Transitional and Presumptive Input VAT: The 2% and 4% Credits Under NIRC Section 111

NIRC Section 111 provides two special input VAT credits that do not come from an ordinary VAT invoice: a transitional input tax of 2% of beginning inventory for a business newly entering the VAT system, and a presumptive input tax of 4% of primary agricultural purchases for a short list of food and sugar processors. Both are creditable against output VAT, and both are easy to miss because they are not tied to a supplier’s VAT receipt.

Transitional input tax: 2% of beginning inventory #

When a business becomes liable to VAT or elects to register, NIRC Section 111(A) grants it a transitional input tax equal to 2% of its beginning inventory of goods, or the actual VAT paid on that inventory, whichever is higher. The provision reads:

“A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to two percent (2%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.”

— NIRC of 1997, Section 111(A)

The purpose is fairness: a business crossing into the VAT system already holds inventory bought before it could claim input VAT, so Section 111(A) lets it recover a presumed 2% rather than losing that embedded cost. To claim it, the taxpayer files an inventory of goods on hand as of the date it becomes VAT-registered.

Presumptive input tax: 4% for specific processors #

NIRC Section 111(B) allows a presumptive input tax of 4% of the gross value of primary agricultural purchases, but only for processors of sardines, mackerel, and milk, and manufacturers of refined sugar, cooking oil, and packed noodle-based instant meals. The provision grants these firms:

“…a presumptive input tax, creditable against the output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.”

— NIRC of 1997, Section 111(B)

Because raw agricultural inputs (fresh fish, raw milk, sugarcane) are often VAT-exempt, the processor pays no input VAT to trace — so the law presumes a 4% input to avoid taxing the full value added twice. The list of covered products is exclusive; a food processor outside these categories cannot claim it.

How the two credits differ #

The transitional input tax is a one-time credit tied to inventory when a business enters VAT; the presumptive input tax is a recurring credit tied to specific agricultural purchases by named industries. They rest on the same idea — allowing an input credit where no ordinary VAT invoice exists — but apply in different situations.

For how input tax offsets output tax generally, see Input VAT vs Output VAT in the Philippines, and for the records each input credit needs, Input VAT Substantiation Requirements.

Worked examples #

A new VAT registrant with ₱2,000,000 of beginning inventory claims a ₱40,000 transitional input tax; a sardine processor buying ₱1,000,000 of fresh fish claims a ₱40,000 presumptive input tax.

The retailer credits its ₱40,000 once, on its first VAT return after registration; the processor credits 4% on every batch of qualifying fish it buys, quarter after quarter. A business deciding whether to enter the VAT system voluntarily should factor the transitional credit into the decision — see VAT Registration Threshold in the Philippines.

Frequently asked questions #

What is the transitional input tax? #

The transitional input tax is a VAT credit given to a person who becomes liable to VAT or who newly registers as a VAT taxpayer. Under NIRC Section 111(A), it equals 2% of the value of the beginning inventory of goods, materials, and supplies, or the actual VAT paid on those items, whichever is higher, creditable against output tax.

Who can claim the presumptive input tax? #

Under NIRC Section 111(B), only persons or firms engaged in processing sardines, mackerel, and milk, and in manufacturing refined sugar, cooking oil, and packed noodle-based instant meals. They may claim 4% of the gross value in money of their purchases of primary agricultural products used as inputs to production.

How is the transitional input tax computed? #

Take the value of the beginning inventory of goods on hand when the business becomes VAT-registered, and multiply by 2%. Compare that to the actual VAT actually paid on those goods; the transitional input tax is the higher of the two, credited against output VAT on the first VAT return.

Is the presumptive input tax based on actual VAT paid? #

No. The presumptive input tax is a fixed 4% of the gross value of qualifying primary agricultural purchases, granted whether or not VAT was actually paid on them — many primary agricultural products are VAT-exempt, so the credit presumes an input rather than tracing an actual VAT invoice.

Can a service business claim either credit? #

A pure service business generally cannot claim the transitional input tax, which applies to inventory of goods, and cannot claim the presumptive input tax, which is limited to the specific food and sugar processors named in Section 111(B). Both credits are inventory- and industry-specific.

Summary #

Section 111 exists so that businesses are not overtaxed at two seams of the VAT system: the moment a company enters VAT still holding pre-registration inventory, and the point where a processor buys VAT-exempt raw agriculture. The transitional 2% credit answers the first, the presumptive 4% credit the second, and both are creditable against output VAT even without an ordinary VAT invoice. File the inventory list for the transitional credit, confine the presumptive credit to the products Section 111(B) names, and confirm current rules on the BIR website before claiming either.