Percentage Tax on Gross Sales and Receipts
Updated October 16, 2026
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A 3% tax on gross quarterly sales paid by persons who are not VAT-registered and whose gross annual sales do not exceed ₱3 million, filed on BIR Form 2551Q.
Overview of Percentage Tax
Percentage tax under NIRC §116 is a 3% tax on the gross quarterly sales of persons who are not VAT-registered and whose sales are exempt from VAT under Section 109(CC) because their gross annual sales do not exceed ₱3,000,000. It applies instead of 12% VAT. Other percentage taxes in Sections 117 to 127 of the Tax Code cover specific businesses such as carriers, franchise grantees, banks and amusement places at their own rates.
Who Pays Percentage Tax
Section 116 applies to non-VAT-registered persons whose gross sales for the past 12 months do not exceed ₱3,000,000. Sole proprietors, professionals, partnerships and corporations in trade, manufacturing and services can all fall under it. Cooperatives are exempt, and self-employed individuals and professionals who elect the 8% income tax rate pay that rate in lieu of the percentage tax. A person whose gross sales for the past 12 months exceed ₱3,000,000, or are expected to exceed it in the next 12 months, must register for VAT (NIRC §236(F)).
Tax Rate and Computation
The rate is 3% of gross quarterly sales. It was cut to 1% from July 1, 2020 to June 30, 2023 by the CREATE Law and returned to 3% on July 1, 2023. The tax is reported on BIR Form 2551Q, the quarterly percentage tax return.
Example: A retail business with gross quarterly sales of ₱500,000 owes percentage tax of ₱15,000 (₱500,000 × 3%), due within 25 days after the end of the quarter.
Key Differences from VAT
VAT-registered sellers charge 12% VAT and credit the input VAT on their purchases against it. Percentage tax has no credit mechanism: the seller pays 3% of gross sales and cannot claim input VAT on purchases. This makes percentage tax simpler for small businesses, though the VAT paid on purchases becomes part of their costs (NIRC §110, §116).
Filing and Payment Obligations
Form 2551Q is filed and the tax paid within 25 days after the end of each quarter: April 25, July 25, October 25 and January 25 (NIRC §128). Late filing or payment adds a 25% surcharge and interest of 12% a year (NIRC §248, §249). Micro and small taxpayers, which includes most percentage tax payers, pay a reduced 10% surcharge and 6% interest (RA 11976 §45).
Businesses must keep accurate records of gross sales to support their quarterly returns. The BIR may audit to verify compliance, particularly if reported sales look inconsistent with business activity.
Transition to VAT
A business whose gross sales for the past 12 months exceed ₱3,000,000 must register for VAT. If it does not, it pays VAT as if it were VAT-registered but without input tax credits for the period (NIRC §236(F)). A business may also register for VAT voluntarily, but then cannot cancel that registration for three years (NIRC §236(G)).
Exempt Transactions
Many transactions listed in Section 109, such as sales of agricultural food products in their original state and educational services of accredited schools, are exempt from VAT on their own terms. Percentage tax under Section 116 applies only to sales exempt from VAT because they fall under the ₱3,000,000 threshold in Section 109(CC).
Gross sales, gross receipts and percentage taxes
Gross sales are not your profit: do not subtract operating expenses before applying the Section 116 percentage-tax rate. Under RR 3-2024, goods and services use gross sales for this tax. Older references to cash receipts can therefore be misleading.
The phrase “gross receipts tax” also refers to taxes on banks and other financial intermediaries. Those have their own rules; do not apply a small business's 3% calculation to every financial institution. See the BIR percentage-tax guidance for the relevant business category.
For a Section 116 computation, use the percentage-tax calculator. For eligible individuals considering the 8% election, compare 8% and graduated income tax before choosing a regime.
Why it matters
Percentage tax is the business tax most small sellers in the Philippines pay when their sales are ₱3 million or less a year and they are not VAT-registered. Understanding whether it applies, how to compute the 3% tax, and when to move to VAT is essential for compliance and for avoiding surcharges and interest.
How it works
Determine Eligibility
Check that you are not VAT-registered, that your gross sales for the past 12 months did not exceed ₱3 million, and that you did not elect the 8% income tax rate. If all three apply, you pay the 3% percentage tax instead of VAT.
Compute Quarterly Tax
Compute 3% of your gross sales for the quarter. Expenses are not deducted.
File and Pay Quarterly
File BIR Form 2551Q and pay the tax within 25 days after the end of each quarter: April 25, July 25, October 25 and January 25 (NIRC §128). Paying on time avoids surcharges and interest.
Monitor Sales Growth
Track your gross sales over the last 12 months. Once they exceed ₱3 million, you must register for VAT and move out of the percentage tax regime (NIRC §236(F)).
Examples
Retail store with ₱2.5 million annual sales
Maria Santos operates a small retail clothing store with annual gross sales of ₱2,500,000 and is not VAT-registered. In Q1 her gross sales are ₱600,000, so her percentage tax is ₱18,000 (₱600,000 × 3%), due by April 25.
Service business exceeding the threshold
Juan dela Cruz runs a plumbing service whose gross sales for the past 12 months reached ₱3,200,000. Having exceeded the ₱3 million threshold, he must register for VAT. He then charges 12% VAT to customers and credits the input VAT on his business purchases (NIRC §236(F)).
Canteen operator below the threshold
Rosa runs a canteen as a concessionaire inside a private school, with annual gross sales of ₱900,000, and is not VAT-registered. Her Q3 gross sales are ₱150,000, so she pays percentage tax of ₱4,500 (₱150,000 × 3%) by October 25. The school's own tuition is VAT-exempt under a separate provision of Section 109.
Manufacturing business with ₱2.8 million sales
Anna Reyes manufactures handmade furniture with annual gross sales of ₱2,800,000 and is not VAT-registered. Q2 gross sales are ₱700,000, so her percentage tax is ₱21,000 (₱700,000 × 3%), due by July 25. She cannot claim input VAT on materials purchased.
Sole proprietor transitioning to VAT
A freelance consultant earned ₱2,900,000 in Year 1 under percentage tax. In Year 2, a new contract makes it reasonable to expect sales of ₱3,500,000 over the next 12 months. The consultant must register for VAT, since registration is required once there are reasonable grounds to believe sales for the next 12 months will exceed ₱3 million (NIRC §236(F)).
Common misconceptions
- Myth: Percentage tax businesses can claim input VAT on their purchases.
- Fact: No. Percentage tax is a gross-receipts tax with no input tax credits. Businesses bear the full 3% cost and cannot recover VAT paid on purchases (NIRC §116).
- Myth: Once you register for VAT, you can switch back to percentage tax if sales drop below ₱3 million.
- Fact: Not automatically. A VAT-registered person may cancel its VAT registration if it shows the BIR that its gross sales for the next 12 months will not exceed ₱3 million, or if it stops doing business. A person who registered voluntarily must wait three years before cancelling (NIRC §236).
- Myth: Percentage tax is only for retail businesses.
- Fact: False. Section 116 applies to any business, whether trading, manufacturing or services, that is not VAT-registered and has gross annual sales of ₱3 million or less (NIRC §116).
- Myth: You can deduct business expenses from gross sales before calculating percentage tax.
- Fact: No. Percentage tax is computed on gross sales or receipts with no deductions. Net income or expenses are irrelevant to the 3% calculation (NIRC §116).
- Myth: Percentage tax is the same as the 3% VAT rate.
- Fact: No. Percentage tax is a single-stage tax on gross receipts with no credit mechanism. VAT is a multi-stage tax with input credits. They are different systems (NIRC §116 vs. §110).
Questions people ask
What is the percentage tax rate in the Philippines?
The rate is 3% of gross quarterly sales (NIRC §116). It applies to persons who are not VAT-registered and whose gross annual sales do not exceed ₱3 million. The tax is reported quarterly on BIR Form 2551Q within 25 days after each quarter ends.
How do I know if I qualify for percentage tax?
You pay percentage tax if you are not VAT-registered, your gross sales for the past 12 months did not exceed ₱3,000,000, and you did not elect the 8% income tax rate (NIRC §116, §24(A)(2)(b)). Cooperatives are exempt. If your sales exceed ₱3 million, you must register for VAT.
Can I claim input VAT if I am under percentage tax?
No. Percentage tax businesses cannot claim input VAT on purchases. Percentage tax is a tax on gross quarterly sales with no credit mechanism, unlike VAT (NIRC §116). This is a key disadvantage if your business incurs significant material or service costs.
What happens if I exceed ₱3 million in annual sales?
You must register for VAT (NIRC §236(F)). You then charge 12% VAT to customers and credit input VAT on business purchases. If you fail to register, you pay VAT as if you were VAT-registered but without the benefit of input tax credits for the period.
When are percentage tax returns due?
Percentage tax returns are due quarterly within 25 days after the end of each quarter: April 25, July 25, October 25 and January 25 (NIRC §128). Late filing adds a 25% surcharge and 12% interest a year, or 10% and 6% for micro and small taxpayers (NIRC §248, §249; RA 11976 §45).
Can I voluntarily register for VAT instead of using percentage tax?
Yes. You may register for VAT voluntarily even if you qualify for percentage tax, for example if you have large input VAT to recover. A voluntary registrant cannot cancel its VAT registration for the next three years (NIRC §236(G)).
Are there penalties for late payment of percentage tax?
Yes. Late payment adds a 25% surcharge on the unpaid tax plus interest of 12% a year (NIRC §248, §249). Micro and small taxpayers pay a reduced 10% surcharge and 6% interest (RA 11976 §45).
Do I need to keep records to support my percentage tax returns?
Yes. Keep records of gross sales, sales invoices and other business documents to support your quarterly returns. Books and records are kept for five years from the filing deadline of the return (NIRC §235, as amended by RA 11976).
In practice
- Small sari-sari stores, neighborhood retail shops, and family-run businesses with sales below ₱3 million commonly use percentage tax to simplify compliance and reduce administrative burden.
- Businesses must monitor their sales over the past 12 months; exceeding ₱3 million requires VAT registration, and an unregistered business pays VAT without input tax credits for the period (NIRC §236(F)).
- Percentage tax returns are filed quarterly within 25 days after the quarter; a late return costs a 25% surcharge and 12% interest a year, or 10% and 6% for micro and small taxpayers.
- Sole proprietors and partnerships below the threshold often stay non-VAT because percentage tax avoids input and output VAT reconciliation.
- The BIR cross-checks percentage tax returns against business licenses, bank deposits, and supplier records to detect underreporting of gross sales.
Next steps
Related content
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Sources & References (2)
Primary sources and the laws, regulations, and official issuances this page relies on. Links open the recorded source documents or references.
- LawPhil Project (Arellano Law Foundation). “NIRC §116 as amended by RA 11534 (CREATE): 3% rate reverted 1 Jul 2023 (was 1% Jul 2020-Jun 2023).” lawphil.net. Republic Act No. 11534 (CREATE), amending NIRC Sec. 116. Source checked .
- Bureau of Internal Revenue. “BIR RR 4-2021: percentage tax rate transition (1% then 3%).” bir.gov.ph. Bureau of Internal Revenue, RR 4-2021. Source checked .