Taxability of Cassava Starch

September 4, 1991 BIR RULING NO. 170-91 103 (b) 569-88 170-91 Gentlemen : This refers to your letter dated May 23, 1991 to the Secretary of Finance, Manila, which was referred to this Office by way of a 1st Indorsement dated June 6, 1991, in effect, requesting for a review of BIR Ruling Nos. 128-89 dated June 16, 1989 and VAT Ruling No. 023-91 dated April 3, 1991 subjecting cassava starch to 10% VAT Ruling No. 569-88 dated December 22, 1988 exempting the same. Verification report disclosed that cassava starch is produced manually or mechanically. It is produced manually by the individual farmers through the process of grating the cassava meat and separating the milk from the pulp. After drying, the milk is converted to cassava starch. Mechanically, it is produced by crushing the cassava meat into a pulpy mash, and separating the milk from the pulp through the use of a mechanical separator. After drying the milk in the centrifuge device, the milk is transformed into cassava starch (without the addition of any chemicals). The cassava starch produced mechanically are sold to the manufacturers of glucose as condiments; to pharmaceutical companies as dextrose or dextrine; to ice creams processors as extenders; to paste manufacturers as binders, etc. In other words, cassava starch have both food and non-food uses. Because cheaper cassava starch from neighboring countries are available locally and compete with the local products, the millers are unable to raise their price to compensate for the additional cost, so the VAT is shifted back to the farmers by depressing the purchasing price of the tubers from what used to be P750.00 per metric ton to P400.00 per metric ton. As a result, the farmers agonized, complained and refused to cultivate the crop resulting in substantial reduction in the supply of cassava tubers to the millers. Considering that only 40 to 50% of the tubers are produced from the miller's plantation, while 50 to 60% are produced by the farmers, the cassava industry suffers. Moreover, since the plantation site is located in what is known as rebel territory, the low purchasing price of the cassava tubers poses a threat to the peace and order condition in the area; hence, a liberal and flexible policy is needed to mollify the farmers and save the industry from certain collapse. In reply, please be informed that after a re-study of your case, we find your arguments valid and meritorious. It appears that under the "catching up" effect in the VAT system, when the VAT-exempt product is used as raw material of VAT-taxable products, the VAT catches up with the exempt product when the finished products are sold. This is so because while the exempt product forms part of the cost of the finished products, no input tax credit can be claimed against output tax. In other words, since cassava starch is essentially an intermediate product, even if the same were exempted from VAT when sold by the miller-producer, upon being used as raw material for VAT-taxable goods, e.g., candies, dextrose, dextrine, paste, ice cream, etc., the 10% VAT catches up with the cassava starch when the finished products are sold. Unlike the "backward shifting" effect when the VAT is collected on the cassava starch, the collection of the VAT on the finished products merely adds up to the cost thereof resulting in the "forward shifting" of the VAT to the consumers which is an acceptable alternative to depressing the price of the cassava tubers, which not only creates a social problem but, also threatens the collapse of the industry. This ruling is being issued only because of the foregoing facts and considerations. It will not apply if the cassava starch were sold to a one who will not use it as an ingredient in the manufacture of VAT taxable products but for direct consumption, such as stiffening of cloth or laundry. This modifies BIR Ruling No. 128-89 dated June 16, 1989 and VAT Ruling No. 023-91. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge