Increased VAT: Unfair Burden to Most
Aside from making life harder for the poor, increasing VAT unduly punishes
By Joseph Yu
Posted by Bulatlat
IBON Features-- For the majority of Filipinos who are struggling to make
ends meet, the planned increase in the value-added tax (VAT) rate from 10%
to 12% represents a repulsive imposition on the part of government.
This can be seen in the percentage distribution of family expenditures by
major expenditure group and income class based on the 2000 Family Income
and Expenditure Survey (FIES). For those earning P20,000 a year and below
(or a monthly income of P1,667 or less), for instance, the expenditure
groups affected by VAT make up more than 20% of their total expenses.
Thus, any increase in the cost of goods falling under these expenditure
groups would represent a burden, especially since their monthly incomes
are not enough to enable a poor family to meet its basic needs.
The effect of the VAT rate hike would be aggravated by the rising prices
of goods and services. Inflation has already hit 8% last December, an
all-time high. The National Economic Development Authority (NEDA) has
estimated that the 2% VAT hike would have an impact on inflation of almost
2 percent. If inflation hovers at this same level, then inflation would
reach nearly 10% as a result of the VAT hike. But even if you assume an
average 6% inflation rate, the increase in VAT would result in inflation
of almost 8 percent.
The plan to lift VAT exemptions on several sectors will also have a
further negative impact on the poor. For example, lifting the VAT
exemption on the sale or importation of coal, natural gas and petroleum
products is projected to push power rates up by at least P0.74 per
kilowatt-hour. Apart from its direct impact on consumers’ energy bills,
the expected hike in power rates would also result in increases in the
prices of goods and services as the cost of production goes up.
The effect of all these measures would be further multiplied by the P2 per
liter across-the-board hike on the specific taxes of petroleum products,
which became effective starting this January.
But the VAT hike would affect not only those who are visibly poor but also
those who may not be poor by government standards but do not earn enough
to maintain a decent life.
IBON estimates that as of December 2004, the daily cost of living for a
family of six in the Philippines
has already reached P492.19. Using this measure, seven out of nine income
classes (or 78%) do not earn enough to meet their food and non-food needs.
VAT-affected expenditure groups make up an increasing percentage of their
total family expenditures, hence making them vulnerable to price increases
such as those that would be caused by a VAT rate hike.
The problem with VAT
But the problem with the VAT goes beyond rate increases. The VAT is an
example of what is called a regressive tax, or a tax that is levied
equally rather than being pegged on the taxpayer’s ability to pay. Hence,
those who earn less end up paying a larger proportion of their salary than
those with higher incomes.
The 2003 FIES indicates that the three poorest income deciles are already
in debt since their expenditures exceed their income. Thus, any increase
in their expenditures would only drive them deeper into debt.
Since only 3 million pay their taxes, government increasingly relies on
indirect taxes to prop up its tax collections. VAT makes up a substantial
share of total indirect taxes at 47% in 2003 from 29% a decade earlier.
VAT share to total government tax revenues has also increased from 19% in
1993 to 25% in 2003.
Despite this, VAT revenues are still seen as inadequate due to leakages in
tax collection. The average leakage from VAT has been estimated at 29.8%
annually from 1998 to 2002, according to a National Tax Research Center (NTRC)
study. This resulted in losses of some P41.6 billion annually, or P208
billion over a five-year period.
VAT effort-- the proportion of VAT collections to Gross Domestic Product
(GDP) -- has also been generally declining, from 3.5% and 3.6%
respectively in 1996 and 1997, to 2.9% and 3.1% in 2002 and 2003. The bulk
of the increase in collections in 2003 was even attributed to the
reimposition of VAT on banks, which has been deferred since 1995.
Fiscal incentives laws enacted by Congress have also allowed firms mostly
in the export sector and those under investment priority areas to avail of
various VAT exemptions and zero-rated privileges amounting to P195.5
billion in 2003 alone, larger than the 2004 budget deficit of P194
billion. These exemptions accounted for 65% of tax and duty exemptions
granted by government in 2003.
A knee-jerk solution
The above figures make it clear that what is needed is greater collection
efficiency on the part of the Bureau of Internal Revenue (BIR). Compared
to other Asian countries, the Philippines has one of the lowest efficiency
ratios in terms of VAT collection.
“Efficiency ratio” is defined as VAT effort over the country’s statutory
VAT rate. The country lags behind South Korea, Singapore and Thailand.
Thailand, in fact, has a lower VAT rate than the Philippines, but
registers a higher VAT effort and efficiency ratio.
Since government seems unable or unwilling to muster the political will to
improve VAT collections, it chooses instead to resort to the “quick-fix”
solution of increasing the VAT rate.
Aside from making life harder for the poor, increasing VAT also unduly
punishes honest taxpayers.
But in fact, it is possible to increase VAT collections without any rate
adjustment. A 2004 study conducted by the Congressional Planning and
Budget Department (CPBD) recommended the use of a presumptive VAT on
hard-to-tax groups using adopted industry benchmarks. It proposed a
minimum net VAT of 3% of industries, hotels, restaurants, freight, etc.
The CPBD also called on Congress to review special treatments under the
VAT, including those enjoyed by independent power producers (IPPs) and
other favored sectors, as well as to spread input VAT credits over a
longer period of time, rather than a one-time claim.
Thus, the Arroyo administration must muster the political will to adopt
longer-term solutions to its tax collection problems that would not burden
the poor further. IBON Features / Posted by Bulatlat
IBON Features is a
media service of IBON Foundation, an independent economic policy and
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