BIR Ruling

June 26, 1970 Miss Leonora S. Ipapo Nory's Art Craft Saluysoy, Meycauayan Bulacan M a d a m : This refers to your letter dated May 13, 1970 requesting clarification on the tax exemption privilege under the NACIDA Law, particularly on the period of exemption and the requirement relative to the employment in a cottage industry of members of the family in view of your desire to engage in the manufacturing business as a NACIDA member. In reply, I have the honor to inform you as follows: Pursuant to Section 11 of Republic Act No. 3470, as amended by Republic Act No. 5326, otherwise known as the NACIDA Law, the term "cottage industry" shall mean an economic activity in a small scale carried on mainly in the homes or in other places for profit and mainly done with the help of the members of the family with capitalization not exceeding fifteen thousand pesos. Section 16 of said Republic Act No. 3470, as amended also provides: "SEC. 16. The production, manufacture and sale of cottage industry products shall be exempt from all taxes, except specific and income taxes, for a period of five years from the date of registration of the person or firm engaged in the production or manufacture of cottage industry products with the Board: Provided , That seventy-five percent of the total cost of raw materials utilized in the production or manufacture of cottage industry products consists of raw materials of Philippine origin: Provided, further , That the latter requirement as to raw materials shall not apply to embroidery, piggery, poultry, livestock and metal craft industries: Provided, furthermore , That no exemptions from the percentage taxes on sales shall be enjoyed for all sales in excess of two hundred thousand pesos each year: . . ." Under the foregoing Sections, it should be understood that a duly registered cottage industry should have a capitalization of not exceeding fifteen (P15,000.00) pesos and its activity carried on a small scale and mainly done with the help of the member of the family for purposes of tax exemption (specific and income tax excluded). Such exemption shall be for a period of five years from the date of registration of the cottage industry with the Board. However, as regard the employment of persons other than member of the family in the industry, the Secretary of Justice in his opinion dated November 15, 1967 on the question posed as to whether the determining factor is the number of workers and the capitalization or the fact that the work is performed mainly by members of a family, said: "I am more inclined to believe that the limited number of workers and the limited capitalization should be the determining factors. And of these two, I think it is the latter which is more controlling. For in the final analysis, the amount of funds available dictates whether a particularly industry shall be conducted on a small or large scale. acd "Although the statute speaks of an industry 'which is done mainly with the help of members of the family' I do not think that a cottage industry ceases to be such the moment persons other than immediate members of the family are employed in said activity. For instances may occur and do occur in which an enterprising individual may have no family of his own, being still unmarried or childless, or because his children are still very young to help in their home industry. Yet, this fact alone should not operate to deprive the activity of the benefits of the law so long as it is a 'cottage industry' in the judgment of the NACIDA." Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue