National Food Authority Subject to VAT on Sugar Operations

May 27, 1998 BIR RULING NO. 073-98 103 (c)-000-00-073-98 National Food Authority 101 E. Rodriguez Sr. Ave. Quezon City Attention: Hon . Joemari D . Gerochi Undersecretary Gentlemen : This refers to your letter dated June 20, 1997 stating that the early part of that year saw the lowering of the farmgate prices of sugar, to the detriment of our farmer-producers; that to counteract the situation, the President issued Executive Order No. 398 dated January 31, 1997, directing the National Food Authority (NFA) to intervene in the stabilization of the price of sugar; that to date, the NFA has procured about 253,000 MT of raw sugar at an average price of P610.00 per bag at 50kg.; that with such volume and given the present and immediate future scenario of the industry, the government is expected to intervene up to the end of that year; that, however, in order to be able to stabilize prices at the consumer side, selling price would have to be at a level not higher than P18.50 per kg. of refined sugar, while costs and expenses are estimated at P19.63 per kg.; that losses, therefore, is inevitable, as the NFA performs its function to stabilize prices both at opposing ends of the market; that estimates show a total loss of P330 Million; that while refined sugar is clearly a vatable commodity under the VAT Law, it has always been a profitable commodity under the control of the private sector; that it is your belief that the exemption of agricultural products in their raw forms is a protective decree for the farmer-producers; that the directive given to the NFA is likewise a protective action of the government for the same sector, hence the imposition of a high support price; that on the other hand, that the selling price of refined sugar now being held by the government has to be maintained at a government-dictated-low level so as not to jeopardize the consumers; that viewed from the foregoing circumstances, it is your firm contention that the NFA's operations on sugar, like rice and corn, are not subject to direct and certain indirect taxes, including the VAT; and that you have negotiated with the sugar mills for them not to collect the usual VAT imposed on refined sugar pending clarificatory communications with this Office using the same arguments as above cited. LibLex Based on the foregoing representations, you now request for a ruling that NFA should not be subject to the VAT on its sugar operations. In reply, please be informed that under Section 103(c) of the Tax Code, as amended, sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption, and breeding stock and genetic materials therefor is exempt from VAT. Products classified under Section 103(a) and (c) shall be considered in their original state even if they have undergone the simple process of preparation or preservation for the market, such as frying, drying, salting, broiling, roasting, smoking and stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses and ordinary salt shall be considered in their original form. Accordingly, since refined sugar cannot be considered as agricultural food product in its original state, this Office regrets to inform you that your aforesaid request for exemption from VAT is hereby denied for lack of legal basis. prLL Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue