The reduction in VAT appears to apply with the termination of the exemption
By Justine Irish D. Tabile, A reporter
GOVERNMENT will have to expand the tax base for the proposed reduction in value-added tax (VAT) to continue, and may have to crack down on transactions that do not currently pay VAT, say analysts.
Raymond A. Abrea, founder and CEO of Asian Consulting Group (ACG), said the proposed reduction in VAT rate from 12% – the highest rate in Southeast Asia – to 10% will help ease the burden on consumers.
“The Philippines currently has the highest VAT rate in ASEAN, yet our effective collection is only about 35-40%, far below the world average of about 57%,” said Mr. BusinessWorld via Viber.
“This clearly shows that the real problem is not the tax rate — it’s irrelevantfileaks and leaks in the system,” he added.
ACG said ASEAN’s VAT rate is 10%, while Thailand rates the lowest at 7%.
Indonesia ranks 11%, Cambodia and Laos 10%, and Vietnam and Singapore 8%.
Collection efficiency was highest in Thailand at 71%-79%, followed by Singapore at 71%, Vietnam 70%, Cambodia 66%, and Indonesia 45%-50%.
This puts the average ASEAN concentration at 57%.
As such, many members of the Philippine Congress have introduced bills aimed at reducing the domestic VAT rate to 10%, including Senator Mark A. Villar and Senate bill 1916.
Currently in committee, the bill states that the reduction in the VAT rate would increase the income of the average household by P8,000 per year.
Former Finance Secretary Ralph G. Recto warned last year that lowering the VAT rate could cost the government P339 billion in annual revenue.
“Although the (advance income) of P339 billion annually is a legitimate concern, this can be reduced by balancing the more than 30 existing businesses that do not pay VAT,” said Mr.
“Many of these exemptions are non-reimbursable, compliance is poor, and they are vulnerable to abuse, contributing to an estimated P539 billion in revenue according to the World Bank,” he added.
He said that exemptions given to the elderly and disabled should be considered.
“(These) are not well targeted, often benefiting those who spend more money than those who are at greater risk,” he said.
“Direct support mechanisms – such as targeted coupons, cash transfers, or universal pensions – will deliver aid more efficiently and equally,” he added.
The President of the Foundation for Economic Freedom, Calixto V. Chikiamco, said the tax base should be expanded to compensate for the low VAT rate.
“(This can be done) by removing the tax exemption for other products, such as the sale of cooperatives,” he said of Viber.
Cielo D. Magno, associate professor at the UP School of Economics and former finance secretary, said at the tax forum:
“If you really want to reduce VAT from 12% to 10% to 8%, it is possible. But we have to prevent leakage and remove other exemptions. We have to increase the tax base regarding VAT.”
Mr. ACG’s Abrea said the government should also strengthen VAT administration through electronic invoicing, digital monitoring, and enforcement.
“The way forward is clear: broaden the VAT base, adjust exemptions, and modernize tax administration,” he said.
“Fiscal integrity does not come from imposing a high tax rate in ASEAN, but from a fair, efficient, and technology-driven tax system that really works,” he added.
