The Sacred VAT

There is a growing clamor for the removal of the VAT on petroleum products to ease local prices, especially since it adds from P4 to P6 peso to pump prices. Just recently, the Catholic Bishops Conference of the Philippines echoed the same demand. But the Arroyo government flatly rejected it. What is it with the VAT that the Arroyo government is so adamant at rejecting all proposals to remove this form of taxation on petroleum products?

Vol. VIII, No. 23, July 13-19, 2008

When oil prices started to skyrocket at the start of the year, the Bagong Alyansang Makabayan (Bayan or New Patriotic Alliance) and the IBON Foundation immediately called for the removal of the VAT on petroleum products to ease local prices, and for the repeal of the Downstream Oil Industry Deregulation Act of 1998 or RA No. 8479 to enable the government to control pump prices.   Within Congress Sen. Mar Roxas was the first to put forward the proposal to suspend the VAT on petroleum products.  Just recently, the Catholic Bishops Conference of the Philippines added their voice to the growing clamor to remove the VAT on oil.  But the Arroyo government flatly rejected it.

In a radio interview, Deputy Presidential Spokesperson Lorelei Fajardo said removing the VAT at this time would sacrifice many vital government projects and programs. Finance Sec. Margarito Teves said that the government cannot forego the P73.1 billion ($1,600,963,644 at an exchange rate of $1=P45.660) projected revenue from VAT on petroleum products. Former Press Sec. Ignacio Bunye called VAT as the linchpin solution to the country’s economic problems. In one of his last statements as press secretary, Bunye was quoted as saying that removing the VAT on oil would create more problems than solutions.  House Speaker Prospero Nograles said suspending the VAT on oil would do harm to the country’s efforts to “weather the global financial firestorm”. Pres. Gloria Macapagal-Arroyo, on the other hand, said that the VAT on petroleum products affects the rich more than the poor because the rich consumes more fuel.

What is it with the VAT that the Arroyo government is so adamant at rejecting all proposals to remove this form of taxation on petroleum products?

Biggest Chunk

The VAT on petroleum products constitute the biggest chunk in the government’s VAT collections.  In 2006, the Arroyo government was able to get P49.2 billion ( $1,077,529,566)  from VAT collections on petroleum products.  VAT on petroleum products in 2006 accounted for 63.9 percent of the government’s total VAT collections. From January to July 2007, of the P42.7 billion ($935,173,017)VAT collections, 43.5 percent or P18.6 billion ($407,358,738) was collected from petroleum products.

The government is expecting to gain P73.1 billion ($1,600,963,644) this year from VAT on petroleum products alone. Finance Undersec. Gil Beltran estimates that as of June, 2008, the government has already collected P 9 billion ($197,109,067) in “excess revenues” from the VAT on oil. This excess revenue on petroleum products is expected to reach P18.6 billion ($407,358,738) by the end of the year. Excess revenue is derived from the difference between the projected VAT collection on petroleum products and the increased collection due to the spike in oil prices.

At whose expense?

The windfall in VAT collections that the Arroyo government is so happy about is a bane for most Filipinos. When the price of diesel was at P41.55 ($0.909) per liter in May, 2008, P5 ($0.109) was due to VAT.  When diesel reached P55 ($1.20) per liter as of July 11, the Arroyo government would be collecting P6.60 ($0.14) per liter as VAT.  Oil companies claim that the price per liter of diesel would still have to be increased by P16 ($0.35)until August because of the so-called “under-recoveries”. That would mean that the price per liter of diesel would reach P71 ($1.55), and the Arroyo government would gain P 8.52 ($0.186) per liter.

The Arroyo government gains more for every increase in the price of fuel, which translates into a correspondingly heavier burden for the Filipino people. It is practically in the same league as profiteers that take advantage of people’s miseries. The P18.6 billion ($407,358,738) in excess revenues projected by the Arroyo government only means that it expects to take P18.6 billion ($407,358,738) more from the Filipino people because any increase in VAT resulting from increases in pump prices is merely passed on by oil companies to consumers.

This is what is supposedly being allotted for subsidies being distributed by the Arroyo government. The Arroyo government claims that it has released P4 billion ($87,604,029) in subsidies from this excess revenue: P 2 billion ($43,802,014) for subsidy to small power users, P1 billion ($21,901,007) for scholarships and student loans, P1 billion ($21,901,007) as loan for transport operators.  The government said that it is planning to allot another P5 billion ( $109,505,037) in subsidies for the next quarter.  But are these subsidies commensurate to the burden that the Filipino people is being made to shoulder by the Arroyo government? Certainly not.  These subsidies do not make the slightest dent in the worsening poverty situation being brought about by oil price spikes.

An insulting falsehood

Nothing is farther from the truth than the claim of Pres. Arroyo that the VAT affects the rich more than the poor.  While it is true that only the rich, and to a lesser degree, the middle class, use private vehicles and therefore purchase gasoline, increases in fuel prices translates into higher production and freight costs, which is passed on to consumers through higher prices of basic goods such as food, cooking oil, clothes, among others.  This also translates into higher costs for drivers of public utility vehicles.  The only reason that fares do not increase as fast is that the Arroyo government makes drivers shoulder the increases in pump prices.

Second, while it is also true that the rich purchases more goods and services and therefore pay more VAT, it is still a heavier burden for the poor.  Arturo Boquiren,a professor of the Department of Economics and Political Science at the University of the Philippines- Baguio in his article “Economics and Society 101: A but for VAT” made an excellent point when he said that VAT is essentially regressive because “consumption as a percentage of income decreases as income increases (savings rate increase) and, therefore, the tax rate decreases as one goes up in the income ladder under the VAT.”  In layman’s language this means that because the income of the poor is very low, all of it is spent in buying basic goods, services, and utilities, therefore, a big percentage of their income goes to VAT. Conversely, even if the rich purchases more goods and services, their expenditures for these constitute a very low percentage of their income, therefore, a lower percentage of their income goes to VAT.

As an economist, Pres. Arroyo knows this.  When she makes this false claim with a straight face, she is insulting the intelligence of the people.


Even more insulting is Usec. Fajardo when she called those calling for the removal of VAT on petroleum products as shortsighted.  What major government project or program can the Arroyo government boast of during the past seven years?  It has built a few highways such as the Clark-Subic and Batangas expressways but beyond that it has nothing to show for.  It boasts of the nautical highway but the sinking of the MV Princess of the Stars reveals the sorry state of the country’s shipping lines. Its grand plan of developing mega-regions – which is, in reality, nothing more than a plan to develop infrastructures such as roads and bridges – has never taken off the ground.

Currently, the Arroyo government has less than two years before the end of its term (that is if it plans to vacate Malacañang in 2010), what more can it do?

The real reason for the Arroyo government’s adamance in keeping the VAT on oil is that it is trying to delay the inevitable: the onset of another convulsion of the economic crisis enveloping the country.  The Arroyo government was only able to buy some time before the eruption of another fiscal crisis because it was able to sell P90.6 billion ($1,984,231,274)in government assets in 2007.  This, according to IBON Foundation, is nearly as much as the P93.9 billion ($2,056,504,599) sold during the past three administrations, spanning 15 years. Without this big amount gained from the sale of government assets, the Arroyo administration should have incurred a deficit of P78 billion ($1,708,278,580), for the first 11 months of 2007, which is 31 percent higher than in 2006.  On the other hand, even with VAT, government tax revenues increased by a dismal 8.3 percent and non-tax revenues, without privatization, by just 6.1 percent during the January to November 2007 period.  The problem is, the Arroyo government is running out of assets to sell.

The Arroyo government is to blame for the worsening economic situation. The Arroyo government, despite its empty boast of bringing the country closer to “First World status”, is pursuing the same policies of deregulation, liberalization, and privatization that has kept the country at a backward state. The country’s trade balance has consistently been on a deficit. In 2007, the country’s trade deficit amounted to $5.056 billion.  It was $4.363  billion in 2006, $6.163 billion in 2005, and $4.358 billion in 2004. It is expected to get worse in 2008 – double by government estimates – because of the recession in the US, the country’s biggest trade partner, the oil price spikes, which would increase the country’s import expenditures, and the frantic efforts of the Arroyo administration in importing rice. The country has become the biggest rice importer this year, contracting 2.3 million metric tons at record prices.  The Arroyo government had to do this because it has neglected rice production during the previous years. It preferred to import rice because it thought that the global rice supply is more stable, that is, before rice prices have gone haywire.  Who is shortsighted now?

The question is whether the Filipino people is willing to carry the burden of the economic crisis while the Arroyo government goes about with its profligate ways – s.uch as bringing along an excessively large contingent in a junket to the US – and is involved in numerous corruption scandals. If not, then we should start confronting the crisis head on by pushing for the removal of VAT, the repeal of the Downstream Oil Industry Deregulation Law, and for a major reorientation and redirection of the country’s economic policies and programs. If the Arroyo government refuses to do so, then it must be made to face the consequences of not doing anything to mitigate the sufferings of the Filipino people while giving primacy to the interests of oil companies, and for presiding over the worsening state of the Philippine economy.(

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