Value added tax is a tax on commodity bought and later sold. Every time the commodity changed hand or sold, the seller realized a profit. The value of the commodity increased, it is on this increased that 12% tax is imposed. Tax on the value added.

The mechanics, the seller sells the commodity plus the VAT called Input VAT to the buyer. The buyer then became a seller, he add his profit and VAT called output VAT. The buyer who later became a seller pays to the BIR the difference between the VAT ouput and VAT output. The availment is not automatic, the enterprise  must first register with BIR.

Another example, an apartment buys material for repair. These purchases have VAT included INPUT VAT. The apartment rental have also VAT included OUTPUT VAT.The apartment owner pays only the difference between the INPUT and OUTPUT VAT. Items bought for personal consumption can not claim VAT credit.