VAT: The Sound and the Fury
In an overnight session that lasted until the early morning of 27 January, the House of Representatives passed on final reading the proposed Value-Added Tax Restructuring Act, or HB 3555 by a vote of 126-11. The night before, some opposition and party-list solons walked out of the session hall protesting the lack of public consultations on the issue of increasing the VAT rate to 12% from 10%. Unsuccessfully, the group attempted to return the measure back to the Ways and Means Committee since some of its sponsors did not sign the committee report.
Protests against the measure revolves around its impact on consumer prices, particularly on food items (noodles, pan de sal, sardines, coffee, processed milk); fuel; and power. Despite the measure’s negative impact on consumer spending, inflation, economic growth, and cost of production as simulated by the National Economic and Development Authority and the National Statistical Coordination Board, the government maintains increasing the VAT rate is not anti-poor. The National Tax Research Center estimates the annual leakage in VAT collections amounting to an average of P30.7 billion a year from 1992 to 2003. In contrast, the measure is expected to generate P35 billion in additional revenues for the government.
Meanwhile, it was the Senate Ways and Means Committee that conducted a series of public hearings on the proposed VAT rate hike under SB 1873. Committee chair Ralph G. Recto, initially favored a multi-tiered VAT rate: 5-6% for services presently exempt from VAT; 12% for goods and services presently subject to 10% VAT; and 15% VAT for nonessential items like jewelry, country club shares, and services in hotels and restaurants. He also believes the proposal should only be temporary – until the fiscal deficit will have been wiped out by 2010. Meanwhile, opposition and some administration senators in the Committee opposed the measure. To offset the impact of the VAT rate increase on consumers, Senator Recto also held public hearings on SBs 1198, 1817, and 1874 seeking cuts on the withholding taxes of individual income tax earners.
The House of Representatives has also approved on third reading, HB 3705 – the measure lifting VAT exemptions on certain transactions. Last 28 February, the House voted 158-30 (with three abstentions) in favor of repealing VAT exemptions enjoyed by the following to raise P17.7 billion: electricity sales by power companies; sale or importation of petroleum products; sale or importation of raw materials used in making petroleum products by the buyer or importer himself; lease or importation of passenger or cargo vessels of more than 5,000 tons, including engine and spare parts used exclusively for international shipping; and services by doctors and lawyers. The bill removes the zero-rated VAT privilege of private power companies as well as that of the National Power Corporation. Independent power producers and oil companies are prohibited from passing on the VAT to consumers.
HB 3705 also slaps multi-tiered VAT rates on the following: sale, barter or exchange of petroleum products subject to excise tax for the National Power Corporation, power and oil companies (4% percent on the first year, 6% on the second year, 8% on the third year, and 12% on the fourth year); 6% for locally produced milk, refined sugar, cooking oil, canned goods (sardines and mackerel), packed noodle-based instant meals, instant noodles, noodle products (miki, misua, sotanghon, pancit canton, bihon), and generic medicines; 8% for imported milk, refined sugar, cooking oil, canned goods (sardines and mackerel), packed noodle-based instant meals, instant noodles, noodle products (miki, misua, sotanghon, pancit canton, bihon), and generic medicines; and 12% for services of doctors and lawyers earning in excess of P750,000 a year.
At the same time, HB 3705 also exempts the following transactions from VAT: pan de sal; sale or importation of liquefied petroleum gas; importation or lease of passenger or cargo vessels and aircraft (including engine, equipment and spare parts) for local and international transport; importation of fuel, goods, and supplies by vessels or aircraft for use in international shipping or air transport operations; services for vessels or aircraft for use in international shipping or international air transport operations, including leases and property for use; medical services rendered to indigent patients; and legal services given to workers, labor unions, subsistence farmers, fisherfolk, urban poor, students, agrarian reform beneficiaries, senior citizens, and indigenous peoples.
The Senate also held public hearings on the controversial proposal. SB 1838 seeks to lift VAT exemptions on transactions involving petroleum products (with an expected revenue yield of P7 billion); raw materials in the manufacture of petroleum products (P9.7 billion); passenger and cargo vessels (P1 million); cooperatives (P4.9 billion); books (P228 million); and services of doctors and lawyers (P1.8 billion). Assuming a 70% collection efficiency rate, the incremental revenue yield from the measure will reach P23.6 billion.
Before Congress takes a break on 18 March, the Senate still needs to act on three important revenue measures already passed by the House of Representatives on third reading: HB 2933 granting tax amnesty, HB 3295 rationalizing fiscal incentives, HB 3555 increasing the VAT rate to 12% from 10%, and HB 3705 lifting of VAT exemptions and implementing a multi-tiered VAT rate. Moody’s Investors Service downgraded the country’s long-term foreign currency debt to four notches below investment-grade last 16 February after only two revenue measures were enacted into law: RA 9334 (increase the excise tax rates on alcohol and tobacco products) and RA 9335 (Attrition Act of 2005).
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