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NTRC TRJ-6: Proposed Reforms on the Value-Added Tax

The paper traces the historical changes in the VAT system since its inception in 1988 to the present, its revenue performance, and the impact of the proposed amendments to the VAT under Package I of the proposed Comprehensive Tax Reform Program (CTRP). The Philippines introduced the VAT in 1988 through Executive Order (EO) No. 273. Since then, several laws were enacted to amend and expand the coverage of the VAT but at the same time add certain items to the list of exemptions. One major latest amendatory law is Republic Act (RA) No. 9337 or the Reformed VAT (RVAT) which raised VAT rate from 10% to 12% after meeting certain conditions. It was implemented on November 1, 2005 while the increase in the VAT rate from 10% to 12% took effect on Feb. 1, 2006 via BIR Revenue Memorandum Circular (RMC) No. 7-2006. Except for the year 1998 when collection dropped by 10.6%, total VAT collections from 1988 to 2004 were generally on the uptrend which ranged from PhP14.3 billion to PhP139.1 billion. When RA 9337 was implemented in the latter part of 2005, total VAT collections more than tripled from PhP156.7 billion in 2005 to PhP259.8 billion in 2006. There was a significant increase in the VAT collection of the BIR (60.4%) and the BOC (72.7%) in 2006, with the increase in VAT rate from 10% to 12%. VAT collection continued to increase from PhP274.04 billion in 2007 to PhP621.95 billion in 2016. Of the six ASEAN countries imposing the VAT (Philippines, Cambodia, Lao PDR, Thailand, Vietnam and Indonesia), five impose a single VAT rate on sale of goods and services. The Philippines imposes the highest rate of 12%, Cambodia, Indonesia and Lao PDR with 10% and Thailand, 7%. It is noted that in the case of Indonesia, a special levy termed as luxury goods sales tax (LST) with rates ranging 10% to 75% is also imposed. On the other hand, Vietnam has two-tiered VAT rates i.e. a standard rate of 10% and 5% for specific essential goods and services. While the Philippines’ 12% VAT is high by ASEAN standards, its VAT effort stood only at 4.4% of GDP in 2014, same with Thailand with a VAT rate of only 7%. The low ratio of VAT to GDP is due to numerous exemptions and zero-rated transactions under the Philippine VAT system. Thus, under the CTRP, broadening the VAT base, limiting exemptions and other enhancing measures to improve VAT collection efficiency are being proposed. It is noted that while the Philippines has 59 lines of VAT exemptions in the Tax Code, Indonesia has 37, Thailand, 37 and Vietnam, 25. Moreover, under special laws, more than 80 sectors/entities/individual groups are accorded VAT exemption. On May 31, 2017, the House of Representatives approved on 3rd reading, Package 1 of the CTRP as HB 5636. Meanwhile, SB 1408 on the same package was filed in the Senate of the Philippines. The proposed reforms on the VAT as indicated in the bills are as follows: 1. Limit the imposition of 0% VAT to direct exporters only; 2. Include electric cooperatives in the definition of sale or exchange of services subject to the VAT under Section 108 (A) of the NIRC of 1997; 3. Subject the sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels to VAT exemption instead of zero-rate; 4. Remove VAT exemption of cooperatives under Section 109 (L), (M), and (N) of the NIRC as amended; 5. Remove VAT exemption of real property utilized for low cost and socialized housing; 6. Remove VAT exemption on the lease of a residential unit with a monthly rental not exceeding PhP10,000. (now PhP12,800); 7. Remove VAT exemption of the National Grid Corporation of the Philippines (NGCP); 8. Retain the VAT exemption of the senior citizens and persons with disabilities (PWD); and 9. Increase VAT threshold from PhP1.5 million (now PhP1,919,500) to PhP3 million which is to be adjusted to inflation not later than January 31, 2018 and every three (3) years thereafter. The proposals on the VAT under the CTRP are supported. Fiscal prudence dictates that to compensate for the foregone revenues from the restructuring of the personal income tax, the broadening of the VAT base would be an effective revenue raising measure. VAT exempt transactions tend to break the VAT chain, which lead to higher costs and prices, and revenue losses to the government. Zero rating, on the other hand, is extremely complex as it provides strong incentives for fraud, creates excessive burden on tax administration, and effectively erodes the base. For a VAT regime to be effective it must have a broad base and limited number of exemptions. The exemptions create problems in compliance and administration, particularly when a company produces both exempt and/or VATable items/transactions as well as numerous efficiency and effectiveness problems.

National Tax Research Center
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Published in 2017 and available in the NTRC Library or Downloaded 31,104 times since January 31, 2019
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