Banks should absorb VAT on short-term loans, says Recto

Banks and other financial institutions, including credit card companies, should absorb part of the 10-percent value added tax (VAT) on short-term loans, Sen. Ralph Recto said yesterday.

He said it is not right that banks pass on to their customers the entire 10-percent VAT on loans maturing in five years or less.

"These loans are covered by another tax – the five-percent gross receipts tax which is embedded in the interest rates that financial companies charge their borrowers. Under the VAT law, these firms can pass on to their customers only five-percent VAT," he said.

In the case of long-term loans which are not covered by the gross receipts tax, banks can charge the entire 10-percent VAT, said Recto, who chairs the Senate ways and means committee and who authored the law imposing VAT on financial transactions.

He made the clarification on the imposition of VAT in the wake of numerous complaints about banks and credit card companies charging the tax to their borrowers or customers.

In the case of credit card firms, there is an advisory in their monthly billing statements informing their card holders that they would be charged 10-percent VAT on top of financing charges on accounts that are not paid when they fall due.

These companies charge interest rates ranging from two percent to 3.25 percent a month, or 24 percent to 39 percent a year. Some are offering 1.5 percent a month or 18 percent a year as a promotional rate.

Recto said these rates include the five percent gross receipts tax and credit card firms should therefore charge only five-percent VAT.

"Niloloko nila tayo kung kokolekta sila ng 10 percent (They are pulling a fast one on us if they collect 10 percent)," he said.

To clear up matters, he said he would ask finance and banking officials to make the necessary clarification and amendment in their regulations.