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Vol. IV,    No. 52      January 30 - February 5, 2005      Quezon City, Philippines











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Increased VAT: Unfair Burden to Most Filipinos

Aside from making life harder for the poor, increasing VAT unduly punishes honest taxpayers

By Joseph Yu
IBON Features

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 research institution.



© 2004 Bulatlat  Alipato Publications

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