The government is losing over P90 billion in potential annual revenues from value-added tax (VAT), which can be avoided by broadening the VAT base—a measure contained in the first package of the Comprehensive Tax Reform Program (CTRP), the Department of Finance (DoF) said on Thursday.
In a tax forum at the Philippine International Convention Center, Finance Undersecretary Karl Kendrick Chua said the Philippines’ antiquated tax code, which contains 59 lines of exemptions from the VAT and 84 special VAT-related laws, have led to massive revenue leaks costing the government an estimated P90.7 billion each year.
Overhauling the country’s outdated tax system by broadening the VAT base through the removal of multiple exemptions will hit affluent or well-connected sectors that are the primary beneficiaries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, he said.
“In general, 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.
Removing several exemptions from VAT as provided under the National Internal Revenue Code and special laws is among the provisions of House Bill (HB) 4774 or the “Tax Reform for Acceleration and Inclusion Act,” filed by Rep. Dakila Carlo Cua of Quirino.
The DoF official said the VAT exemptions that account for the biggest annual losses for the government include those of cooperatives, the housing sector, and special economic zones.
But to protect the poor and other vulnerable sectors, Chua said HB 4774 will retain VAT exemptions for seniors and persons with disabilities, raw food purchases, as well as health and education expenses. In addition, all purchases from stores with sales below P3 million annually are also exempted. This should exempt most purchases of the poor, the DoF official said.
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 Committee on Ways and Means approved on May 15 the final substitute bill that consolidated HB 4774 with 54 similar tax reform proposals. The final version of the substitute bill contains a few modifications to the original measure and earmarking provisions for additional revenues to be collected from the fuel excise tax adjustments.
Poor collection efficiency
Though the Philippines’ VAT rate is the highest in Asean at 12 percent, the country’s collection efficiency is far lower compared with other Southeast Asian economies, at an average of 4.2 percent of gross domestic product (GDP), Chua noted.
“In contrast, Thailand’s VAT rate is a lower 7 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,” he said.
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,” he added.
“Reforms” in the CTRP will benefit 99 percent of Filipinos in the immediate term and the entire population in the near term because revenues will be spent on a public investment program focused on infrastructure, health, education and social protection for the poor, Chua said.