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Removal of the 70% cap on input VAT

Removal of the 70% cap on input VAT

By Wendell D. Ganhinhin

Republic Act (RA) No. 9361, the law that repeals the 70% cap on creditable input VAT imposed RA 9337, was finally signed by the President and published in the newspapers last November 28, 2006.

I commend Congress for responding to the concerns of the taxpayers relatively fast after just a year of its implementation last November 1, 2005, and the executive department for supporting the repeal even if it could affect the attainment of their revenue targets.  The new law should become effective 15 days after such publication which means that the 70% cap shall finally be laid to rest beginning on December 13, 2006.  The Bureau of Internal Revenue (BIR) is currently drafting a regulation to implement the new law.

Prior to the amendment, if a VAT taxpayer has accumulated a huge amount of input taxes including the input tax carried over from the previous quarter and such total input tax exceeds the output tax, the total input tax that may be credited in every quarter shall not exceed 70% of the output tax.

Many VAT taxpayers ended up paying 30% of the output tax for every quarter notwithstanding substantial accumulation of input taxes.

The business sector and consumer groups have cried foul over the said controversial provision because it distorted the tax credit method of the VAT system and affected the competitiveness and overall financial viability of the VAT-registered taxpayers.

Even some Supreme Court justices did not approve of this feature of RA 9337.  The Supreme Court, however, has ruled that RA 9337 was valid and should therefore be implemented.

Implementing the revised VAT law without the 70% cap appears easy for both the BIR and the taxpayers.  Upon effectivity of the new law, the taxpayers will compute the VAT due by just using a simple math: Output tax less Input tax equals Net VAT Due or Excess Input Tax.  The excess input tax can be carried over to the next period.

In determining the amount of allowable input tax, however, the taxpayer still has to consider the deferral of input tax on capital goods exceeding P1 million because such provision was not amended and still in effect.

On the part of the BIR, the VAT return will likely be revised by deleting the portion of the return pertaining to the computation of the 70% cap computation which is currently a little complicated.  Administratively, the new law will lessen the burden of the BIR because the revenue examiners would no longer check the computation of the 70% cap by the taxpayers during a tax audit examination.

The limited resources of the BIR could now be focused in determining the proper substantiation of input taxes to avoid abuses and consistently implementing the computerized system of matching sales information from the seller with the corresponding declaration of purchases by the buyer or vice versa.

However, the most important issue that should be addressed by the BIR in implementing the new law is the impact on the timing of its effectivity which should be captured in the transitory provisions of the proposed revenue regulations.  Though the new law will be effective on December 13, 2006, would BIR immediately allow its application for the whole quarter?

For instance, a taxpayer whose fiscal year ends on October 31 2007 will be filing its 1st quarterly VAT return covering November 2006, December 2006 and January 2007 in February 2007.

How should the creditable input tax be determined for said quarter?  Should the removal of the 70% cap be applicable to the whole quarter, in this case 1st quarter of fiscal year ending October 2007, even before the effectivity on December 13, 2006?  Or would BIR require an allocation or specific identification of output and input taxes that would either be still subject to the 70% cap (if incurred before December 13, 2006) or would be fully deductible (if incurred on or after December 13, 2006)? 

The taxpay ers a re hoping for the smooth implementation of this new law through the immediate issuance of clear and comprehensive implementing regulations that would completely address all possible concerns.

Although the BIR has not yet achieved its collection target to date, many taxpayers are hoping that the removal of the 70% cap could be applied for the whole quarter on first implementation without the need for further allocation.  That should somehow compensate taxpayers who have been unduly penalized for having excess input taxes.

(The author is a senior tax manager at the Cebu branch of Punongbayan & Araullo, member of Grant Thornton International.  For comments and inquiries, please e-mail the author or call 032-2316090.)