This story
was taken from Bulatlat, the Philippines's alternative weekly
newsmagazine (www.bulatlat.com, www.bulatlat.net, www.bulatlat.org).
Vol. IV, No. 52, January 30 - February 5, 2005
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
Permission is granted to reprint or redistribute this article, provided its author/s and Bulatlat are properly credited and notified.