Wednesday, February 25, 2015

Why do we have value added tax?

Our tax professor in bar review said that the value added tax (VAT) keeps us honest. People who pay the VAT only pay the value they have added to a good or service. A person who is VAT-registered can deduct his input costs so he only pays the tax on his added value.

There are three rates of VAT: 12 percent, zero percent, and VAT-exempt. Persons or businesses who sell goods or services generally pay 12 percent VAT on their added value.

Businesses who export goods are generally zero-rated. This means they do not pay VAT, but they can still deduct their input costs.

Persons or businesses who engage in selling goods that are essential or necessary can be part of the list of goods and services that are not subject to VAT. This means that if they are not registered, it's all right because they do not need to pay VAT. However, they are not able to deduct their input costs. If they register for VAT, they can deduct their input costs.

Let's give an example. A wholesaler buys from a farmer two cavans of rice at Php 500 per cavan, he pays Php 1,000 for the two cavans. The farmer does not need to pay VAT because this good is not subject to VAT. Of course, he can always register for VAT so that he can deduct his input costs.

The wholesaler sells the rice at Php 600 per cavan. So his value added for one cavan is only Php 100 so he must pay Php 12 as VAT. If he sells two cavans, his VAT is Php 24. Of course, he must be VAT-registered to get deductions.

A caterer buys the two cavans of rice from the wholesaler, cooks the rice over a week, and sells the cooked rice for a total of Php 1,500. So the value added is Php 300 and the VAT is Php 36. Again, he must be VAT-registered to get deductions.

A hungry consumer buys a cup of rice. He pays P 20 for a cup of rice and gets a receipt saying that his VAT is Php 2.40. While he seems to pay a big amount for VAT, in reality, almost everyone down the line must pay the VAT. Of course, those who are exempted do not need to pay.

So the lesson for everyone is to get your VAT receipt.

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