Majority of businesses registered with the Bureau of Internal Revenue (BIR) in the Philippines are subject to sales tax. The two most popular types of sales tax are: VAT and NON-VAT, also referred to as Other Percentage Tax.
What is a Sales Tax?
Sales tax is a tax imposed on the gross sales or gross receipts of an entity. The tax rate ranges from 3% to 12% depending on the tax type, such as VAT or NON-VAT.
Difference Between VAT and NON-VAT
In order to understand the difference between the two types of sales tax, here are the list of things you need to consider.
When a business entity is VAT registered, it is subject to 12% sales tax on its gross sales or receipts. Such sales tax is referred to as VAT or Output Tax. On the other hand, if a business entity is NON-VAT, it is subject to 3% sales tax on its gross sales or receipts. Such sales tax is referred to as Percentage Tax.
An entity’s formation or ownership type determines if it will be registered as VAT or NON-VAT. Sole-Proprietors can be either VAT or NON-VAT depending on the nature and size of the business. On the other hand, Partnership and Corporation are advised or preferred to be VAT registered except when the nature of their business will make them VAT Exempt or Zero-Rated.
Another way to determine if an entity should be VAT or NON-VAT is the Annual Gross Sales. If the company’s gross annual sales or receipts exceeds P1,910,000.00 (this is subject to change depending on BIR rules)
Nature of Business
Another way to determine if a business entity is VAT or NON-VAT is by the nature of its services or products. Some industry are Exempt from VAT or Zero-Rated such as Export Sales or those company with BOI Certificate or under the Economic Zones. Please note that NON-VAT is different from Zero-rated or Exempt.
Who Will Pay the Tax
VAT is considered indirect tax while Percentage Tax is direct tax. The former means that the tax (VAT) can be passed on to the customer while on the latter, Percentage Tax, will solely be shouldered by the business entity and is not allowed to be passed on to customers.
Deductibility of the tax on purchases/payments
Another important difference of VAT and NON-VAT is the deductibility of the tax on purchases/payments. In computing VAT Payable, the amount of Tax on purchases, also referred to as Input Tax, can be deducted from the Output tax (VAT on Sales). Which means that if the company has many purchases or payments which are VAT inclusive, it can use those VAT on Purchases (input tax) as deduction to its computed vat on sales (output tax). The difference will be the amount of vat to be paid by the business entity. Which is also referred to as VAT Payable.
On the other, if the company is NON-VAT, it is not allowed to deduct the VAT on the purchases or payments it has incurred.
I hope this article has helped you understand and differentiate VAT from NON-VAT.
If you have further questions regarding this topic, please feel free to leave a comment below.