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CHAPTER I

THE PROBLEM AND ITS SCOPE

INTRODUCTION

Rationale of the Study

Ever since society was formed, taxes have always been a part of it.

Taxes help to spend for the upkeep, and maintenance of society’s governance.

Governments have always included taxes as part of the daily or required

knowledge of all people.

Taxes have evolved over the centuries, general taxes usually included

everything. But as societies grew, they made specific taxes, specific outputs or

activities. These specific taxes later on evolved in the course of governments

need to increase revenue or taxes. Thus, they created more taxes to be able to

make more money.

One of the things that they developed in early 1918 was a new kind of tax

added to the system and this was known as Value-Added Tax or VAT. These

started in France and over a period of time, many countries copied or followed

the value added tax of the French government. At present, it is implemented in

the Philippines and covers all businesses.

Through VAT, every Filipino is a taxpayer. Everyone pays VAT on

telecommunications, water, electricity, health care services and medicine, fuel,

many types of foods and transport fees. However, not everyone knows what

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Value-Added Tax really means. Many are clueless about the taxes that the

government promotes.

With this background the group decided to conduct a study on the Value

Added Tax awareness among 4th year finance students. Considering that these

students have studied VAT in their tax subjects, it is the presumption that they

know much about it. It is for this very reason that this study is conducted in order

to determine the specific and the current level of awareness among these

students.

Theoretical Framework

This paper is anchored on the theories, concepts, and practices of the

value-added tax or VAT. It will also highlight Philippine laws regarding the

implementation of VAT.

Taxes have a great impact in every Filipino’s life. It plays a significant role

in society. It serves as the lifeblood of the government. The government can use

this revenue to help the people and expenditures of our country. People can get

benefits on the taxes that are payed for emergency purposes. The money they

collected is used to fund the expenditures of the country and for an emergency

purpose.

Value-added tax plays an important role in our society. Through the value-

added tax, every Filipino is a taxpayer and it gives a financial stake in

governance. It is a form of sales tax. It is now the most common form of tax

consumption tax systems used around the world. It is defined as the levy on the

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sale, barter, exchange or lease of goods or properties and services in the

Philippines and on the importation of goods into the Philippines.

Considering the number of constitutional challenges raised against the

value added tax laws in the Philippines by various sectors and industries affected

by their impositions and on account of the significant tax issues met by tax

authorities and taxpayers alike in their administration and compliance of laws,

respectively, many people regarded the value added tax laws as the most

controversial revenue measures in the country for the last two decades. Certain

professional groups, notably the accountants who were included in the overage

of the value added tax system in 2003.Also expressed their objections against

the unequal treatment they received vis-à-vis lawyers and doctors who were

exempted from the value added tax under Republic Act. No. 9238 on January 1,

2004: However, they chose not to raise the constitutional issue before the high

court for judicial determination.

In the Philippines the tax department, popularly known as Bureau of

Internal Revenue (BIR), is under the aegis of the Department of Finance. The tax

department has enormous and wide ranging administrative and legislative

powers when it comes to assessment, enforcing taxes and collection. The tax

department in the Philippines does not collect VAT (value added tax) and excise

tax as these are collected by the Bureau of Customs.

The BIR is considered to be the main revenue “earning” agency for the

government of Philippines. Annual the bureau collects practically 80 percent of

the total generated revenue. The BIR has monthly and annual targets for

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collection and this is determined by the Development Budget and Coordinating

Council, which is an inter-agency council headed by the Department of Budget

and Management.

The concept of value added tax (Philippine taxes on transfer and

business) by Crispin P. Llamado, JR. is a form of sales tax. It has evolved into a

tax on leases also. The value added tax is imposed on the gross selling price or

gross receipt derived from the sale, barter or exchange of goods, properties and

services, or lease of goods and properties in the course of trade and business.

In the theory, it is a tax levied on the value added tax to the purchase price

or cost in the sale or lease of goods, properties or services in the course of trade

and business. Hence, the name value added tax (Primer on value-added tax). It

is also a tax on the importation of goods and properties, whether or not in the

course of trade or business, and whether or not the importer is an individual or a

corporation. It is imposed at every stage of the distribution or contracting process

until the goods, properties or services reach the ultimate consumer or end-user.

The Philippines Bureau of Internal Revenue (BIR) outlines the following

information:

Who Are Required To File VAT Returns

The following persons or entities are required to file VAT returns:

1. Any person or entity who, in the course of his trade or business, sells, barters,

exchanges, leases goods or properties and renders services subject to VAT, if

the aggregate amount of actual gross sales or receipts exceed P1,919,500 (RR

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16-2011, RR 3 -2012), as amended.

2. A person required to register as VAT taxpayer but failed to register

3. Any person, whether or not made in the course of his trade or business, who

imports goods

When is a new VAT taxpayer required to apply for registration and pay the

registration fee?

• New VAT taxpayers shall apply for registration as VAT Taxpayers and pay the

corresponding registration fee of five hundred pesos (P500.00) using BIR Form

No. 0605 for every separate or distinct establishment or place of business before

the start of their business following existing issuances on registration. Thereafter,

taxpayers are required to pay the annual registration fee of five hundred pesos

(P500.00) not later than January 31, every year.

Is the liability of a taxpayer becoming liable to VAT and did not register as

such?

• Any person who becomes liable to VAT and fails to register as such shall be

liable to pay the output tax as if he is a VAT-registered person, but without the

benefit of input tax credits for the period in which he was not properly registered

What is the invoicing/ receipt requirement of a VAT-registered person?

• A VAT registered person shall issue: 1. A VAT invoice for every sale, barter or

exchange of goods or properties; and 2. A VAT official receipt for every lease of

goods or properties and for every sale, barter or exchange of services.

What is the information that must be contained in the VAT invoice or VAT official

receipt?

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1. Name of Seller

2. Business Style of the Seller

3. Business Address of the Seller

4. Statement that the seller is a VAT-registered person, followed by his TIN

5. Name of Buyer

6. Business Style of Buyer

7. Address of Buyer

8. TIN of buyer, if VAT- registered and amount exceed P1,000.00

9. Date of transaction

10. Quantity

11. Unit cost

12 .Description of the goods or properties or nature of the service

13. Purchase price plus the VAT, provided that:

• The amount of tax shall be shown as a separate item in the invoice or receipt;

• If the sale is exempt from VAT, the term "VAT-EXEMPT SALE" shall be written or

printed prominently on the invoice or receipt;

• If the sale is subject to zero percent (0%) VAT, the term "ZERO-RATED SALE"

shall be written or printed prominently on the invoice receipt; and

• If the sale involves goods, properties or services some of which are subject to

and some of which are zero-rated or exempt from VAT, the invoice or receipt

shall clearly indicate the breakdown of the sales price between its taxable,

exempt and zero-rated components, and the calculation of the VAT on each

portion of the sale shall be shown on the invoice or receipt.

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14. Authority to Print Receipt Number at the lower left corner of the invoice or

receipt.

What is "output tax"?

Output tax means the VAT due on the sale, lease or exchange of taxable

goods or properties or services by any person registered or required to register

under Section 236 of the Tax Code.

What is "input tax"?

Input tax means the VAT due on or paid by a VAT-registered on

importation of goods or local purchase of goods, properties or services, including

lease or use of property in the course of his trade or business. It shall also

include the transitional input tax determined in accordance with Section 111 of

the Tax Code, presumptive input tax and deferred input tax from previous period.

Deadline

• Manual Filing

Not later than the 20th day following the end of each month.

Tax Rates

• On sale of goods and properties - twelve percent (12%) of the gross selling price

or gross value in money of the goods or properties sold, bartered or exchanged.

• On sale of services and use or lease of properties - twelve percent (12%) of

gross receipts derived from the sale or exchange of services, including the use or

lease of properties.

• On importation of goods - twelve percent (12%) based on the total value used by

the Bureau of Customs in determining tariff and customs duties, plus customs

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duties, excise taxes, if any, and other charges, such as tax to be paid by the

importer prior to the release of such goods from customs custody; provided, that

where the customs duties are determined on the basis of quantity or volume of

the goods, the VAT shall be based on the landed cost plus excise taxes, if any.

On export sales and other zero-rated sales - 0%

Financial expert Henry Ong discusses Value-added tax computation and outlines

the following:

A VAT is like a sales tax in that ultimately only the end consumer is taxed. It

differs with the latter; the tax is collected and remitted to the government only

once, at the point of purchase by the end consumer. With the VAT collections,

remittances to the government, and credits for taxes already paid occur each

time a business in the supply chain purchases products.

Personal end-consumers of products and services cannot recover VAT

on purchase, but businesses are able to recover VAT on the products and

services that they buy in order to produce further goods or services that will be

sold to. In this way, the total tax at each stage in the economic chain of supply is

a constant fraction of the value added tax by a business to its products, and most

of the cost of collecting the tax is borne by business, rather than by the state.

Value added taxes were introduced in part because they create stronger

incentives to collect than a sales tax does. Both types of consumption tax create

an incentive by end consumers to avoid or evade the tax. But the sales tax offers

the buyer a mechanism to avoid or evade the tax- persuade the seller that the

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buyer is not really an end consumer, and therefore the seller is not legal they

required to collect it.

Therefore, the burden of determining whether the buyer motivation is to

consume or re sell is on the seller, and the seller has no direct economic

incentive to collect it. The VAT approach gives seller a direct financial stake in

collecting the tax and eliminates a decision needing to be made by the seller

about the buyer is or consumer or is not an end consumer.

VAT is assesses and collected on the value of goods or services that have

been provided every time there is a transaction (sale/purchase).The seller

charges VAT to the buyer , and the seller pays this VAT to the government.

If however, the purchaser is not an end user, but the goods or services

purchased are costs to its business, the tax it has paid for such purchases can

be deducted from the tax it charges to its customers. The government only

receives the difference; in other words, it is paid tax on the gross margin of each

transaction, by each participant in the sales chain. A general economic idea is

that if sales taxes are high enough, people start engaging in widespread tax

evading activity. On other hand, total VAT rates can rise above 10% widespread

evasion because of the novel collection mechanism.

The standard way to implement a value added tax involves assuming a

business owes some fraction on the price of the product minus all taxes

previously paid on the good. The method of collection, VAT can be accounts-

based or invoice-based. Under the invoice method of collection, each seller

charges VAT rate on his output and passes the buyer a special invoice that

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indicates the amount of tax charged. Buyers who are subject to VAT on their own

sales (output tax), consider the tax on the purchase invoices as input tax and can

deduct the sum from their own VAT liability. By the timing of collection, VAT (as

well as accounting in general) can be either accrual or cash based. Cash basis

accounting is a very simple form of accounting.

When a payment is received for the sale of goods or services, a deposit is

made, and the revenue is recorded as of the date of the receipt of funds no

matter when the sale had been made. Checks are written when funds are

available to pay bills, and the expense is recorded as of the checks date

regardless of when the expense had been incurred. The primary focus is on the

amount of cash in the bank, and the secondary focus is on making sure all bills

are paid.

Little effort is made to match revenues to the time period in which they are

earned, or to match expenses to the time period in which they are incurred. Basis

accounting matches revenues to the time period in which they are earned and

matches expenses to the time period in which they are incurred. While it is more

complex than cash basis accounting, it provides much more information about

your business. The accrual basis allows you to track receivables (amounts due

from customers on credit them sales) and payables (amounts due to vendors on

credit purchases). The accrual basis allows you to match Accrual revenues to the

expenses incurred in earning, giving you more meaningful financial reports.

VAT registered means registered for VAT purposes that is entered into an

official VAT payer’s register of a country. Both natural persons and legal entities

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can be VAT registered. Countries that use VAT have established different

thresholds for remuneration derived by natural persons/legal entities during a

calendar year (or a different period), by exceeding which the VAT registration is

compulsory.

Natural persons/legal entities that are VAT registered are obliged to

calculate VAT on certain goods/services that they supply and pay VAT into a

particular state budget. VAT registered persons/entities are entitled to a VAT

deduction under legislative regulations of a particular country. The introduction of

a VAT can reduce the cash economy because businesses that wish to buy and

sell with other VAT registered businesses must themselves be VAT registered.

Value-added tax is important and useful for many reasons. This is a good

thing because VAT is something that not everyone pays a big amount of, except

those who decide to purchase non-necessity luxury items and can afford to pay

the taxes. People who deal with VAT generally belong to Matthew Howard VAT

solutions, and they advise other people about the same. It is important because

this helps to create revenue for the government.

This is indeed, because at least a good portion of the government revenue

comes from this tax, and is a very good source of income for them. Due to the

changes in the economy, during the recession and economic booms it means

more revenue (in times of economic boom) and a steadier income (during times

of recession) because it’snot based on taxes a person pays out of their income,

but by what how much they buy and how often they buy. It is also useful because

it is paid by each and every person at each and every step.

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For example, with cell phone, VAT is paid on each part individually by the

company building it, not by the end consumer. This is a good thingbecause it

means that there is less VAT paid by each part at step since they only remit to

the government the difference between what they receive as VAT and what they

paid as VAT. This means that each business does not lose any significant

amount of money while building or making the product.

VAT is also useful because the things that people need most, such as

food essential medicines are most often not taxed. This means that the end-

consumer does not have to pay extra for these items than if they would if they

were taxed. This is a useful in many ways, because some people are on a very

strict limited income and if these were taxed they would not be able to afford the

necessary items for survival.

Also, it is more transparent than other taxes, which makes it easier to

track. It also makes it easier for the government to know what they are due

because they can merely look at the sales receipts and collect the required

amount. It also makes it harder for businesses to evade paying taxes, because

they will have to show exactly what they were paid and what they paid, which in

turn makes everything easier and less messy.

It also useful because an item that is being imported or exported will not

be taxed twice by either VAT or sales tax.Thisis because when an item is

imported they are charged the VAT, for the full price instead of piece by piece,

the first time they are purchased by the end consumer, while goods that are

exported are not charged VAT.

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Awareness of taxpayers about VAT:

As taxpayers, it is very important to the people to be aware about VAT so

that they will know the process in paying taxes. Awareness on this topic helps

and provides better understanding to the taxpayers on how VAT is charged and

how it contributes to the economy. If people are not aware about VAT, the

government will be eager to use the revenues in their own good. In order to have

a modern and developed country, people must do their obligation to the

government so that the government can give adequate services that can help the

society and give satisfaction to every Filipino.

The awareness of the taxpayers of VAT will come primarily from the

Bureau of Internal Revenue. Through this agency, people will gain enough

information about value-added tax and how the revenue of the country is used by

the government. Through this, people will know their rights and obligations as

taxpayers of this country.

The school inculcates this subject so that the students will be aware on

the process that goes through the money paid on taxes. Students will be eager to

study and learn more about this topic because it plays a significant role in our

economy. It can help the students aware of what are the benefits of paying taxes.

In the course of the research on the topics for this paper, the researchers

took note of several related studies that might be relevant to the conduct of this

project.

In research by Biplab Mazumder , et. al (2011), A Thesis on, “Review of

the VAT System to Identify a Standard VAT Rate to Improve the Tax Revenue

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Status of Bangladesh” was proposed in order to give emphasis and modernize,

develop the VAT collection system and reduce corruption, mismanagement and

evasion to improve revenue status of their country. Their aim was to have a

develop, modernize the VAT system and divide the VAT collection system into

various sectors. Their study emphasized on the economic condition to move

forward to make up the budget deficit and to increase economic activities, higher

consumption rate, adjustment of real income, GDP growth rate and economic

stability.

In another research by de la Feria, et. al (2009) “The EU VAT System and

The Internal Market” was proposed in focusing VAT in the context of the

Community’s internal market. Their study aims to prove that the current EU VAT

system is incompatible with the concept of internal market as set out in the EC

Treaty and interpreted by the Court of Justice.

In order to have a modernize and develop country, people must do their

obligations to the government, as well as the government will give services that

can help to the society and satisfaction to every Filipinos.

The above stated studies may have a little similarity to this paper but this

is not a duplication of their work since it deals with a different environment,

respondents and processes.

Flow of the Research Process

The research flowchart is a graphical representation of the value added

tax awareness. It is the illustration of how the research will be conducted and it

consists of three parts, the input, the process and the output of the study.

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The input refers to what the researchers want to find out in the study. This

indicates the personal profile of the Financial Management students. The

personal profile includes the age, gender, and year level. It also includes the

extent of awareness of the students to USJ-R on areas of: background and

definition of Value-added tax.

The process involves the use of descriptive survey method with

questionnaires as the main instrument for data collection developed by the

researchers. These questionnaires will be subjected to a dry run, finalized,

administered, and retrieved. The answers will be tallied, processed, and

tabulated. They will then be presented, analyzed, and interpreted.

The output refers to the conclusion and the outcome of the study

conducted. It will present proposals to improve the awareness of the students

with regards on value-added tax.