DOF open to VAT reduction

MANILA, Philippines — The Department of Finance (DOF) would consider a reduction in the value-added tax rate if government successfully improves tax collection by eliminating all lines of VAT exemptions, the country’s finance chief said.

In an interview, Finance Secretary Carlos Dominguez III said the government needs to be careful in reducing the current VAT rate of 12 percent considering the various infrastructure and social protection programs that need to be funded.

“At this particular time, because we have a lot of heavy expenditures, we have to be very careful about reducing the VAT rate,” Dominguez said.

The finance chief said the DOF is studying the proposal of Sen. Risa Hontiveros to lower the country’s VAT rate, considering its impact on government revenues.

“We will calculate the effect of that. All of that can be subject to discussion,” he said.

Dominguez said one alternative is the removal of all VAT exemptions to give way to the reduction of the VAT rate.

“There might be a possibility to reduce the rate by eliminating all exemptions. That is one possibility, but we haven’t calculated that yet. Definitely, we have to look at all the alternatives,” he said.

“If we can bring up our collection rate, say to seven percent, by eliminating exemptions, of course we would be open to reducing the rate of the VAT,” he added.

According to Dominguez, the government’s collection efficiency and tax effort have suffered due to the passage of laws that grant VAT exemptions to certain sectors and individuals.

The finance chief said the country only collects VAT equivalent to 4.7 percent of gross domestic product (GDP) despite having the highest rate in the Southeast Asian region at 12 percent. He said Thailand, on the other hand, imposes a seven percent VAT, yet it is able to collect the same VAT-to-GDP ratio as the Philippines.

“Unfortunately, in the past, VAT has been used as a fiscal incentive, which is really wrong. There is no other country in the world which has so many exemptions,” Dominguez said.

Earlier this week, Hontiveros filed Senate Bill 1671 or the “Bawas VAT” bill, which seeks to cut the VAT rate to 10 percent effective Jan. 1, 2019, and to eight percent on Jan. 1, 2022, if the previous year’s revenue collection, from VAT reach at least 4.5 percent of GDP.

The lawmaker said the bill aims to provide relief to Filipinos affected by the Tax Reform for Acceleration and Inclusion (TRAIN) Act.

Under the TRAIN law, various laws granting VAT exemptions have already been repealed, except those for raw food, agricultural products, health and education, as well as for senior citizens, persons with disabilities and cooperatives.

The VAT zero-rating for renewable energy and direct exporters have also been retained.

On the other hand, the VAT zero-rating for other sectors, such as indirect exporters will be removed provided that the government implements an enhanced VAT refund system that grants refunds of creditable input tax within 90 days from the filing of the refund application.

  Finance Undersecretary Antonette Tionko said the Bureau of Internal Revenue (BIR) still has P35 billion worth of tax refunds yet to be paid as of Dec. 31, 2017.