DOF reiterates opposition to VAT reduction to 6%

MANILA, Philippines - The Department of Finance (DOF) reiterated its opposition to the measure reducing the value-added tax (VAT) to six percent from the current 12 percent which was approved by the House of Representatives last week.

House Bill 1970 mainly proposes a six-percent value simplified tax (VAST) in lieu of the 12-percent VAT and effectively removes the input VAT credit mechanism currently employed under the VAT system.

“Without this mechanism, VAST is therefore equivalent to a turnover type of sales tax,” Finance Undersecretary Gil Beltran said.

In effect he said, the VAST, as a turnover tax, could cause prices of goods and services to increase.

“A six-percent VAST will now be imposed at every stage in the production and distribution of goods without removing the tax element paid at a prior stage. The VAST will now form part of the selling price at every stage. So the VAST, in effect, causes the tax to cascade, what is commonly referred to as a tax on tax situation.

Consumers will definitely be put at a disadvantage,” Beltran said.

Prices of a certain good will go up because a six-percent tax is slapped on every stage that the good has to pass through before reaching the hands of the consumer.

These steps include the importer, manufacturer, wholesaler and the retailer, Beltran noted.

While the consumer would only see a six percent tax slapped on the product or services that he will buy, the final price is actually higher because of all the stages that the product goes through before landing in the hands of the consumer.

Under the VAT system, the final consumer pays only a tax equivalent to 12 percent of the price, which is equal to the nominal rate of the VAT.

“This is made possible through the input VAT credit mechanism which takes away the tax paid at prior stages,” he said.

In the short-term, Beltran said the more immediate impact of the House-approved measure is the immediate reduction in the revenues that are collected at the ports.

“Whereas currently BOC collects 12- percent VAT on imports, this will drastically be reduced to only 6 percent under the VAST system. This will create extreme pressure on the government’s finances and will make fiscal consolidation in the short-term even far more challenging,” Beltran said.