What You Need Know About Value Added Tax

VAT for Entrepreneurs FAQ (v2022-1)

Do I need to worry about paying VAT? What is VAT?

Yes. You need to check.  It is important to know if you are covered by VAT.  VAT stands for Value Added Tax.  VAT is a type of sales tax applied to both goods and services at a rate of  12% - which is a huge amount for any business.  If for instance, you are covered by VAT but are not aware, you are still liable to remit 12% of the sales of goods or services!

What kinds of goods and services are covered?

In general, all good and services are covered by VAT.  But, if your sales are below Php3,000,000.00 per year, you are not required to register under the VAT system.

Are there any exceptions?

Yes, some items are exempt from VAT.  There is also such a thing as zero-rated VAT.

What are some exempted items?

Some examples are agricultural food products in the original state, educational services rendered by duly accredited institutions, etc.  A list can be found in Section 109 of the Tax Code.

What is the difference between VAT exempt and zero-rated.

It’s a bit technical.  Generally, exempt means that the transaction is not subject to VAT, and not part of the VAT system at all.  However zero-rated transactions are still part of the VAT system, and those with zero-rated transactions can still be credited with any ‘input’ VAT that has been paid.

What do you mean by ‘input’ VAT?

A good way to understand input VAT is to take a manufacturing example.  If your company purchased supplies for manufacturing and already paid VAT on such supplies, the VAT paid considered as ‘input’ VAT.  When you compute the 12% liability VAT on the sale of your manufactured item, that is called ‘output’ VAT.  You may deduct the input VAT from the output to reduce your liability.

Who must remit the VAT?

The registered VAT entity is required to remit the VAT.

Who is required to register as a VAT entity?

If you are a seller of goods and/or services, with gross receipts of more than Php3,000,000.00, you are required to register as a VAT tax payer and issue receipts that show how much of the price paid is VAT.

NOTE: If you are liable to register and pay VAT, it is recommended that you consult with a Certified Public Accountant and/or a Law Office with tax practice.