Demystifying VAT Exemptions in the Philippines: A Quick Guide Based on NIRC and Key Republic Acts

Tags: VAT exemptions Philippines, NIRC 1997, RA 9337, RA 10963, RA 11534, RA 11976, RA 12023, BIR VAT rules

Understanding Value-Added Tax (VAT) exemptions in the Philippines is crucial for individuals, businesses, and tax practitioners.

The complexity arises from the many amendments made over the years to the National Internal Revenue Code (NIRC) of 1997 through various Republic Acts, notably RA 9337, RA 10963 (TRAIN Law), RA 11534 (CREATE Act), RA 11976 (Ease of Paying Taxes Act), and RA 12023 (VAT on Digital Services Act). This blog will guide you through the evolution and current scope of VAT exemptions in light of these key legislations.

I. The Foundation: NIRC of 1997

The NIRC of 1997 is the primary law governing taxation in the Philippines, including VAT. Under Section 109 of the NIRC, various transactions and entities are explicitly exempted from VAT. Some of the main VAT-exempt items include:

Agricultural and marine food products in their original state
Educational services by duly accredited institutions
Sale of real properties not primarily held for sale to customers
Medical and hospital services
Books and other educational materials

Full text: NIRC of 1997

II. RA 9337 (Expanded VAT Law, 2005)

RA 9337 was a landmark law that expanded the VAT base and removed several exemptions. It raised the VAT rate from 10% to 12% and revised Section 109 of the NIRC. Notable changes included:

Removal of exemptions on petroleum products and power generation
Introduction of a threshold for VAT exemption (now indexed at P3 million under later laws)
Inclusion of zero-rated transactions for export-oriented activities

This law marked a shift toward a more broad-based VAT system to increase government revenues.

Full text: RA 9337

III. RA 10963 (TRAIN Law, 2017)

The Tax Reform for Acceleration and Inclusion (TRAIN) Law further refined VAT exemptions. Its major VAT-related provisions included:

Adjustment of VAT threshold from P1.9 million to P3 million
Repeal of some VAT exemptions such as the lease of residential units exceeding P15,000/month
Retained exemptions for senior citizens and persons with disabilities (PWDs)

This law aimed to simplify the VAT system while expanding the tax base.

Full text: RA 10963 (TRAIN Law)

IV. RA 11534 (CREATE Law, 2021)

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act amended certain VAT rules, focusing mainly on export-related and investment-promotion incentives. Key points include:

Refinement of zero-rating on export sales, subject to BIR rules
Clarification that only direct exporters may enjoy VAT zero-rating on purchases
Withdrawal of VAT exemption for indirect exporters unless certified

The CREATE Law also granted VAT exemption to COVID-19-related equipment and medicines.

Full text: RA 11534 (CREATE Law)

V. RA 11976 (Ease of Paying Taxes Act, 2024)

Signed into law in 2024, RA 11976 aimed at streamlining tax compliance and enhancing taxpayer services. For VAT, the major impact includes:

Refinement in VAT refund processing to be faster and more transparent
Digitalization of VAT filings and invoices
Alignment of administrative requirements with global best practices

This act supports the government’s push for digitalization and taxpayer convenience.

Full text: RA 11976

VI. RA 12023 (VAT on Digital Services Act, 2024)

RA 12023 expanded the VAT base to include digital services provided by both resident and non-resident digital service providers (DSPs). Noteworthy provisions include:

Definition and classification of digital services subject to VAT
Mandatory registration of non-resident DSPs earning over P3 million annually
Clarification of exemptions on educational digital services

This law ensures fairness in the digital economy and plugs revenue leakages.

Full text: RA 12023 (VAT on Digital Services Act)

VII. Consolidated List of Common VAT Exemptions (As of 2025)

Here's a simplified list of VAT-exempt transactions based on the most updated laws:

A. Goods:

Agricultural products in their original state
Books and educational materials
Sale of real properties not primarily for commercial use
Prescription drugs for COVID-19, diabetes, high cholesterol, and hypertension

B. Services:

Educational services by accredited institutions
Medical, dental, and hospital services
Transport services (excluding international carriage)
Financial services (e.g., interest income)
Digital educational services (RA 12023)

C. Entities:

Senior Citizens (RA 9994)
Persons with Disabilities (RA 10754)
Barangay Micro Business Enterprises (BMBEs)

VIII. Understanding the ₱3 Million VAT Threshold

A business is required to register as a VAT taxpayer if its gross annual sales exceed ₱3 million. Below this threshold, the taxpayer may opt for the Percentage Tax (Non-VAT) scheme under Section 116 of the NIRC.

Advantages of VAT Registration: Input tax credit, B2B credibility
Disadvantages: Compliance costs, administrative burden

IX. Common Issues and Pitfalls in VAT Exemption

A. Misclassification

Businesses sometimes misclassify VATable goods as exempt, leading to penalties.

B. Documentary Requirements

Lack of supporting documents like invoices, BIR certifications, or export documentation can void exemptions.

C. Frequent Law Updates

The VAT landscape changes frequently. Staying updated is crucial.

D. Non-Resident DSPs

Failure of foreign companies to register or remit VAT on digital services can result in legal consequences and restricted access to the Philippine market.

X. BIR Issuances and Administrative Guidance

The BIR plays a critical role in implementing these laws. Key issuances include:

Revenue Regulations No. 13-2018 (VAT rules under TRAIN)
Revenue Memorandum Circular No. 24-2022 (Guidance on VAT zero-rating under CREATE)
Revenue Regulations No. 16-2024 (Implementing RA 12023)

Visit www.bir.gov.ph for updated issuances.

XI. Conclusion

Understanding VAT exemptions in the Philippines involves tracking multiple laws and updates. The evolution from the NIRC of 1997 to RA 12023 reflects the government’s efforts to balance tax collection with fairness and simplicity. Whether you are a small business owner, a digital service provider, or a tax consultant, staying compliant and informed is essential.

If in doubt, consult a licensed tax professional or CPA, and regularly review BIR updates. VAT may seem daunting, but with the right knowledge, it becomes a powerful tool for sound financial planning and responsible citizenship.

Related Resources:

Stay informed. Stay compliant. Honor God even in your taxes (Romans 13:7 KJV).