Effect of VAT on RHB 1-1 Project

August 31, 1988 BIR RULING NO. 425-88 102 000-00 425-88 Gentlemen : This refers to your letter dated July 23, 1988, requesting opinion as to the effect of the value-added tax on a project (RHB 1-1) bidded in September 1987. It is represented that the abovesaid project was bidded last September 1987 and was awarded to you only last June 16, 1988; that as such, the detailed estimate was made by MWSS way back 1986 and the 10% VAT scheme was not yet considered and provided in the estimate of the project cost; that since the project involves the cleaning and rehabilitation of existing water lines in the central Manila area thru water jettings, debris suctioning, TV inspection and grouting of pipe joints, the same does not require so much materials; and that most of the work calls for an extensive use of equipment and labor only, thus, you cannot generate substantial amount of input tax which you could offset against the 10% output tax for the contract accomplishment. Hence, you requested MWSS for upward price adjustment equivalent to 10% of the contract price. In reply, please be informed that since the project was awarded to you after January 1, 1988, the gross receipts derived therefrom are subject to the 10% value-added tax. "Gross receipts" means the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the service performed or to be performed for another person, excluding value-added tax ." [Sec. 102(a), Tax Code, as amended by E.O. No. 273] However, although the 10% VAT is excluded from the gross receipts for tax purposes, the same is included in estimating the project cost which would be the bid price. Such being the case, the 10% VAT required to be paid beginning January 1, 1988 would in effect reduce your expected receipts probably by 6% (10% VAT less the then 4% contractor's tax) since the tax was not yet provided in the bid price fixed in 1987. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner