VAT tweaks to help offset income tax cut
THE FINANCE DEPARTMENT will keep value-added tax (VAT) exemptions for three key sectors, but may opt to remove this benefit from senior citizens and others to arrive at a “fair” tax regime.
Finance Secretary Carlos G. Dominguez III told reporters late last week that the government is looking to trim the list of exemptions from the 12% VAT in order to raise more revenues that will fund state projects, a tweak that will come alongside lower personal and corporate income taxes.
While refusing to go into details as the department finalizes the proposal, Mr. Dominguez said three sectors particularly important to the poor will continue to enjoy VAT-free transactions: “We will not remove the VAT exemptions on food, medicine and education. Those are very necessary.”
The VAT rate went up to 12% from 10% in February 2006 under former president Gloria Macapagal-Arroyo and is imposed on the sale of goods and services. VAT-exempt items include farm produce in its original state such as rice, fruits and vegetables.
VAT payments are equivalent to 4.2% of gross domestic product (GDP), Mr. Dominguez said, adding that, in 2015, tax effort stood at 13.7% of GDP.
“[I]t will be very irresponsible to only do the reduction (of income taxes), so we will rationalize now what we are exempting… We have a lot of exemptions and we have lots of zero-rated transactions, so we have to collect on that side,” Mr. Dominguez said.
Tax cuts form part of the 10-point socioeconomic agenda President Rodrigo R. Duterte outlined in his first State of the Nation Address on July 25.
Mr. Dominguez said he is looking at a three-year window to bring down income taxes by adjusting existing brackets, which were last set in 1997, and reducing the rates to a maximum of 25% from the current 32% ceiling.
Budget Secretary Benjamin E. Diokno had earlier said that the Cabinet is looking at raising the excise tax on fuel products by P4-6 per liter, along with additional taxes on soft drinks to offset revenue losses from the planned income tax reduction.
Mr. Dominguez hinted of revoking the VAT exemption of senior citizens — provided under Republic Act No. 9994, or the Expanded Senior Citizens Act of 2010 — saying this perk is used more often by those well-off to get discounts.
“I go buy a meal that is P1,000, and I get a subsidy of P120 because I don’t pay the VAT. But the guy who needs the P120 (discount) cannot get it because he doesn’t have the money to pay for an expensive meal. Now is that fair?” the Finance chief said.
“If you put it in that way, we want it to be fair. Why should I or she be subsidized when that guy cannot get it?”
Apart from VAT exemption, a 20% discount is also accorded to Filipinos aged at least 60 for medical-related purchases or payments; local transport fares; in hotels, restaurants, leisure places and for funeral and burial services.
“Tax reform has two purposes: one is fairness and the second is to allow the country to make the necessary investments precisely to reduce poverty,” Mr. Dominguez added.
The Duterte government plans to ramp up public spending for the next six years, particularly by increasing investments in infrastructure and social services. Mr. Diokno said infrastructure spending is expected to reach P7 trillion from 2017 to 2022, starting with an P860.7-billion allocation next year.
Mr. Dominguez has thumbed down suggestions to hike the VAT rate to 14%, saying instead that the department will work to broaden the VAT base, rationalize fiscal incentives granted to firms and boost collection efficiency.
Improved tax administration by the Bureau of Internal Revenue and Bureau of Customs are seen to contribute a third of additional collections, he added.
In a conference call with clients of Zurich-based investment bank Credit Suisse last week, Mr. Dominguez said economic managers will maintain “fiscal discipline” by capping the budget shortfall at 3% of GDP yearly, as well as fortify anti-tax evasion efforts and further reduce red tape in their bid to raise more revenues.
The Finance department plans to submit a comprehensive tax reform package proposal to Congress by September, to be legislated and then signed into law by Malacañang.