Introduction to Consumption
Taxes
Chapter 1
CONSUMPTION TAX
• Tax on the purchase, utilization or
consumption of goods or services by
consumers or buyers
Rationale of Consumption Tax
• It promotes savings formation
• It supports the “Benefit Received” Theory
• It helps in wealth redistribution to society
Caveat to consumption tax
• Consumption tax should not be levied upon
basic necessities such as:
1) Food (in original state)
2) Education
3) Health
4) Shelter/housing (within limit)
Income Tax & Consumption Tax
Comparison
Income Tax
Consumption Tax
Nature
Tax upon receipt of income
Tax upon the usage of
income or capital
Scope/coverage
Tax to the capable
A tax to all
Theoretical basis
Ability to pay Theory
Benefit received theory
Types of consumption
• Domestic consumption
• Foreign consumption
➢Domestic consumption is subject to
consumption tax in accordance with
“destination principle”
➢Foreign consumption is NOT taxed on the
basis of “cross-border doctrine”
Types of taxable domestic
consumption
• Purchase by residents from resident sellers
termed as “sale”
• Purchase by residents from sellers abroad
known as “Importation”
Consumption Tax on Domestic
Purchase from Resident Sellers
• Business taxes (VAT, Percentage, Excise)
• Tax is collected from the seller, although the buyer is
actually the one being taxed.
• Seller = statutory taxpayer
• Buyer = economic taxpayer
• Thus, business tax is an indirect tax
• Business tax is made to appear as a privilege tax of
doing business making the term “business tax” a
misnomer
• Applies only when the seller is regularly engaged in
trade or business
Consumption Tax on Importation
• 12% VAT on total landed cost of goods; 12%
withholding VAT on contract price of the
service
• Tax is payable whether both the foreign seller
and the resident buyer are engaged in
business or not and whether the importation
is for business or personal consumption
• Levied directly upon the buyer-importer
Business Tax vs. VAT on Importation
VAT on Importation
Business Tax
Scope of Tax
Imports from business or
non-business
Purchases from those
habitually engaged in
business
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 landed cost
Sales or receipts
Basis of Business Taxes
• Sales for goods or properties
• Receipts for services
Types of Consumption Taxes
• Percentage tax – 0.60% to 30%
• Value Added Tax – 12%
• Excise tax – ad valorem or specific tax imposed
only on certain goods or service
Types of Domestic Consumption as to
Taxability
• Exempt consumption
• Consumptions specifically subject to
percentage tax
• Vatable consumption
Types of Consumption per type of
Domestic Consumption
Importation
Domestic sales/receipts
Exempt consumption
Exempt importation
Exempt sales/receipts
Services subject to
percentage tax
Services specifically subject Services specifically subject
to percentage tax
to percentage tax
Vatable consumption
Vatable importation
Vatable sales or receipts
Basis of exemption from consumption
tax
Basis of exemption
VAT on importation
Business tax
Human necessity
The goods imported is a
human necessity.
The goods, services or
property sold is a human
necessity.
Out of scope of the tax
The importation does not
constitute a domestic
consumption.
The seller is not engaged in
business.
Tax incentive
The importation is
exempted as a tax
incentive to certain
importers.
The sale is exempted as a
tax incentive to certain
sellers.
International comity
The importation is
exempted by treaty.
The sale is exempted by
treaty.
Types of Business Taxpayers
• VAT Taxpayers
• Non-VAT Taxpayers
Value Added Tax on Sales
• Consumption tax imposed on the sales of
goods, properties, services or lease of
properties
Characteristics of VAT on sales
•
•
•
•
•
Tax on the value added
Top-up on sales
Tax credit method
An explicit consumption tax
Quarterly tax
Methods of computing VAT
• Direct method (all figures exclude VAT)
Ex. Sales 250,000
Cost 200,000
GP
50,000
X Vat
12%
=
6,000 Vat payable
• Tax credit method (all figures exclude VAT)
Output VAT (250,000 x 12%)
Input VAT (200,000 x 12%)
VAT Payable
30,000
24,000
6,000
Special Features of the tax credit
method
• Invoice-based crediting
• Non-observance of the matching of costs or
expenses and sales
VAT Accounting Entries
• Upon Purchase:
• Inventories/Purchases
Input VAT
A/P / Cash
xx
xx
xx
• Upon Sale:
• Cash / A/R
Sales
Output VAT
xx
xx
xx
• Setting up of VAT payable:
• Output VAT
xx
Input VAT
VAT due & payable
xx
xx
• Filing and payment of tax:
• VAT Payable
Cash
xx
xx
Sample
Joyful Corporation purchased goods costing
P400,000, exclusive of VAT during the month of
October 2016 and sold the same right away
after purchase for P500,000, exclusive of VAT.
Requirement: Assuming these are the only
transactions of Joyful for the month, prepare the
accounting entries from purchase of goods to
the remittance of VAT payable.
Solution
1. Purchase of goods:
Inventories/Purchases
Input VAT
A/P / Cash
2. Sale of all goods purchased:
Cash/ A/R
Sales
Output VAT
3. Setting up of VAT payable at end of October:
Output VAT
Input VAT
VAT Due & Payable
4. Filing and payment of tax:
VAT Due & Payable
Cash
400,000
48,000
448,000
560,000
500,000
60,000
60,000
48,000
12,000
12,000
12,000
VAT Taxpayers
• VAT-registered taxpayers – with sales/receipts
exceeding P3,000,000 in any 12-month period
and complied with the required VAT
registration
• VAT-registrable taxpayers – with sales
exceeding P3,000,000 in any 12-month period
but did not register as a VAT taxpayer.
Percentage tax
• Business tax of various rates, generally 3% of
gross sales/receipts of non-VAT taxpayers
(reduced to 1% from July 1, 2020 to June 30,
2023 under the CREATE Law)
Characteristics of Percentage Tax
• Tax on sales or gross receipts
• An expensed tax (Debit “Percentage tax
expense” upon payment to BIR)
• An implicit consumption tax
• Quarterly tax
Who pays percentage tax?
• Non-VAT taxpayers
• Taxpayers who sell services specifically subject
to percentage tax
Important points to ponder on VAT &
percentage tax
• Concept of sales between VAT taxpayers and
percentage taxpayers: Invoice price= sales or gross
receipts plus the 12% VAT for VAT taxpayers; Invoice
price = sales or gross receipts for percentage taxpayers
• VAT and percentage tax are mutually exclusive, except:
1. when taxpayer is engaged mixed activities, some of
which are VATABLE and some are specifically designated
by law as subject to percentage tax
2. If taxpayer issued VAT invoice for VAT exempt sales
Excise Tax
- Imposed in addition to VAT or percentage tax on certain
goods manufactured, produced or imported in the Philippines
for domestic sale or consumption such as:
a. sin products such as tobacco and alcohol
b. non-essential commodities (e.g., automobiles, jewelry)
c. non-essential service (cosmetic surgery)
d. products which are environmentally degrading in their
production or consumption (e.g., petroleum, minerals)
- Normally imposed before the goods are sold by domestic
producers or upon their importation by importers.
Classification of Excise Tax
• Specific – an excise tax based on weight,
volume, capacity or any other physical unit of
measurement
Ex. Excise tax of tobacco twisted by hand is
P2.20 per kilogram
• Ad-valorem – an excise tax based on selling
price or other specified value of the goods
Ex. 50% ad-valorem tax on automobiles
valued over P4,000,000
Purposes of Excise tax
• To curtail consumption of certain commodities
which are considered harmful
• To protect domestic industries
• To distribute the tax burden in proportion to
benefit derived from a particular government
service.
• To raise revenue
Filing of Return and Payment of Excise
Tax
• Return shall be filed and the excise tax paid by
the manufacturer or producer before removal
of domestic products from the place of
production; or shall be filed and paid by the
importer before removal of the importation
from the custom warehouse.
Example
• Mighty Corporation, a business subject to VAT,
manufactures machine-packed cigarette which
sells for P20 per pack, excluding VAT. During the
month, it produced 11,000 packs out of which it
sold 10,000 packs. It also paid P16,000 input VAT
on various purchases. Under the NIRC, the sale of
cigarettes at a price above P10.00 per pack shall
be subject to an excise tax of P12.00 per pack.
• How much excise tax should be paid by Mighty?
• How much is Mighty’s VAT payable?
Solution
1. Excise tax due at the point of production:
(11,000 packs x P12 excise tax per pack)
= P132,000
2. Value added tax on sale:
Output VAT (10,000 packs x P20 x 12%)- P24,000
Less: Input VAT
16,000
VAT due & payable
P 8,000
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Final Points
• Percentage tax, VAT and excise tax apply only to
domestic consumption
• Export sale by non-VAT taxpayers is EXEMPT from
percentage tax
• Export sale by VAT taxpayers is subject to 0% VAT
• When excisable articles are exported without returning
to the Philippines whether exported in their original
state or as ingredients or parts of any manufactured
goods, any excise tax paid thereon shall be credited or
refunded upon submission of the PROOF OF ACTUAL
EXPORTATION.
End