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Topic: Exempt vs Zero-rated

Contex Corporation v. CIR

Facts:
1. Contex is a domestic corporation engaged in the business of manufacturing hospital textiles
and garments and other hospital supplies. It conducts its business at the Subic Bay Freeport
Zone and duly registered with the Subic Bay Metropolitan Authority as a Subic Bay Freeport
Enterprise.
a. As such, it is exempt from ALL local and national internal revenue taxes except for
preferential tax. It is also registered with the BIR as a non-vat taxpayer.
b. Petitioner purchased various supplies from suppliers who shifted the VAT to the
petitioner. It had to pay VAT for 1997 and 1998
2. This prompted Contex to file applications for tax refund or tax credit for the paid VAT. This
was denied by the BIR RDO. Another application was filed but this was not acted upon by
the BIR
3. CTA: Granted. Issue a Tax credit certificate
4. CA: Reversed. Exemption from duties and taxes covers only those imposed by the Tax Code.
It does not include VAT of seller-exporter passed to the importer.

Issue: Whether an exempt entity may claim a refund for erroneously passed VAT from its suppliers

Held: No, they cannot.

Ratio:
1. Vat is an indirect tax. In indirect taxation, the tax burden is the one transferred and NOT the
tax liability. In adding or including the VAT due to the selling price, the seller remains the
person primarily and legally liable for the payment of the tax. What is shifted only to the
intermediate buyer and ultimately to the final purchaser is the burden of the tax.
2. VAT exemptions are those provided expressly by the NIRC or special laws. A transaction has
the following preferential treatments under VAT:
a. Exemption: means that the sale of good or properties or services and the use of the
said properties are not subject to VAT (output tax) and the seller is not allowed
any tax credit on VAT (input tax) previously paid. Vat is removed at the exempt
stage or at the point of sale.
b. Zero-Rated: means that the sales of VAT-registered persons are subject to 0%. Tax
burden is not passed on the purchaser and would not result in an output tax.
However, there still exists an input tax on the purchase of goods and hence the
purchaser may claim a refund or credit.
3. Under Zero-rating, all VAT is removed from the zero- rated goods, activity or firm. In
contrast, exemption only removes the VAT at the exempt stage, and it will actually increase,
rather than reduce the total taxes paid by the exempt firm’s business or nonretail customers.
4. The petitioner is Exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax
credit on VAT (input tax) previously paid.
a. It it the petitioner’s suppliers who are proper parties to claim the tax credit and then
refund the same to the petitioner for erroneously passing such tax to the petitioner.