Government may ditch VAT system

Desperate for cash, the Arroyo administration is considering shifting back to regressive taxation by reinstating the sales tax to replace the leak-infested value added tax (VAT) system.

Going to his predecessors for advice, Finance Secretary Jose Isidro Camacho met with former finance secretaries Cesar Virata, Ramon del Rosario Jr. and Ernest Leung to seek their opinion on how to address government’s perennial revenue problems.

"We are trying to find ways to improve the tax system," said Internal Revenue Commissioner Rene Bañez who attended the meeting held during the anniversary celebration of the Department of Finance last week.

During the meeting, the discussion focused on whether the present tax regime was still practical or needed to be replaced with an alternative that would make it easier for government to collect taxes, specifically sales tax instead of VAT.

According to Bañez, the present tax system is riddled with defects, particularly the proliferation of fake invoices that manufacturers and service providers use to bloat their input VAT claims, thereby reducing the output VAT that they have to pay the government.

"We might have to change the invoicing system," Bañez said. "There are just too many fake invoices."

First instituted in 1988, the VAT was touted as a more efficient, equitable and simple way of taxing goods and services. It is a levy imposed on business at all levels of manufacture and production based on the increase in price, or value, provided by each level.

On the other hand, the sales tax is calculated as a percentage of the selling price, collected in the form of an extra charge by the retailer, who remits the tax to the government. It may be levied each time a commodity changes hands as from manufacturer to wholesaler, from wholesaler to retailer and is then called a transaction, or turnover, tax.

Sales taxation is considered regressive but it yields a larger revenue, and governments find it easy to collect.

"Admittedly, sales tax is not as equitable as the VAT," said Land Bank of the Philippines president Margarito Teves who was at the meeting. "But if the only objective is to generate revenue, then you might have to temporarily sacrifice a more equitable system in favor of a more efficient tax system."

According to Teves, there were just too many and too costly requirements for the government to be able to maximize the benefits of value added taxation. "You have to have an extensive and reliable database, your operations have to be computerized and your collecting agencies have to be attuned to the system," he explained.

Reaching this level of efficiency, however, might no be worth the expense, especially since government is trying to contain its budget deficit, an effort made doubly difficult by the failure of the BIR to generate as much revenues as it should.

Camacho, however, has resisted recommendations to impose new taxes until government has done all it can to plug the leaks that the BIR has repeatedly failed to correct.

The DOF’s own records showed that in 1998, the potential VAT collection was P149.4 billion but an estimated 47 percent of this amount leaked out of the system and the government only collected P69.85 billion.

The International Monetary Fund made its own estimate showing that the leakage rate was actually 50 percent. The IMF said the leakage was in the form of understatement of liabilities.

On the other hand, V. Bruce Tolentino, professor of government at the Ateneo de Manila University, said that comparative experiences between different countries have, time and again, prove that the VAT was the more efficient and equitable system.

"We won’t know whether 47 percent is high and low unless we compare it with the leakage rate in alternate systems," Tolentino said. He added that government has to determine whether the leak as inherent in the VAT system or if governance was the issue that caused the leak in the system.

"Most other countries are continuing to move from sales taxation to VAT systems. I don’t know of any that have moved back from VAT to sales tax so there must be something else happening here," Tolentino said.

This year, the Arroyo administration was hoping to generate at least P624.307 billion from taxes, duties and other revenue sources to fund its P754.307-billion expenditure program for 2002.

However, the IMF said that although the government needed to address its tax administration problems, it should also look at selective tax increases, beginning with the reversal of the real erosion in specific excise tax duties.