VAT or Non-VAT: Which One Should You Choose for Your Business?

Posted by under Business . Updated: January 9, 2019

I’ve met a lot of entrepreneurs, and one of the least liked topics that we discuss is taxes. Many say it’s too complicated and can be time consuming.

However, a basic understanding of taxes, could really go a long way in helping you save money, regardless if you’re a professional or a business owner.

When you register with the BIR, one of the first decisions you’ll have to make is if you’d want to be classified under VAT or Non-VAT.

What’s the difference? And how do you decide?

VAT vs Non-VAT

Tax Rate

  • VAT: 12% of VAT Payable (Output Tax less Input Tax)
  • Non-VAT: 3% of Gross Sales (also called Percentage Tax)

Business Structure

  • Professionals and sole-proprietors: can be VAT or Non-VAT
  • Parterships and corporations: usually advised to be VAT-registered

Annual Gross Income

  • If P3 million or less, then you have the option to either register as VAT or Non-VAT.
  • If more than P3 million, then you are required to be VAT-registered

Please note that some industries can be VAT Exempt, particulary those in export sales, companies with a BOI certificate, and those operating within economic zones. They are eligible to be VAT Exempt, which is different from being VAT or Non-VAT.

VAT or Non-VAT: How do you decide?

The best way to know which tax structure you should choose is to compute your taxes under VAT and Non-VAT, and then check with one has less amount.

For self-employed and professionals (SEP) here’s an illustration:

IF REGISTERED AS VAT:

VAT InclusiveOutput Tax
Gross SalesP 1,260,000P 135,000
VAT InclusiveInput Tax
PurchasesP 952,000P 102,000
Output VATP 135,000
Less: Input VATP 102,000
Tax PayableP   33,000

IF REGISTERED AS NON-VAT:

3% Percentage Tax
Gross SalesP 1,260,000P 37,800
Tax PayableP 37,800
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Making the choice

As you can see, for this specific example, registering under VAT is the better choice, because of the deductions from the Input Tax. This means if the SEP will have many purchases or payments, which are VAT inclusive, then those VAT can be used as deduction.

So going back to the original question, how do you decide? Which one should you choose, VAT or Non-VAT?

From our illustration, it would really depend on how much your expected annual gross income would be AND how much VAT inclusive expenses you’ll incur. These two numbers have the biggest impact on your decision.

Getting help and advice

What we’ve discussed is just one of many other things you need to know about paying taxes in the Philippines.

If you have questions or in need of guidance on accounting, taxation, and business registration, then you should check out TAXUMO.

Taxumo is a Filipino company, which helps self-employed individuals and professionals with their business registration and BIR tax compliance.

Beyond their consultation services, you can also conveniently pay your taxes online through their website. This is a time-saver to avoid the fuss and hassle of going to the bank or filing your tax documents at the BIR office.

Taxumo is a brand partner of this blog, and as an exclusive offer to my readers, you can get Php 100 off on your first tax filing when you input the code OPENTAXUMO upon sign up at Taxumo.com.

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