VAT or non-VAT: What should you choose?
If you own a business in the Philippines, you are most likely subject to business tax as required by the Bureau of Internal Revenue (BIR). It is applicable to persons or entities who have a business, are self-employed, freelance, or practicing a profession. There are two types of business tax to choose from — VAT and non-VAT. Let’s first look deeper into each. Afterwards, we will talk about what is the most appropriate for your business.
What is VAT?
BIR defines Value-Added Tax as a form of sales tax that is levied on the sale, barter, exchange, or lease of goods, properties, and services in the Philippines. This indirect tax may be passed on to the buyer, transferee, or lessee of the goods, properties, or services.
The rate of VAT is at 12%, except for export sales and other zero-rated sales which are at 0%.
This is how you compute for VAT: Output VAT – Input VAT = VAT Payable (or VAT Credit)
The Output VAT is the VAT collected on Sales or Receipts while Input VAT is the VAT on payments or purchases. If the Output VAT is bigger than Input VAT, it will result in VAT Payable. If the Input VAT is bigger than Output VAT, it will result in VAT Credit.
Example: Output VAT P100,000 – Input VAT P80,000 = VAT Payable of P20,000
Frequency and Deadline of Filing and Payment
If you are VAT registered, you are supposed to file and pay every month using BIR Form 2550M and every quarter using BIR Form 2550Q. This means a total of twelve (12) tax returns are to be filed in a normal year.
Note that at the end of every quarter, it is mandatory to submit the Summary List of Sales, Purchase, and Importation (SLSPI) together with BIR Form 2550Q. The deadline of submission is similar to the deadline of BIR Form 2550Q.
Here’s a quick guide on when to file each form:
|Form||When to File||Deadline|
|BIR Form 2550M||every January, February, April, May, July, August, October, and November||20th day of the following month|
|BIR Form 2550Q (with necessary attachments)||every end of the quarter: March, June, September, and December||25th day of the following month after the close of the quarter|
Here’s a more comprehensive table for the deadlines:
BIR Form 2550M
BIR Form 2550Q (with necessary attachments)
|1st Quarter||Ending in March||April 25|
|2nd Quarter||Ending in June||July 25|
|3rd Quarter||Ending in September||October 25|
|4th Quarter||Ending in December||January 25th of the following year|
What is non-VAT?
On the other hand, Non-VAT, which is also known as Other Percentage Tax, is a business tax imposed on persons, entities, or transactions specified under Sections 116 to 127 of the National Internal Revenue Code of 1997 (also known as Tax Code). It is a direct tax — meaning it is solely shouldered by businesses and cannot be transferred to the customers.
If you are non-VAT registered, you are subject to a tax rate of 3% on its gross sales or receipts. However, depending on the nature of your business or transactions, it could go as high as 30% of your total gross receipts. Note that as per CREATE Law which was passed last March 2021, there’s a temporarily lower rate of 1% (instead of 3%) from July 1, 2020 to June 30, 2023. After this period, the other percentage tax will go back to 3 percent.
To get your percentage tax, you simply multiply your Quarterly Gross Rate by the Tax Rate.
Quarterly Gross Sales x Tax Rate = Percentage Tax (NON-VAT)
Example: Gross Quarter P100,000 x 1% (Transitional Percentage Tax Rate) = P1,000
Frequency and Deadline of Filing and Payment
The filing and payment for non-VAT are done at the end of every quarter using BIR Form 2551Q. This means a total of four (4) tax returns are to be filed in a normal year.
Here is a guide on the deadline of filing your percentage tax:
|1st Quarter||March||April 25|
|2nd Quarter||June||July 25|
|3rd Quarter||September||October 25|
|4th Quarter||December||January 25th of the following year|
What should you choose?
So, should you register for VAT or non-VAT? To be qualified for NON-VAT, your gross annual sales or receipts should not exceed P3,000,000 (as updated by TRAIN Law effective January 1, 2018). If your gross sales exceed this threshold, you are required to opt for VAT. Note that this can be subject to change depending on BIR’s rules.
Nevertheless, your business formation can help you determine what business tax to register to. If you are a freelancer, self-employed, professional, or sole-proprietor, you can opt for either VAT or non-VAT depending on the nature and size of your business. Usually, if you’re a small business, you are encouraged to register as non-VAT because your operation results in annual sales within its threshold. If you are planning to grow and expand your business beyond the threshold for non-VAT, you might want to consider registering for VAT.
Corporations, partnerships, and one-person corporations (OPC) can also register as non-VAT provided that they meet the criteria. However, they are often advised for VAT registration.
To help you decide better, you can also compute your taxes under VAT and non-VAT, then opt for the one with the less tax payable. For more information, you can always consult your district’s BIR Regional District Office. If you’re still confused, JCSN has tax experts that can help you. Feel free to contact us today.