Big Deception blurs full view of VAT bill

DECEPTION: Some tax expert should expose Big Deceptions that have been blurring the public view of the nature, intent and effects of the expanded Value-Added Tax bill being pushed in Congress.

One deception is that VAT, as embodied in the bills in the two chambers, is more of a sales or consumption tax than a Value-Added Tax. The manner of collecting VAT alone shows its true color.

A Value-Added Tax (10 percent at present) is added to the price of merchandise every time it is sold and resold – all the way until it reaches the ultimate buyer, the consumer.

The 10 percent VAT is tacked on even if no value has been actually added to the merchandise at the point of sale. The VAT collected from the buyer is not based on the value added (which is sometimes zero) but on the selling price.

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IT’S SALES TAX: Businessman A sells a necktie priced at P1,000 to Businessman B. The buyer pays P1,000 plus P100 (10 percent VAT on its P1,000 price), or at a total price of P1,100. The P100 VAT is not based on any value added since no value has been added to the tie since it left the manufacturer.

The P100 tax, misrepresented as VAT, is actually a sales tax.

When Businessman B sells the same tie without touching it, the next buyer will have to pay P1,100, plus a markup or a profit for Businessman B, plus – again – a 10-percent VAT even if no value has been added to the tie.

The new VAT being collected is, again, actually a sales tax.

The price of the tie keeps going up as it changes hands in the market and as each businessman at every stage adds his profit and the usual 10-percent VAT based on the latest selling price.

The last person to buy it, or the ultimate consumer, will pay for the tie at a price bloated by accumulated markups and several layers of VATS – although the poor tie never underwent any transformation that would give it some added value.

VAT hits the end-consumer, who is usually a low-earner, the hardest.

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DOUBLE TAXATION: So why don’t we just call VAT a sales tax?

1. Because, that would be an admission that the so-called VAT is nothing but a sneaky case of double taxation when a sales tax is slapped on goods separately from the VAT.

2. Because that would expose the shameless attempt of the Arroyo administration to extort more blood from a population reeling from the high cost of official corruption and economic mismanagement.

Hanggang saan at hanggang kailan po tayo paloloko sa gobyerno?

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NO PASS-ON?: Another deception is that the VAT proposed to be imposed on power utilities and petroleum imports will not be passed on to the consuming public in the form of higher electricity rates and fuel prices.

To make that big lie sound less grating, lawmakers vow to insert provisions in the VAT bill that would (1) penalize any power utility passing on the VAT to consumers and (2) scrap the excise tax on socially sensitive products and slash it for gasoline.

But while they announce these supposed safeguards against VAT’s eventually being passed on to users of electricity and oil-based fuel, several lawmakers tell us in private that that "no pass-on" proviso is not enforceable in the real world.

It is as immutable as gravity: Taxes on power and oil firms will seep down to the lowest level of consumers.

It is a deception when a VAT law put together by Malacañang, Congress and their Clients pretends to protect the public from power rate increases resulting from VAT’s being passed on to consumers.

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ABSORBING BURDEN: The contracts of Independent Power Producers grant these entities tax exemptions, with the National Power Corp. absorbing their burden,

Removing their tax exemption will violate IPP contracts. The sad part is that when an IPP decides to pull out as a result of such breach of contract, the government is bound by the same contract to pay or in effect buy out the IPP.

Where will the government or the cash-starved Napocor get the billions needed to buy out the IPPs if they decide to pull out? Will the government again turn the screws tighter on taxpayers?

The burden can be expected to fall again on the overburdened public.

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FINANCIAL DEBACLE: Ernesto B. Pantangco, president of the Philippine Independent Power Producers Association (PIPPA), said if the "change of material circumstance" clause is invoked by the IPPs and their lenders, all loans taken for their projects shall become due and demandable.

This means the P1.5-trillion obligation of the government to the IPPs would have to be settled immediately. Industry estimates place the buy-out cost for the top 10 IPPs at $20 billion; and that for the remaining 14 contracts would be $500 million each, for a total of $27 billion.

How do we cast aside the constitutional prohibition against the enactment of laws that constitute breach of contracts?

No wonder, Senate President Franklin Drilon has said that the "no-pass on provision" on VAT on power may lead to another financial debacle for the government.

"This must be carefully discussed in the bicam (conference committee) because of the provision of the contracts of the IPPs that all taxes will be to the account of Napocor," he said. "This obligation is in the contract between the Napocor and the IPPs."

If the IPPs make a common stand against taking the cost of VAT from their profits, the situation could so deteriorate that some of them might decide to pull out.

The IPPs have objected to additional costs that will increase their power rates that are already one of the highest in Asia. Our electricity rates are already the second highest ($0.12 or about P6.60 @ P55:$1) in Asia, second to Japan.

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CHANGING RULES: Besides, is it wise policy to change the rules in the middle of the game?

Foreign investors went into the power business after the government granted them tax and other incentives to forestall a power crisis during the Ramos administration. Should we now withdraw the incentives, in effect changing the rules in the middle of the game?

In the alternative that the Napocor will absorb the IPPs’ tax liabilities as their contracts dictate, the tax burden will again be passed on to the people like other Napocor indebtedness.

Napocor suddenly being saddled with more obligations arising from absorbing VAT liabilities of the IPPs could make it less attractive to investors wanting to buy its assets under the government’s privatization program.

Making the Napocor less attractive by adding to its tax burden could violate the spirit of RA 1936 (Electric Power Industry Reform Act of 2001) that provides for the orderly privatization of Napocor assets.

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CHARGED TO CONSUMERS: As VAT is a passed-on consumption tax that flows down the line to the last consumer, there is no way such as tax will start and end with the IPPs.

From the IPPs, the tax cost will be passed on to Napocor, then to the transmission company and on to the distributor (the Meralco in the case of Metro Manila and outlying areas).

Can you imagine Meralco (Manila Electric Co.) absorbing the VAT cost passed on to it? Even assuming it will absorb the tax burden, this cost will find its way into its expenses and eventually be used to justify another rate increase.

I am sure you remember the case of the Meralco passing on its income tax to consumers and arguing passionately to justify the pass-on charge when it was caught doing it.

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OBJECTIONS: Foreign and local business have expressed reservations on the imposition of VAT on power. They said this would add to the cost of doing business – significantly for manufacturing – making the Philippines less competitive and adding to unemployment.

Both the House and Senate versions contain "no-pass through" provisions which require the VAT on electricity and petroleum products to be "paid and absorbed" by the seller of petroleum products and electricity generation companies.

In their present form, both versions will boost government revenue by P30-70 billion, almost enough to plug the fiscal deficit. But there will have to be delicate balancing as there is no guarantee of commensurate benefits in creating jobs, improving health and other social services, and creating business opportunities.

Among those opposing the VAT bill is the Semiconductors and Electronics Industry of the Philippines (SEIPI), whose membership account for some 60 percent of the country’s total exports, or about $28 billion. The group said most of their member firms would transfer their operations should Congress push through with the inclusion of VAT on power.

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