Cost Adjustment to Cover VAT

July 31, 1989 BIR RULING NO. 158-89 102 (a) 000-00 158-89 S i r : This refers to your memorandum dated June 2, 1989 to Secretary Vicente Jayme of the Department of Finance relative to BIR Ruling No. 226-88 which states that "in the case of contract entered into prior to January 1, 1988 and not completed as of December, 1987 and, therefore, payments thereon are made after said date, the receipts derived by the contractor are subject to the 10% VAT. However, if the contractor will request for cost adjustment to cover VAT, you may reasonably grant an adjustment of 6% only corresponding to the difference between the 10% VAT and the 4% contractor's tax." For reasons stated in your Memorandum, in effect, you would like to have the aforesaid ruling re-studied in order that you can adequately answer the contractors who are claiming for cost adjustment. cdtech Our study shows that, in general, except in the case where the contract calls for the performance of purely labor without the supply of materials whatsoever and the use of equipment purchased or leased, the effective rate of VAT is at most at par with the former 4% contractor's tax for the following reasons: 1. The contractor, the person liable for the VAT, is entitled to credit the amount of taxes he has paid on purchases of materials, supplies, services and capital equipment, (input tax) against the amount of tax he bills the contractee based on the amount of the contract price to be received by him (output tax). In effect, the contractor does not bear the burden of the tax. On the other hand, the former contractor's tax is based on the gross receipts without any deduction whatsoever for the sales tax or tax on services that were passed on to him by the sellers or suppliers; 2. The sales tax rates on ordinary materials, which are usually supplies with services, had been reduced from 20% to 10%; and 3. The contractor is given a relief by way of presumptive input tax of 8% of his inventory of materials and supplies existing as of December 31, 1987. In view of the foregoing, there seems to be no basis for the contractor's request for cost adjustment of 6% to cover VAT. Accordingly, the above-quoted ruling, insofar as it enjoins the contractee to grant an adjustment of 6% to correspond to the difference between the 10% VAT and the 4% contractor's tax, is hereby set aside. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner