October 20, 2017, 9:17 am
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VAT exemptions cost P91B

The Philippines’ tax code, which contains 59 lines of exemptions from the value-added tax and 84 special VAT-related laws, has led to revenue leakages costing the government an estimated P90.7 billion each year, according to the Department of Finance (DOF).

Karl Kendrick Chua, DOF undersecretary, said overhauling the country’s outdated tax system by broadening the VAT base through the removal of multiple exemptions will hit affluent or well-connected sectors that are the primary beneficiaries of such tax privileges. 

“Most consumption of the poor, such as raw food and purchases from small stores, is exempt from VAT already. Broadening the VAT base will make the rich pay more because the VAT, which is a consumption tax, is proportional to one’s income and consumption,” Chua said Thursday at a tax forum in Pasay City. 

The DOF and the Department of Budget and Management held the Luzon-wide Open Government Dialogues, which focused on the first package of the Comprehensive Tax Reform Program (CTRP), at the Philippine International Convention Center.

Removing several exemptions to the VAT as provided under the National Internal Revenue Code and special laws is among the provisions of House Bill 4774 or the Tax Reform for Acceleration and Inclusion Act.

The VAT exemptions that account for the biggest annual losses for the government include the cooperatives, housing, special economic zones, among others, the DOF said.

But to protect the poor and other vulnerable sectors, Chua said HB 4774 will retain the VAT exemptions for seniors and persons with disabilities, and for raw food purchases as well as health and education expenses. 

In addition, all purchases from stores with sales below P3 million are also exempted. This basically exempts most purchases of the poor.

HB 4774 is the DOF-endorsed version of package one of the Duterte administration’s CTRP. 

Besides lowering personal income tax rates and broadening the VAT base, the bill contains provisions adjusting the excise tax rates for fuel and automobiles, among other measures. 

The House ways and means committee approved last May 15 the final substitute bill that consolidated HB 4774 with 54 other similar tax reform proposals.  

The final version of the substitute bill contains moderate modifications to the original measure and earmarking provisions for the additional revenues to be collected from the fuel excise tax adjustments. 

Chua noted although the Philippines’ VAT rate is the highest in the Asean region at 12 percent, the country’s efficiency and revenue collection is far lower than those of other Southeast Asian economies, as collections are only equivalent to an average of 4.2 percent of gross domestic product (GDP).

“In contrast, Thailand’s VAT rate is a lower seven percent, but its efficiency and revenue collection is also equivalent to about 4.2 percent of its GDP because its VAT exemptions are limited to only 35 items,” Chua said.

Chua added in reforming the country’s VAT system “those who are unfairly subsidized or who take advantage of this tax system’s complexity are the ones who will pay more and provide the money to fund more government services for the poor.”
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