withheld on such quarter.  In this respect, may the seller claim the 5 percent withholding VAT at the time he reports the sales of goods notwithstanding that the VAT has not yet been withheld?

The existing revenue regulations and circulars are not clear on this matter. As discussed above, since the timing of the recognition of input VAT credit will create a significant impact on the cost or expense of the seller, it is but proper that the Bureau of Internal Revenue (BIR) issue a definitive ruling on this issue. We hope that the BIR will address the issue promptly and provide a clarificatory circular to answer this practical question.

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Paraluman.Andres@ph.gt.com.  For other tax concerns, please check out our other tax services.