UNIVERSITY of the Philippines School of Economics professor Benjamin E. Diokno, the incoming Department of Budget and Management (DBM) chief, has backed proposals to raise the 12-percent value-added tax (VAT) to increase government funds for infrastructure projects.
“My personal position is that it’s better to tax consumption than income, for as long as food in its original state is exempted from VAT. It is in this sense that our VAT system is slightly progressive; the burden is heavier on the rich. But this is the call of the incoming finance secretary,” Diokno said.
The incoming DBM chief had earlier proposed hiking the VAT to 15 percent.
The proposed increase in the VAT is being floated by the economic team led by incoming Finance Secretary Carlos G. Dominguez III and by outgoing Finance Secretary Cesar V. Purisima as part of the tax-reform package that will supposedly ease the tax burden on those earning up to P1 million in annual gross income.
Under Purisima’s tax-reform study to be turned over to the new administration, the main component of the tax reform, which is the exemption from income tax of the first P1-million annual salaries of every individual wage earners, will cost the government some P151 billion to P215 billion in foregone revenues.
Purisima’s proposal will also make the income-tax rate on self-employed individuals and professionals pegged to a fixed rate of 25 percent on their taxable income, retaining the allowable itemized deductions or the optional standard deduction on gross income, but removing all other personal and additional deductions.
The projected decrease in government revenues from the adjustments to be made on the income tax of wage earners will be offset from the increase in the VAT rate from 12 percent to 14 percent, and the removal of all exemptions from VAT, except for goods and services relating to agriculture, health, banks and education.
However, there is opposition to the proposal to increase the VAT rate, which now seems to be the most popular alternative among policy-makers to make up for the shortfall in revenues expected from the tax reform, although Duterte had earlier categorically dismissed the proposals to raise the VAT.
According to the Tax Management Association of the Philippines (TMAP), the proposed increase in the VAT rate is uncalled for at this time as this will result in a minimal increase in VAT collection without an improvement in the efficiency of the Bureau of Internal Revenue.
“Not now. Increasing the VAT rate at this time is uncalled for, since the VAT effort is still very low,” TMAP President Benedict Tugonon said.
“The BIR has to improve the VAT effort and improve VAT collection efficiency before increasing the VAT rate, otherwise, the rate increase will not result to substantial increase in revenue collection,” Tugonon added.
However, he said the increase in the VAT and the lifting of some of the VAT-exemptions should definitely be among the government’s options in increasing revenues.