Difference Between VAT and Non-VAT

Updated on July 20, 2022

vat vs non-vat

You are likely to be charged business tax in the Philippines if you work for yourself, are self-employed, freelancing, or are otherwise registered with the Bureau of Internal Revenue (BIR).

Businesses, sole proprietors, independent contractors, freelancers, and other professionals are exempt from this tax, which is why it is referred to be a business tax. As an example, an individual taxpayer having compensation income from employment is exempt from the requirement to file and pay company tax. Freelancers and other self-employed workers, however, must pay company taxes.

If you’re a business owner, you have two options for taxes: VAT (Value Added Tax), or non-VAT (also referred to as Person or Entity Exempt from VAT or Other Percentage Tax.)

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What is a Business Tax?

A VAT or NON-VAT taxpayer’s gross sales or revenues are taxed as business tax. If the tax is VAT or NON-VAT, the rate might be anywhere from 3 to 12 percent.

A transitional (or temporary) reduced rate of 1% will be in effect from July 1, 2020, to June 30, 2023, for NON-VAT (Other Percentage Tax) under the CREATE Law approved last March 2021. After that, starting on July 1, 2023, the non-VAT tax percentage will return to 3%.

Difference Between VAT and NON-VAT

Listed below are eleven (11) variations between VAT and NON-VAT:

1. Business Formation

The taxpayer’s business structure can help determine whether or not it will be VAT or NON-VAT registered.

Depending on the nature and scale of the firm, freelancers, self-employed professionals, and sole proprietors can be either VAT- or NON-VAT-registered. Individual taxpayers who operate small businesses with annual sales below the NON-VAT threshold may elect to register as NON-VATs. The only exception is if they aim to increase or expand their firm over the non-VAT level.

NON-VAT registration is an option for some types of businesses, including as corporations, partnerships, and one-person corporations (OPCs). Due to their anticipated growth and extension over the non-VAT barrier, they are often suggested or preferable to be VAT registered.

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2. Tax Rate

In general, a taxpayer’s gross sales or revenues are taxed at a rate of 12 percent when they are VAT registered. Output VAT, or VAT, is the name given to such a tax. Zero-Rated or Exempt sales, on the other hand, are subject to a 0% tax rate and are referred to as such.

Non-VAT registered taxpayers are subject to a tax rate of 1 percent (from July 1, 2020 to June 30, 2023) or 3 percent (before July 1, 2020 and starting July 1, 2023) on their gross sales or receipts, respectively. Percentage tax is the name given to this type of tax.

3. Annual Sales

Annual gross sales or receipts are another technique to evaluate if an entity should be VAT or NON-VAT.

NON-VAT (Person or Entity Exempt from VAT) qualification requires gross annual sales or revenues of less than P3,000,000, as amended by the TRAIN Law starting January 1, 2018. (Note: The BIR rules could modify this in the future.)

To put it simply: If the gross yearly sales or receipt of a taxpayer surpass the threshold, they are immediately registered for VAT purposes.

4. Tax Deductions

The ability to deduct VAT from purchases and payments is another significant distinction between VAT and NON-VAT.

If you are VAT-registered, you can deduct the amount of VAT you paid on purchases from your VAT bill.

The percentage tax payable cannot be deducted if the business is NOT VAT REGISTERED. Because Gross Quarterly Sales are used to calculate the amount of tax that must be paid.

5. Tax Computation

Percentage tax (Non-VAT) is simpler to calculate than VAT.

Taxes as a Percentage of GDP (NON-VAT) Percentage tax is calculated as follows: Gross quarterly sales x tax rate (NON-VAT)

For instance, in the first three months of 2021. P200,000 in gross revenue x 1% (Transitional Percentage Tax Rate) Equals P2,000 for the third quarter.

On the other hand, VAT is calculated in the manner described below.

Calculation of Value-Added Tax (VAT): (VAT Credit)

Sales or Receipts-related VAT is referred to as output VAT. The VAT on payments and purchases is referred to as “input VAT”. This means that if your output VAT is greater than your input VAT, you’ll have to pay VAT on it. VAT Credit is generated when input VAT exceeds output VAT.

Ex. : Output VAT P120,000 minus input VAT P80,000 equals a taxable amount of P40,000

6.  Tax Collected from Customer

While VAT falls under the category of an indirect tax, Percentage Tax falls under the category of a direct tax.

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Vat can be passed on to the consumer because it is an indirect tax. It might be included in the purchase price or charged to the client as a service fee. Computation: Value Added Tax (VAT) on the selling price or service fee

Example: P10,000 service fee + P1,200 VAT = P11,200

Percentage Tax (Non-VAT) on the other hand, is a direct tax and cannot be passed on to the buyer. The total amount collected will be equal to the selling price or service.

For instance, a service fee of P10,000 equals P10,000 in total revenue.

7. Accounting Treatment and Recording

To be treated and recorded as a liability, VAT registered businesses must treat and record sales tax (Output VAT) collected from customers as an asset, whereas purchases tax (Input VAT) paid to vendors or suppliers is treated as an asset. An adjustment for VAT Payable (Liability) or VAT Credit will be made at the end of the month (Asset).

Percentage Tax is a direct expense for NON-VAT Registered companies and is generally documented in Taxes and Licenses. It can be deducted or incurred as a legitimate expense.

8. BIR Form Used

The BIR Forms that must be filed by VAT-registered businesses include:

Value-added tax (VAT) Declaration Form 2550M, and Quarterly Value-added tax (VAT) Return Form 2550Q are required by the Bureau of Internal Revenue (BIR).
Only BIR Form 2551Q for the Quarterly Percentage Tax Return is necessary for non-VAT registered companies.

9. Frequency of Filing and Payment

If you’re a VAT registered business, you’ll file and pay using BIR Form 2550M and BIR Form 2550Q on a monthly basis. Twelve (12) tax returns are typically filed each year. See the information in the guidance that follows.

Each month of the year, the BIR Form 2550M is submitted to the government.
Every quarter, the BIR Form 2550Q is filed: March, June, September, and December.
NON-VAT Registered must file and pay using BIR Form 2551Q at the end of each quarter. In a typical year, taxpayers will file four tax returns. See the calendar below for the following calendar period.

When a new quarter ends, it is necessary to file a new BIR Form 2551Q.

10. Deadline of Filing and Payment

BIR Form 2550M is due on the 20th day of the next month, and quarterly BIR Form 2550Q is due the 25th day of the following month after the end of the quarter, for VAT registered businesses. See the calendar below for the following calendar period.

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The following is the BIR Form 2550M deadline:
Throughout the months of January (20 days due), February (23 days due), April (24 days due), May (25 days due), June (20 days due), August (20 days due), October (20 days due), and November (20 days due) (December 20).
The following are the due dates for BIR Form 2550Q:
For the three months ending March (Due April 25)
In the June quarter (Due July 25)
For the third quarter of the year (Due October 25)
For the December 2018 quarter (Due January 25 of next year)
BIR Form 2551Q, which is equivalent to BIR Form 2550Q, must be filed and paid by the end of each quarter for non-VAT registered businesses. See the calendar below for the following calendar period.

The deadline for submitting the BIR Form 2551Q is:
For the quarter ending on March 31st, 2014. (Due April 25)
In the June quarter (Due July 25)
For the third quarter of the year (Due October 25)
On December 31st, the quarter was over (Due January 25 of next year)

11. Required Attachment

The final and most important distinction between VAT and NON-VAT is the BIR Form attachment.

As a VAT-registered business, you must file an attachment to the BIR Form 2550Q known as the Summary List of Sales, Purchase, and Importation (SLSPI). The submission deadline is the same as the BIR Form 2550Q deadline.

NON-VAT registrants, on the other hand, do not need to provide any attachments.

That’s all there is to it. Vat and non-vat have eleven (11) main differences.

I hope this essay helped you better understand the distinctions between VAT and NON-VAT.. Comment or ask a question in the space provided. Please spread the word if you enjoyed this article!

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