FINANCE Secretary Benjamin E. Diokno on Tuesday said the government is collaborating with the International Monetary Fund (IMF) on how to boost the country’s value added tax (VAT) collection, which currently stands at 40 percent, the lowest in Southeast Asia.
Citing a World Bank study, Diokno explained that the government is losing some P539-billion revenues because of the country’s low VAT efficiency ratio.
On an average, the national government collected P723 billion in VAT from 2016 to 2020, which is just half of the P1.307-trillion potential full revenue collections of the government, Diokno added.
Diokno attributed the low VAT collection to “too much” exemptions extended by laws, such as those being enjoyed by cooperatives.
“So while we, the Philippines, has the highest VAT rate compared to the other countries in this part of the world, our VAT collection is the most inefficient,” he said in a virtual briefing on Tuesday.
“If perfect, it should be 100 percent, but we are only able to collect 40 percent and that is because of a lot of exemptions,” he added.
The Philippines’s VAT efficiency ratio of 0.4 is below the 0.57 average in the Asean region. Singapore led the region with the highest VAT efficiency ratio at 0.79 followed by Singapore (0.71), Vietnam (0.70), Indonesia (0.5) and Malaysia (0.48).
In terms of VAT rate, the Philippines has the highest 12 percent against Indonesia’s 11 percent, Singapore and Vietnam at 8 percent, and Thailand at 7 percent.
The finance chief disclosed that the DOF has already tapped the IMF to conduct a study on how the national government can broaden its tax base.
“Maybe find areas where we can recover from the too much exemptions. So the IMF study will tell us how do we recover because 0.4 [VAT efficient is] really poor, poor performance,” Diokno said.
Nonetheless, Diokno emphasized that VAT remains as the “best” tax in the world as it is consumption-based instead of income-based.
Diokno explained that it is better to tax consumption than income as it is “more neutral” since it is based on spending rather than wealth.
“For example, you are independently wealthy. You got your money from your grandpa or your dad, you don’t work, you don’t have income, so you do not pay any income tax. But you spend all day in the mall or in a 5-star hotel consuming, so you should be taxed. So that’s what you take away from society,” he said.
“Meanwhile, income is your contribution to society. That is why you are being paid, that is your value to society. So to me, it’s fairer that we tax consumption rather than income,” he added.
Diokno pointed out that the country’s VAT system is “pro-poor” since it the national government does not impose consumption levy on food “in its original state” like rice and meat.