Constructors seek cut in VAT on gov’t deals

After failing to collect unpaid excess taxes withheld by the government, the construction industry is lobbying for a 2.5-point cut in the value added tax on government contracts from 8.5 percent to six percent.

Construction companies, led by FF Cruz & Sons Inc, have made representations with the Department of Finance (DOF), asking for the revision of the VAT on government contracts.

Government sources revealed that from the Department of Public Works and Highways alone, the industry was claiming at least P50 billion worth of unpaid excess taxes withheld by the government from various government contracts.

The source explained that the government automatically withholds 8.5 percent from all its payments to private contractors involved in various public works contracts.

At the end of the fiscal year, however, the source explained that construction companies apply huge input VAT that more than offsets the output VAT already withheld by the government.

The source said that construction companies end up with claims for excess VAT withheld, but the process is lengthy and difficult since the payback would have to be covered by the national budget.

"They can not collect unless there is a budget allocation for it," the source explained. "So, it usually takes two to three years for them to get paid and in the meantime, their money essentially sleeps in the treasury."

As a long-term solution, the source said that FF Cruz has begun lobbying for the transformation of the 8.5 percent creditable output VAT into a six percent final tax.

This way, government could still withhold the six percent but not as a creditable VAT but as a final tax that could not be offset by input VAT claims.

However, the source said the basis for the six percent final tax was unclear and would have to be verified by the DOF. "That’s the number they came up with, we have to see if it’s reasonable," the source said.

According to the source, FF Cruz president Felipe Cruz Jr. has met with Finance Secretary Jose Isidro Camacho to discuss the shift from VAT to final tax that would be applicable to all government contracts.

The DOF has made no decision on the proposal but the source said the department has been instructed to validate the claims of the industry, especially the proposed six percent tax rate.

The construction industry is in dire need of fresh capital to finance what is seen as a slow but encouraging recovery after it hit a deep slump following the 1997 Asian Financial crisis.