"This will be the first time that electricity, among other goods and services, will be subject to VAT," Napocor said.
Napocor explained that for the generation side, which involves the production of electricity at the power plants, VAT will be applied based on the type of fuel to be used and the amount of electricity generated.
A 10-percent VAT will be imposed for electricity generated using the conventional fuel sources such as oil, coal and natural gas.
The power firm noted that electricity generated using renewable energy sources such as hydro, geothermal, wind and solar are considered zero- rated, such that any form of taxes accrued by the firm as an input to its production may be credited to the government through tax refund or tax credit.
However, the final and actual adjustments on power rates due to VAT and to be paid by end-consumers will differ monthly depending on the power supply mix used to generate the electricity, as well as other factors such as other goods and services considered as input to power generation.
At the onset, the Energy Regulatory Commission (ERC) has directed utilities and power companies to strictly follow an economic dispatch of power plants that will bring the least cost of electricity to consumers.
The ERC is also expected to issue the relevant guidelines to ensure that only legitimate costs due to VAT implementation are carried on the consumers’ electricity bills.
The zero-percent VAT rate on power generated using renewable sources of energy will cushion the total impact of VAT on power.
This is also seen to increase the utilization of indigenous and renewable energy sources in power generation, consistent with the government’s program to reduce dependence on imported energy.
As of end-2004, renewable energy sources such as geothermal and hydro accounted for 18.4 percent and 15.4 percent, respectively, of the country’s energy aggregate generation mix.