How can I “lower” my taxes? – This is one of the questions I get a lot when discussing with Business Owners, Directors and CEOs. This question is valid because as business owners, we do not just strive to increase our revenues and bottom line, but we also find ways to save on costs and expenses. So, if you are interested to know how you can “lower” your taxes (or how you cannot), then read through this article.
There are many types of taxes here in the Philippines. We have Income tax, Value-added tax (VAT), Percentage Tax, Estate Tax, Donor’s Tax, etc. Today, let me focus on business taxes, particularly in VAT. You see, VAT is an indirect tax wherein it is something you add up into your selling price and pass it on to your customers. If you are selling a product or service at Php 1 million, then you will bill your customer at P1,120,000 (Php1 million + 12% VAT). The 12% Output VAT is not yours; it is what you need to remit to the government less the Input VAT from your purchases of goods and services from VAT-registered suppliers.
“Mr Singh, if I can deduct the Input VAT (coming from my purchases) to my Output VAT, then I should buy more from VAT-registered suppliers so that the Net VAT due to be remitted to the government will be lower, right?”
You may, and there is nothing wrong with that. But let me ask you this question, imagine that you have two suppliers, both suppliers have the same product/service quality, same payment terms, same delivery time, practically identical in everything. But one supplier sells at Php1 million (a non-vat registered supplier), and the other supplier sells at Php1,120,000 (Php1.0 million + 12% VAT), which supplier will you choose? Will you choose to pay P1 million or P1,120,000? I thought so too.
You see, VAT is an indirect tax that you add on top of your selling price. A pricing issue arises when instead of adding the VAT on top of the selling price, some, knowingly or unknowingly, include VAT in their selling price. In effect, their profit margin decreases since they need to take out the 12% VAT from their selling price. (If you are selling at Php1 million then you need to take out the VAT amounting to Php107k, so your selling price decreased to Php892k instead of Php1 million).
“But Mr Singh, if I add another 12% on my selling price, then I will lose some of my customers since they will pay 12% more”.
First, as a VAT registered entity, you are mandated to remit the 12% VAT to the government. Either you add it on top of your selling price, or let your margin suffer when you shoulder the 12% VAT (by extracting it from your selling price).
Second, if you are afraid that you will lose some of your customers by charging them what is right, then this is not a pricing issue, this is a Marketing issue. It means that you don’t have enough customers. You are not generating enough leads and converting these leads into customers. Imagine if you have 100 or 1,000 inquiries from people or businesses who want to avail of your product or service, will you worry if you lose some customers who do not wish to pay the correct/reasonable price? [Let’s say you are an employee who receives job offers from 3 or 5 companies who want to pay you at the right market rate or even twice your current salary, will you worry if you lose your current job?]
Another reason is that you are probably not articulating enough the value of your product or service in your marketing campaigns; that is why the market buys from you only because of your price. You see, after being in the consulting industry for a decade and managing my other businesses, I learned that the market is not price-conscious, they are value-conscious. (I know that pricing is a different topic. If you want me to create a guide on how you can charge a premium price for your product or service or how you can ask for a salary increase that your boss will even thank you that you did, then comment “Yes to Premium Prices” so I can gauge if you are interested in this topic).
So, how can you “lower” your VAT due? My answer is you don’t have to. You remit what is due to the government; you make money because of your pricing structure – everyone wins.
If you have questions, feel free to get in touch with us at www.cgsinghcpas.com or by filling up the contact form below. We are receiving a lot of inquiries during this compliance season, so I cannot promise that my team will get back to you within our standard of one business day.
WARNING: I understand that what we share will not resonate to everyone since most of what we share about accounting, tax, investments, business, career, and life goes against the conventional wisdom and most of the time do not conform to the status quo. But if you are a leader, an action taker who make things happen, who values change and who have a high standard about your life, career, or business, then follow us on FB and IG – you’ll love what you’ll see:
Until next time. I’ll see you at the top.
PS: In case you missed the article I shared a few weeks ago about the 5 Costly Mistakes During Year-end Tax Compliance, then you can check it out here:Read Now