Difference Between VAT and Non-VAT

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.

Tax Rate

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.

Business Formation

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.

Annual Sales

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.

Tax Services in the Philippines
If you find this article helpful, please feel free to share it to your friends. You can also like us on Facebook to receive tips and important tax deadline reminders and updates.

Disclaimer: The content of this article may become outdated because of changes in the rules and regulations over time. It does not substitute the need for inquiring professional advice.

Comments

  1. linalu rivera says:

    Sir,
    If the company is under PEZA and since it has no output tax from where to offset its input tax, can it register as non-vat?

    • MPM Consulting Services says:

      Hi Ms. Linalu Rivera. Thank you for asking. In our opinion, you may still register as VAT under “Zero-Rated Sales”. As such, you may be able to declare the input tax (VAT on purchases) and claim it later on as Tax Refund. If you register as Non-Vat, you might not be able to claim refund on the input taxes you pay.

      • linalu rivera says:

        Thank you for your reply.
        Our company has registered with BIR but the COR does not indicate if it is VAT or non-vat; however, their OR says non-vat. Since they have a special tax rate of 5% on their gross profit, do you think they will have a problem with BIR if their registration is Non-VAT?

        • MPM Consulting Services says:

          We don’t see any problem with the special tax rate of 5% ’cause this pertains to the Income Tax. We’re not sure how you can claim tax refund on input taxes on your purchases since you are not filing VAT. If you don’t plan to refund those input taxes, we think that the Non-Vat registration is okay. To be sure, you may confirm it to the RDO where the business is registered, if that’s okay.

  2. Aaron Aguilar says:

    Hi!
    I would like to inquire if a NON-VAT registered entity should record input VAT in its books or should it be part of the expense incurred. In our case, our affiliate leases to us an office space wherein part of our payments is inclusive of VAT, how shall we record the said transaction? Thanks!

  3. linalu rivera says:

    Our company is net loss but already subject to Mcit. In some of the Income St that I see, MCIT is presented as current tax. However, Ive read that MCIT should be booked as Deferred asset. Which presentation is correct?
    Thank you.

  4. Ces De Guzman says:

    Good day!

    We are a non vat registered business and a client/company is imposing a 12% vat and 2% withholding tax deductions on the gross amount of our transaction. Is it possible that a client will make such deductions?

    Thank you and more power! :)

    • Hi Ms Ces De Guzman, thank you for your question.
      1. If you’re registered as NON-VAT, you are not required to put 12% VAT on your gross receipts or sales. You may present to your customer your BIR Certificate of Registration (COR) to show that your company is NON-VAT.
      2. 2% withholding is required to be withheld on Income payments to prime contractors/sub-contractors. You may ask your client for a copy of BIR Letter requiring them to withheld 2%.

      Hope this helps you.

  5. Tay Pantoja says:

    How to calculate non vat on the new receipts?

  6. Jeff Triunfo says:

    Hello MPM… Thank you so much for providing this kind of means. This is very helpful to us specially as newby in business industry.

    I just want to confirm my understanding. If we’re VAT registered, to make it simple, say.. i collected a total P20 VAT from customer however we paid our lease with P20 VAT on it, does this means that we don’t owe anything for BIR?

    Thank you very much for taking time to answer this. That is very much appreciated!

    • Hi Jeff Triunfo. Yes, the VAT Payable will be zero. But please keep in mind that you still need to file a VAT Return and submit it to the BIR. Thank you for leaving a question. We’re glad that our article has been helpful for you.

  7. Gel Dimaya says:

    Hi admin! i do appreciate your post here. if we purchase from a non vat company, can we deduct them an ewt?

  8. Deejay Buiza says:

    Hi! I am a laundry shop business owner, a non-vat reg. . I have a manufacturing client (VAT Registered) and was advised me that they have a tax of 2% which should be included in my invoice. I am really confused with regards with this since I have no background in Business Tax and a new entrepreneur. I am also paying a tax of 3% from my total sales. Do this mean I have to pay a total of 5% tax? My Service Invoice issued by BIR doesn’t include the “tax” entity. It is just the “Total Sales” and “Total Amount Due”. Should I put their 2%tax to the Official Receipt?

    • Hi Deejay, Thank you for your question. We will tackle this in the next article we will post. the 2% means withholding tax. It is based and deducted from the Gross Sales. Example Sales is P1,000.00 a withholding tax of P20.00 will be deducted so you will only receive P980.00 from your customer. When they deduct 2%, ask for a BIR Form 2307 – Certificate of Withholding Tax so you can use this as deduction on your Income Tax (BIR Form 1701). Hope this helps

  9. linalu rivera says:

    For a non-vat taxpayer paying rental of 16,800 to a VAT-registered lessor, what is our basis for the computation of the 5% EWT? should it be 16,800 (inclusive of VAT) or 15,000 (excluding VAT)?

    Thank you.

  10. joel gavino says:

    This is really very helpful

    We are a non-vat registered company. Out tax consultant is advising us to book all input vat on purchases as a separate input vat receivable. He tells us that we can apply for a tax credit refund and if it’s not approved, we can charge the aggregate amount to our Retained Earnings after the expiration of prescription period for the refund. Is this accepted? Is there some basis for this? Im more with the advise you gave to Mr. Aaron Aguilar.

    Thank you very much

  11. Hi, Our company is vat-exempt sale because they import agriculture food products. Can we cannot pay the input tax on payment of duties & taxes and others and how. Thanks.

  12. TERESA LLARENAS says:

    good afternoon,
    i would like to ask what would be my tax benefits if i purchase from vat reg & non-vet reg supplier…thanks

  13. JOVIE ESPAYOS says:

    HI ADMIN, THIS ARTICLE IS VERY HELPFUL. JUST WANT TO ASK.. WE ARE NON VAT REGISTERED. LAST YEAR (I WAS NOT YET AROUND) THE COMPANY COLLECTED 12% VAT FROM A CLIENT BUT NOT ABLE TO PAY/REMIT IT TO BIR. NOW THE PAYOR DEMANDS FOR THE REFUND WHAT SHOULD WE DO?

  14. Jen Dapilaga says:

    Hi MPM!
    Were paying to a non-vat corp and they’re saying were not suppose to deduct ewt to them. We are a Top 20k Corp. Thanks!

  15. Mari Miranda says:

    Hello Sir,

    We are a VAT registered business, we have clients who are NON-VAT,
    they are asking us to deduct 12% VAT, because they are NON-VAT.

    Some told us, they are tax exempted, we can put them under EXEMPT SALES
    but others told us, no matter VAT nor NON-VAT, because we are VAT registered,
    we are required to pay 12% VAT.

    Hope you can clarify this.

    Thank you ma’am/sir. :)

    • Hi Ms Mari Miranda, thank you for your comment/question. For those exempt from VAT, you may not impose/add the 12% VAT on the EXEMPT SALES provided they give you a certificate from the BIR, or other government agencies like those in the PEZA/BOI, as proof of their exemption from VAT. For NON-VAT, it is not applicable. You still need to add 12% VAT.

  16. Hi,

    We are a Vat registered company, who would like to engaged in export business of auto parts. Is it possible?

    Our supposed to be supplier will be from PEZA company. I understand that Peza company will charged us VAT, but what about taxes & duties, are we still subject to pay 1% taxes & duties?

    We can’t charged output Vat on our export sales. Can we refund the Input Vat from BIR?

    Can we occupy a warehouse from PEZA warehousing company to be used for our planned export business?

    What will be our tax obligations if we will do export business ?

    Thank you,

    Rose

  17. Hi MPM.

    I am a sole-proprietor of a business. I got it registered with DTI last July. But had no chance of moving from there due to a busy schedule. unfortunately when I had a chance to register my business thru barangay level. They told me that businesses are required to renew registration every december. So it would be better if I would register my business during that Month, so I could start fresh. Start my business running for a whole year.

    I just want to clarify something about VAT and NON-VAT. My business solely involves Printing Services, like souvenirs, gifts, or giveaways. Also we retail our products too. So we are Services/Retail. As I have read your article. NON VAT and VAT category would depend on the Nature of the business. With Service/ Retail as a nature Of Business what category would it fall?

    and also, if it would fall to the NON VAT category, would it possible to enlist it to a VAT category. Because we cater some corporate accounts because we also offer corporate giveaways and printing services. Could you enlighten me with this?

    Thank you and God bless! :)

    • Hi Mark, thank you for leaving a question. You may register under VAT, if that’s what your company prefers. But the requirement states that if your annual sales is more than P1,910,000.00 (this is subject to change), you are to be VAT registered. Otherwise, you can be NON-VAT.

  18. Hi MPM,

    Thank you for posting blog like this. Very informative.

    I work in a VAT registered company and we have customers who insists on deducting the amount of VAT on their payment citing that they are registered as NON VAT.

    Just wondering if BIR has any RR/RMC which states that NON VAT registration of a business is not equivalent to VAT exemption (or anything to that effect) so we can show them proof of our point.

    Thank you and God bless.

  19. Victor Francis Roxas says:

    Hello MPM!

    Thanks for this post – very helpful!
    Though I want to clarify this scenario — our cooperative is VAT registered, though I read a ruling that I can be registered as Non-VAT but have to comply with certain requirements.

    The question is this, say for example, we are currently selling at P112 per item (Sales of P100+ P12 output VAT); on the event that we are registered as Non-VAT, can we still sell at P112? Do you know specific rulings that can support this?

    Thanks and God bless you!

  20. Prela Product Distributor says:

    Hi!
    How can we apply Vatable under Zero rated or what is the qualification and who are qualified to apply Vatable under Zero rated. .

  21. Kristine Quirante says:

    Hi! If you are non-vat, does it follow that you should have percentage tax on your COR? We only have withholding expanded, income tax, and registration fee listed under tax type on our COR.

  22. hi,
    am a sole proprietor(Non- Vat) and i have 2 branch, my main branch is Pharmacy in marikina and the other one is computer shop in Caloocan,where did i file my Monthly percentage return in computer shop? or add the gross sale of computer shop to Pharmacy for the Monthly percentage in Main Branch.

  23. My supplier is VAT registered, I am a Non VAT registered business, how or is there a way that I can remit or exclude the 12% tax from my purchase, or through BIR filing? Will this make the items that I will sell cost more compared to the other businesses because I will try to make up for the 12% tax I got from my purchase and I can’t pass it on to my customers? Thank you.

Your inputs and questions are always welcome. Please use the comment box below..

*