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E-Vat practical implications for right now

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This article was originally written in February 2006

Changing the VAT rate does not change the Selling Price Today, February 1, the VAT is officially 12%. What does this mean? This means that VAT-subject buyers and sellers now have to factor in 12% instead of 10% for their Input/Output VAT.

The following is important to appreciate and understand.  Changing the VAT rate DOES NOT INCREASE (or DECREASE) the selling price of an item.  It simply means that the the government’s share of every peso of your sales and purchases (the built-in VAT) is now higher. In our current situation where the VAT has been raised from 10% to 12%, here's the math:

A businessman sells a handbag for P100. Under the old 10% rate, the VAT on the sale is P9.09, and the base amount for the sale (on which the 10% VAT is computed) is P90.91. Under the new 12% VAT rate, the VAT on the sale would be P10.71, and the base amount for the sale (on which the 12% VAT is computed) is P89.29. In both cases, the handbag is sold at P100.

Naturally, this change reduces the businessman's profit margin. If he wishes to preserve his margin, the businessman can increase his price if he thinks the market  can bear it (and again, the VAT eats up a bit more into this increased selling price).

Therefore, increasing the VAT rate (imposed on us today by law) is a different thing from increasing the selling price (the businessman's decision entirely).

Users of certain Balmori Software solutions have to edit their Stock Reference Files

As far as our SURE! DMS, SURE! ISARAP, SURE! ARAP and SURE! POS clients (who are subject to VAT) are concerned, today's kicking in of the new VAT rate means that they have to change the individual VAT rates of each of their stocks in the stock reference file, from 10% to 12%. The latest versions of the DMS, ISARAP, ARAP and POS have a utility that will automatically change in one go, all the items with a particular VAT rate (let's say 10%), to another VAT rate (let's say 12%). If he has  a recent-enough version of the software, the user need not edit each item's reference file individually. Once the user has specified the new VAT rate, the utility goes through the entire stocks reference file, and once it sees a stock with the defined VAT rate (10% in our example), it changes the VAT rate to the new rate (12% in our example). The utility will do this entirely automatically for all items with the defined VAT rate.

If a particular item or group of items for some reason happens to be assigned a different VAT rate (say  5%  or even  0%), the aforementioned utility will not affect this different rate. If the user wishes to change this other rate as well, he simply does another iteration of the same simple process. Thus, it doesn't matter if the businessman has 20,000 or 150,000 or 3 million stock keeping units (SKUs). What matters is how many different product categories he has that are subject to different VAT rates. He only has to run the process once for every VAT rate that he wants to change.

Questions? Reactions? Write to balmori@balmorisoftware.com.

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