ProposedVAT expansion and

rate hike

Kontra-KulimVAT AssemblyBalay Kalinaw

February 11, 2005

The ‘tsunami’ of GMA’s new taxes

What is VAT?First introduced in 1988 under the Tax

Reform Program (EO 273), replacing around 61 indirect taxes on goods and services

VAT broadened in 1994 (RA 7716) to include more services, replacing 12 more indirect taxes

In 1996, Expanded VAT (E-VAT) legislated (RA 8241) to restore, lift certain exemptions

In 2004, Improved VAT (I-VAT) legislated to restore, lift certain exemptions

What is VAT?A form of sales tax based on the

destination principle (goods, services taxed on the basis of where they are consumed rather than where they are produced).

An indirect tax paid by the buyer, transferee or lessee of the goods, properties or services (a pass-on tax).

Theoretically, a tax on the value-added in each stage of the production or distribution chain.

In reality, a tax on consumption shouldered by the final consumers, with manufacturers and sellers acting only as tax collectors.

How does VAT work?MANUFACTURER produces a good at P10.00, adds a mark-up of 20% (P10 + P2.00 = P12.00) and sells the product to WHOLESALER with 10% VAT (P12.00 + P1.20 = P13.20)

WHOLESALER buys the good at P13.20, adds a mark-up of 20% (P13.20 + 2.64 = P15.84) and sells the product to RETAILER with 10% VAT (P15.84 + P1.58 = P17.42)

RETAILER buys the good at P17.42, adds a mark-up of 20% (P17.42 + P3.48 = P20.90) and sells the product to CONSUMER with 10% VAT (P20.90 + P2.09 = P22.99)

CONSUMER buys the good at P22.99

Which sectors are VAT-covered?

Barter or exchange of goods or properties

Covers every importation of goodsCovers sale or exchange of services

Food products • Processed meat• Canned fish• Coconut & vegetable oil• Bakery products• Noodles• Milk, Dairy products• Coffee• Refined sugar

Examples of VAT-covered goods and services

Examples of VAT-covered goods and services

ClothingFootwear, tannery & leather

productsDrugs & medicine FurnitureGlass & glass products Cement, steel, iron, wood and

most construction materialsElectrical lamps & equipment

Pulp and paperWholesale trade & retail tradePawnshopsMachinery & equipment for both

manufacturing and agricultureTelecommunications (including

landline, post-paid & pre-paid mobile phone services)

Examples of VAT-covered goods and services

Restaurants, cafes & other eating and drinking places

Employment & recruitment agencies

Motion picture productionHotels and motelsWater services

Examples of VAT-covered goods and services

Sale or importation of agricultural products in their original form

Sale or importation of coal and natural gas

Sales of cooperatives (agricultural, electric, multi-purpose, etc.)

Lease of residential unit with monthly rental not exceeding P8,000

Sale, importation of petroleum products

Services rendered by medical and legal professionals

Examples of VAT-exemptgoods and services

Pending VAT bills

HB 3555 One-time increase in the VAT rate by

20% from 10% to 12%Railroaded in Congress Jan. 27 with a

vote of 126-11Presently pending in the Senate

HB 3705Lifting of exemptions on power, oil,

shipping, doctors and lawyersPresently being deliberated in

Congress

Why should we oppose the proposed VAT bills?

VAT is regressive and hits the poor the most. An increase and expansion will reinforce government’s regressive tax structure.

1

DOF’s twisted logicThe Department of Finance (DOF)

insists that VAT is progressive since it taxes consumption (i.e., “the more you consume, the more tax you pay”)

This violates the basic principle of progressive taxation (Adam Smith) that taxes should be based on “ability to pay”

Since VAT hits everyone equally, those with more income pay proportionally less than those with less income. Thus, it hits the poor the most.

DOF’s twisted logicDOF excludes minimum wage earners

from the “poor,” thereby excluding 3,479,499 families from its study.

DOF’s “poor” actually have negative savings, thus any added tax burden would be criminal.

DOF’s assumed additional VAT burden is too low (P35.12B when it should be P50.17B). The 20% VAT rate hike translates to a monthly burden of P123.6 for the poor.

Of 230 economic sectors…

166 are VAT-liable (72%)Only 54 are VAT-exempt (23%)10 are partially exempt (4%)Worst is yet to come with HB

3705 which means an additional 12% tax on socially sensitive oil and electricity rates.

Government’s increasing dependence on VAT

National tax revenues by tax type and VAT shareIn billions of pesos, 1993-2003 (2-year intervals)

Type 1993 1995 1997 1999 2001 2003

Tax revenues 230 312 412 432 490 538

1. Direct 77 114 168 188 229 251

2. Indirect 153 198 244 243 261 287

o/w VAT 44 59 89 92 106 135VAT to indirect 28.9% 29.6% 36.4% 37.7% 40.8% 47.1%

VAT to all taxes 19.2% 18.7% 21.6% 21.3% 21.7% 25.1%

2Honest, tax-paying consumers will shoulder the cost of low VAT collections due to inefficiencies and exemptions

High VAT leakage

Billions in annual VAT leakage traced to inefficiencies in administration and corruption

Average leakage estimated at 30% from 1998-2002 by the National Tax Research Center (NTRC)

Equivalent to losses of about P41.6 billion per year or P208 billion from 1998-2002

High VAT leakage

VAT gap and leakage rate (1998-2003)

1998 1999 2000 2001 2002 2003 Ave.

P35.7B P26.9B P34.3B P54.3B P56.9B P144B P65.5B

31.0% 22.6% 26.3% 33.8% 33.0% 51.6% 33.1%

What causes VAT leakage?

Excessive claims of VAT creditClaims of presumptive VAT by firms

not entitled to do so under the law Lack of industry standards to validate

input VAT claimsUnder-declaration of salesNon-issuance of official receipts,

issuance of non-official receipts-BIR Special VAT Task Force (2001) & NTRC (2003)

Excessive VAT exemptions

Amount of tax and duty exemptions under various fiscal incentives, by tax type (2003)

1. Income Tax P34.88 B

2. Excise Tax P0.037 B

3. Capital Gains Tax P0.003 B

4. Donor Tax -

5. Withholding Tax P0.009 B

6. Franchise Tax P0.016 B

7. Percentage Tax P1.989 B

8. Value Added Tax P195.52 B

9. Duty P56.05 B

TOTAL P299.42 B

Excessive VAT exemptions

In 2003, gov’t collected P135 B in VAT but gave out P195.5 B in exemptions to favored industries.

Exemptions granted mainly to exporters in special ecozones and big corporations in the investments priority list (mining firms, IPPs, oil companies, telcos)

VAT exemptions comprise the biggest share (65%) of foregone revenues from fiscal incentives in 2003

VAT hike is a quick-fix solution

These findings clearly point to tighter VAT administration as the key to plugging the P65.5-B annual VAT leakage

But GMA regime is resorting to the quick-fix solution of raising VAT

Aside from unduly punishing honest taxpayers, VAT increase will further widen tax differential among VAT, non-VAT and zero-rated VAT firms

4The 10% VAT rate is neither “low” nor “old” by international standards

10% neither ‘low’ nor ‘old’

IMF and other VAT hike proponents argue that the 10% VAT rate is low and has to be raised to “keep with the changing times”

But RP just falls within the 11% standard VAT rate in Asia, similar to Cambodia, Indonesia and S.Korea, higher than Thailand (7%), Singapore (5%) and Japan, while Vietnam charges between 5-10%

Key to better collections is efficiency, not higher rate Statutory VAT rates, VAT effort and

efficiency, Selected Asian countries

Country

VAT

rate

VAT effort Efficiency

1994 1998 1994 1998

Indonesia 10% 4.80% 2.96% 0.48% 0.30%Philippines 10% 3.33% 3.78% 0.33% 0.38%Singapore 3% 1.49% 1.56% 0.50% 0.52%Thailand 7% 3.15% 4.20% 0.45% 0.61%South Korea 10% 4.04% 4.30% 0.40% 0.43%

HB 3555, HB 3705 and the Pangasinan Express

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VAT and other tax bills are being railroaded in Congress

The approval of HB 3555 was marked by the violation of the the three day rule on notices of meetings, conduct of public hearings and due process.

VAT-liable sectors and consumers were not duly represented and consulted in the hearings.

The House leadership deceived Congress on the so-called exemptions on instant noodles and other food products.

VAT bills are conditionalities of the International Monetary Fund (IMF) and credit-rating agencies

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IMF Post-Program Monitoring Team (June 25-

July 8, 2004) Prior to the announcement of GMA’s eight

revenue measures, an IMF team visited the country to evaluate government’s fiscal situation

IMF reportedly recommended a VAT rate increase to 15% to GMA’s economic managers, who were not receptive to the idea then

The government instead recommended the lifting of VAT exemptions, a shift to GIT and tax amnesty. The last two have since been rejected by the IMF, while the GMA regime has made a complete turnaround from its initial position

IMF has been pushing the government to increase the VAT rate as early as 1999 under its Memorandum of Economic and Financial Policies

Other taxes and reforms in tax administration can be resorted to.

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Some proposals to plug VAT leakage

Use of presumptive VAT on “hard-to-tax groups” using adopted industry benchmarks (e.g., minimum net VAT of 3% for industries, hotels, restaurants, freight, etc.)

Review of special treatments under VAT including exemptions, deferments and zero-rated privileges

Place a cap or a scheme to spread maximum allowable VAT input credit

Some proposals to tax the IPPs and oil

companiesHigher income or franchise taxWindfall profit taxRegulate pricing and the oil and

power generation industry in general to ensure taxes are not passed on to consumers.