To VAT or not to VAT: VAT to negatively impact PHL housing backlog

I HAD a casual chat with the president of the Subdivision and Housing Developers Association (SHDA), Chris Narciso, who is appealing to the government to reconsider proposals to lift the value-added tax (VAT) exemption on low-cost, economic and socialized housing, especially in light of a recent study about its negative impact on the Philippine housing backlog.

It will be recalled that President Duterte’s administration is currently seeking for the reduction of personal and income taxes and the lifting of VAT exemption on industries, such as transport and mass housing, as part of the proposed tax reforms. Early this year, the House of Representatives has already approved House Bill 5636, also known as the Tax Reform for Acceleration and Inclusion. The tax reform is seen as a means to fund the administration’s massive “Build, Build, Build” infrastructure project.

However, the plan to lift the VAT exemption on mass housing couldn’t have come at a worse time—the industry is already dealing with a rising backlog.

As of 2016, the country’s estimated housing backlog is at 6.9 million units. Current industry trends indicate that the average increase in the number of households is 435,000 per annum, while the average number of housing units constructed is at 233,000 per annum. From these figures alone, it is clear that the the housing developers still have a lot of catching up to do.

“Researchers have already confirmed what we have suspected all along. The study has concluded that housing backlog in the Philippines is expected to widen not only because the production capacity of the housing sector is failing to meet the demand for housing, but because the imposition of VAT on low-cost housing is also looming,” Narciso said.

“We already have an existing housing backlog, but adding VAT on housing acquisition will not send a positive message to prospective buyers. It will set us back instead,” Narciso added.

According to the study “Measuring the Impact on Affordability and Housing Demand of Lifting the Value-Added Tax Exemption on Low-Cost Housing” published in September 2017 and conducted by the Center for Research and Communication, the housing backlog will persist in the country regardless if the VAT exemption for mass housing will be lifted. However, the response of developers and buyers to new taxes will also significantly alter and impact the backlog situation. To be frank and factual about it, the VAT imposition will actually worsen the backlog.

The government is targeting to collect about P6.2 billion of new taxes from mass housing. However, judging from the results of the study, this may not be possible.

The Center for Research and Communication report suggests how the original target of generating the P6.2 billion of new taxes may be difficult to achieve. These include “[a] many buyers who will be priced out and/or postpone the decision to purchase; [b] the net positive effect of higher disposable incomes following the reduction in personal taxes on mass-housing demand may be offset by the dampening effect of a VAT-induced increase in the selling prices of mass housing; [c] only a few in the mass-housing segments are salaried workers and wage earners who will benefit from the reduction in personal income rates; and [d] developers of mass-housing projects may decide to cut production owing to decreased market demand, hence reducing the taxable base.”

Experts and industry analysts agree with the study believing that the target of  P6.2-billion tax collection from the mass-housing sector may not be possible should the VAT exemption no longer apply.

“Those who are eyeing certain household aspirations may be forced to look for lower category of housing because of higher taxes. Worst-case scenario would be that potential buyers would lose interest and postpone any decision to buy housing units,” Narciso remarked.

“We urge the policy-makers to study the impact of new taxes very carefully because a VAT imposition would dramatically shift market demands and this may not be in favor of the tax-collection targets.”

Though imposing VAT on mass housing for the poor and low-income earners will create a dip in the backlog, it’s going to be temporary and for unappetizing reasons. There will be a decreased demand for mass housing, but only because households will be pushed down to the next lower category or, worse, priced out from the market.

This observation is echoed by other members of the industry, who asked to remain anonymous due to the controversial nature of the issue.

“The simulations conducted during the research showed that there will be an artificial reduction in the backlog not because of an increase in supply but rather a reduction in the demand of households for mass housing in the economic and lower-priced segments. The demand for mass housing will decrease as prices increase with the developers passing the tax burden on buyers,” he added.

For a tax reform that intends to be pro-poor, the lifting of VAT exemption on mass housing directly hits those who can only afford low-cost housing. These include the minimum-wage and low-income earners as well as overseas Filipino workers (OFWs). After all, it’s the buyers who will bear the brunt of VAT.

“The study bared that in a recent industry consultative workshop, discussions with developers of socialized, economic and low-cost housing indicated that the housing industry would raise their selling prices from a low of 7 percent to a high of 12 percent for any VAT that will be levied on their mass-housing projects,” Narciso shared.

Moreover, the report showed that a significant share of the households that rely on overseas remittances to purchase low-cost housing will bear the burden of the VAT imposition on housing. It revealed that while on average, 22 percent of the total households depend on overseas remittances as a major source of income, a breakdown of the same households according to housing segments showed that a large number—19 percent, 36 percent and 40 percent of households belonging to the socialized, economic and low-cost housing segments—depend on overseas remittances. This only confirms that it will be the OFWs, the unsung heroes of Philippine economy and GDP contributors, as well as their families who will be the most affected among the patrons of mass housing by the VAT imposition.

The simulations conducted to support the study also showed how housing-price increase has a cascading effect.

“Housing construction activities have a multiplier effect on the economy and on employment. Should the housing developers cut back on production in response to diminished market demand, expect a direct impact on economic activities,” Narciso stated.

Given the situation, the SHDA is prepared to coordinate and work closely with the administration to address these issues.

“There will be a number of concerns to contend with when it comes to the imposition of VAT on mass housing, but the SHDA is willing to work with the government to find an alternative and a workable solution. With a meaningful dialogue between the government and the industry representatives, I am certain we can find a delicate balance to ensure that the housing backlog will diminish without hurting the tax collection or the common tao, who simply wants to provide decent housing for the family. After all, it’s a basic need and a right that one shouldn’t be deprived of,” the SHDA president concluded.