To VAT or not to VAT

If professionals including those in the entertainment industry feel they will be overburdened by the imposition of the 10-percent VAT this year, here are some interesting facts:

Out of P80.24 billion in total taxes paid by individuals in 2001, P66.3 billion were paid by wage-earners whose tax payments were withheld by employers and remitted to the government.

Of the P10.75 billion paid by a mix of professionals, self-employed and mixed-income earners, and those earning from peddling talent (actors and actresses) or consulting fees (doctors, dentists or lawyers) paid only P620 million.

Of the 2,605,505 individual taxpayers in 2001, about 20 percent or 525,760 were classified as professionals and self-employed while the remaining were compensation earners or employees. (In 2000, only 28,915 professionals were counted to have paid taxes.)

Based on 2001 data, salaried earners paid government an average of P31,878 in a year while professionals remitted only P21,442 each on an annual basis.

According to the Family Income and Expenditure Survey of the National Statistics Office in 1997, business and professionals took home 62 percent of individual incomes but accounted only for 13 percent of the tax collections. Salaried individuals, on the other hand, accounted for only 38 percent of individual incomes but contributed 83 percent of taxes.

Understanding instead of protesting VAT

The issue however is not about additional income taxation. It is about the imposition of value added tax or VAT on professionals including entertainers starting Jan. 1 this year. As one of the structural reforms provided for in the 1986 Tax Reform Program designed to make tax administration simple and equitable, VAT has become one of the most misunderstood government edicts.

The VAT system is intended to promote transparency and provide the government with a good tool in tracking tax evaders. It is estimated to earn the government close to P100 billion a year in taxes, a far cry from the previous three percent gross sales impost system that managed to chalk up less than P50 billion annually.

The imposition of VAT on professional fees alone is expected to bring in an estimated P9 billion yearly for government. Large as this may seem, VAT payments do not necessarily mean that professionals will be burdening their customers with higher fees.

Unlike the income tax, VAT is an indirect, pass-on tax that covers only that portion of one’s income where the individual or the business adds value. This means that all purchases of goods and services needed in business – provided they were bought from VAT-registered companies – can be used as input and deducted from the output or total sales to determine the net amount subject to VAT payment.

For example, in the case of showbiz people, maybe even liposuctions and reconstructive surgeries can be classified as "cost of business" and would therefore be VAT-deductible.

To simplify this issue, let us use Actor X as an example.

Actor X earns a net monthly talent fee of P500,000 from a television network. His VAT payment would be equivalent to P50,000. If in a particular month, he buys P400,000 worth of goods and services from VAT-registered companies in pursuit of his craft, he will need to remit only P10,000 in VAT payments to the government because he can deduct the amount of P40,000 representing his VAT payment for the goods and services acquired.

Consumers should not end up being burdened by the VAT in professional fees. Often, the VAT imposed on the professional is subsequently covered by the VAT on products or services that the professional acquired from VAT-registered firms or providers.

What the VAT system will do, though, is force professionals to register so that they can offset the VAT payments from products or services acquired to the VAT component in their billings. They will also be compelled to issue receipts for people availing of their services.

Only unscrupulous taxpayers will have to fear VAT since this will definitely enable the BIR to track the correctness of their tax payments and remittances. Since the honest taxpayer needs to issue correct receipts to refund VAT payments, the system rewards correct declarations.

The butt against VAT

The other argument against the continued expansion of VAT is the fact that, despite its existence since 1988, about P540 billion worth of VAT supposedly remains uncollected.

How much of this uncollected VAT is due to graft and corruption? It is, after all, well known that corrupt revenue collectors often connive with taxpayers and agree on "compromises" and "arrangements" to evade paying the right amount of VAT.

Would we not be broadening the playing field of these corrupt revenue collectors if we widen the base of VAT payers to include professionals and entertainers? This is a valid question unless immediate concrete steps are taken to revamp the BIR.

Can you imagine the additional amount of corruption money available from naive and not so naive professionals and entertainers who would like to evade VAT payments?

The need to revamp the BIR and overhaul the collection system should be of paramount importance to the government. Because no matter how wide the coverage of items that are VAT-table, if there continue to be big holes, the coffers of government will not get filled.

We may criticize the inefficiency and corruption of the country’s tax collection system or the fraudulent or wasteful use of government funds. But this should not be used as an excuse not to pay the right amount of taxes, or not to do our share in cleaning up and streamlining government’s taxation system.

On TV: How agri exporters are being bullied

Watch "Isyung Kalakalan at Iba Pa" on IBC-13 News starting today ’till Friday (5 p.m. and 10:30 p.m.) to learn how Filipino agriculture exporters are bullied by developed countries in the world market. This is a must-view for the newly designated Agriculture Secretary Luis "Cito" Lorenzo and his staff.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. If you wish to view the previous columns or telecasts of "Isyung Kalakalan at iba pa," you may visit my website at http://bizlinks.linkedge.biz.