VAT Ruling No. 014-06

November 28, 2006 VAT RULING NO. 014-06 Sec. 109 (1) (A) BIR Ruling 170-91 Cassava Planters And Millers Association of the Philippines, Inc . 3/F Penthouse Ermita Center Bldg. Roxas Blvd., Ermita, Manila Attention: Atty. Rassendell Rex F. Gingoyon Legal Counsel Gentlemen : Reference is made to your letter dated September 12, 2005 requesting, in effect, for a confirmation of your opinion that the sale of cassava starch is exempt from the 10% (now 12%) value-added tax (VAT) pursuant to Section 109(1)(A) of the National Internal Revenue Code (Tax Code) of 1997, as amended. It is represented that the Cassava Planters and Millers Association of the Philippines, Inc. is composed of domestic corporations and farmers cooperatives engaged in the processing of cassava starch; that in preparing cassava starch, the following simple steps are followed: washing and peeling, grating of cassava tubers, starch milk extractions through cone screens, centrifugation in separators to increase starch density, dewatering and drying; that although cassava starch undergoes some manual and mechanical process in its production, the same does not alter its original state inasmuch as no chemical substances are added in its preparation; that the processing is necessary only to preserve and prepare the starch for market considering that cassava starch in tubers ferments and spoils rapidly within forty eight (48) hours after harvesting; that in VAT Ruling No. 569-88 issued on December 22, 1988, it was ruled that cassava tubers when milled into cassava starch retains its original state and thus, exempt from the 10% (now 12%) VAT pursuant to Section 103(B) of the then Tax Code, as amended by Executive Order No. 273. 07taxcda In reply, please be informed that Section 109 (1)(A) of the Tax Code, as amended by RA No. 9337, provides: "SEC. 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: (A) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. DcaCSE Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state;" A closer scrutiny and application of the above provision would reveal that in order for the sale of cassava starch to be exempt, it must: (1) be considered an agricultural food product; and (2) have undergone only a simple process to retain its "original state." Webster's New Collegiate Dictionary defines " cassava " as " any of several plants (genus Manihot) of the spurge family grown in the tropics for their fleshy EDIBLE rootstocks which yield a nutritious starch ," hence, an agricultural food product. BIR Ruling No. 170-91, dated September 4, 1991 issued to the Cassava Planters and Millers Association of the Philippines explained the process cassava undergoes to produce cassava starch. It was ascertained that: ''. . . cassava starch is produced either 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 )."' (Emphasis supplied.) It is observed that, whether it be manually or mechanically, cassava starch is simply produced by separating the milk from the pulp of the cassava and then drying the milk to transform it into the cassava starch without adding any chemicals. Considering that the transformation of cassava to cassava starch does not involve any chemicals, it is, therefore, the opinion of this Office that the said process could not be so complicated as to remove it from the term " simple process ." Be that as it may, the "catching up" effect in the VAT system, as elucidated in BIR Ruling No. 170-91 finds application in the instant case. Thus, ". . . It appears that under the 'catching tip' 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." Based on the foregoing, this Office, therefore, reiterates BIR Ruling No. 170-91 exempting cassava starch from the VAT pursuant to Section 109 (1) (A) of the Tax Code, as amended by RA No. 9337. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it is discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue "Page 4 of 4, VAT Review Committee Ruling for Cassava Planters and Millers Association of the Philippines, Inc. re: VAT on cassava starch."