The Department of Finance (DoF) said an efficient tax system free of leakages would eventually allow the government to impose a lower value-added tax (VAT) rate on goods and services, currently at 12 percent.
“Our proposal really is to clean up the VAT system. Over time, once we have addressed the exemptions, we may reduce the VAT rate. We will do it step by step,” Finance Undersecretary Karl Kendrick Chua said in a statement over the weekend.
Chua said that Thailand, which has a 7 percent VAT, collects the same amount of revenue as the Philippines despite the lower rate because of fewer exemptions.
Thailand, he said, has 35 lines of exemptions while the Philippines has 59 under the Tax Code, and 84 special laws with VAT exemptions.
The Philippines and Thailand also have the same 4.2 percent revenue share as a percentage of gross domestic
product (GDP) from the VAT, he added.
“Our strong belief is that the moment we have exemptions and a multitude of exemptions, it multiplies the opportunity for discretion, and therefore corruption and tax evasion,” he said.
Because Thailand has done the basics of making its tax system simpler, fairer and more efficient, it can afford to provide its citizens lower tax rates and corporate investors an enticing tax incentive to relocate there, he added.
“We have a dual system, we have high tax rates for half of the population and half of the population pay very little [because]of incentives, exemptions. So our tax system really is very inequitable in that sense. What we want to do as with the VAT is really to broaden the base so that it is fairer to everyone,” Chua noted.
Even with fiscal incentives favoring private businesses, the Philippines remains behind Thailand in terms of per capita gross national income because the fundamentals—good governance, adequate infrastructure, public service efficiency—remain lacking.
“And that is, I think, very linked to the fact that as of today we have only collected 13.8 percent of our GDP in taxes while in Thailand, it’s 17 percent,” Chua said.
The Tax Reform Acceleration and Inclusion Act (Train) or House Bill 5636, which the House of Representatives approved on May 31, would address tax leakages, the department said.
This bill, which consolidated the DoF’s original proposal—HB 4774—with 54 other tax-related measures, seeks to make the country’s tax system simpler, fairer and more efficient by slashing personal income tax rates and fill up the revenue loss by adjusting excise taxes on certain products and broadening the VAT base.