In a position paper, PBLF, an associate of Economist Intelligence Unit (EIU), said the 70-percent cap on chargeable VAT "distorts the system from a pure tax on consumption," and is seen as another disincentive to doing or expanding business in the country.
PBLF members include various foreign business chambers of commerce, financial institutions and economic experts.
Section 8 of the newly-ratified Expanded Vat Law has set the concept of a ceiling on input tax credits, prescribed to wit: "…provided that the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed 70-percent of the output VAT."
The business leaders said this policy would mean that businesses that have a profit margin of less than 30-percent may not be able to fully offset their VAT inputs from their VAT output.
"In other words, any company where the input VAT is more than 70-percent of the output VAT will not be allowed to deduct the "excess input VAT from the output VAT," the PBLF paper said.
Though a carryover provision is allowed, the PBLF said "chances are such companies will not recover in full the differential, until such time as the businesses ceases to trade."
It was reported that when the cap on creditable VAT was first introduced in the Senate floors, the intent of the proposal was to address the under-reporting of output VAT and the over-reporting of input VAT by non-compliant taxpayers and the original suggestion was for a 90-percent cap, a level that would not impact too adversely on compliant taxpayers while compensating the problem of non-compliant one.
"The skill is to set the cap at a level so as not to encourage compliant taxpayers to opt out of the system….at the 90-percent level, the measure can be defended as a rough proxy for VAT. However, at a level of 70-percent, many believe the level to be punitive," the group said.
The group noted that the best solution would be to make the tax regime revenue-neutral.
For instance, in the case of dealers for the oil companies having a very measly profit margin of one percent, and selling unleaded gasoline at P32 per liter (assuming gas prices are constant in three months), its input VAT to be credited as output should have been P2.88 per liter, factoring in its profit margin.
However, with the proposed 70-percent cap, it would only be able to recover P2.03 VAT per liter, thus, this entails a loss of P0.85 per liter from unrecovered VAT charges.
The PBLF said the same calculation would apply to all businesses that have a profit margin of less than 30 percent.
The group noted that "the only solution to keep businesses afloat would be to recover the loss of income via an increase concerned, thereby adding a one-time inflationary factor into the economy at a time when inflation is already high by recent historical standards."
The business leaders instead suggested that the government should just pursue a legislative amendment that could be passed before the new VAT bill takes effect on July 1, 2005.