The Value-Added Tax (VAT) is one of the major contributors to government revenues, ranking second to income tax and far ahead of the third and fourth placers consisting of excise taxes and customs duties, respectively. From 2004-2009, the government generated from the VAT total revenues amounting to P 1.43 trillion, averaging P 238.1 billion annually and representing on the average, 3.75% of gross domestic product (GDP). Of the annual VAT collections, 53.4% was generated from domestic transactions while 46.6% was from foreign trade.
Following a methodology developed by Aguirre and Shome (1987) in calculating the Mexican VAT base, the country’s VAT base in 2009 was estimated at P 3,652 billion, declining by 0.51% compared to the 2008 record of P 3,671 billion because of the significant drop in imports brought about by the global financial crisis. The VAT base constitutes around 72% of the taxable sales.
The estimated potential VAT revenue in 2009, which was derived by multiplying the VAT base by 12% is estimated at P 437.39 billion after deducting the presumptive input tax credit (PITC) allowed to certain subsectors. With the actual VAT collection of P 302.19 billion in 2009, the VAT gap or leakage was estimated at P 135.19 billion, representing 30.9% of the potential VAT revenue. This indicates that the tax authorities captured only 69.1% of the potential VAT collection. The VAT gap for 2009 was lower by P 7.76 billion or by 5.43% compared with the 2008 gap of P 142.95 billion. This decline in 2009 VAT gap is an indication of improved collection efforts of the BIR associated with the adoption of administrative reforms, particularly the "Oplan Kandado” under RMO 3-2009, and the "SanTAX Claus” project under RMO 34-2009.
The effective VAT rate (EVR) or the ratio of actual VAT collection to taxable sales in 2009 was 5.95%. Had the government fully collected the potential VAT revenue, the EVR should have been 8.6% which is equal to the ratio of potential VAT revenue to taxable sales.
The VAT gap/leakage could be traced from the inefficiencies within the system itself. The VAT system, particularly the tax credit mechanism, allows taxpayers to credit their VAT payments on inputs and purchases of capital goods (input VAT) against their output VAT. Excessive claims of tax credits could result into VAT leakages. Under declaration of sales and purchases associated with the non-issuance of invoice/receipts also contribute to VAT leakages.
From 2008 — 2009, the performance of the VAT improved as the VAT gap declined from 32.5% to 30.9%. To enhance further the revenue productivity of the VAT and further eliminate leakages in the tax system, the recommendations made in previous studies are reiterated, as follows:
a. Continue and sustain initiatives to intensify industry profiling and benchmarking, monitoring, audit and examination of large taxpayers, including enhancing the tax computerization effort of the BIR for easy detection of tax fraud;
b. Monitor closely the carry-over of excess input tax credits in the succeeding years;
c. Intensify the implementation of the RELIEF program and the extensive use of third party information in gathering and processing data necessary to strengthen BIR’s assessment and enforcement functions;
d. Strengthen the implementation of the "Oplan Kandado” program;
e. Intensify the enforcement of the "RATE” and "RATS” programs of the BIR and BOC to penalize tax evaders and smugglers; and
f. Disaggregate reports on actual collection on VAT by industry for easy monitoring
