Last December 14, 2007, Senator Mar Roxas filed Senate Bill 1962, a bill which seeks to amend RA 9337 by suspending the 12% Reduced Value Added Tax (RVAT) on the importation of crude oil and finished fuel products for six months. Two days later, Senator Juan Miguel Zubiri filed Senate Bill 1977, which proposes to amend RA 9337 by lifting the 12% RVAT on crude oil and finished products as well as on electricity.

In January 2008, ahead of their counterparts at the House of Representatives, the Senate Committees on Ways and Means and Energy held a public hearing on the popular clamor among consumer, labor, and transport groups to remove the reformed value added tax on oil.

The consultation was held prior to an end-January energy summit organized by the Department of Energy in the light of the continuous rise in the price of crude oil abroad and domestic fuel pump prices.

SOLUTIONS: SHORT OR LONG TERM?

However, suspending, removing, or reducing the 12% VAT on oil or power is not the best course of action at these times. It has negative consequences affecting government revenues, which, would impact the quality and quantity of services that government provides, especially on health and education.

Based on the government’s 2008 revenue projections, MBC Research estimates the foregone revenues to reach P27.3 billion under SB 1962 and P51.1 billion under SB 1977. Both measures will undoubtedly keep the Bureau of Internal Revenue and the Bureau of Customs from meeting their revenue targets unless alternative revenue sources are identified soon. Although ahead of the medium-term plan, the proposals will further set back a projected fiscal consolidation by the end of 2008.

In a joint public statement with the Management Association of the Philippines, and the Financial Executives Institute of the Philippines, MBC stresses the importance of having a stable economy with consistent policies in creating a business environment that is globally competitive for investments. Instead of revising our position on RVAT for oil and power, the government should, instead, focus on relieving consumers from the impact of rising world oil prices, which have now reached beyond US$100 per barrel.

Suspending the law on RVAT would only weaken the legislature as an institution. Furthermore, it might reverse the international credit ratings upgrade given to the country after it passed the RVAT Law in 2005. In effect of a downgrade, government’s borrowing costs and interest expenditure would increase, while the private sector’s credit rating would be also be affected as it cannot go higher than the sovereign’s rating.

Another area of concern is conservation. The price of oil is rising everywhere in the world, and this trend sends a signal to consumers about the value of the commodity. Suspending VAT on oil, making oil cheaper than its real price would send a message that there is nothing wrong with the market. As such, consumers will never learn to adapt to this scenario – one of which is conserving resources like oil and electricity.

This will prove to be a much bigger problem after the six months VAT suspension has lapsed and the problem returns. The likelihood is that high oil prices are here to stay, and offering to suspend VAT on oil and power is a transient solution, not a real one. On the other hand, if the suspension ends up being a permanent exemption, it would be disastrous for our fiscal health and would jeopardize the implementation of government programs.

On the other hand, MBC research shows that should the estimated foregone revenues from both measures, amounting to P27.3 billion to P51.1 billion, directly translate into consumer spending or investments, an additional 0.4% to 0.8% will directly contribute to the country’s GDP growth.

In terms of consumer prices, LPG, kerosene, electricity, oil, gas, diesel, and other lubricants comprise only 6.7% of the entire consumer price index basket. Based on the changes in the price indices of these items since they have been covered by RVAT, MBC Research estimates that the cost reduction would result in reducing inflation rate by only 0.1%.