Chapter 1 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. The utilization of goods or services may be through purchase, exchange or other means. This utilization is subject to a tax called consumption tax. Income tax versus Consumption Tax Nature Scope/coverage Theoretical basis Income Tax Tax upon receipt of income A tax to the capable Ability to pay theory Consumption Tax Tax upon usage of income or capital A tax to all Benefit received theory • The Ability to Pay Theory presupposes that taxation should consider the taxpayer’s ability to pay. Taxpayers should be required to contribute based on their relative capacity to sacrifice for the support of the government. • The Benefit Received Theory presupposes that the more benefit one receives from the government, the more taxes he should pay. Types of Consumption Types of consumption 1. Domestic consumption Purchaser Resident Status Taxable 2. Foreign consumption Non-Resident Exempt/Effectively non-taxable 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. It is called business tax because the consumption tax is indirectly imposed upon sellers which are businesses. Business tax is also known as indirect tax. Note: The business tax is imposed if the seller is a business and is based upon the sales of goods or receipts from rendering of services of the seller. 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 VAT on importation. The VAT is directly levied upon the buyer – importer. Business Tax versus VAT on Importation VAT on Importation Business Tax Type of consumption tax Imports from business or non-business Pure form Purchases from businesses only Relative form Statutory taxpayer The economic taxpayer Nature of imposition Buyer Buyer Direct Seller Buyer Indirect Total purchase cost Sales or receipts Scope of tax Basis of tax Types of Consumption Taxes 1. Percentage Tax – tax of various rates from 0.60 % to 30% 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 Types of Domestic Consumption as to Taxability 1. Exempt consumption 2. Consumptions specifically subject to percentage tax 3. Vatable consumption Exempt Consumption - Are neither subject to percentage tax nor value added tax. - If they are sourced from abroad, they are exempt from VAT on importation. - If sourced from within, they are exempt from business tax. - Basis of exemption: a. human necessity b. out of scope of tax c. tax incentive d. international comity - Basis of exemption: Human necessity (natural agricultural or marine food products, agricultural inputs, books, newspapers and magazines, residential properties , and essential services such as residential rentals, educational services of schools, and medical services of hospitals are exempt). Out of scope of tax (imports of personal, household and professional instruments or effects of a nonresident persons, already his even before he brought (imported) the goods into the Philippines. - Basis of exemption: Tax incentive (importation of vessels or aircraft in an effort of the government to assist or improve domestic air or sea transport or assist tourism in the Philippines; exemption of cooperatives) International comity (agreed to be exempted in an international agreement to which the Philippine government is a signatory) Services Specifically Subject to Percentage Tax - Are taxable consumption of services but subject only to a specific percentage tax rate set by the NIRC. - Consumption of these services are not subject to VAT. Vatable Importation or Sales - All other importation or sales of either goods or services that are not exempted or specifically imposed a percentage tax is vatable. The Structure of the VAT on Importation Import of services • The import of service is either: Import of goods • The import of goods is either: Exempt Subject to percentage tax Subject to final withholding VAT Exempt Subject to VAT on importation The Structure of the Business Tax Sales of services • The receipt from the sale of services is either: Exempt Specifically subject to a percentage tax Vatable Sales of goods • The sales from sale of goods is either: Exempt Vatable VAT on Importation vs. VAT on Sales in Business Tax - The VAT on importation is directly computed on the landed costs or total purchase costs of importation without any deduction or tax credit. - The VAT imposed on sales or receipt follows a tax credit method wherein a VAT of 12% is imposed on sales and is reduced by VAT paid by the business on its purchases. Computation of VAT/Tax Due Output VAT (12% of sales or receipts) Pxx Less: Input VAT (12% VAT paid on purchases)Pxx VAT due Pxx === Example: A VAT-registered taxpayer recorded the following sales and purchases, exclusive of VAT, during the month: Sales P300,000 Purchases P200,000 Output VAT (P300,000 x 12%) Less: Input VAT (P200,000 x 12%) VAT due P 36,000 24,000 P12,000 ======= The Excise Tax • Excise tax is imposed on the consumption of commodities such as: a. sin products such as alcohol and cigarettes b. non-essential commodities, such as automobiles and jewelry c. non-essential services, such as cosmetic surgery d. products which are environmentally degrading in their production or consumption, such petroleum and minerals The Excise Tax • Excise tax is an additional imposition to VAT or percentage tax. • Excise tax on excisable goods is normally imposed on importers or producers at the point of production or importation. Reference: • Banggawan, R. B. (2019). Business and Transfer Taxation. (2019 Edition). Real Excellence.
