Tax Articles

VAT: Gross Sales or Gross Receipts?

By Atty. Fulvio D. Dawilan

In my article in this column at the beginning of the year, I mentioned about the pending bills on taxation that are worthy of consideration and support. These include the Ease of Paying Taxes Act. The bill was already approved by the House of Representatives and is now being discussed at the Senate Ways and Means Committee.

One of the more significant but contentious provisions of the proposed laws is related to the proposed harmonization of the rules on value-added tax (VAT) treatment of sales of goods and services. Based on the present law, there is a distinction between sales of goods and sales of services. For goods, VAT is levied, assessed, and collected on the gross selling price or gross value in money of the goods or properties sold. On the other hand, for sale of services, VAT is levied, assessed and collected based on gross receipts.

Thus, the output tax on sales of goods is required to be reported upon sale while the output tax on sale of services is required to be reported upon receipt. On the part of the buyer, the input tax for the purchase of goods needs to be recognized upon purchase while the input tax on purchase of services is to be recognized upon payment. It follows that the required documentations are also different – sales invoice for goods and official receipt for services.

The bills propose to harmonize the rules by providing a uniform treatment for sales of goods and services. And based so far on the proposed provisions of the bills, the current rules for sales of goods shall be adopted for sales of services. This means that the output taxes on sale of services shall also be levied and collected upon sale. Consequently, the input tax on the part of the buyer shall be recognized upon purchase. It follows that the present prescribed documentation for services, which is the official receipt, shall be discarded and the sales invoice shall be required. In essence, the tax base/timing/documentation for the sale of services, which is presently based on gross receipts/official receipts, is being harmonized with the current tax base/timing/documentation for sales of goods/properties.

There is no disagreement that the treatment for VAT purposes for both sales of goods and services, including the prescribed documentations, should be uniform. This would harmonize the rules and avoids the confusions caused by the difference. The disagreement lies on which should be the basis/timing – upon sale/purchase or upon receipt/payment?

I believe that in harmonizing the rules, the rules for sale/purchase of goods should follow the current rules for services - recognition of output tax/input tax upon receipt/payment – instead of the other way around.

From a purely legal perspective, no rule is superior over the other. It is the law that fixes it, and whatever the law requires should prevail. In the present exercise, since the objective is to “ease the payment of taxes”, then the changes should lean towards the realization of that objective. And it is my belief that “gross receipts” as the reckoning for the recognition of VAT would better achieve that objective than “gross sales”.

Let me address some of the concerns of the opposite side. There is an argument that the reference to gross receipts, rather than the gross sales, is inconsistent with the accrual method of accounting. That is misplaced. In fact, the present practice – where the VAT on sale of services is based on gross receipts – clearly negates that argument. Also, the sales taxes, percentage taxes, and other business taxes before the adoption of VAT in our tax law traditionally referred to “gross receipts” as the basis for the payment of taxes on sales of services. Yet, consistency or inconsistency with the accounting rules had never been an issue. As I earlier noted, it is the law that fixes the rule, and whatever it mandates should be followed, regardless of its consistency or inconsistency with the accounting rules.

Also, the fear that the use of “gross receipts” would delay the payment of VAT is misplaced. If at all, this is only a timing concern that would only be felt in the first month of implementation. Once the collections are realized and the corresponding VAT are reported, the usual cycle for VAT reporting is restored.

But even that temporary delay would have a minimal effect. Beginning this year, the payment of VAT dues on a monthly basis is no longer required. VAT is now paid on a quarterly basis. That 3-month period is the usual term for sales made on credit. Sales and collection would therefore fall on the same period, and therefore the VAT is captured in the same period. Only when the collection flows in the following quarter will there be a quarter delay.
Turning now to the advantage of using the “gross receipts”, there are lots of them when it comes to ease in compliance. And let me just mention one. The payment of VAT based on sales is not necessarily final. There are transactions, movements and changes that may affect the modification of the amounts earlier reported. And I am referring to the sales returns, allowances and discounts. These need to be monitored by the seller and the buyer so that the adjustments can be made, and this requires a number of documentations. Obviously, that is not necessary for sale/purchase of services. That alone will ease the compliance burdens of taxpayers, and the checking by revenue officers.

I’ll end here, but I’ll be happy to share further if there are interesting changes in the bills. Again, let’s support this wonderful piece of legislation.