CONSUMPTION TAX

• CONSUMPTION OCCURS WHEN ONE ACQUIRES GOODS OR SERVICES BY PURCHASE, EXCHANGE OR

OTHER MEANS.
• CONSUMPTION TAX IS A TAX UPON THE UTILIZATION OF GOODS OR SERVICES BY CONSUMERS OR
BUYERS.
• IT IS A TAX ON THE PURCHASE OR CONSUMPTION OF THE BUYER AND NOT ON THE SALE OF THE SELLER.

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RATIONALE OF CONSUMPTION TAX
1. IT PROMOTES SAVINGS FORMATION
2. IT HELPS IN WEALTH REDISTRIBUTION TO SOCIETY
3. IT SUPPORTS THE BENEFIT RECEIVED THEORY

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IT PROMOTES SAVINGS FORMATION
• INCOME IS INHERENTLY DESTINED TOWARD CONSUMPTION.
• THE RESIDUAL INCOME THAT REMAINS AFTER CONSUMPTION IS SAVINGS.
• SAVINGS PROMOTES CAPITAL FORMATION AND INVESTMENT WHICH ARE CONSIDERED CRUCIAL TO
ECONOMIC DEVELOPMENT.
• A TAX ON CONSUMPTION IS THEREFORE IMPORTANT TO LIMIT CONSUMPTION TO SHIFT PART OF THE
INCOME TO SAVINGS FORMATION.

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IT HELPS REDISTRIBUTE WEALTH TO
SOCIETY
• IT IS A BASIC STATE POLICY TO REDISTRIBUTE WEALTH TO SOCIETY SO EVERYONE IN THE STATE SHOULD
ENJOY THE SAME.
• RICH PEOPLE BUY MORE AND SPEND MORE SINCE THEY CAN AFFORD EXPENSIVE LIFESTYLES.
• A TAX ON CONSUMPTION WILL MAKE THEM PAY MORE TAX.

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IT SUPPORTS THE BENEFIT RECEIVED
THEORY
• UNDER THE BENEFIT RECEIVED THEORY, THOSE WHO RECEIVE BENEFIT FROM THE GOVERNMENT SHALL
PAY TAXES.
• UNARGUABLY, EVERYBODY CONSUMES GOODS AND SERVICES.
• THERE IS ONE IMPORTANT CAVEAT TO CONSUMPTION TAX HOWEVER, IT SHOULD NOT BE LEVIED UPON
BASIC NECESSITIES SUCH AS FOOD, EDUCATION, HEALTH AND SHELTER OR HOUSING.

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INCOME TAX VS. CONSUMPTION TAX
Income Tax Consumption Tax
Nature Tax upon receipt of income Tax upon usage of income or
capital
Scope A tax to the capable A tax to all
Supporting tax theory Ability to pay theory Benefit received theory

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TYPES OF CONSUMPTION
1. DOMESTIC CONSUMPTION – REFERS TO CONSUMPTION OR PURCHASES OF PHILIPPINE RESIDENTS
2. FOREIGN CONSUMPTION – REFERS TO CONSUMPTION OR PURCHASES OF NON-RESIDENTS

The seller is a Domestic consumption Foreign consumption

(Buyer is a resident) (Buyer is a non-resident)
Non-resident Taxable No tax
Resident Taxable Effectively no tax

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TYPES OF TAXABLE DOMESTIC
CONSUMPTION
1. PURCHASE OF RESIDENTS OF GOODS OR SERVICES FROM NON-RESIDENTS ABROAD – IMPORTATION
2. PURCHASE OF RESIDENTS OF GOODS OR SERVICES FROM RESIDENT SELLERS – SALE

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CONSUMPTION TAX ON IMPORTATION
• IMPORTERS OF GOODS SHALL PAY CONSUMPTION TAX ON THEIR IMPORTATION. THIS CONSUMPTION TAX
IS CALLED “VALUE ADDED TAX (VAT) ON IMPORTATION.”
• EVERY PURCHASER OF SERVICE FROM NON-RESIDENTS SHALL LIKEWISE PAY VAT ON IMPORTATION OF
THE SERVICE. THIS VAT ON IMPORTATION IS CALLED THE “WITHHOLDING VAT.”
• THESE CONSUMPTION TAXES ON IMPORTATIONS ARE PAYABLE WITHOUT REGARD AS TO WHETHER THE
FOREIGN SELLER OR THE RESIDENT BUYER IS ENGAGED OR NOT ENGAGED IN BUSINESS OR WHETHER THE
IMPORTATION IS FOR BUSINESS OR PERSONAL CONSUMPTION.

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ILLUSTRATION
• MR. PLACER, A PHILIPPINES RESIDENT, IMPORTED SEVERAL GOODS FROM A FOREIGN SELLER. HE
INCURRED THE FOLLOWING COSTS BEFORE WITHDRAWAL OF THE GOODS FROM THE WAREHOUSE OF THE
BUREAU OF CUSTOMS:
• TOTAL COSTS OF IMPORTATION FOR PERSONAL USE P1,000,000
• TOTAL COSTS OF IMPORTATION FOR BUSINESS USE P2,000,000

• COMPUTE FOR THE VAT ON IMPORTATION:

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ILLUSTRATION
• MR. LUZANO HIRED THE SERVICES OF A FOREIGN POWER SOLUTIONS COMPANY TO INSTALL A SOLAR
POWER IN HIS HOME IN THE PHILIPPINES FOR P500,000.

• COMPUTE FOR THE WITHHOLDING VAT:

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ILLUSTRATION
• A PHILIPPINE FIRM CONTRACTED THE SERVICES OF A FOREIGN WEB-DEVELOPER FOR P2,000,000 WHERE
80% OF THE SERVICE WAS RENDERED ABROAD WHILE 20% WAS RENDERED IN THE PHILIPPINES.

• COMPUTE FOR THE WITHHOLDING VAT, IF ANY:

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CONSUMPTION TAX ON DOMESTIC
CONSUMPTION FROM RESIDENT SELLERS
• THE CONSUMPTION TAX ON THE PURCHASES OF PHILIPPINE RESIDENTS FROM RESIDENT SELLERS IS
COLLECTED FROM THE SELLER.
• OUR TAX LAW IMPOSED THE CONSUMPTION TAX UPON THE SALES OF SELLERS OF GOODS OR RECEIPTS OF
SELLERS OF SERVICES.

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ILLUSTRATION
• CAIN COMPANY, A RESIDENT BUSINESS, PURCHASED P100,000 WORTH OF GOODS FROM FLORES
COMPANY, ANOTHER RESIDENT BUSINESS. CAIN RECORDED THE TRANSACTION AS A PURCHASE WHILE
FLORES RECORDED THE SAME AS SALES. BOTH CAIN AND FLORES ARE SUBJECT TO 3% BUSINESS TAX, A
CONSUMPTION TAX.

• WHO IS OBLIGED TO PAY THE CONSUMPTION TAX?

• HOW MUCH IS THE CONSUMPTION TAX?

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ILLUSTRATION
• MR. NAVALES IS A TRADER WHO IS SUBJECT TO A 3% BUSINESS TAX. DURING THE MONTH, HE SOLD THE
FOLLOWING:
• SALES TO PHILIPPINE RESIDENT BUYERS P100,000
• SALES TO FOREIGN BUYERS (EXPORT) P150,000
• TOTAL SALES P250,000
• HOW MUCH BUSINESS TAX (CONSUMPTION TAX) IS MR. NAVALES REQUIRED TO REMIT?

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CONSUMPTION TAX FOR RESIDENT BUYERS
APPLIES TO BUSINESSES ONLY
• IT MUST BE EMPHASIZED, HOWEVER, THAT THE CONSUMPTION TAX LEVIED ON THE SALES OR RECEIPTS OF
A RESIDENT SELLER IS APPLICABLE ONLY WHEN THE SELLER IS REGULARLY ENGAGED IN BUSINESS.
• THAT IS WHY THIS CONSUMPTION TAX IS CALLED A “BUSINESS TAX”.

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ILLUSTRATION
• MR. TORREON IS REGULARLY ENGAGED IN THE BUY-AND-SELL OF USED CARS. DURING THE MONTH, HE
SOLD A USED FORD EXPEDITION WHICH HE PREVIOUSLY PURCHASED FROM A FRIEND FOR P1,200,000.
• MR. INOCENTES IS REGULARLY ENGAGED IN THE PRACTICE OF HIS PROFESSION AS A MEDICAL DOCTOR.
DURING THE MONTH, HE SOLD HIS RESIDENTIAL DWELLING FOR P2,000,000.
• MS. CELERINOS IS AN EMPLOYEE AT A PRIVATE UNIVERSITY. DURING THE MONTH, SHE RECEIVED A
P40,000 COMPENSATION INCOME.
• IDENTIFY WHICH ACTIVITIES ARE SUBJECTED TO BUSINESS TAX.

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BUSINESS TAX IS A MISNOMER
VAT on Importation Business Tax
Basis of Tax Acquisition Cost Sales or receipts
Scope of Tax All consumption Consumption from businesses
only
Nature of consumption tax Pure form Relative form
Statutory taxpayer Buyer/Importer Seller
The economic taxpayer Buyer/Importer Buyer
Nature of imposition Direct Indirect

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BASIS OF BUSINESS TAXES
1. SALES – FOR BUSINESSES WHICH SELLS GOODS OR PROPERTIES
2. RECEIPTS – FOR BUSINESSES THAT SELLS SERVICES

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TYPES OF BUSINESS TAXES
1. VALUE ADDED TAX (VAT) ON SALES
2. PERCENTAGE TAX
3. EXCISE TAX

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TYPES OF BUSINESS TAXPAYERS
1. VAT TAXPAYERS – THOSE REQUIRED TO PAY VAT
2. NON-VAT TAXPAYERS – THOSE WHO PAY THE PERCENTAGE TAX

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THE VALUE ADDED TAX (VAT) ON SALES
1. TAX ON VALUE ADDED – TAX ON MARK-UP ON ITS PURCHASES IN MAKING SALES
2. TOP-UP SALES – VAT ON SALES IS REQUIRED BY THE LAW TO BE INCLUDED IN THE PRICE OF THE GOODS
3. TAX CREDIT METHOD – VAT ON SALES SHALL BE REDUCED BY THE AMOUNT OF VAT PAID BY THE
BUSINESS ON ITS PURCHASES.
4. AN EXPLICIT CONSUMPTION TAX – AMOUNT OF VAT IS EXPLICITLY DISCLOSED IN THE INVOICE OR
OFFICIAL RECEIPT OF THE SELLER
5. QUARTERLY TAX – VAT RETURN IS FILED QUARTERLY BUT PAID ON A MONTHLY BASIS

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METHODS OF COMPUTING VAT
1. DIRECT METHOD – VALUE ADDED TAX IS COMPUTED BY APPLYING THE VAT RATE TO THE DIFFERENCE OF
THE SELLING PRICE AND THE PURCHASE PRICE.
2. TAX CREDIT METHOD – THE VAT RATE IS IMPOSED UPON THE SALES OR RECEIPT (OUTPUT) OF THE
BUSINESS.
3. ILLUSTRATION: A BUSINESS PURCHASED GOODS FOR P200,000 AND SOLD THE SAME FOR P250,000.
THE BUSINESS PAID P24,000 VAT ON THE PURCHASE OF THE GOODS. THE BUSINESS IS SUBJECT TO
12% VAT.

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SPECIAL FEATURES OF THE TAX CREDIT
METHOD
1. INVOICE-BASED CREDITING – ENTITLEMENT FOR INPUT VAT IS TO BE SUBSTANTIATED WITH INVOICES.
2. NON-OBSERVANCE OF THE MATCHING OF COSTS OR EXPENSES AND SALES – OUTPUT VAT IS RECORDED
WHEN A SALE IS MADE; INPUT VAT IS RECORDED WHENEVER A PURCHASE IS MADE AND NOT WHEN THE
GOODS ARE SOLD.

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ILLUSTRATION: THE VAT ON SALES
• MANILA CORPORATION IS A VAT-REGISTERED SELLER OF GOODS. DURING THE MONTH, IT PURCHASED
GOODS FOR P1,120,000 INCLUSIVE OF P120,000 VAT. MANILA ALSO SOLD GOODS TO A CLIENT FOR
P1,500,000, EXCLUSIVE OF VAT.
• HOW MUCH SHALL BE THE AMOUNT TO BE BILLED TO THE CLIENT?
• HOW MUCH IS THE VAT DUE AND PAYABLE?
• PREPARE ACCOUNTING JOURNAL ENTRIES ON THE BOOKS OF MANILA CORPORATION.

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VAT TAXPAYERS
1. VAT-REGISTERED TAXPAYERS
2. VAT-REGISTRABLE TAXPAYERS
BUSINESSES WHICH EXCEED P3,000,000 IN SALES OR RECEIPTS IN ANY 12-MONTH PERIOD ARE
MANDATORILY REQUIRED TO REGISTER AS VAT TAXPAYERS. SMALLER BUSINESSES WITH SMALLER ANNUAL
SALES OR RECEIPTS MAY OPT TO VOLUNTARILY REGISTER AS VAT TAXPAYERS.
REGISTRABLE TAXPAYERS ARE THOSE WHO EXCEED P3,000,000 THRESHOLD IN ANY 12-MONTH PERIOD BUT
DID NOT REGISTER AS VAT TAXPAYERS.

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PERCENTAGE TAX
1. TAX ON SALES OR GROSS RECEIPTS – TOTAL AMOUNT DUE FROM THE BUYER (INVOICE PRICE) IS
CONSIDERED SALES OR GROSS RECEIPT
2. AN EXPENSED TAX – PERCENTAGE TAX IS PRESENTED AS AN EXPENSE DEDUCTIBLE AGAINST THE SALES
OR GROSS RECEIPT
3. AN IMPLICIT CONSUMPTION TAX – INHERENTLY FACTORED IN BY SELLERS IN THE PRICING OF THEIR
GOODS OR SERVICES.
4. MONTHLY OR QUARTERLY TAX – PAYABLE MONTHLY AND QUARTERLY DEPENDING ON CERTAIN
PERCENTAGE TAXPAYERS

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ILLUSTRATION
• DURING THE MONTH, MR. SANCHEZ PURCHASED P80,000 WORTH OF GOODS. P56,000 OF THIS WAS
PURCHASED FROM A VAT SUPPLIER INCLUSIVE OF P6,000 VAT WHILE P24,000 WAS PURCHASED FROM
NON-VAT TAXPAYERS. MR. SANCHEZ, A PERCENTAGE TAXPAYER, SOLD AND INVOICED THE GOODS FOR
P100,000.

• HOW MUCH IS THE CONSUMPTION TAX TO BE REMITTED?

• PREPARE ACCOUNTING JOURNAL ENTRIES IN THE BOOKS OF MR. SANCHEZ.

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WHO PAYS PERCENTAGE TAX?
1. NON-VAT TAXPAYERS
2. TAXPAYERS WHO SELLS SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX
NON-VAT TAXPAYERS ARE THOSE WITH SALES OR RECEIPTS NOT EXCEEDING THE P3,000,000 VAT
REGISTRATION THRESHOLD AND WHO DID NOT OPT TO REGISTER AS VAT TAXPAYERS.
CERTAIN SERVICES ARE SPECIFIED BY THE LAW TO BE SUBJECTED TO PERCENTAGE TAX AT VARIOUS RATES.
BUSINESSES WHICH HAVE RECEIPTS FROM THESE SERVICES WILL PAY THE CORRESPONDING PERCENTAGE
TAX ON SUCH SERVICES EVEN IF THEY ARE VAT-REGISTERED.

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IMPORTANT POINTS TO CONSIDER:
1. THE CONCEPT OF SALES BETWEEN VAT TAXPAYERS AND PERCENTAGE TAXPAYERS DIFFERS.
2. VAT AND PERCENTAGE TAX ARE MUTUALLY EXCLUSIVE.

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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.

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LEVIED ON THE PRODUCTION OR
IMPORTATION OF:
1. SIN PRODUCTS, SUCH AS TOBACCO AND ALCOHOLIC PRODUCTS
2. PETROLEUM PRODUCTS
3. AUTOMOBILES
4. NON-ESSENTIAL COMMODITIES LIKE JEWELRY, PERFUMES, TOILET WATERS, YACHTS, AND SPORTS
CARS
5. METALLIC OR NON-METALLIC MINERALS, MINERAL PRODUCTS, AND QUARRY RESOURCES SUCH AS
COAL, COKE, GOLD, CHROMITE AND SILVER

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ILLUSTRATION
• UNFORTUNATE CORPORATION, A BUSINESS SUBJECT TO VAT, MANUFACTURES MACHINE-PACKED
CIGARETTES WHICH SELL FOR P50 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 VAT ON VARIOUS PURCHASES.
• UNDER THE SIN TAX & TRAIN LAWS, THE SALE OF CIGARETTES AT A NET RETAIL PRICE (EXCLUDING EXCISE
AND VAT) ABOVE P11.50 PER PACK SHALL BE SUBJECT TO AN EXCISE TAX OF P32.50 PER PACK FOR 2018.

• COMPUTE FOR THE EXCISE TAX DUE AND VALUE ADDED TAX ON SALE

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TAXES APPLY ONLY TO DOMESTIC
CONSUMPTION
• THE EXPORT SALE OF A NONVAT-REGISTERED TAXPAYER IS EXEMPT FROM PERCENTAGE TAX.
• THE EXPORT SALE OF A VAT-REGISTERED TAXPAYER IS IMPOSED BY THE LAW WITH A 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 OR
PRODUCTS, ANY EXCISE TAX PAID THEREON SHALL BE CREDITED OR REFUNDED UPON SUBMISSION OF
THE PROOF OF ACTUAL EXPORTATION.

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IMPOSABLE TAX PER TYPES OF
CONSUMPTION
Buyer/Consumer
Sellers of goods
Resident Non-resident
Domestic business
- VAT-registered business 12% VAT on gross sales 0% VAT on gross selling price
- Non-VAT registered business 3% Percentage tax on gross sales Exempt
Foreigners 12% VAT on landed cost of Exempt
importation

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IMPOSABLE TAX PER TYPES OF
CONSUMPTION
Buyer/Consumer
Sellers of services
Resident Non-resident
Domestic business
- VAT-registered business 12% VAT on gross receipts 0% VAT on gross selling receipts
- Non-VAT registered business 3% Percentage tax on gross sales Exempt
Foreigners 12% final withholding VAT Exempt

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COMPARISON OF BUSINESS TAXES
VAT Percentage Tax Excise Tax
Tax rate 12% Generally 3% Various ad valorem tax
rates and specific taxes
Basis Mark-up or value-added Sales or receipts Sales value or per unit of
excisable goods or
articles
Timing of imposition Upon sales or collection Upon sales or collection Upon production or
importation
Generally paid by Bigger businesses Smaller businesses Both big and small
businesses
Export sales Subject to 0% VAT Exempt Exempt
(Tax is reimbursable)

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