THIRTEENTH CONGRESS OF THE REPUBLIC 
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! 5 JEH-6 P627 
First Reaular Session 
OF THE PHILIPPINES 
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S E N A T E  
2838 
S. No. 
Introduced by Senators S. R. Osmefia 111 and Ma. Ana Consuelo 
A. S. Madrigal 
EXPLANATORY NOTE 
This bill seeks to amend Section I10 (B) of the National Internal Revenue 
Code (NIRC) of 1997, as amended. 
Section 110 (6) is the result of an 
amendment to the NIRC which was included in Republic Act No. 9337. 
It 
introduces a cap on input VAT tax credits of 70% of output VAT that has the 
effect of creating a minimum 3% tax on gross receipts. 
The cap on input tax credits sought to address the under-reporting of 
output VAT and over-reporting of input VAT by non-compliant taxpayers. The 
original amendment approved in the Senate Bill was a 90% cap. At that level, 
the rule should not generally impact adversely on compliant taxpayers but would 
result in non-compliant taxpayers having to account for closer to their true tax 
liability. At a 90% cap, the measure is acceptable,as a rough proxy for VAT; at 
70%, it is punitive. 
Moreover, the introduction of the minimum VAT removes the incentive for 
taxpayers to enter the formal sector of the tax base. Taxpayers would have an 
incentive to obtain goods from the informal or tax-evading sector since there will 
be no input tax paid for the purchase. 
On the other hand, the provision in Section 110 (B) contains drafting 
ambiguities. The second proviso may be interpreted as qualifying the first, so 
that the input tax attributable to zero-rated sales will be fully creditable despite 
the 70% cap. 
A cap on input VAT may not be considered best practice in a VAT system, 
but its imposition in the Philippine setting may prove to be valuable since evasion 
appears to be widespread. However, the level of cap needs to be realistic to 
ensure that compliant taxpayers will not prefer to be outside the ambit of the tax 
system. 


In view of the foregoing, approval of this bill is earnestly requested. 
c 
Senator 


SEFJATF 
OFFICE OF THE SECRETARY 
1. . ., 
THIRTEENTH CONGRESS OF THE REPUBLIC 
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p6;28 
OF THE PHILIPPINES 
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First Regular Session 
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!: 
REMEWED BY : 
S E N A T E  
S. No. 
2038 
Introduced by Senators S. R. OsmeAa 111 and Ma. Ana Consuelo 
A. S. Madrigal 
AN ACT 
AMENDING SECTION 110 (8) OF THE NATIONAL INTERNAL REVENUE 
CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES 
Be it enacted by the Senate and the House of Representatives of fhe Republic of 
the Philippines in Congress assembled: 
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(A) 
Creditable lnput Tax. - 
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( 1 ) x x x  
SECTION 1. Section 110 (B) of the National Internal Revenue Code of 
1997, as amended, is hereby further amended to read as follows: 
“SEC. 1 I O .  Tax Credits. - 
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x x x  
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(B) 
Excess Output or lnpuf Tax. - 
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(I) If at the end of any taxable quarter the output tax 
exceeds the ALLOWABLE input tax, the excess shall be 
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paid by the VAT-registered person. 
(2) 
THE 
ALLOWABLE 
INPUT 
TAX 
FOR 
ANY 
QUARTER SHALL BE THE LOWER OF: 
(a) 
THE INPUT TAX FOR ANY QUARTER PLUS 
ANY EXCESS INPUT TAX CARRIED FORWARD 
FROM PREVIOUS QUARTERS; OR 


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(b) 
THE AGGREGATE OF: 
(i) 
NINETY PERCENT (90%) OF THE 
OUTPUT TAX ON THE PERSON’S GROSS 
SALES OR RECEIPTS FOR THE QUARTER 
THAT ARE SUBJECT TO TEN PERCENT 
(10%) VALUE-ADDED TAX; AND 
(ii) 
ONE HUNDRED PERCENT (100%) OF 
THE 
PERSON’S 
INPUT 
TAX 
ATTRIBUTABLE TO GROSS SALES OR 
RECEIPTS OF THE PERSON FOR THE 
PERIOD THAT ARE ZERO-RATED OR 
EFFECTIVELY ZERO-RATED, 
(3) 
ANY INPUT TAX IN EXCESS OF THE ALLOWABLE 
INPUT TAX FOR ANY QUARTER [If the input tax exceeds 
the output tax, the excess] shall be carried over to the 
succeeding quarter or quarters.[: Provided, that the input tax 
inclusive of input VAT carried over from the previous quarter 
that may be credited in every quarter shall not exceed 
seventy percent (70%) of the output VAT:] 
(4) 
IF THE ALLOWABLE INPUT TAX EXCEEDS THE 
OUTPUT TAX BECAUSE THE PERSON MAKES ZERO- 
RATED OR EFFECTIVELY ZERO-RATED SALES, THE 
EXCESS 
SHALL 
BE 
CARRIED 
OVER 
TO 
THE 
SUCCEEDING QUARTER OR QUARTERS: Provided, 
[however, that any input tax attributable to zero-rated sales 
by a] THAT THE VAT-registered person may at his option 
HAVE THE EXCESS [be] refunded or credited against other 
internal revenue taxes, subject to the provisions of Section 
112. 


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(C) 
x x x  
x x x. ‘I 
SEC. 2. lmplementing Rules and Regulations. - The Secretary of 
Finance shall, upon the recommendation of the Commissioner of Internal 
Revenue, promulgate the necessary Rules and Regulations for the effective 
implementation of this Act. 
SEC. 3. Repealing Clause. - All provisions of laws, orders, decrees, 
including rules and regulations inconsistent herewith are hereby repealed and/or 
modified accordingly. 
SEC. 4. Separability Clause; - 
If any part or provision of this Act shall 
be held to be unconstitutional or invalid, other provisions hereof which are not 
affected thereby shall continue to be in full force and effect. 
SEC. 5. Effectivity. -This Act shall take effect on July 1, 2005 
Approved,