VALUE ADDED TAX (VAT)

Value Added Tax or VAT is a tax levied by the government to certain providers of goods or services. The National Internal
Revenue Code provides further that the gross annual revenues should exceed P3,000,000 (based on TRAIN Law which is
to be adjusted to inflation not later than January 31, 2021 and three years thereafter) before the company is required to pay
this privilege tax called Value Added Tax. The VAT does not only affects sellers of goods but also providers of services
such as practitioners (lawyers, doctors), lessors, owners of hotels, restaurants, movie theaters, common carriers
(transportation companies), among others as long as their gross sales/receipts exceed P3,000,000.

What is VAT-exempt sale?

It is a sale of goods, properties or service and the use or lease of properties which is not subject to output tax and whereby
the buyer is not allowed any tax credit or input tax related to such exempt sale.

Examples of VAT-Exempt transactions per RA 10963 or the TRAIN Law

1. Raw of agricultural and marine products
2. Educational services
3. Senior citizens
4. Health services
5. Cooperatives
6. Persons with disabilities
7. Sale of gold to the Bangko Sentral ng Pilipinas (BSP)
8. Sale of drugs and medicines prescribed for diabetes, high cholesterol and hypertension beginning January 1, 2019
9. Association dues, membership fees and other assessments and charges collected by homeowners’ associations and
condominium corporation
10. Transfer of property in pursuance of a plan of merger or consolidation

What is a zero-rated sale?

It is a sale, barter or exchange of goods, properties and/or services subject to 0% VAT pursuant to Sections 106 (A) (2) and
108 (B) of the Tax Code. It is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the
input tax on purchases of goods, properties or services, related to such zero-rated sales, shall be available as tax credit or
refund in accordance with existing regulations.

Examples of VAT Zero-rated sales of goods, properties and services

1. Sales to bonded manufacturing warehouse for export-oriented manufacturers, export traders, diplomatic missions
and Philippine Economic Zone Authority (PEZA) are considered export sales under Executive Order No. 226.
2. Sale of goods, supplies and equipment to international shipping and international air companies
3. The transport of passengers and cargo by domestic air or sea vessels from the Philippines to foreign country

What is "input tax"?

Input tax means the VAT due on or paid by a VAT-registered on importation of goods or local purchase of goods, properties or services,
including lease or use of property in the course of his trade or business. Each time a purchase is made, 12% VAT is included
increasing the amount to be paid by the buyer which must be debited to the title Input Tax. This may be shifted by the buyer
if it sells goods to customers.

What is "output tax"?

Output tax means the VAT due on the sale, lease or exchange of taxable goods or properties or services by any person registered or
required to register under Section 236 of the Tax Code.
Each time a sale is made, VAT is charged to the customers increasing the amount to be collected which is credited to the
title Output Tax.

❖ The two accounts (Input tax and Output tax) are closed every month and the difference may represent a Tax Payable
to the government if the Output tax is higher than the Input Tax.
Output > Input = VAT Payable
Output < Input = Creditable VAT

Deadline of Filing VAT Forms:

1. Monthly VAT Declarations using BIR Form 2550M - Monthly Value-Added Tax Declaration (February 2007
ENCS)
❖ Manual Filing - Not later than the 20th day following the end of each month.
❖ Through Electronic Filing and Payment System (eFPS)- 21 to 25 days following the end of the month,
depending upon the group.

2. Quarterly Value-Added Tax Return using BIR Form No. 2550Q - Quarterly Value-Added Tax Return (February
2007 ENCS)
❖ Within twenty five (25) days following the close of the taxable quarter.

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 Accounting Entries for Value Added Tax

Illustration A.
Assume Addicted Shoe Emporium, a VAT-registered company, bought goods on account for P20,000 from History Shoe
Store which is also a VAT-registered company. Few days after, Addicted sold the goods to cash customers for P30,000.
Note that the prices are not yet VAT inclusive

Date Description PR Debit Credit

2019
1 Purchases 20,000
July
Input tax (20,000 x .12) 2,400
Accounts payable (20,000 x 1.12) 22,400
Purchases on account including 12% VAT.

10 Cash (30,000 x 1.12) 33,600

Sales 30,000
Output tax (30,000 x .12) 3,600
Sold merchandise for cash.

31 Output tax 3,600

Input tax 2,400
VAT Payable 1,200
To record tax liability

Aug. 15 VAT Payable 1,200

Cash 1,200
Tax remitted and paid to BIR.

On July 1, Addicted paid for purchases including VAT of P2,400 but only on July 10 it was passed on to the customer who
paid VAT P3,600 more. He was able to recover the amount paid with the excess of P1,200 to be remitted to the BIR. The
VAT ultimately becomes the burden of the consumer. Note that the 12% VAT is based on the purchase price and sales price
which you can see in receipts as VATable sale.

Illustration B.
July 1. S Company sold merchandise to B Company on cash basis. Invoice price is P11,200 (VAT inclusive).
S Company B Company
Cash 11,200 Purchases (11,200/1.12) 10,000
Sales (11,200/1.12) 10,000 Input tax (10,000 x .12) 1,200
Output tax (10,000 x .12) 1,200 Cash 11,200

July 2. S Company sold merchandise to B. Invoice price is P56,000 (inclusive of 12% VAT) terms 2/10, n/30.
S Company B Company
Accounts receivable 56,000 Purchases (56,000/1.12) 50,000
Sales (56,000/1.12) 50,000 Input tax (50,000 x .12) 6,000
Output tax (50,000 x .12) 6,000 Accounts payable 56,000

July 4. S Company issued a credit memorandum to B Company for defective merchandise sold on July 2. The invoice price
is P5,600.
S Company B Company
Sales returns and allowance 5,000 Accounts payable 5,600
Output tax 600 Purchase returns and allowances 5,000
Accounts receivable 5,600 Input tax 600

July 12. S Company received full payment from B Company.

S Company B Company
Cash 49,392 Accounts payable 50,400
Sales discount 900 Cash 49,392
Output tax 108 Purchase discount 900
Accounts receivable 50,400 Input tax 108

Reference:
https://www.bir.gov.ph/index.php/tax-information/value-added-tax.html

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 EXERCISES

Exercise 1
The following selected transactions of Gulong ng Palad Company are completed during July 2018.

Date Transactions
The company purchased 200 tires for P50,000, terms FOB destination, 2/15, n/EOM. The goods arrived
July 1
on July 2.
2 Paid shipping cost of P1,000 for the delivery of merchandise.
5 Returned 20 defective tires.
6 Paid the merchandise purchased on July 1.
7 Sold 100 tires on account for P400 per tire, terms FOB shipping point, 2/15, n/EOM.
9 Sold 80 tires for P400 each.
12 Purchased 350 tires for P250 each, terms FOB shipping point.
16 Sold 150 tires for P400 each, FOB shipping point 3/10, n/30.
19 A customer returned 15 defective tires sold on July 16.
22 Collected sold merchandise on July 7.

Required:
Journalize the transactions, for both the buyer and the seller, if the company is a VAT registered business and uses periodic
inventory system and assuming that:
a. 12% VAT are included in the prices
b. 12% VAT are not yet included in the prices

Exercise 2
The following transactions were completed by Enterprises during the month of November 2018:
1 Purchased merchandise from Manila Trading for P22,320, terms 2/10, n/30.
2 Returned P570 worth of defective merchandise to Manila Trading.
3 Sold merchandise on account to Armando for P10,710, terms 2/10, n/30.
4 Armando returned P960 worth of defective merchandise.
5 Sold merchandise for cash to Bobby for P6,525.
6 Purchased office supplies on account from Makati Commercial for P9,675.
7 Returned P425 worth of defective supplies to Makati Commercial.
8 Sold merchandise for cash to Cora for P8,190.
9 Cora returned P290 worth of defective merchandise.
10 Paid Manila Trading in full.
11 Sold merchandise on account to Delia for P14,260, terms 2/10, n/30.
12 Received cash from Armando in full payment of his account.
14 Purchased merchandise for cash from San Juan Company for P20,700.
15 Returned P2,450 worth of defective merchandise to San Juan Company.
20 Paid Makati Commercial in full.
21 Received cash from Delia in full payment of her account.

Required:
Journalize the transactions, for both the buyer and the seller, if the company is a VAT registered business and uses periodic
inventory system and assuming that:
a. 12% VAT are included in the prices
b. 12% VAT are not yet included in the prices

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