Underdeclaration of VAT means huge losses for gov't

MANILA, Philippines - Underdeclaration of sales and abuses in the tax credit mechanism of the value added tax (VAT) system continues to translate in revenue losses of hundreds of billions a year for the government, the Congressional Policy and Budget Research Department of the House of Representatives (CPBRD) said in its latest report.

“Under the VAT system, possible abuses persist because of the tax credit mechanism which allows taxpayers to credit their VAT payments on inputs used in production as well as on purchases of capital equipment,” the CPBRD said.

It noted that the excessive claims on input VAT lessen VAT collection.

“Furthermore, underdeclaration of sales is a common practice among business owners to avoid payment. Similar to income tax payments, the absence of a mechanism to verify declarations by businessmen and self-employed compounds the problem of VAT payment leakage,” the CPBRD said.

Citing estimates made by the Philippine Institute of Development Studies, the VAT gap in 2009 amounted to P335.5 billion. The VAT gap is the difference between actual VAT collections and potential VAT collections.

For its part, the Bureau of Internal Revenue (BIR), the government’s main revenue agency, has already embarked on a massive clampdown against an organized syndicate found to be attacking the VAT system.

The BIR said billions of pesos are lost because there are companies selling invoices to legitimate businesses.

The fake invoices allow the legitimate businesses to avail of the tax credit allowed for input purchases.

Under the amended VAT law of 2005, businesses can avail of tax credit on input purchases. These are the VAT paid for purchases of raw materials, supplies and capital goods. There is a cap on VAT credit for inputs up to 70 percent of output VAT. To claim the tax credits, companies must present to the BIR invoices, which would detail their purchases.

VAT is the tax slapped on consumption and is levied on the sales of goods and services at each stage of production and distribution process.

It is collected using the invoice of the tax credit method. In computing for one’s VAT liability, a VAT-registered taxpayer can deduct input tax from output tax. Output tax is the VAT due on the taxpayer’s sale of goods and services.

The agency, which accounts for 70 percent of government revenues, is tasked to collect P940 billion in taxes this year.