World Bank recommends review of VAT exemptions

To improve tax collections

MANILA, Philippines —  A review of value-added tax (VAT) exemptions can help the Philippines improve tax collections without having to increase tax rates, according to the World Bank.

Gonzalo Varela, lead economist for the Philippines at the World Bank, said in a briefing yesterday that the Philippines can increase its tax collection without raising tax rates through better tax administration.

He said one of the ways to improve the tax haul  is by looking at the VAT exemptions in the country.

“There are many exemptions that apply to VAT zero-rated sectors that introduce distortions in the system, that allocate resources in a way that is not necessarily optimal, but also reduce the capacity of the collector to collect taxes, given the tax rates,” he said.

He said an analysis  of the VAT exemptions would allow the government to look at the rationale of such measures and its impact, particularly on whether such exemptions benefit the poor or the wealthier households.

Based on the review, the government can make a decision on how to streamline the VAT exemptions.

“Streamlining these exemptions, reducing these exemptions can be a way of increasing tax collection without having to increase tax rates,” Varela said.

Based on a 2018 study conducted by the World Bank, forgone revenues from VAT exemptions and incentives are estimated to reach as high as P539 billion.

A 12-percent VAT is levied on the consumption of goods and services and importation of goods into the country.

Transactions exempt from VAT include social goods and services consumed by individuals such as agricultural and marine food products in their original state, education, health services and financial services.

Varela said digitalization can also help improve tax collections, through the introduction of new methods for collectors.

“Behavioral science, behavioral economics tells us a lot of ways in which we can induce taxpayers to actually pay rather than evade taxes, and these types of interventions can be put in practice and have been effective in many other countries,” he said.

Earlier, Finance Secretary Ralph Recto said there would likely be no new taxes until the end of the current administration as the government intends to focus on improving tax collection efficiency first.