Understanding VAT Leads One to Oppose It

An understanding of the local and global context of the value-added tax (VAT) shows that just like other onerous policies, multilateral creditors like the IMF and WB are behind this anti-people measure. This context serves to highlight the opposition to the current proposal to increase the VAT to 12 percent.

BY DANILO ARAÑA ARAO
Bulatlat

In defending the government’s move to increase by two percent the value-added tax (VAT), Press Secretary Ignacio Bunye stressed that the people need not worry since basic necessities are exempted from the VAT. Fears of any price increase are also misplaced because according to him, “External factors, such as the armed conflicts that cause the oil prices to shoot up, are the ones that will make the prices of commodities go up.”

As regards accusations that VAT is anti-poor, he argued, “VAT will not charge farmers and fishermen who are responsible for our produce. Revenues to be generated should the new VAT bill become a law would go back to the taxpayers in the form of jobs, education, water and health projects.”

Just like Bunye, pro-VAT legislators also argued that a combination of savings and new revenues is necessary for the country to wipe out its P180 billion-budget deficit ($3.27 billion, based on an exchange rate of P55.09 per US dollar). They claimed that a 12 percent VAT would increase revenues by P35 billion ($635.32 million), almost half of the P80-billion ($1.45-billion) projection from various revenue-generating measures to be passed by Congress.

Walkout

House Bill No. 3555, also known as the Value-Added Tax Restructuring Act, was passed on third and final reading last Jan. 27 with 129 in favor and 11 against. Twenty-two legislators walked out of the session hall on the night of Jan. 26 as the motion to recommit the bill back to the ways and means committee was defeated by only one vote.

The bill is now scheduled for discussion at the Senate. But this early, Senate President Franklin Drilon reportedly stressed that there is a commitment by the majority to pass this measure.

The 12 percent VAT is the sixth revenue measure approved by the House in three months. The House approved the bills raising excise taxes on sin products, lateral attrition, tax amnesty, fiscal incentives and extending the franchise of the Philippine Amusement and Gaming Corporation (PAGCOR) by 25 years.

The VAT was implemented in 1988 through Executive Order No. 273 signed by then President Corazon Aquino two days before the opening of Congress in July 1987. At that time, the 10 percent VAT replaced the four-tiered sales tax structure and some 60 other taxes like advance sales tax, miller’s tax and contractor’s tax.

It initially covered goods. However, goods produced for exports are zero-rated, which means that they are not subject to VAT and producers may even avail of tax credits.

In 1996, the VAT was expanded to include most types of services and selected products not originally covered by VAT like pesticides and specialty feeds. The expanded VAT was passed in 1994 through Republic Act No. 7716 but the implementation was delayed due to a temporary restraining order in 1995.

In 1994, the administration of then President Fidel Ramos applied for a $650-million loan under an extended fund facility (EFF) of the International Monetary Fund (IMF). One of the commitments of the government at that time was the expansion of the coverage of the VAT.

At present, the VAT covers a wide range of goods and services. According to research by Bayan Muna, these include “food products (processed meat, canned fish, coconut and vegetable oil, bakery products, noodles, milk, dairy products, coffee, sugar); clothing, footwear, tannery and leather products; drugs and medicine, furniture, pulp and paper, glass and glass products; cement, steel, iron, wood and most construction materials; electrical lamps and equipment, machinery and equipment both for manufacturing and agriculture, wholesale trade and retail trade, pawnshops, restaurants, cafes and other eating and drinking places; employment and recruitment agencies; motion picture production; hotels and motels, telecommunications (including landline, post-paid and pre-paid mobile phone services.”

Currently exempted from VAT include raw agricultural products, magazines, public transportation, shipping and apartment units with monthly rental of not more than P8,000 ($145.22). Fees of doctors and lawyers are also exempted while other professionals like accountants, athletes and actors were able to get postponements in the collection of VAT.

In the past, Congress has allowed firms mostly engaged in exports and those under investment priority areas to avail of various VAT exemptions and zero-rated privileges.

These exemptions and zero-rated privileges amounted to P195.5 billion ($3.55 billion) in 2003, during which year the budget deficit was pegged at P199.9 billion ($3.63 billion). According to Bayan Muna, “(this amount) cornered the biggest share of tax and duty exemptions granted by the government in that year which amounted to P299.42 billion ($5.44 billion).”

Global context

Economists Paul Samuelson and William Nordhaus explained that Congress is “infatuated with the idea of a VAT” because it is a tax on consumption. In the context of the United States, they argued, “many economists think that (the tax structure should be changed) toward one based on consumption and away from one based on income.”

Once called “The Sexy European” given its being a politically-palatable sales tax in the eyes of neoliberal economists, the VAT has been implemented since the 1960s in Europe and Latin America. The IMF and the World Bank pushed for the global adaptation of VAT to establish a uniform taxation system.

In Europe and Latin America, the VAT averages 20 percent and 14 percent respectively. Iceland has the highest rate of 24.5 percent. France, Germany, Greece, Italy, Mexico, China, Pakistan and Bangladesh are reportedly among 98 countries whose VAT rates are more than 10 percent, according to Rep. Eric Singson, a sponsor of HB 3555.

According to Bayan Muna, the Philippines currently has the same rate as Cambodia, Indonesia and South Korea, while “VAT is much lower in…Thailand (7%), Singapore (5%) and Japan (5%) while Vietnam charges a VAT of (5% to) 10% depending on the nature of transaction.”

Increasing VAT gap

As early as 1984, or a year after the country’s debt moratorium, the International Monetary Fund (IMF) pushed for tax reforms whose purpose is to “reduce reliance on taxes on foreign trade and increase taxes on domestic transactions so as to make taxes more buoyant and to avoid discouraging exports.”

In 1988, VAT collections amounted to P5.74 billion ($104.19 million) which was substantially more than the P1.5-billion to P2.0-billion ($27.23 million to $36.30 million) projection of the Bureau of Internal Revenue (BIR) during its first year of implementation. The 1988 projection allows for a 50 percent leakage, or an assumption that half of actual collections will not be collected for various reasons like inefficiency.

In 2003, the VAT collections reached P82.63 billion ($1.50 billion), an increase by more than P16 billion ($290.43 million) compared to 2002. Congressman Singson noted that VAT collections have increased by “an average of 20.64 percent (from) 1988 to 2003.”

Data from the National Tax Research Center (NTRC) however, showed that the average leakage from VAT was estimated at 29.8 percent annually from 1998 to 2002 which resulted in losses of about P41.6 billion ($755.13 million) yearly, or P208.1 billion ($3.78 billion) over the five-year period. According to the Department of Finance (DoF), VAT revenues in 2003 amounted to P135 billion ($2.45 billion) but the collection target was P279 billion ($5.06 billion), resulting in a VAT gap of P144 billion ($2.61 billion). (See Table 1) Taking this into account, the accumulated VAT gap amounts to P352.1 billion ($6.39 billion) from 1998 to 2003, or P58.7 billion ($1.07 billion) annually.

Terms of opposition

As early as 1988, opposition to the VAT was premised on its nature as a regressive form of taxation. By its nature as an indirect tax (or a tax on goods and services), both the rich and the poor are made to pay for this.

The DoF argued that VAT is progressive on the premise that tax liability depends on consumption rather than income (i.e., “the more you consume, the more taxes you pay). However, it must be noted that basic commodities like canned fish, bakery products, noodles, milk and coffee are covered by VAT. If the DoF argument were any indication, the government seems to imply that a solution to the problem is for the poor to eat less, or not at all.

This situation highlights the need to oppose not just the passage of the 12 percent VAT but also the junking of the VAT altogether.

Granting that there is a need for government to increase its revenues, this must not be done at the expense of the poor who are already suffering from the situation of low purchasing power mainly due to low wages and high cost of living. While it is true that there is a need to be efficient in its tax collection as may be gleaned from the glaring gaps in VAT collection through the years, the collection of personal income and business taxes particularly from rich tax evaders must be the government’s focus.

One must not fall into the political trap of calling on government to improve its efficiency in VAT collection. Such a reformist demand may give the impression that the VAT per se is acceptable and that only the proposed two-percentage point increase is not.

Comparing the VAT rate of the Philippines with that of other countries is also senseless given the difference in the people’s standard of living, wages and purchasing power. Such an argument is reminiscent of excuses made by government and oil companies in justifying oil price increases in the country.

An understanding of the local and global context of the VAT shows that just like other onerous policies, multilateral creditors like the IMF and WB are behind this anti-people measure.

This context serves to highlight the opposition to VAT which is essentially a continuation of past struggles against regressive taxation. Bulatlat

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