Proposed income tax cut seen to wipe out add’l VAT collection

The government will lose nearly half of its incremental collections from the increase in the value-added tax (VAT) rate if Congress approves the proposed reduction in the income tax rate.

The National Tax Research Center (NTRC) disclosed over the weekend that the proposed legislations now pending in both houses of Congress would shave off between P14 billion and P50 billion from the government’s tax revenues.

NTRC director Lina Isorena told reporters that initial simulations indicated loss of tax revenues that would ultimately eat into the incremental tax revenues from the two percentage-point increase in the value added tax (VAT) rate beginning next year.

According to Isorena, the proposed changes in the individual income tax structure would essentially offset the VAT impact by at least one third.

There are at least four proposed tax measures pending in the Senate seeking to amend the individual income tax structure, purportedly to offset the impact of the VAT adjustment on family income.

According to Isorena, the legislative measure filed by Senator Loi Estrada would result to revenue losses of at least P48 billion a year while the bill proposed by Senator Ralph Recto would take off at least P14 billion from the annual revenue collection.

The Department of Finance (DOF) had expected to collect an additional P28 billion to P31 billion from the lifting of various VAT exemptions this year and over P100 billion from the increase in the actual VAT rate beginning 2006

If the individual income tax structure is adjusted, Isorena said the incremental revenue collections from the VAT would ultimately dissipate.

The Arroyo administration had planned to use the proceeds of the new value added tax law to reduce its budget deficit this year and then 70 percent of future proceeds beginning 2006.

For the first time since the Arroyo administration went into austerity mode, the DOF also planned to increase its budget allocations for social services and infrastructure.