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Publication Detail
TRJ 2012-4: VAT on Petroleum Products, March - April 2012

The paper discusses facts about the oil industry, its tax treatment and the issues and implications of the proposed abolition of VAT on oil. The Philippines is an oil importing country. Its petroleum industry is primarily a downstream industry which consists of the business of importing, exporting, re-exporting, shipping, transporting, processing, refining, storing, distributing, marketing and/or selling crude oil, gasoline, diesel, liquefied petroleum gas (LPG), kerosene, and other petroleum products. The Philippines downstream oil industry was deregulated in 1998 and is currently dominated by two (2) major oil refining and marketing companies; Petron and Pilipinas Shell. A third oil refiner and marketer, Caltex Philippines, Inc. converted its refinery into an import terminal in 2003 and now operates as a plain marketing and distributing company under the name Chevron, but maintains its Caltex brand. Based on the Department of Energy (DOE) data, the National Capital Region (NCR) consumed more than one-third of the total oil consumption of the country followed by South Luzon, North Luzon, Mindanao and the Visayas. By industry, petroleum consumption in 2008-2010 was highest in the power generation sector, followed by commercial, transport and manufacturing sectors. The least consumers were the construction and agricultural sectors, whose levels of consumption were even lower than the refinery/fuel losses. By type of consumption, it is noted that diesel fuel oil/gas oil was the most frequently consumed type or petroleum product by households and industries; followed by gasoline and LPG. RA 9337 removed the VAT exemption of petroleum products subject to excise tax under Section 109(e) and (f) of the NIRC of 1997, as amended. The inclusion of petroleum products among the goods subject to VAT is consistent with the principle that for VAT to be effective, it should be broad-based and with limited exemptions. Moreover, the inclusion of petroleum under the VAT system was primarily for revenue consideration and to improve tax collection efficiency. It should be noted that the inclusion of the said petroleum products within the ambit of the VAT system simultaneously reduced the excise tax rates and tariff rates of certain petroleum products thereby mitigating the impact of the VAT. It is observed that the excise tax and VAT collection showed an inverse relationship, i.e., an increase in VAT collection correspondingly results to a decrease in the excise tax collection. The rationale for this is that as the prices of petroleum increases, the demand decreases. Excise tax being based on quantity is adversely affected by the decrease in demand while VAT being based on value or selling price is favorably affected by the increase in price. Hence, the combination of VAT and excise tax on petroleum has balanced the inflow of revenue to the government to some extent. Based on the Organization of Petroleum Exporting Countries (OPEC) basket price, in the last ten years, prices of petroleum jumped by almost 365% or from $23 to $107 per barrel while the peso appreciated by only 17% from the 2001 level. The peso appreciation has minimized the impact of the increasing price of petroleum to some extent. In the last 12 weeks of the year, the price of crude oil based on OPEC basket price, grew eight times but only decreased four times. The increasing prices of petroleum products adversely affect the prices of commodities in the country. During these trying times, several proposals seeking for the abolition or reduction of taxes imposed on petroleum products specifically the abolition or reduction of the VAT rate come from various sectors. Some sectors recommended abolition of the VAT on oil products. It should be noted, however, that the abolition or reduction of the VAT on petroleum products will affect the steady flow of revenue of the government from this source. This will cut funding for social programs whose direct beneficiaries are the poor households. On the other hand, the rich people who consume more petroleum products (e.g. gasoline for their cars, etc.) will be benefited. It is worth to note that the prices of petroleum products depend primarily on the prices of crude oil in the world market, exchange rate, supply and demand, and geo-political factors. Thus, removing the tax imposed on petroleum products is not a guarantee that their prices will go down. On the other hand, if the government maintains the current VAT on petroleum, the proceeds may be used extensively to help the poor. Having more VAT collections means more funds to finance various programs such as the Pantawid Pasada Program which is a direct subsidy to public utility vehicle (PUV) drivers/operators. This program can be expanded to further help the transport sector either by increasing the subsidy or cover more beneficiaries. Another form of Pantawid Pasada Program that may be considered by the government is through partial reimbursement of VAT paid based on the sales invoice issued by the gas stations. This scheme will not only reduce the impact of VAT on the public transport sector but at the same time promote awareness on the importance of asking receipt for every purchase of gasoline or diesel. This in effect will help the collecting agency to determine the accuracy of the declared sales of gasoline stations. Under this scheme, PUV drivers will be able to partially reimburse their VAT payments from their purchases of gasoline/diesel subject to a maximum number of allowable liters per day or week. Alternatively, the government may introduce non-oil related subsidies out of the Katas ng VAT. In 2008, the government allotted PhP16 billion of VAT collection to various social programs such as the Pantawid Kuryente, student assistance fund for education, microfinance program, subsidy to elderly, agriculture guarantee loan fund pool and Department of Agriculture’s FIELDS (Fertilizer, Irrigation and Infrastructure, Extension and Education, Loans, Dryer and other post Harvest Facilities and Seeds). The funds may also be used to finance the administration’s flagship program granting conditional cash assistance (CCA) to indigent families or the so-called Pantawid Pamilyang Pilipino Program (4Ps). Finally, the VAT proceeds may be used to ease the burden of the transport sector through better infrastructure, better traffic management, scholarships for the children of public transport drivers/operators, health insurance subsidy, loan grants to operators and drivers’ associations to help them establish small businesses for additional source of income.

National Tax Research Center
Authors Keywords
NTRC; value added tax (VAT); petroleum products;
Download PDF Number of Downloads
Published in 2012 and available in the NTRC Library or Downloaded 228 times since January 02, 2014
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