VAT-Exempt Transactions Under NIRC
Updated June 13, 2026
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Definition
VAT-exempt transactions are sales, importations or services that Section 109 of the National Internal Revenue Code exempts from Value-Added Tax (VAT), meaning no 12% VAT is charged to customers and input VAT on purchases attributable to those sales cannot be credited by the seller.
VAT-exempt transactions are very different from zero-rated transactions. Zero-rated sales are taxable at 0%, so the seller can credit or recover input VAT; exempt sales carry no output VAT and give no input VAT credit. Section 109 of the NIRC lists the transactions that qualify, including agricultural and marine food products in their original state, educational services of accredited schools, hospital and medical services (other than those of professionals), services subject to percentage tax, books, residential rentals of up to ₱15,000 a month, and sales of sellers whose gross annual sales do not exceed ₱3,000,000. The exemption lowers the price of the listed goods and services for consumers. However, sellers cannot credit the VAT paid on their purchases for exempt sales, so that VAT becomes part of their cost. Revenue Regulations No. 16-2005 (the Consolidated VAT Regulations, as amended) provides the detailed rules on VAT exemptions.
Detailed explanation
Overview
VAT-exempt transactions are sales, importations and services that the National Internal Revenue Code (NIRC) places outside the 12% Value-Added Tax (VAT). When a transaction is VAT-exempt, the seller does not charge VAT to the buyer and cannot credit the input VAT paid on purchases attributable to that sale (NIRC §109, §110(A)(3); RR 16-2005).
Legal Basis
Section 109 of the NIRC, as amended by the TRAIN Law (RA 10963), CREATE (RA 11534) and the Ease of Paying Taxes Act (RA 11976), lists the transactions exempt from VAT. Exemptions are strictly construed, so only transactions that fall within the list qualify.
Categories of VAT-Exempt Transactions
Agricultural and Marine Food Products
Sales and importations of agricultural and marine food products in their original state, livestock and poultry are VAT-exempt. Products remain in their original state even after simple preparation or preservation such as freezing, drying, salting, broiling, roasting or smoking, and polished or husked rice, corn grits, raw cane sugar, molasses and ordinary salt are treated as in their original state. Further processed products, such as canned fish, are subject to VAT (NIRC §109(1)(A)).
Educational Services
Educational services rendered by private educational institutions duly accredited by DepEd, CHED or TESDA, and by government educational institutions, are VAT-exempt (NIRC §109(1)(H)). The exemption covers the educational services, not every sale a school makes.
Medical and Health Services
Medical, dental, hospital and veterinary services are VAT-exempt, except those rendered by professionals (NIRC §109(1)(G)). A doctor's professional fees are therefore not covered by this exemption. Medicines used in hospital treatment form part of the exempt hospital service, while sales by a hospital pharmacy are generally subject to VAT unless a specific exemption applies.
Financial Services
Services subject to percentage tax under Title V are VAT-exempt (NIRC §109(1)(E)). Banks and non-bank financial intermediaries pay gross receipts tax (NIRC §121), and life insurance companies pay premium tax (NIRC §123), instead of VAT. Non-life insurance companies, by contrast, are subject to VAT on their premiums.
Real Property Transactions
The sale of real property not primarily held for sale to customers or for lease in the ordinary course of business is VAT-exempt, as are sales of real property for socialized housing and, since 2021, sales of houses and lots and other residential dwellings priced at not more than ₱2,000,000, an amount adjusted every three years for inflation (NIRC §109(1)(P)). The lease of a residential unit with monthly rent of not more than ₱15,000 is also exempt (NIRC §109(1)(Q)); other leases by VAT-registered lessors are subject to 12% VAT.
Transportation
Transport of passengers by international carriers is VAT-exempt (NIRC §109(1)(S)), and domestic land transport of passengers is subject to the common carrier's percentage tax instead of VAT (NIRC §109(1)(E), §117). Domestic air and sea transport of passengers and cargo is subject to VAT.
Books and Small Sellers
The sale, importation, printing or publication of books and of newspapers, magazines and similar periodicals not devoted principally to paid advertisements is VAT-exempt (NIRC §109(1)(R)). Sales by persons whose gross annual sales do not exceed ₱3,000,000 are also exempt (NIRC §109(1)(CC)); these sellers pay the 3% percentage tax under §116 unless they elect the 8% income tax rate. Restaurants and caterers are not exempt as such; they become VAT-exempt only through this threshold.
Input VAT Treatment
A key consequence of VAT exemption is that the seller cannot credit input VAT paid on purchases attributable to the exempt transaction. For example, if a hospital buys medical equipment for its exempt services, it cannot credit the VAT paid on that equipment. The VAT becomes part of the exempt entity's cost (NIRC §110(A)(3)).
Mixed Transactions
When a business has both VATable and VAT-exempt sales (e.g., a school that also leases commercial space), input VAT directly attributable to taxable sales is creditable, input VAT attributable to exempt sales is not, and input VAT that cannot be directly attributed is allocated in proportion to the volume of sales (NIRC §110(A)(3)).
Documentation and Compliance
VAT-registered sellers must still issue invoices for exempt sales, with the words "VAT-exempt sale" written or printed on them, and invoices covering taxable and exempt items must show the breakdown (NIRC §113(B), as amended by RA 11976). The BIR requires proper documentation to support the exempt status of transactions during audits.
Why it matters
VAT-exempt transactions directly affect your tax liability and cash flow. If you run a VAT-exempt activity (an accredited school, a hospital, a farm selling produce in its original state), you cannot credit the input VAT on your purchases, which raises your costs. Knowing which transactions qualify helps you plan pricing, manage costs, and avoid assessments for wrongly charging or not charging VAT. Misclassifying a transaction can trigger BIR assessments and surcharges.
How it works
Identify the Transaction Type
Determine whether your sale falls within one of the categories in NIRC §109, such as agricultural and marine food products in their original state, educational services of accredited schools, hospital services, services subject to percentage tax, books, residential rentals of up to ₱15,000 a month, or sales within the ₱3,000,000 threshold. Exemptions are strictly construed, so only the listed transactions qualify.
Do Not Charge VAT to the Customer
If you are VAT-registered, issue an invoice with the words "VAT-exempt sale" written or printed on it (NIRC §113(B), as amended by RA 11976). Do not add 12% VAT to the customer's bill. The customer pays only the price of the good or service.
Cannot Claim Input VAT
Input VAT on purchases attributable to exempt sales cannot be credited against output VAT. If you have both exempt and taxable sales, input VAT that cannot be traced to either is allocated in proportion to the volume of sales, and only the share for taxable sales is creditable (NIRC §110(A)(3)).
Report on VAT Return
VAT-registered persons report exempt sales separately from taxable sales on the Quarterly VAT Return (BIR Form 2550Q), filed within 25 days after the close of each quarter (NIRC §114). Keep supporting documentation (invoices, accreditation or registration certificates) to substantiate the exempt status during BIR audits.
Examples
School Charging Tuition Fees
A private high school accredited by DepEd charges ₱150,000 annual tuition per student. No VAT is added; the student pays exactly ₱150,000. The school cannot credit the VAT paid on classroom supplies or building maintenance. Educational services of accredited private schools are VAT-exempt under NIRC §109(1)(H).
Hospital Providing Surgery
A private hospital bills ₱250,000 for a surgical procedure. The hospital's services are VAT-exempt, so the patient pays no VAT on the hospital charges; the surgeon's professional fee is not covered by this exemption. VAT paid by the hospital on surgical instruments and supplies cannot be credited as input VAT (NIRC §109(1)(G)).
Farmer Selling Rice
Juan dela Cruz, a rice farmer, sells 100 sacks of palay to a cooperative for ₱50,000. No VAT is charged, since agricultural food products in their original state are exempt. Polished or husked rice is also treated as being in its original state, so selling milled rice is exempt too, as is the service of milling palay into rice for others (NIRC §109(1)(A), (F)).
Bank Charging Interest
A bank lends ₱500,000 to Maria Santos at 8% annual interest. The ₱40,000 annual interest bears no VAT, because bank services are subject to percentage tax instead (NIRC §109(1)(E)). The bank pays gross receipts tax, for example 5% (₱2,000) on interest from loans with remaining maturities of five years or less (NIRC §121), and cannot credit input VAT on office supplies.
School Leasing Out Commercial Space
A VAT-registered school also leases space to a bank branch. Tuition is VAT-exempt, while the lease is subject to 12% VAT. Input VAT on purchases used only for the lease is creditable, input VAT used only for teaching is not, and input VAT on shared costs is allocated in proportion to the volume of sales (NIRC §110(A)(3)).
Common misconceptions
- Myth: VAT-exempt means the seller pays no tax at all.
- Fact: VAT-exempt means no 12% VAT is charged to customers, but the seller still pays income tax on profits, and some exempt sellers pay percentage tax instead, such as the 3% tax on non-VAT sellers or the gross receipts tax on banks. The seller also cannot credit input VAT, which increases costs (NIRC §109, §110, §116, §121).
- Myth: Any non-profit organization automatically qualifies for VAT exemption.
- Fact: Exemption depends on the transaction listed in NIRC §109, not on the type of organization. A non-profit selling merchandise or taxable services above the VAT threshold must charge VAT.
- Myth: If I buy from a VAT-exempt seller, I pay no VAT.
- Fact: Correct. The VAT-exempt seller does not charge VAT. However, if you are a VAT-registered buyer, you cannot claim input VAT on that purchase because no VAT was charged (NIRC §110).
- Myth: A VAT-exempt business can claim input VAT on all purchases.
- Fact: Input VAT attributable to exempt sales cannot be credited. A business with both exempt and taxable sales can credit only the input VAT attributable to its taxable sales (NIRC §110(A)(3)).
- Myth: Once a transaction is VAT-exempt, it remains exempt forever.
- Fact: Exemption status depends on the nature of the transaction and on the law in force. Laws change the list: for example, the exemption for the sale of houses and lots was limited from 2021 to residential dwellings priced at not more than ₱2,000,000, an amount the law adjusts every three years for inflation (NIRC §109(1)(P)).
Questions people ask
Can a VAT-exempt seller issue a VAT invoice?
A VAT-registered seller must write or print "VAT-exempt sale" on the invoice for an exempt sale, and must not show 12% VAT (NIRC §113(B), as amended by RA 11976). Invoices covering both taxable and exempt items must show the breakdown between them.
If I buy from a VAT-exempt seller, can I claim input VAT?
No. Since the VAT-exempt seller did not charge VAT, there is no VAT on the invoice to claim. As a buyer, you pay the price only, and if you are VAT-registered you have no input VAT on this purchase (NIRC §110).
Can a VAT-exempt business become VAT-registered?
Yes. A person whose VATable sales exceed ₱3,000,000 a year must register for VAT, and one below the threshold may register voluntarily (NIRC §236). Once registered, it charges VAT on its taxable sales and can credit the input VAT related to those sales.
What happens if I incorrectly charge VAT on an exempt transaction?
A VAT-registered seller who issues an invoice without the "VAT-exempt sale" label risks having the sale treated as taxable. A person who is not VAT-registered but issues an invoice showing VAT becomes liable for the VAT shown, without input tax credit, plus a 50% surcharge (NIRC §113(D), §248(B)). If VAT was charged by mistake, correct the invoice and return the VAT to the customer.
Are medicines sold by a VAT-exempt hospital subject to VAT?
No. Hospital services, including the medicines and supplies used in treating patients, are VAT-exempt (NIRC §109(1)(G)). However, if a hospital operates a pharmacy or drugstore, its sales of medicines are generally subject to VAT unless a specific exemption applies, such as the exemptions for certain prescription drugs for diabetes, high cholesterol, hypertension, cancer, mental illness, tuberculosis and kidney diseases (RR 16-2005, as amended).
Can a VAT-exempt school claim input VAT on building construction?
No. Input VAT on building construction, renovation, or maintenance used for exempt educational services cannot be credited against output VAT (NIRC §110(A)(3)). The school absorbs this VAT as part of its cost, which is a disadvantage compared with VAT-registered businesses.
How do I report VAT-exempt sales on my BIR return?
VAT-registered persons report VAT-exempt sales separately from taxable and zero-rated sales on the Quarterly VAT Return (BIR Form 2550Q), filed within 25 days after the close of each quarter (NIRC §114). Keep supporting documentation (invoices, registration or accreditation certificates, proof of exempt status) to substantiate the exemption during BIR audits.
If my business has both VAT-exempt and taxable sales, how do I handle input VAT?
You must allocate input VAT between exempt and taxable activities. Input VAT directly attributable to taxable sales can be credited; input VAT attributable to exempt sales cannot. Input VAT that cannot be directly attributed is allocated in proportion to the volume of taxable and exempt sales (NIRC §110(A)(3)).
In practice
- Accredited schools and universities issue invoices marked "VAT-exempt sale" for tuition when VAT-registered; they absorb VAT on classroom materials and building maintenance, reducing their operating margins.
- Hospitals and clinics cannot recover VAT paid on medical equipment and medicines, making healthcare delivery more expensive; this cost is often passed indirectly to patients through higher service fees.
- Agricultural and marine food products stay exempt even after simple processes such as freezing, drying, salting or husking and polishing rice; products that are further processed, such as canned fish, are subject to VAT, and the seller must register once its sales exceed ₱3,000,000.
- Banks and life insurance companies do not charge VAT on interest and premiums because they pay percentage taxes instead, and they cannot credit input VAT on office operations; non-life insurance premiums, by contrast, are subject to VAT.
- Mixed-activity businesses (e.g., a school with a commercial bookstore) must carefully apportion input VAT; failure to do so triggers BIR assessments and 25% surcharge plus 12% annual interest (NIRC §248).
Next steps
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Sources & References (1)
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 §109 as amended by RA 10963 / RA 11976: VAT-exempt transactions.” lawphil.net. NIRC of 1997 (RA 8424), Sec. 109, as amended. Source checked .