Senators belonging to the majority and minority blocs are treading cautiously on a counter offer by the Department of Finance to consider a Senate proposal to reduce the value-added tax (VAT) rate from 12 percent to 10 percent. The DOF has signaled the reduction could be done provided the number of exemptions is trimmed considerably.
However, Senate President Pro Tempore Ralph G. Recto, who authored the expanded VAT law, sees an element of “intellectual dishonesty” in the notion that exemptions can be lifted or taken back from key economic sectors, citing as example business-process outsourcing (BPO).
“That is all talk,” Recto told the BusinessMirror over the weekend, referring to reports quoting Finance Secretary Carlos G. Dominguez III as saying the DOF could consider—provided the number of VAT exemptions is also reduced—a Senate bill to cut the VAT rate to 10 percent to ease the impact of higher excise rates under the Duterte administration’s tax-reform law.
The VAT rate reduction embodied in Senate Bill (SB) 1671 was filed recently by Sen. Riza Hontiveros.
According to Recto, “the DOF knows you cannot take away all exemptions from the VAT.”
He then cited the case of export and BPO enterprises: “Both industries represent at least 40 percent of our economy. You can’t impose a VAT on them. There is intellectual dishonesty.”
Still, Senate President Aquilino L. Pimentel III asserts the VAT rate reduction is doable “without touching
the exemptions.”
“Yes, [we can] cut VAT even without touching the exemptions. That should be possible for as long as we are judicious and conscientious in spending people’s money,” Pimentel said.
Senate Majority Leader Vicente C. Sotto III indicated other senators have yet to firm up their vote on the VAT bill.
Senate Minority Leader Franklin M. Drilon, in a separate text message to BusinessMirror, however, held
out hopes that certain VAT exemptions can still be lifted, as proposed by Hontiveros, provided President Duterte gives this a big push. “Yes, I will support [the Hontiveros bill],” Drilon said.
But the Minority Leader acknowledged that “the lobby of business groups enjoying VAT exemptions makes the removal of the exemption very difficult and almost impossible to achieve.”
Drilon anticipates lengthy deliberations over Hontiveros’s VAT reform bill, recalling that “we saw this in the VAT and TIMTA debates,” referring to the Tax Incentives Management and Transparency Act passed earlier by Congress.
He hinted that Palace persuasion may come into play to win over enough votes to pass the VAT reform bill in the Senate.
“Just like the rationalization of fiscal incentives, both reforms are possible only if President Duterte flexes his political muscle and political will to make these reforms possible,” Drilon added.
VAT rate cut impact
last Friday Dominguez voiced “serious reservations” over the Hontiveros-led proposal to cut the VAT rate, urging people “to be very careful” in suggesting such owing to the huge task to finance the Duterte administration’s infrastructure program—estimated to require at least P8 trillion until 2022.
Despite his reservations, Dominguez did not rule out considering the VAT rate reduction, saying DOF officials have not calculated the impact of such VAT rate cuts. He dangled the option of eliminating the exemptions as a countermove to ease the fiscal impact of reducing the rate.
The finance chief was earlier quoted as saying, “There might be a possibility to reduce the rate by eliminating all exemptions, that is one possibility, but we haven’t calculated that yet. But definitely we have to look at all the alternatives.”
The current VAT rate in the country is 12 percent, but the government only collects 4.7 percent as a percentage of GDP, Dominguez was quoted in the PNA report as pointing out. He added that improved collection—by eliminating exemptions, among others—could raise the collection level to at least 7 percent. “Of course we are open to reducing the rate of the VAT. Unfortunately in the past VAT has been used as a fiscal incentive which is really wrong,” he added.
VAT rate in the Philippines was increased to its current level from 10 percent in February 2006 under the term of President Gloria Macapagal-Arroyo.