The Philippines’ antiquated tax code, which contains 59 lines of exemptions from the Value-Added Tax and 84 special VAT-related laws, have led to massive revenue leakages costing the government an estimated P90.7 billion each year, according to the Department of Finance (DOF).
Finance Undersecretary Karl Kendrick Chua said overhauling the country’s outdated tax system by broadening the VAT base through the removal of many of these multiple exemptions will hit affluent or well-connected sectors that are the primary beneficiaries of such tax privileges.
“In general, most consumption of the poor, such as raw food and purchases from small stores, is exempt, from VAT already. Broadening the VAT base will make the rich pay more because the VAT, which is a consumption tax is proportional to one’s income and consumption,” Chua said Thursday at a tax forum in Pasay City.
The DOF and the Department of Budget and Management (DBM) held the Luzon-wide Open Government Dialogues, which focused on the first package of the Comprehensive Tax Reform Program (CTRP), at the Philippine International Convention Center (PICC).
Some 100 representatives of civil society groups and government agencies based in Luzon attended the forum.
Removing several exemptions to the VAT as provided under the National Internal Revenue Code and special laws is among the provisions of House Bill 4774 or the Tax Reform for Acceleration and Inclusion Act filed by Quirino Rep. Dakila Carlo Cua.
The VAT exemptions that account for the biggest annual losses for the government include the cooperatives, housing, special economic zones, among others.
But to protect the poor and other vulnerable sectors, Chua said that HB 4774 will retain the VAT exemptions for seniors and persons with disabilities, and for raw food purchases as well as health and education expenses. In addition, all purchases from stores with sales below P3 million are also exempted. This basically exempts most purchases of the poor.
HB 4774 is the DOF-endorsed version of Package One of the Duterte administration’s Comprehensive Tax Reform Program (CTRP). Besides lowering personal income tax rates and broadening the VAT base, the bill contains provisions adjusting the excise tax rates for fuel and automobiles, among other measures.
The House ways and means committee chaired by Rep. Dakila Carlo Cua approved last May 15 the final substitute bill that consolidated HB 4774 with 54 other similar tax reform proposals. The final version of the substitute bill contains moderate modifications to the original measure and earmarking provisions for the additional revenues to be collected from the fuel excise tax adjustments.
Chua noted that although the Philippines’ VAT rate is the highest in the ASEAN region at 12 percent, the country’s efficiency, and revenue collection is far lower than those of other Southeast Asian economies with our collections only equivalent to an average of 4.2 percent of GDP.
“In contrast, Thailand’s VAT rate is a lower 7 percent, but its efficiency and revenue collection is also equivalent to about 4.2 percent of its GDP because its VAT exemptions are limited to only 35 items,” Chua said.
Chua said that in reforming the country’s VAT system “those who are unfairly subsidized or who take advantage of this tax system’s complexity are the ones who will pay more and provide the money to fund more government services for the poor.”
Chua said the reforms contained in the CTRP will benefit 99 percent of Filipinos in the immediate term and the entire population in the near-term because the revenues generated from these reforms will be spent on an unprecedented public investment program focused on infrastructure, health, education and social protection for the poor.
Finance Secretary Carlos Dominguez III said the CTRP will serve as the “cornerstone” of the funding for the government’s infrastructure program, dubbed the “Build, Build, Build” agenda, which will require some P8.4 trillion over the medium term.
The “Build, Build, Build” agenda is a key element of “DuterteNomics,” which is President Duterte’s economic strategy to dramatically raise funds–in large part through CTRP–and spend big on infrastructure, human capital formation, and social protection.
This strategy will enable the government to sustain the Philippines’ growth momentum, attract investments and create jobs, achieve economic inclusion and transform the Philippines into a high middle-income country by 2022, by which time poverty incidence will have been reduced to 14 percent.
If “DuterteNomics” is sustained over the medium term, the government envisions the Philippines to be a high-income economy in one generation or by 2040.
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