Bernardo M. Villegas
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Need to Broaden VAT Base

          The imposition of the Value Added Tax (VAT) during the presidency of Gloria Macapagal Arroyo was a very positive factor in the attainment of fiscal discipline or reduction of the government budget deficit to safe levels below the maximum allowable of 3% of GDP.  It was a politically unpopular move but the leadership during that time has to commended for going against populist pressures to promote the common good.  Once again, the Duterte Administration is faced with the challenge of going against a popular outcry against the move of the Department of Finance to recommend to Congress to limit VAT exemptions so as to broaden the base to enable the Government to raise the necessary funds for a more aggressive funding of infrastructures as well as the significant increase in the budgets for public education and health, two of the most vital expenditures to address mass poverty in the Philippines.

         I fully support the view of the Department of Finance that the ideal VAT system is one in which there is a low VAT rate but few exemptions limited to raw food, health and education.  This is not the case in the Philippines as there are 79 laws granting 59 exemptions leading to large leakages.  In Indonesia there are only 37 exemptions, 25 in Vietnam and 14 in Malaysia.   The numerous exemptions in the Philippines result in a very inefficient VAT collection, despite the increase in the rate from 10% to 12%.  The revenues from VAT constitute 4.3% of GDP (35.7% tax efficiency) versus Thailand’s VAT rate of 7% which is able to capture almost the same 4.1% of GDP (59% tax efficiency).

         According to the Department of Finance, while the poor and vulnerable rightly need protection, using the VAT system is not an efficient way to address their needs since exemptions lead to large leakages.  Targeted support programs, such as the Conditional Cash Transfer and larger budgets allocated to public education and public health can better ensure the trickling down of the benefits of the economic growth to the poor.  The proposed removal of tax exemptions will actually adversely affect only the Cooperatives since medical and educational services remain exempted under the substitute House Bill 4774 already approved at the committee level.  Cooperatives with less than the VAT threshold of P3 million sales will remain exempt but the rest will already be subject to VAT.

         The following exemptions are proposed to be removed:

         --Cooperatives, except those with gross sales below VAT threshold of P3 million as proposed.

         --Power transmission to replace franchise tax with VAT.

         --Lease of residential units.

         --Domestic shipping importation.

         --Boy scouts and girl scouts

         --Low-cost and socialized housing.

         --Limit zero rating to direct exporters:  this means removing zero rating from the following:  indirect exporters and agents; foreign currency denominated sales

         --Move renewable energy from zero-rating to exempt status.  The difference is under zero rating, the government refunds the input or VAT on their purchases; while VAT-exempt entities absorb the input tax.

         Also under public criticisms are the specific taxes being imposed on automobiles, fuels, and sweetened beverages.  These will be inflationary and will also burden lower-income households, especially the urban poor.  In fact, a study done by some of my colleagues at the University of Asia and the Pacific came out with the findings that a specific tax on sweetened beverages will lead to a decline in GDP because of lower sales of these products that are purchased by a mass base of C, D, and E households.  My own view, however, is that despite these adverse effects, the tax reforms are still justified because of the need for the Government to raise revenues to undertake an aggressive expenditure program that will be  directly targeting the rural poor, the poorest of the poor in this country.  Building more farm-to-market roads, irrigation systems, post-harvest facilities and other infrastructures in the country side will redistribute incomes away from the urban population to the poorest of the poor. These expenditures will more than counteract the drop in GDP occasioned by the taxes on sweetened beverages and shift spending from consumption to investment which augurs well for sustainable and inclusive growth.

    The same goes for larger expenditures in improving the quality of public education and health services in the regions outside the National Capital Region.  It should be noted that the poverty incidence in the NCR is only 4 percent while poverty incidences of 40% to 60% of the population are found in many regions in Mindanao, Eastern Visayas, Bicol and especially in areas where coconut is the major source of income of the farmers.  I am of the opinion that the proposed tax reforms will significantly improve the distribution of income in the Philippines in the next six years.  Not only will the tax burden be shifted from the middle income households to the rich.  By enabling the Government to raise the tax revenues, direct expenditures on projects and programs that directly benefit the very poor will be made possible.  For comments, my email address is