This story
was taken from Bulatlat, the Philippines's alternative weekly
newsmagazine (www.bulatlat.com, www.bulatlat.net, www.bulatlat.org).
Vol. V, No. 5, March 6-12, 2005
Analysis
VAT Spurs Exportation at the Expense of Domestic
Needs
There is another reason to
oppose VAT. A close scrutiny of the VAT system shows that it allows exporters to
avail of tax credits. Meanwhile, those who produce for local consumption end up
shouldering the VAT whose rate will even increase to 12 percent if Congress
would have its way.
BY DANILO ARAÑA ARAO With the Senate’s approval
of the 2005 national budget last March 1, the passage of the increase in the
value-added tax (VAT) to 12 percent cannot be far behind. Among the administration’s
eight revenue-generating measures that are projected to raise P80 billion ($1.46
billion, based on an exchange rate of P54.94 per US dollar) in additional
income, the increased VAT is said to be the single biggest contributor with P35
billion ($637.1 million). Legislators are currently
trying to explore various options to make the 12 percent VAT acceptable to the
public. From a uniform tax rate, they have proposed a multi-tiered VAT system
similar to Vietnam. Instead of a 12 percent
VAT, for example, the following products are proposed to be subject to a 6
percent VAT: processed food items (canned mackerel and sardines, milk, refined
sugar, cooking oil, instant meals based on packed noodles); and noodle products
(miki, misua, sotanghon and pancit canton); generic medicines; and sale of
cooperatives’ products to members. On the other hand, the
independent power producers, petroleum products, raw materials for manufacture
of petroleum products and the National Power Corporation (NAPOCOR) will be
subject to 4 percent VAT during the first year; 6 percent, second year; 8
percent, third year; and 12 percent in the fourth year of the new VAT law’s
implementation. Deputy Speaker Raul del Mar
(Cebu) and Rep. Teodoro Locsin (Makati City) even introduced a “no pass-on”
provision that prohibits power-generating firms and petroleum producers from
passing on the VAT to consumers. How this will be done in the wake of the
deregulation of the power and oil industries, however, was not explained. This
led Bayan Muna Rep. Teodoro Casiño to conclude that this provision is
practically “toothless.” Clearly, legislators talked
about the lifting of VAT exemptions and the possibility of a multi-tiered VAT
system. They were, however, conspicuously silent on one aspect of the VAT – the
zero-rated transactions. Reviewing
zero-rated transactions According to Sec. 106 of
the Republic Act No. 8424 or the Tax Reform Act of 1997, the following goods are
subject to zero percent VAT: (1) export sales; (2) foreign currency denominated
sale; and (3) “sales to persons or entities whose exemption under special laws
or international agreements to which the Philippines is a signatory effectively
subjects such sales to zero rate.” With regard to services,
Sec. 108 of RA 8424 identifies the following transactions as zero-rated:
“Processing, manufacturing or repacking goods
for other persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
“Services other than those mentioned in the
preceding paragraph, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
“Services rendered to persons or entities
whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such services to
zero percent (0 percent) rate;
“Services rendered to vessels engaged
exclusively in international shipping; and
“Services performed by subcontractors and/or
contractors in processing, converting, of manufacturing goods for an
enterprise whose export sales exceed seventy percent (70 percent) of total
annual production.” Under the current set-up,
those who are engaged in exports are subject to zero percent VAT. This means
that not only are the exporters’ products and services not subject to VAT they
can also avail of tax credits from the VAT they paid for various VAT-covered
transactions as they manufactured their goods and rendered their services. According to a study by
Bayan Muna, “various fiscal incentives laws enacted by Congress have allowed
firms mostly engaged in exports and those under investment priority areas to
avail of various VAT exemptions and zero-rated privileges that amounted to
P195.5 billion ($3.56 billion) in 2003 alone – equivalent to the P194-billion
($3.53-billion) budget deficit in 2004.” Clearly, exporters continue
to benefit from this zero-rated privilege under VAT. VAT
inconsistent with industrialization The situation of zero-rated
transactions under VAT sends a wrong message to local entrepreneurs that instead
of producing for domestic consumption, they should focus instead on export goods
and services. Not only will they be exempted from paying VAT, they will end up
earning from it through tax credits. It is ironic that the
Arroyo administration aims for industrialization as it perpetuates a VAT system
that, in effect, penalizes those who want to add value to products that are
meant for domestic consumption. Then again, one may argue that the kind of
industrialization the administration wants is not the kind that strengthens
domestic industries but rather one that, among others, perpetuates foreign
domination and fosters export orientation. Bulatlat © 2004 Bulatlat
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