Treatment of VAT on Drugs Purchased by an Hospital

August 23, 1988 BIR RULING NO. 403-88 100 023-88 403-88 M a d a m : This refers to your letter dated February 1, 1988 seeking clarification on how to treat the value-added tax (VAT) on drugs purchased by your hospital as well as printed forms and other supplies purchased by your school since both hospital and school are exempt from VAT. In reply thereto, please be informed that the VAT on purchases made by exempt companies is not allowed as a tax credit since there is not VAT output from which it can be deducted. These input taxes shall form part of the company's expense which the company could either absorb or pass on to clients as part of the price of the service to be performed or goods to be sold. However, if a hospital operates a drugstore, the sale of medicine or drugs whether to in-patient or out-patient is subject to value-added tax if it exceeds P200,000.00 during a 12-month period pursuant to Section 7(b)(12) of Revenue Regulations No. 5-87 implementing Executive Order No. 273 (BIR Ruling No. 023-88). In such case, the VAT on purchase made by the hospital is allowed as a tax credit. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner