Apartment and other real property rentals of P10,000 and below will remain VAT-free while those leasing out condos and other housing units whose gross sales of receipts fall under P3 million VAT threshold will also be exempt from this tax under the first package of the Comprehensive Tax Reform Program (CTRP), according to the Department of Finance (DOF).
Finance Undersecretary Karl Kendrick Chua said the substitute bill on the CTRP’s first package that was approved by the House ways and means committee last May 15 ensured that such safeguards are in place to protect low-income renters and small property owners from the impact of tax reform.
Chua said that instead of handing over VAT exemptions to big housing developers and their well to do clients who can well afford to pay the tax, the proposed CTRP will instead give the privilege directly to low-income families in the form of cash vouchers so that they can save up to buy their own homes. For those who can afford, they have lower income taxes to help them purchase their houses.
Contrary to the wrong information being peddled by certain groups, Chua explained that doing away with this VAT privilege for property developers is actually pro-poor because it will stop the practice of big-time real estate companies and condominium buyers to dodge tax payments by chopping up their properties into smaller units or use transfer pricing schemes so that these properties fall below the VAT threshold.
“The lease today, if it is below P10,000, is VAT free, then above P10,000, that is VATable. Halimbawa po nag-lease po tayo ng (For example, we leased a) condo unit or townhouse for P10,000, so every year P120,000. Ayon naman po sa ating proposal kapag ‘yung nag papa-upa ay may (Based on our proposal if the lessor has) gross sales below P3 million, kasi ‘yan po ‘yung (that’s the) VAT threshold, that is exempt,” said Chua in a recent radio interview.
“Sa isang nag papa-upa na (For a lessor who) let’s say has 25 units at P10,000 per month pasok po ito sa (this will fall within the) VAT threshold so that is still exempt. Siyempre kung ikaw talaga ay nag nenegosyo na maraming unit isang daan, dalawang daan na unit sa isang (Of course, if you are really in the business of leasing condo units and you have many units, like 100 or 200 units in a) condominium siyempre dapat mag bayad po ng (of course, you will have to pay) VAT kasi para patas (so that it’s fair for everyone),” he added.
The old VAT threshold of P1.9 million based on gross sales will be raised to P3 million under House Bill 5636, the substitute CTRP bill also be known as the Tax Reform for Inclusion and Acceleration Act (TRAIN) that is currently undergoing plenary deliberations in the House of Representatives.
For middle-income buyers, Chua said the significantly lower personal income tax rates under Package One of the CTRP will enable them to afford purchasing slightly pricier houses.
Moreover, he explained that “the price increase will only be slight and will remain affordable for buyers because even if the 12 percent VAT is applied on low-cost and socialized real estate developments, the tax increase will actually be only around 4 percent because VAT inputs can be credited instead of the usual practice of padding the final price to offset the cost of input VAT.”
“Assuming a 50 percent markup for low cost housing developers, the price increase for a P1 million house will be only P37,000, which is just 3.7 percent of P1 million,” Chua said.
He said removing the VAT-exempt privilege of housing developers will stop their practice of raising the final selling price of socialized or low-cost housing units in order for them to indirectly pass on VAT inputs they had paid for the construction of the units to house buyers.
“Now if we remove their VAT exempt privilege, then they can already credit all their VAT inputs and they will no longer need to pass on their added costs in the final price of the housing unit. That’s why our estimate is that the increase in the final price is only 4 percent and not 12 percent because the input VAT can now be credited, and the less the markup of developers, the lower the additional increase” Chua said.
Chua said the abuse of the VAT-free privilege by property developers results in large tax leakages that could have otherwise been used to help the poor buy low-cost housing units by means of targeted subsidies.
“The transfer pricing scheme employed by some property developers to avoid paying VAT, such as moving the input VAT from exempt to VATable sales lead to massive leakages, which is currently the subject of BIR audits,” Chua said.
Many developers also abuse the VAT threshold by selling condo and land parcels below the VAT threshold to avoid the tax and combining the properties later on, he added.
In lieu of tax exemptions that only rich property developers get to enjoy, Chua said a better strategy is to transfer this benefit directly to poor and low-income house buyers by way of targeted subsidies.
The substitute bill or HB 5636—which contains moderate modifications to Package One of the CTRP, removes the VAT exemptions specified in special laws, except for raw food, health and education and those granted to seniors and persons with disabilities.
HB 5636 consolidated the mother bill—HB 4774—authored by Rep. Dakila Carlo Cua, the chair of the ways and means panel, with 54 other similar tax reform measures.
Finance Secretary Carlos Dominguez III said the approval of the CTRP is crucial to the financial viability of the Duterte administration’s higher public spending policy because it aims to correct our tax system’s “inherent flaws, such as non-indexation to inflation of rates and large scope of exemptions and special treatments that complicates tax administration.”
“This is the tax package that will enable us to reshape our economic growth to make it more inclusive. It is the tax reform package that will bring us to the irreversible path towards being a high-income economy in one generation and bring down our poverty rate to a mere 14% by 2022,” Dominguez has said.
He noted that, “If we fail to raise the volume of revenues required for our economy to break out over the next few years, we will fail in everything else. We will fail to close the infra gap. We will fail to make the investments in our young to prepare them for meaningful economic participation. We will fail to catch up with our neighbors in the region who have invested twice of the amount than what we did on infra over the past three decades. Most important, we will fail to bring down the level of poverty afflicting our people.”