Determination of Sales Tax Still Due as Tax Credit in Favor of the Taxpayer

October 16, 1987 BIR RULING NO. 315-87 163, 164 166 (a) 69-S. 1961 315-87 S i r : There are returned to you herewith the papers consisting of twenty (20) pages bearing on the claim for tax credit filed by Mr. Chua Kiong of Bangkulasi, Navotas, Metro Manila, involving the amount of P251,604.66 as alleged erroneous payment of the sales tax and the 1.5% tax on subsequent sales for the year 1986. It appears that the taxpayer, operating under the business name of C.K. Bagoong Factory, is engaged in business as producer and repacker of bagoong; that as producer, he buys fish (dilis) in big quantities, and adds salt to prevent the fish from spoilage; that the mixture is kept in cement tanks for fermentation; that after about three (3) months, the mixture is ready for marketing and is bottled, canned or put in plastic; and that the taxpayer also buys processed bagoong and repacked them for sale. It appears also that the taxpayer paid the 10% sales tax on sales of produced bagoong and the 1.5% tax on subsequent sales on the repacked bagoong. However, the taxpayer claims that the bagoong is an agricultural product subject to 0% sales tax; hence, his claim for tax credit. Pertinent portion of Section 163(2)(a) of the Tax Code, as amended by E.O. No. 36 states that the term "processed" as applied to the food products mentioned therein means that such products have undergone the process of curing, canning, bottling or other manufacturing process. It does not include those which have merely undergone the simple process of preservation such as freezing, refrigeration, drying, salting or smoking. Accordingly, the bottled or canned bagoong is considered "processed fish"; hence, classified as an essential article subject to the 10% sales tax. On the other hand, the bagoong (mixture of fish and salt) contained in plastic is still considered agricultural product in its original state hence the sale thereof are subject to the 0% sales tax. [Sec. 162(3), Tax Code] cdta Section 164 of the Tax Code states that the subsequent sale of agricultural products in their original state, i.e., those that have undergone the simple process of preservation, shall be subject to the 0% sales tax. Accordingly, if the said bagoong bought by the taxpayer is sold in plastics, the same had still undergone the simple process of preservation, hence, the subsequent sale is subject to the 0% sales tax. On the other hand, if the bagoong bought by the taxpayer is repacked in bottles or cans, the same no longer underwent the simple process of preservation, and, instead, the process of canning or bottling considered as manufacturing process; hence, the subsequent sales thereof are subject to the 1.5% sales tax. In this connection, it appears in the manufacturer's sales tax return of the taxpayer that there is no claim for tax credit with respect to the sales tax paid on the raw materials e.g., containers used in the manufacture of bagoong against the sales tax due from the finished product. Since the containers (bottles and cans) are considered raw materials of the manufactured articles, the sales tax paid on the domestically purchased raw materials may be credited against the sales tax due from the processed bagoong, provided that the former is billed as separate item in the sales invoice. [Sec. 166 (a), Tax Code] In view thereof, further investigation should be conducted in this case in line with the above ruling in order to ascertain the amount of sales tax still due as tax credit in favor of the taxpayer. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner