Difference Between VAT and Non-VAT (2024)

If you are engaged in doing business, self-employment, freelancing or practice of profession registered with the Bureau of Internal Revenue (BIR) in the Philippines, you are most likely subject to what is referred to as business tax.

It is called business tax as it is only applicable to person or entity engaged in doing business, self-employment, freelancing or practice of profession. Thus, for an instance, an individual taxpayer with compensation income from employment, are not required to file and pay business tax. On the other hand, a freelancer or self-employed, are required to file and pay business tax.

Two business tax to choose from is either of the following: VAT (Value Added Tax) and NON-VAT (also referred to as Person or Entity Exempt from VAT or Other Percentage Tax.)

What is a Business Tax?

Business tax is a tax imposed on the gross sales or receipts of a VAT or NON-VAT taxpayer. The tax rate ranges from 3% to 12% depending on the tax type, such as VAT or NON-VAT.

Important Note: For NON-VAT (Other Percentage Tax), per CREATE Law passed last March 2021, there’s a transitional (or temporary) lower rate of 1% from July 1, 2020 to June 30, 2023. And after which, beginning July 1, 2023, the other percentage tax for NON-VAT will go back to 3%.

Difference Between VAT and NON-VAT

To understand the difference between VAT and NON-VAT, read on below eleven (11) differences:

1. Business Formation

Business formation of the taxpayer can help in determining if it will be registered as VAT or NON-VAT.

Freelancers, Self-Employed, Professional, or Sole-Proprietors of a Business can be either VAT or NON-VAT depending on the nature and size of the business. Oftentimes, these individual taxpayers register as NON-VAT if their business operation is small resulting to annual sales within the threshold for NON-VAT. However, if they plan to grow and expand their business beyond the NON-VAT threshold, they will register as VAT.

On the other hand, Corporation, Partnership and One-Person Corporation (OPC) can also be NON-VAT registered if they meet the criteria. However, they are often advised or preferred to be VAT registered due to growth and expansion expectation beyond the NON-VAT threshold.

2. Tax Rate

When a taxpayer is VAT registered, in general, it is subject to 12% tax rate on its gross sales or receipts. Such tax is referred to as VAT or Output VAT. However, there are certain type of sales that are subject to 0% tax rate, referred to as Zero-Rated or Exempt.

On the other hand, if a taxpayer is NON-VAT registered, it is subject to Tax Rate of 1% (From July 1, 2020 to June 30, 2023) or 3% (prior to July 1, 2020 and starting July 1, 2023) on its gross sales or receipts. Such tax is referred to as Percentage Tax.

3. Annual Sales

Another way to determine if an entity should be VAT or NON-VAT is the Annual Gross Sales or Receipts.

To be qualified for NON-VAT(Person or Entity Exempt from VAT), the gross annual sales or receipts do not exceed P3,000,000, as updated by TRAIN Law effective January 1, 2018. (Note: This is subject to change in the future depending on BIR rules)

As such, if the taxpayer exceeds the gross annual sales or receipt threshold, they will automatically be classified as VAT registered.

4. Tax Deductions

Another important difference of VAT and NON-VAT is deductible tax from purchases/payments.

If VAT Registered, the amount of VAT paid on purchases can be used as deduction from the VAT Payable.

On the other, if the company is NON-VAT Registered, no deduction is allowed in computing the Percentage Tax Payable. Because the computation of tax due is based on Gross Quarterly Sales.

5. Tax Computation

Percentage tax (NON-VAT) is easier to compute compared to VAT.

Percentage Tax (NON-VAT) Formula: Quarterly Gross Sales x Tax Rate = Percentage Tax (NON-VAT)

Example: For the first quarter of 2021. Gross Quarter P200,000 x 1% (Transitional Percentage Tax Rate) = P2,000

On the other, VAT has the following computation.

Value-Added Tax (VAT) Formula: Output VAT – Input VAT = VAT Payable (VAT Credit)

Output VAT pertains to VAT collected on Sales or Receipts. Input VAT pertains to VAT on payments or purchases. If the Output VAT is bigger than Input VAT, it will result to VAT Payable. While if Input VAT is bigger than Output VAT, it will result to VAT Credit.

Example: Output VAT P120,000 – Input VAT P80,000 = VAT Payable of P40,000

6. Tax Collected from Customer

VAT is considered indirect tax while Percentage Tax is direct tax.

As an indirect tax, Value Added Tax (VAT) can be passed on to the customer. It can be added to the selling price or service fee collected from customer. Computation: Selling Price or Service Fee x VAT Rate

Example: Service Fee P10,000 + VAT P1,200 = Total Collected P11,200

On the other hand, as a direct tax, Percentage Tax (NON-VAT) is shouldered by the taxypayer and cannot be passed on to customers. Selling Price or Service will equal the Total Amount Collected.

Example: Service Fee P10,000 = Total Collected P10,000

7. Accounting Treatment and Recording

For VAT Registered, VAT on Sales (Output VAT) collected from customers are treated and recorded as liability, while VAT on Purchases (Input VAT) paid to vendors or suppliers are treated and recorded as asset. And then at the end of the month, an adjustment will be made to reflect if VAT Payable (Liability) or VAT Credit (Asset).

For NON-VAT Registered, Percentage Tax is treated as a direct expense normally recorded under Taxes and Licenses. It can be used as a valid deduction or expense.

8. BIR Form Used

For VAT Registered, the BIR Forms required to be filed are:

• BIR Form 2550M for the Monthly Value-Added Tax (VAT) Declaration, and;
• BIR Form 2550Q for the Quarterly Value-Added Tax (VAT) Return.

For NON-VAT Registered, the BIR Form required to be filed is only BIR Form 2551Q for the Quarterly Percentage Tax Return.

9. Frequency of Filing and Payment

For VAT Registered, filing and payment are as follows: every month using BIR Form 2550M and every quarter using BIR Form 2550Q. Overall, there will be twelve (12) tax returns filed in a normal year. See below guide following calendar period.

• BIR Form 2550M is filed every January, February, April, May, July, August, October, and November.
• BIR Form 2550Q is filed every end of the quarter: March, June, September and December.

For NON-VAT Registered, filing and payment is every end of the quarter using BIR Form 2551Q. Overall, there will be four (4) tax returns filed in a normal year. See below guide following calendar period.

• BIR Form 2551Q is filed every end of the quarter: March, June, September and December.

10. Deadline of Filing and Payment

For VAT Registered, the deadline of filing and payment are as follows: for monthly BIR Form 2550M, the deadline is 20th day of the following month, while for the quarterly BIR Form 2550Q, the deadline is 25th day of the following month after the close of the quarter. See below guide following calendar period.

• BIR Form 2550M deadline is as follows:
  • For the month January (Due February 20),
  • For the month February (Due March 20),
  • For the month April (DueMay 20),
  • For the month May (June 20),
  • For the month July (August 20),
  • For the month August (September 20),
  • For the month October (November 20),
  • For the month November (December 20).
• BIR Form 2550Q deadline is as follows:
  • For the quarter ending March (Due April 25)
  • For the quarter ending June (Due July 25)
  • For the quarter ending September (Due October 25)
  • For the quarter ending December (Due January 25 of next year)

For NON-VAT Registered, the deadline of filing and payment is every end of the quarter using BIR Form 2551Q, similar to BIR Form 2550Q. See below guide following calendar period.

• BIR Form 2551Q deadline is as follows:
  • For the quarter ending March (Due April 25)
  • For the quarter ending June (Due July 25)
  • For the quarter ending September (Due October 25)
  • For the quarter ending December (Due January 25 of next year)

11. Required Attachment

Last, but not the least, difference between VAT and NON-VAT is the required attachment to the BIR Form.

For VAT Registered, every end of the quarter, it is mandatory to submit an attachment referred to as Summary List of Sales, Purchase and Importation (SLSPI) together with BIR Form 2550Q. The deadline of submission is similar to the deadline of BIR Form 2550Q.

On the other hand, for NON-VAT registered, there is no attachment required to be submitted.

That’s it. Those are the eleven (11) top differences between vat and non-vat.

I hope this article gave you relevant information to know the differences between VAT and NON-VAT. Feel free to comment or ask question below. If you liked this article, please share it!