Chapter I

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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 BiplabMazumder, 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.