Analysis

VAT Spurs Exportation at the Expense of Domestic Needs

There is another reason to oppose VAT. A close scrutiny of the VAT system shows that it allows exporters to avail of tax credits. Meanwhile, those who produce for local consumption end up shouldering the VAT whose rate will even increase to 12 percent if Congress would have its way.

BY DANILO ARAÑA ARAO
Bulatlat

With the Senate’s approval of the 2005 national budget last March 1, the passage of the increase in the value-added tax (VAT) to 12 percent cannot be far behind.

Among the administration’s eight revenue-generating measures that are projected to raise P80 billion ($1.46 billion, based on an exchange rate of P54.94 per US dollar) in additional income, the increased VAT is said to be the single biggest contributor with P35 billion ($637.1 million).

Legislators are currently trying to explore various options to make the 12 percent VAT acceptable to the public. From a uniform tax rate, they have proposed a multi-tiered VAT system similar to Vietnam.

Instead of a 12 percent VAT, for example, the following products are proposed to be subject to a 6 percent VAT: processed food items (canned mackerel and sardines, milk, refined sugar, cooking oil, instant meals based on packed noodles); and noodle products (miki, misua, sotanghon and pancit canton); generic medicines; and sale of cooperatives’ products to members.

On the other hand, the independent power producers, petroleum products, raw materials for manufacture of petroleum products and the National Power Corporation (NAPOCOR) will be subject to 4 percent VAT during the first year; 6 percent, second year; 8 percent, third year; and 12 percent in the fourth year of the new VAT law’s implementation.

Deputy Speaker Raul del Mar (Cebu) and Rep. Teodoro Locsin (Makati City) even introduced a “no pass-on” provision that prohibits power-generating firms and petroleum producers from passing on the VAT to consumers. How this will be done in the wake of the deregulation of the power and oil industries, however, was not explained. This led Bayan Muna Rep. Teodoro Casiño to conclude that this provision is practically “toothless.”

Clearly, legislators talked about the lifting of VAT exemptions and the possibility of a multi-tiered VAT system. They were, however, conspicuously silent on one aspect of the VAT – the zero-rated transactions.

Reviewing zero-rated transactions

According to Sec. 106 of the Republic Act No. 8424 or the Tax Reform Act of 1997, the following goods are subject to zero percent VAT: (1) export sales; (2) foreign currency denominated sale; and (3) “sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.”

With regard to services, Sec. 108 of RA 8424 identifies the following transactions as zero-rated:

1. “Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

2. “Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

3. “Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0 percent) rate;

4. “Services rendered to vessels engaged exclusively in international shipping; and

5. “Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70 percent) of total annual production.”

Under the current set-up, those who are engaged in exports are subject to zero percent VAT. This means that not only are the exporters’ products and services not subject to VAT they can also avail of tax credits from the VAT they paid for various VAT-covered transactions as they manufactured their goods and rendered their services.

According to a study by Bayan Muna, “various fiscal incentives laws enacted by Congress have allowed firms mostly engaged in exports and those under investment priority areas to avail of various VAT exemptions and zero-rated privileges that amounted to P195.5 billion ($3.56 billion) in 2003 alone – equivalent to the P194-billion ($3.53-billion) budget deficit in 2004.”

Clearly, exporters continue to benefit from this zero-rated privilege under VAT.

VAT inconsistent with industrialization

The situation of zero-rated transactions under VAT sends a wrong message to local entrepreneurs that instead of producing for domestic consumption, they should focus instead on export goods and services. Not only will they be exempted from paying VAT, they will end up earning from it through tax credits.

It is ironic that the Arroyo administration aims for industrialization as it perpetuates a VAT system that, in effect, penalizes those who want to add value to products that are meant for domestic consumption. Then again, one may argue that the kind of industrialization the administration wants is not the kind that strengthens domestic industries but rather one that, among others, perpetuates foreign domination and fosters export orientation. Bulatlat

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