INTRODUCTION TO CONSUMPTION TAXES

The Concept of Consumption and Consumption Tax

Consumption – refers to the acquisition or utilization of goods or services by any

person.

This utilization is subject to a tax called consumption tax.

Rationale of Consumption Tax

1. Savings Formation
2. Rationalization of the Benefit Received theory
3. Wealth redistribution to society

A caveat to consumption tax

Consumption tax should not be levied upon basic necessities such as food, education,
health and shelter.

Income Tax Consumption Tax

Nature Tax upon receipt of Tax upon usage of
income income or capital
Scope / Coverage A tax to the capable A tax to all
Theoretical basis Ability to pay theory Benefit received theory

Types of Consumption

1) Domestic Consumption – consumption or purchases of Philippine residents.

2) Foreign Consumption – consumption or purchases of non-residents.

Territorial Limitation

Destination Principle – only goods and services destined for consumption in the
Philippines are subject to consumption tax while those destined for consumption
abroad are not subject to consumption tax.
 Types of Consumption Purchaser Status
Domestic Consumption Resident Taxable
Foreign Consumption Non-resident Exempt/ Effectivity non-
taxable

Cross Border Doctrine – goods that cross the border which are destined toward
foreign territories should not be charged consumption taxes.

Seller Domestic Consumption Foreign Consumption

(buyer is resident) (buyer is non-resident)
Resident seller (Sale) -> Taxable (Export) -> No tax
Non-resident seller (Import) -> Taxable Effectively No tax

Types of Domestic Consumption as to source

1. Domestic Sales – purchases from resident sellers.

2. Importation – purchases from abroad by non-residents.

Consumption Tax on Domestic Sales

The domestic consumption of resident buyers from resident sellers commonly known
as purchase is subject to a consumption tax called a business tax. Business tax is well-
known as indirect tax.

Consumption Tax on Importation

The domestic consumption of goods or services from non-resident sellers commonly

known as importation is subject to a consumption tax called the VAT on importation.

The VAT is directly levied upon the buyer – importer.

Business Tax Vs. VAT on Importation: A Differentiation

VAT on Importation Business Tax

Scope of tax Imports from business or Purchases form
non-business (all businesses only
consumption)
Type of Consumption Tax Pure Form Relative Form
Statutory Taxpayer Buyer Seller
Economic Taxpayer Buyer Buyer
 Nature of imposition Direct Indirect
Basis of tax Total purchase cost Sales or receipts

Business tax rules on domestic sales

The seller is The buyer is Subject to Business Tax?

Business Business Yes
Business Not Business Yes
Not Business Business No
Not Business Not Business No

Value Added Tax rules on importation

The seller is The buyer is Subject to VAT

Importation?
Business Business Yes
Business Not Business Yes
Not Business Business Yes
Not Business Not Business Yes

TYPES OF BUSINESS TAXES

1. Percentage Tax – tax of various rates from, generally 3%

2. Value Added Tax – a consumption tax of 12%
3. Excise Tax – an ad valorem or specific tax, which is imposed in addition to
VAT or percentage tax, only on certain goods or services.

VALUE ADDED TAX (VAT) ON SALES

Characteristics of VAT on Sales

1) Tax on Added Value

- VAT is a tax on the value added by the seller (mark-up) on its
purchases.
2) Top on Sales
- VAT is required to be included in the price of the goods as a top-
up thereto.
 3) Tax Credit Method
- VAT on Sales minus VAT on Purchases = VAT Payable
4) An explicit consumption tax
- VAT is explicitly disclosed in the invoice or official receipt of the
seller.
5) Quarterly Tax
- The VAT Return is filed quarterly but is paid on a monthly basis.

METHODS OF COMPUTING THE VAT

1) Direct Method
- The VAT is computed by applying the VAT rate to the difference of
the selling price and purchase
2) Tax Credit Method
- VAT on sales or receipts (Output VAT) - VAT on purchases (Input
VAT) = VAT Payable

WHO PAYS THE VAT?

• VAT-registered taxpayer

• Business with annual sales or receipts exceeding 3,000,000.

PERCENTAGE TAXES

Characteristics of Percentage Tax

1) Tax on Sales or Gross Receipts

- The % tax is multiplied directly to the gross sales/receipts
2) An expensed tax
- % tax is presented as an expense deductible against the sales or
gross receipt.
3) An implicit consumption tax
- % tax is not separately presented in the invoice, hence not
disclosed to the buyer.
4) Monthly or Quarterly Tax
- % tax is payable monthly for most taxpayers and quarterly for
certain taxpayers.
WHO PAYS THE PERCENTAGE TAX?

• Non-VAT registered taxpayer

• Business with annual sales or receipts not exceeding 3,000,000.

• Certain large businesses designated by law

EXCISE TAX

Excise tax is levied or imposed on the production or importation of:

1) Sin products such as tobacco and alcohol.

2) Petroleum products
3) Automobiles
4) Non-essential commodity like jewelry, yachts & sport cars
5) Metallic & non-metallic minerals, mineral products, and quarry resources
such as coal, gold, chromite, silver etc.

Excise tax is an additional imposition to VAT or percentage tax.

Excise tax is levied at the point of production or importation.

Types of Domestic Consumption as to Taxability

1. Exempt consumption – these are consumption of goods or

services that are not subject to consumption tax.
2. Consumptions specifically subject to percentage tax – this
includes consumption of services that are not subject to VAT but
are imposed with a specific percentage tax.
3. Vatable consumption – this includes all other consumption that
are neither exempted nor subject to percentage tax.
Types of Consumption Per Type of Domestic Consumption

Importation Domestic Sales or

Receipts
Exempt Consumption Exempt Importation Exempt domestic sales or
receipts
Services subject to a % Service specifically Service specifically
tax subject to a % tax subject to a % tax
Vatable Consumption Vatable Importation Vatable sales or receipts
Exempt Consumption – are neither subject to % tax or VAT

Basis of exemption from consumption tax

Basis of Exemption VAT on Importation Business Tax

Human Necessity The goods imported is a The goods, services or
human necessity property sold is a human
necessity
Out of Scope Tax The importation does not The seller is not engaged
constitute a domestic in business
consumption
Tax Incentive The importation is The sales or receipt is
exempted as a tax exempted as a tax
incentive to certain incentive to a certain
importers sellers
International comity The importation is The sales or receipt is
exempted by treaty exempted by treaty

Services specifically subject to percentage tax – are taxable consumption of services

but subject only to a specific percentage tax rate set by the NIRC.

The structure of the VAT on Importation

Import of Service Import of

Goods
Exempt Exempt Exempt
Percentage Percentage Tax -
Tax
VAT Final VAT on
Withholding VAT Importation
The structure of the Business Taxes

Sales of Service Sales of Goods

Exempt Exempt receipts Exempt sales
Percentage Tax Receipts subject to % tax -
VAT Vatable receipts Vatable sales

Vatable sales or receipts are subject to 12% VAT if the taxpayer is a VAT taxpayer and
to a 3%/1% general percentage tax if the taxpayer is a non-VAT taxpayer.

Terminologies Meaning
a. Exempt sales or receipts Exempt to VAT and percentage tax
b. Services specifically subject to a % tax Subject to a particular percentage tax
and is exempt from VAT
c. Vatable sales or receipts Subject to either VAT or 3%/1
percentage tax

NOTES TO REMEMBER:

 Only domestic consumption is subject to tax.

 If goods enters the Philippines, it will be taxed to consumption at the point
of entry.
 If goods are exported, it is effectively not subjected to consumption tax. 0%
VAT for VAT taxpayers & exempt for Non-VAT Taxpayers exempt from
Excise Tax.
 The VAT on importation applies uniformly to all taxpayers.
 The business tax applies only if the seller is engaged in Business.
 Taxpayer either pays VAT on Sales or Percentage Tax plus excise Tax as
additional tax.
 The VAT on sales and percentage tax accrues at the point of sales while
excise tax accrues at the point of production.
 VAT is based on the value added. It is 12% of sales or receipt less VAT paid
on purchase. Percentage tax is directly computed on the sales or receipts.