VAT removal on system loss may save consumers P20

CEBU, Philippines — The removal of value-added tax (VAT) on system loss charges could save an average household at least P20 on its monthly electricity bill, Energy Secretary Sharon Garin said.

Garin said during a virtual press conference on Tuesday that the measure is part of the government’s broader effort to bring down electricity costs and ease the burden of high power prices on consumers.

“Wala na pong VAT on system loss,” she said, clarifying that the Bureau of Internal Revenue (BIR), which implemented the VAT treatment, is under the Department of Finance and not the Department of Energy (DOE).

However, Garin stressed that removing VAT from system loss is only one part of the government’s efforts, with the next objective being to reduce and eventually eliminate system loss itself.

She said addressing system loss would require a whole-of-government effort involving government agencies, local government units, distribution utilities, electric cooperatives, the National Electrification Administration, and other stakeholders.

“All of them are working and implementing now so that we can lower or remove the system loss,” Garin said.

System loss refers to electricity that is lost in the delivery of power from the transmission and distribution system, including technical losses and, subject to regulatory rules, non-technical losses such as electricity theft.

The BIR formalized the VAT treatment through Revenue Memorandum Circular No. 97-2026 issued by Commissioner Charlito Mendoza on September 14, 2026.

The circular adopts and disseminates Energy Regulatory Commission (ERC) Resolution No. 26, Series of 2026, which declares the allowable system loss charge, within the cap approved by the ERC, as a government-mandated pass-through cost.

Under the BIR circular, the allowable system loss charge is excluded from the gross sales of generation companies, the National Grid Corporation of the Philippines (NGCP), distribution utilities, and electric cooperatives for VAT purposes.

As a result, the allowable system loss charge will not be subject to output VAT, provided that it is separately identified in the electricity billing statement, invoice, or similar document in accordance with ERC rules.

The BIR said the exclusion applies specifically for VAT purposes and does not extend to income tax and the corresponding creditable withholding tax.

The circular also directs concerned generation companies, NGCP, distribution utilities, electric cooperatives, and other affected taxpayers to ensure the proper billing, accounting, reporting, and separate identification of the allowable system loss charge.

The BIR said the circular takes effect immediately and shall be applied prospectively from its effectivity and from the effectivity of ERC Resolution No. 26, Series of 2026.

The VAT relief comes as consumers in the Visayas and Mindanao continue to face elevated electricity prices amid tight power supply conditions.

On September 10, the ERC ordered the regional implementation of the Secondary Price Cap (SPC) in the Wholesale Electricity Spot Market (WESM), retroactive to the August 2026 billing period, following extraordinary price spikes in the Visayas and Mindanao grids.

The ERC said its data showed that the Visayas recorded a combined 652 hours of red and yellow alerts in August, while Mindanao recorded 89 hours.

WESM prices reached as high as P18,590 per megawatt-hour in the Visayas and P19,560 per MWh in Mindanao.

The commission said the existing system-wide SPC mechanism failed to adequately capture the severity of the price spikes because the lower prices in Luzon were factored into the national average used to determine whether the threshold had been breached.

Under the ERC order, the SPC will instead be computed and applied on a regional basis using each grid’s own rolling average price.

Cebu Third District Rep. Karen Flores Garcia welcomed the ERC action but urged consumers to monitor whether the measures would translate into lower electricity bills.

In a statement posted on her Facebook page, Garcia said consumers in the Visayas had reason to hope for relief following the ERC’s regional application of the price cap and the BIR’s removal of VAT on system loss.

She also noted that the mechanics for any refund arising from the recalculation had yet to be announced.

Garin said the government’s work would not end with the removal of VAT on system loss, stressing that authorities would continue to address other factors affecting energy costs, including fuel and petroleum prices.

“The work doesn’t stop whether it’s in fuel, in oil, in petroleum, or in the electricity rates,” she said.

She also assured consumers that the DOE would continue to provide updates on the government’s progress and the challenges it faces in addressing the country’s energy concerns.

“We will keep working and we will keep being transparent with you about both our progress and our challenges,” Garin added. — (FREEMAN)