Value Added Tax on Sales to Government in Philippines

Government, any of its political subdivision, instrumentality  or agencies, including government-owned or controlled corporations (GOCCs) is also subject to value added tax in the Philippines, unless otherwise exempted. Sales to government of goods, properties, or services are subject to 12% value added tax.  However, there are some special rules that one must be aware of in dealing with the government sales – final withholding VAT on sales to government in the Philippines, accounting and fill-out of value added tax returns in the Philippines.

Final withholding VAT on sales to government

As a rule, government or any of its political subdivision, instrumentalities, or agencies, including government-owned or controlled corporations are mandated to withhold 5% (out of the 12% VAT) on VATable sales upon payment to value added tax sellers of goods or services. Such 5% withholding tax shall represent the net VAT payable by the seller to government.  This would mean that the seller will not be made to pay more than 5% out of the 12% value added tax on government sales in the Philippines. In the VAT returns however, the 12% value added tax on sale to government has to be declared for transparency purposes.

Sample computation on final VAT on sales to government:

A Corp. sold P1,000,000 worth of goods plus 12% VAT or P120,000 to Government Agency (GA). Upon payment of GA to A Corp., GA will withhold the 5% or P50,000 (P1,000,000 multiplied by 5%), so it will only pay P1,070,000.00 (P1,120,000 less P50,000) to A Corp. A Corp. will no longer pay or remit the Bureau of Internal Revenue (BIR) the P70,000 (P120,000 less P50,000) because the P50,000 withheld by GA constitute final VAT on sales to government in the Philippines.

Standard input VAT on sales to government

Since the seller will effectively pay the 5% out of the 12% value added tax on sales to government, the 7% (12% less 5%) effectively accounts for the standard input VAT in lieu of actual input VAT. The question now is – How about the actual input tax on purchases of the seller for goods or services used in sales to government? Such actual input tax attributable or ratable (for those with mixed transactions) to sales to government will no longer be deducted against the output VAT on other regular sales because the standard input VAT will take their place. Said actual input VAT attributable or ratable to government sales shall not also be carried over to succeeding months or quarters, not an outright input VAT expense, and not allowed to be claimed for refund and tax credit certificates. Instead, such actual input VAT are closed to the standard input VAT in the books of account of the VAT-registered taxpayer in the Philippines and any difference treated as follows:

  • If actual input VAT  exceeds standard input VAT, input VAT expenses; or
  • If actual input VAT is less than the standard input VAT, closed to expense or cost.

Sample computation on sales to government

A Corp. sold P1,000,000 worth of goods plus 12% VAT or P120,000 to Government Agency (GA). In making such sales to government, A Corporation’s purchases totaled P625,000 plus 12% VAT of P75,000.00.

As a sale to government, A Corp. will not compute VAT due and payable at P45,000 (P120,000 less P75,000). With the 5% or P50,000.00 final VAT withheld  by GA, the P75,000.00 input VAT will not be deducted from the P120,000 output VAT on sales to GA or on other VATable sales of A Corp. Instead, it will be closed in the books of accounts of A Corp. as input VAT expense of P5,000 (P75,000 actual less P70,000 standard). On the other hand, assuming the actual input VAT is only P60,000, then closing the actual input VAT in the books will result to a reduction of expense or cost, or simply other income of P10,000 (P60,000 actual less P70,000 standard).

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Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at info@taxacctgcenter.org.)


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