Facing the need to reduce the Value-Added Tax (VAT) as a major relief for low-income Filipino consumers, Finance Secretary Ralph Recto said on Wednesday a cut in the VAT may be a long time coming but will be implemented eventually.
Any reduction is contingent on an improvement in government finances, Recto explained.
In the early 2000s, Recto was a key advocate for increasing the VAT to 12 percent from 10 percent and expanding its coverage to address the government’s budget deficit.
A 2017 study by the National Tax Research Center showed that this helped more than triple VAT collections, from P156.7 billion in 2005 to P259.8 billion in 2006, following the implementation of the Reformed VAT Law (RA9337).
This week, however, facing a Senate Committee on Finance and the Development Budget and Coordination Committee (DBCC) hearing, Recto said there should be “light at the end of the tunnel” for people burdened by numerous taxes.
“It’s only natural and I understand that the VAT should be reduced. There should be a light at the end of the tunnel, just like what I mentioned when we also pushed for it back then. This means that for example, when our debt-to-GDP ratio reaches 40 percent and our deficit is 3 percent, we can reduce it.”
The Philippines is currently balancing its finances with a debt-to-GDP ratio of 62 percent as of the first quarter of the year. The budget deficit for the end of 2024 was 5.7 percent of total economic output.
Analysts: strong fiscal buffers needed
John Paolo Rivera, a research fellow at the Philippine Institute for Development Study, said a VAT reduction, if it happens, would be a “major relief for Filipino consumers, especially the lower-income segments who are disproportionately affected by consumption taxes.”
A one or two percentage point reduction could “meaningfully increase disposable income, boost consumption, and even improve tax compliance,” he said.
However, Rivera stressed that it should only be done when “fiscal buffers are strong” and debt and deficit metrics are “sustainably within prudent thresholds.”
Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said a VAT reduction “could realistically take many years” given the high budget deficit and debt-to-GDP ratio.
The immediate challenge, he said, is to narrow the budget deficit through “faster growth in recurring tax revenues and more disciplined government spending.”
VAT exemptions
Before Recto’s statement, Sanator Panfilo Lacson told the same hearing that instead of new taxes to plug the deficit, the government should reduce the number of VAT exemptions.
The Philippines currently has one of the highest numbers of exemptions compared with other countries, such as Indonesia (37 exemptions, 11 percent VAT), Vietnam (25 exemptions, 5 percent VAT), and Thailand (37 exemptions, 7 percent VAT).
Recto noted that agriculture products, exporters, cooperatives, persons with disability (PWD), and senior citizens are currently exempt from VAT. He added that VAT accounts for 24 percent of all government tax collections, with an estimated P1.5 trillion in collections this year.
“This means that if our economy is P28 trillion, more or less, the effective VAT rate is 5 percent, not 12,” Recto said.
Recto explained that the tax collected from VAT is only enough to cover salaries, maintenance, operating expenses, and interest payments, among other things.
“That’s why we should spend correctly. Everything we borrow. All of our capital outlay, we borrow that,” he said.
