The Value Added Tax in the Philippines

Taxation as a whole

Taxes are one way of how the government raises its revenue for public purposes. Public purposes which include building of public schools, hospitals, libraries, bridges and highways. Taxes are enforced to each person because each time a person pays tax, he or she is supporting the government in a way. Taxes are solely based on one’s ability to pay. The nature of taxing power is to not remove the tax because it is an attribute of sovereignty. The main purpose of taxation is for the government to raise revenues for public needs and for non-revenue purposes which include the reduction of social inequality and encouragement of growth of local industries. The extent of the taxing power us comprehensive because it covers everything and unlimited because a tax does not cease to exist just because it regulates, discourages or even definitely deters the activities that are being taxed. It also is plenary because it ensures that the Bureau of Internal Revenue (BIR) will have no trouble in collecting the taxes and lastly, it is supreme because even though taxes are sometimes referred to as the strongest of all the government powers, it is not to be interpreted as superior to other powers of the government (Dimaampao, 2008).

According to Dimaampao (2008), the theories of taxation include the Necessity Theory and the Benefits-Protection Theory. The Necessity Theory is a necessary burden to preserve the State’s sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry and those which come within the State’s territory and facilities and protection which a government is supposed to provide. The Benefits-Protection Theory, on the other hand, bases the power of the state to demand and receive taxes on the reciprocal duties of support and protection. The citizen supports the State by paying the portion from his property that is demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society.”

There are two kinds of tax namely the Direct Tax and Indirect Tax. Direct Tax is where the seller pays the tax directly and the seller does not transfer the tax to the consumers. Indirect Tax, on the other hand, is commonly used in expenditures. Indirect Tax is a tax that are being passed to buyers when they sell goods and services. One notable example of the Indirect Tax is the Value-Added Tax. The Value-Added Tax (VAT) is a tax intended for spending and consumption. It is being imposed on everytime there is a sale, barter, exchange or lease of goods and services inside the Philippine Area of Responsibility and also includes goods that are imported from the Philippines (Dizon, 2006).

One notable example of an Indirect Tax is the VAT. The Value-Added Tax (VAT) is a consumption tax and it affects almost everyone, be it a student or not. Also, if the VAT were to increase, people would still consume as much as they have consumed before because the VAT is present in every necessity or good being sold in the economy, even if they do not want to.

The Value Added-Tax (VAT)

The Value-Added Tax (VAT) is a type of consumption tax that is put on a product whenever the value of a certain product is added at a certain stage of production and at final sale. The VAT affects consumers. Aside from consumers, it also greatly affects business transactions in the sense that in goods or services bought and sold that contain VAT, it maximizes the business entity’s profits. According to the tax law, any person who is in the course of trade or business, selling, bartering, exchanging, leasing of good and properties, rendering services, and any person who is in the course of importing goods shall be authorized to the Value-Added Tax (VAT). (Ong, 2006). The VAT now raises about 20% of the world’s tax revenue and affects mainly about 4 million people. Indeed, the rise of the VAT has been the most significant development in tax policy and administration in the past decades (Keen & Lockwood, 2007).

In the Philippines, taxation is being administered by the Bureau of Internal Revenue (BIR). Taxes in the Philippines range from 5% to 35%. The main motive of advocates of VAT is that, if it will be well-designed, it will make a particularly efficient tax. The government today presumes that the adoption of VAT in their respective countries makes it easier for them to earn revenue and in a sense, it improves the overall tax system’s efficiency (Ong, 2006).

The Value-Added Tax (VAT) is a type of indirect tax focusing on consumption and sale of goods (Keen & Lockwood, 2007). When there is a need to increase investment, create more opportunities for employment, and increase other productive activities, the VAT is bound to increase. In the Philippine structure, tax revenue rise and fall due to altering economic conditions. It increases during economics booms and decreases during recessions. If there is a recession, revenue falls, which would pave way for the government not having enough available use for government consumption and economic recovery to hold back, but because there is VAT, it would help in stabilizing financial and revenue flow. If there is a need to increase investment, the government would increase the VAT in order for them to be able to make ends meet and provide for the needs of people through public service (Ong, 2006). Increasing the VAT would yield to increasing prices which, in turn would yield to inflation. In the perspective of an economist, if the VAT were to increase, the inflation rate would increase as well.  Inflation, on the other hand, would make consumers feel poor. If the government does not want to maintain a high inflation rate, they would be obliged to draw back the VAT (Keen & Lockwood, 2007).

Last February 1, 2006, the VAT rate increased from 10% to 12% under the approval of the President of the recommendation of the Secretary of Finance to increase the VAT rate to 12%. The Memorandum was issued by Executive Secretary Eduardo R. Ermita dated January 31, 2006. VAT-registered persons who perform services in the Philippines are under the control of zero percent rate if they perform services which include processing, manufacturing or repacking of goods for other people who do business outside the Philippine Area of Responsibility.  The sale of goods may also be under the control of zero percent rate if they are to be delivered to another person outside the Philippines, but is a VAT-registered resident. Good and properties that were sold, bartered or exchanged are required to have a 12% added amount on the gross selling price. This amount is considered as the Value-Added Tax. At the rate of 12%, the VAT is acceptable because it is what the National Internal Revenue Code of 1997 has stated. On the other hand, on export sales, the rate of the VAT is at zero percent (Ong, 2006).

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