The Market Monitor Minding the Nation's Business
By Luis Leoncio
The government is considering a reduction in the value added tax (VAT) currently pegged at 12 percent contrary to the government earlier proposal to raise the sales tax to 15 percent as part of revenue enhancement.
A lower rate is possible once the government cleans up the tax system and plug leakages in the tax, Finance Undersecretary Karl Kendrick Chua said in a Senate hearing last week.
Thailand, which has a VAT of seven percent, collects the same amount of revenues from this tax as the Philippines because of fewer exemptions, Chua said.
Thailand has only 35 lines of exemptions while the Philippines has 59 lines of exemptions in the tax code and 84 special laws with VAT exemptions.
The revenue share as a percentage of gross domestic product (GDP) from the VAT is the same at 4.2 percent for both the Philippines and Thailand despite the former’s higher tax rate, he added.
“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,” Chua said during the Senate ways and means committee inquiry on the government’s proposed Comprehensive Tax Reform Program (CTRP).
The House of Representatives recently passed the tax reform bill but it remains pending in the Senate.
“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,” Chua said.
Chua said that because Thailand has already 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 the tax incentives that would entice them to relocate there.
“Thailand can afford this because it has done the basics many years ago but we have not,” said Chua.
“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 added.
Chua said that even with the fiscal incentives given by the government to private businesses, the Philippines remains behind Thailand in terms of per capital 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, its 17 percent,” he said.
The House of Representatives approved Tax Reform Acceleration and Inclusion Act (TRAIN) or HB 5636—by a 246-9 vote with one abstention last May 31 before the Congress’ sine die adjournment.
This bill, which had 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, to fill up the consequent revenue loss, by adjusting excise taxes on certain products and broadening the VAT base.
A Department of Finance (DOF) memorandum to President Duterte said the tax reform bill is “expected to help reduce poverty rate from 21.6 percent in 2015 to 14 percent in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from USD3,500 in 2015 to at least USD4,100 by 2022.”
The memo cited “dire consequences” if Congress fails to approve the tax reform law in its entirety.
“The government’s strategy to embark on an aggressive expenditure program by raising deficit spending to three percent of the GDP would lead to an “unsustainable fiscal position,” which, in turn, could trigger a credit rating downgrade possibly costing the government an extra P30 billion in annual debt servicing and P100 billion more in higher borrowing costs for the public.,” he said.
Finance Secretary Carlos Dominguez said he hopes the Senate would act swiftly on the bill when the Congress opens its second regular session in July and retain the original features of TRAIN as outlined in HB 4774.
“We can live” with HB5636, “but of course it’s better if we get more,” he said.
Chua noted that the VAT is a tax on consumption, and thus, would place the burden more on the rich than on the poor.
He assured the lawmakers that the poor and other vulnerable sectors will not be significantly affected by the reforms in the VAT system because “most of their purchases are already exempt from VAT and they often buy from marginal suppliers, which by law are also exempt from VAT.”
Albay Rep. Joey Salceda, senior vice chair of the House committee on ways and means, said the DOF-endorsed tax reform program is the only way to make the tax system more efficient, equitable and pro-poor, as the government cannot exclusively tax the rich because such a measure would be immediately struck down as class legislation.
“If you impose taxes, you cannot tax the rich without also hitting the poor because under our Constitution, there is no such thing as class legislation,” he said.
An increasing number of international financial institutions have lauded HB 5636’s approval as a positive step to reforming the country’s tax system and boosting revenue, and a testament to the Duterte administration’s decisive leadership and firm resolve to pursue broad economic reforms and ensure the financial viability of its ambitious public investment program. These include Moody’s Investor Service, Fitch Ratings, Deutsche Bank, and Nomura.