#AskTheTaxWhiz: Should I pay VAT for my 2012 non-VAT sales?
Dear Mr. Tax Whiz,
I’m running a small marketing/promotion service business. I don’t have full-time employees and equipment so I’m forced to get project-based individuals and rent equipment, which makes my cost a lot higher. This is okay with me, at least I’m sure I have little profit from the projects which I feel is safer than having full-time employees whom you are obliged to pay even when there are no projects.
On average, I only get about 8% to 10% of the project value after taxes and payment to project-based individuals and suppliers, and that 8% to 10% is still subject to income tax.
Back in 2012, my business was registered as non-Value Added Tax (VAT) with the Bureau of Internal Revenue (BIR). I was paying monthly 3% tax based on my monthly gross income.
Around third quarter of the same year, my accountant told me that I was about to reach the annual threshold of P1,919,500 ($42,807.49) and so we need to register for VAT. So we registered from non-VAT to VAT.
Unfortunately, my new registration came out June 2013. I’m not sure why but my bookkeeper said it was because of the receipt issues back in late 2012 up to early 2013 when BIR required taxpayers to surrender all old receipts and have new reprints which caused the delay on the part of the BIR to release my new Certificate of Registration (BIR Form 2303) under VAT.
Now my dilemma is, BIR is asking me to pay the 12% VAT (and I’m not eligible to add any input taxes) based on my gross sales in 2012, which is above the threshold plus penalties and interests amounting to more than P450,000 ($10,045.470). I only earned around P500,000 ($11,161.73) that year and already paid more than P100,000 ($11,161.73) in taxes.
I find it ridiculous to pay the amount they’re asking as the taxes I’ll be paying will be more than the actual income I got in 2012. I didn’t collect this VAT from my clients and my clients wouldn’t allow me to collect VAT back then as my registration was non-VAT and my receipt was non-VAT so it’s illogical for them to pay the extra 12% VAT when they couldn’t use it for input tax.
What are my options here?
The examiner said that I have no choice but to pay the amount due or maybe request to waive the penalties and interest and to have my payment in installment but I really find it unfair to pay more taxes than what I already paid.
I have asked my accountant about my options and they’re not really giving me any sound advice. I feel that they don’t care because they’re not the ones going to pay it anyway.
Hoping for any advice you could give.
Matthew (Name withheld)
I’m sorry that you have to go through all these confusion and anxiety concerning your BIR compliance. It is really important to invest on people you can trust and depend on especially in handling financial and tax matters of your business.
Concerning your VAT issue, a non-VAT taxpayer is required to register as a VAT person if his annual gross sales or receipts during the immediately preceding 12-month period exceeded P1,919,500 ($42,807.49)*.
Supposedly, change of registration can be made by simply filing with the appropriate BIR office the Application for Registration Information Update (BIR Form 1905) and surrendering the old Certificate of Registration (BIR Form 2303).
Unfortunately in your case, it took a while due to the delay on the part of BIR given their circumstances at the time you filed for change in registration.
However, if you only exceeded the threshold in 2012 for the first time, you may not be liable to pay VAT until the following year, which is 2013.
The VAT rules are clear, any person who, in the course of trade or business, sells, barters, or exchange of services shall be liable to register as VAT if:
- His gross sales or receipts for the past 12 months, other than those that are exempt by law, have exceeded P1,919,500 ($42,807.49); or
- There are reasonable grounds to believe that his gross sales or receipts for the next 12 months, other than those that are exempt by law, will exceed P1,919,500 ($42,807.49).
You may write the Revenue District Officer (RDO) regarding this VAT rule so they will not assess you inadvertently and arbitrarily as it is not fair for a small taxpayer like you who have exceeded the threshold for the first time.
Provided there are no basis for BIR to presume that your previous years have already exceeded the VAT threshold, you may appeal for reconsideration and cancelation of the assessment.
It will be better if you consult your case with a tax expert so it can be further reviewed before you make representation in the BIR RDO. If your bookkeeper is not giving you options, probably.
*Effective January 1, 2012; from July 1, 2005 to December 31, 2011, VAT threshold is P1,500,000 ($33,470.41).
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Mon Abrea is a former BIR examiner and an advocate of genuine tax reform. He serves as chief strategy officer of the country’s first social consulting enterprise, the Abrea Consulting Group, which offers strategic finance and tax advisory services to businesses and professionals. Mon's tax handbook, Got a Question About Taxes? Ask the Tax Whiz! is now available in bookstores nationwide. Follow Mon on Twitter: @askthetaxwhiz or visit his group’s Facebook page. You may also email him at firstname.lastname@example.org.
US$1 = P44.82
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