Question & AnswerQ&A (BIR REVENUE MEMORANDUM CIRCULAR NO. 7-94)
The main subject is the imposition of Value-Added Tax (VAT) on the sale of water, clarifying that water is not exempt from VAT under the National Internal Revenue Code (NIRC).
BIR Ruling No. 017-88 held that the sale of fresh water is exempt from the 10% VAT as it was considered an agricultural food product under Section 103(b) of the NIRC.
Water is classified as a mineral, not an agricultural product. Agricultural products come from the cultivation of soil, whereas minerals are naturally occurring inorganic substances, thus water is subject to VAT.
Minerals are defined as all naturally occurring inorganic substances found in nature, whether in solid, liquid, gaseous, or any intermediate state.
Mineral products are defined as things produced and prepared in a marketable state by simple treatment like washing or drying without any chemical change or manufacturing by the lessee, concessionaire, or owner of mineral lands.
Agriculture is defined as the cultivation of soil for food products or any other useful or valuable growths of the field or garden.
An agricultural product refers to the direct result of husbandry and the cultivation of the soil.
VAT is imposed under Section 100(a) of the NIRC for the sale of water.
The sale of bottled mineral water and water supplied to inter-island and ocean-going vessels are subject to 10% VAT.
The Circular revokes BIR VAT Ruling No. 017-88 dated February 1, 1988.
The need to strengthen and improve enforcement of the national internal revenue tax laws and address criticisms against the validity of the previous ruling on VAT exemption of water.