IMF wants government to maintain VAT on oil

The International Monetary Fund (IMF) warned the government against scrapping the value-added tax (VAT) on oil, saying that raising revenues through taxes is more sustainable than privatizing state-owned assets.

The IMF reiterated results of a March 2007 study that the 12 percent VAT on oil has benefited the poor as it has passed on the burdened to the richer segment of the economy.

IMF resident representative to the Philippines Reza Baqir, in a press conference Friday night, said benefits are higher if the government maintains the VAT on oil, contrary to calls by lawmakers and oil companies.

“Our analysis has shown that the poor are better protected by increasing social spending than reducing energy taxes. This is so because the benefits of social spending are better targeted to the poor than those of reducing gasoline taxes,” said Baqir, citing a March 2007 study by the IMF on the distributional implications of the VAT reform.

Sen. Manuel Roxas II proposed the elimination of the 12 percent VAT on oil to help cushion the impact of skyrocketing crude prices on consumers.

Sen. Francis Escudero, chairman of the Senate ways and means committee also said that this would be more effective in cushioning the impact of high oil prices compared to slashing the tariffs on imported petroleum.

Baqir said the government has been able to allocate revenue to social spending, particularly on education and health programs because of the VAT reform.

The IMF and the National Government are one in favoring the retention of the higher VAT rate.

The Department of Finance (DOF) earlier warned that removing the 12 percent VAT on oil as proposed by lawmakers and oil companies would translate to revenue losses for the government of P54 billion this year alone.

Finance Secretary Margarito Teves has said that it would be better to maintain the VAT and use the proceeds to help other sectors.

Baqir said that another way to help the poor is to increase the tax collection efficiency, which would increase the resource envelope available for social spending.

“In addition to providing resources for pro-poor spending, maintaining energy taxation is also important to protect the tax effort and maintain investor confidence in the Philippines,” Baqir said, adding that the investor community has rewarded the Philippines for raising the tax effort by reforming the VAT.

The Philippines raised the VAT rate from 10 percent to 12 percent two years ago to raise more revenues, a move criticized by cause-oriented and consumer groups.

Amid calls to scrap the VAT on oil, the government instead announced last week that it would slash tariffs on imported crude oil to two percent from three percent if the average price of Dubai crude hits $80.94 per barrel and further to one percent if the price hits $92.41 per barrel.

Tariffs on diesel, meanwhile, will be reduced to three percent from one percent if it reaches $110 per barrel.

The reduction in pump prices will be felt by the end of January but depending on the trend in the world market, local oil firms may just put off a one-time price increase because of the tariff cuts.

Cutting the tariffs would help reduce the price of pump prices and cushion the impact of skyrocketing oil prices on motorists and other consumers.