Where will the money go?

We cannot blame the government for feeling smug following a slew of positive developments such as the peso’s continued recovery and Standard & Poor’s upgrade of the Philippines’ credit rating outlook to stable from negative.

The peso is now hitting its highest level in three years, the stock market’s bullish run continues, while interest rates remain modest. These are indeed worth cheering about, at least on the part of administration officials.

Much of the hoopla is related to the Arroyo administration’s decision to implement the second stage increase in its VAT rate, from 10 percent to 12 percent effective Feb.1, as part of a comprehensive sales tax reform program.

The first step was the expansion last Nov. 1, 2005 of the VAT coverage to include primarily oil products. As a result, fuel and power prices as well as airline and shipping fares went up.

The government estimated an additional collection of P80 billion a year from the two-step VAT reform. Additional tax revenues were touted as the means to bring down the government’s budget deficit to zero between 2009 and 2010, if not earlier.

The Arroyo administration is targeting to cut this year’s deficit, a measure of revenue shortfall against expenses, to P124 billion or to 2.1 percent of the projected gross domestic product. Last year, the budget deficit of P146.5 billion was 2.8 percent of GDP from a ratio of 3.9 percent of GDP in 2004.

Kind or honest

The prospect that the Philippines could eventually wipe out its deficit is what S&P is banking on when it raised the country’s credit outlook to stable. An outlook indicates the direction of the ratings in the next six months to a year.

But S&P is just one side of the story. And it is not even a complete tale because the ratings agency simply upgraded the outlook but not the ratings. Moody’s Investor Service, on the other hand, kept its outlook negative despite the VAT hike. And so what does this all tell us?

This means one rating firm is not convinced that the government can actually collect the additional P80 billion it had projected from the VAT or that it does not believe that one tax reform is enough to put the entire fiscal house in order.

As one analyst had rightly put it, S&P is being kind and Moody’s is simply being honest.

Collection still a problem

I cannot blame Moody’s if it prefers to be conservative. The government continues to be hobbled by a tax collection record that sorely lacks credibility. A cursory glance at the VAT track record since it was imposed in the 90s shows how miserable collection efforts have been.

Since the 10-percent sales tax was implemented, there had been shortfalls in the VAT collection by tens of billions of pesos each year. The National Tax Research Institute computed the VAT leakage at almost 30 percent annually from 1998 to 2002 corresponding to uncollected revenues of P41.6 billion yearly or P208 billion over a five-year period.

What is our assurance now that the Bureau of Internal Revenue can finally collect the VAT efficiently? None. If businesses then were adept at evading VAT payments, will an increase of an additional two percent coax them to start remitting VAT collections? Of course, not!

The BIR’s track record in collecting the VAT is dismal. The ratio of VAT to GDP had been declining steadily through the years. In 2002, it dropped to 2.9 percent of GDP. The next year, it recovered to 3.1 percent only because the government had re-imposed the sales tax on bank transactions. table width="95%" cellpadding="10" border="0">Only the buying public hurts So while the tax leakage grows, the poor and the middle class will be the most hit by the reformed VAT structure. Already, the two-step VAT has caused pump prices to rise by more than P2 a liter. Electricity rates and transport fares have similarly risen to reflect higher pump prices.

While the government continues to spit out studies saying that the two-step VAT reform will have no substantial impact on household spending, it is difficult to imagine where the money paid for higher electricity rates and transportation will come from given the fact that basic wages have not been increased.

The think-tank Ibon Foundation cites that as of end-2004, the minimum daily cost of living for a family of six was already at about P500. This was before the VAT reform took effect. Even then, Ibon said that 78 percent of families were not earning enough to meet their basic daily needs. What more now?

Spend collections (if any) wisely

The reformed VAT, no doubt, is a big sacrifice from all of us. On this score, the government must show itself to be more transparent regarding how and where any new collections will be spent. And being transparent does not mean spending millions of pesos in media advertisements to show through colorful graphs where the money is supposedly going. The benefits from the additional tax burden must be felt.

While our debt problem continues to be the government’s biggest concern, any new tax collections should not be used merely to pay for debts. The government must continue to find ways and means, and opportunities to restructure current loans. We must have some reprieve on loan repayments.

Let us use the added collections (if there will be any) to resuscitate and pump prime the economy. Let us not just rely on the dollar remittances of overseas working Filipinos to keep consumer spending strong.

We need to spend money on setting up infrastructure that will allow our farmers, fishermen and manufacturers to compete against the onslaught of produce from other countries. We need to bring down the cost of electricity so factories will continue humming and create new jobs.

We need to spend money to improve our educational system so that our future workforce will be qualified and competitive in the global workplace. We need to deliver responsible health care services to the more than 50 million impoverished Filipinos.

Finally, the last place where any new taxes should go is to line the pockets of our politicians. We are a nation that is being asked to sacrifice; we therefore deserve to be intelligently informed where every centavo that we are being taxed will go. Otherwise, we might as well burn our cedulas.

Solar entertainment’s treat

The Cheng brothers William, Wilson and Willie, and their team of aggressive managers at Solar Entertainment have been giving the weary public good entertainment these days as shown by the steady rise in popularity of its cable TV programs and the sold-out concerts and events it is promoting.

Speaking of concerts and events, Luke Pasiliao, chief operating officer, Ttheatrical, video and events of Solar Entertainment, has been bringing in the crowd with shows like "The Lettermen," the Valentine Day special, "Romantic Evening with Andy Williams" on Feb. 14 at the Araneta, and of course, the much-awaited WWE "Raw" wrestling event on Feb. 24 & 25 also at the Araneta.

On the other hand, Ralph Joseph Roy, Solar’s vice president- business development and operations, and Romano "Oman" de Sagun, Solar’s channel manager-sports plus, continue to surprise TV audiences with their exclusive sports programs and coverages. The highly popular TV show, "Celebrity Poker," is just one of the feathers in its cap.

The poker program menu of "Oman" de Sagun recently got another boost with Solar’s partnership with the Philippine Poker Tour for the coverage of the Million-Peso Hold’em Philippine Championship. The Main Event of the Championship scheduled on 8th and 9th April at Airport Casino Filipino Paranaque will be fully covered and televised by Sports Plus.

Visit http://www.PhilippinePokerTour.com for more details about the search for the first Philippine Poker Champion being conducted in partnership with Solar Entertainment and Philippine Star.

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] or at [email protected]. If you wish to view the previous columns, you may visit my website at www.bizlinks.linkedge.biz