The Department of Finance (DOF) intends to review the value-added tax (VAT) exemptions, as the finance chief pointed out VAT efficiency as well as the revenue ratio (VRR) remain historically low in the Philippines.
“We will review the exemptions, and revisit once and for all which ones are reasonable,” Finance Secretary Benjamin Diokno said during the Kapihan sa Manila Bay forum yesterday.
“While we have the highest VAT rate yet compared with Asean peers at 12 percent, our VAT efficiency is only 40 percent. So that means there’s still some room for improvement in our VAT collection,” he added.
According to the DOF, VAT efficiency is defined as the ratio of VAT revenues to gross domestic product (GDP) divided by the standard rate. This has been widely used as a summary indicator of the performance of the VAT and as a useful gauge of the extent to which the VAT bears uniformly upon a broad base.
Meanwhile, the average VRR is 38.9 in the last decade. The VRR measures the difference between the actual VAT collection and the entire potential tax base multiplied by the standard rate.
A VRR of 100 percent indicates there is no VAT revenue loss due to exemptions and weakening of tax administration.
“A low VAT efficiency ratio and VRR indicate erosion in the VAT base which can be due to exemptions and the weakening of tax administration. Sometimes even in the Philippines, some businesses are able to avoid VAT. So it is important that we constantly look at the efficiency of the VAT and the VAT revenue ratio,” Diokno said.
Diokno, however, noted some worthwhile exemptions, citing educational institutions and hospitals as examples.
“Without exemptions, zero rating, and at 100 percent efficiency, it is estimated that the government has to be collecting VAT equivalent to approximately 10.7 percent of GDP. At present, we are only collecting around 4.7 percent of GDP which makes the combined tax policy and administrative gap to around 6 percent,” Diokno said.
He cited a study from the World Bank in 2018 which also showed that VAT exemptions, or the policy gap, account for 29.1 percent of potential VAT revenue, while the administrative gap accounts for 29.5 percent of potential revenue.
Without exemptions, the potential revenue for VAT in 2018 is P1.85 trillion. In contrast, the actual VAT collection in 2018 was only P784.2 billion.
“Under the existing policy structure for VAT or taking into account the existing VAT exemptions and zero rating, the administrative gap computed for 2018 is P546 billion, or equivalent to 3 percent of GDP. This is 41.6 percent of potential revenue under the existing policy structure. This revenue loss would be higher if we introduce more exemptions to the VAT system. The government cannot afford to lose additional revenues on VAT,” Diokno said.
The finance chief said the DOF is seeking technical assistance from the International Monetary Fund to enable it to adequately assess gaps in the VAT system and develop appropriate reforms to make collection more effective, efficient and responsive to the country’s economic activity.
