12% VAT now in effect

A 12% value-added tax (VAT) takes effect Wednesday after President Gloria Macapagal Arroyo on Tuesday ordered a two-percentage point increase in the tax rate. Executive Secretary Eduardo R. Ermita informed Finance Secretary Margarito B. Teves through a January 31 memorandum that the latter’s recommendation to raise the VAT rate to 12% from 10% was approved by Mrs. Arroyo. Copies of the order were furnished to Internal Revenue Commissioner Jose Mario C. Buñag and Customs Commissioner Napoleon Morales. Mr. Teves recommended an increase in the VAT rate on Monday, after the release of economic data that day showed the two conditions set by law to trigger an increase in the VAT rate were met. Last year’s budget deficit in relation to the gross domestic product (GDP) registered at 2.7%, while 2005 VAT collections in relation to the GDP reached 2.9%. The new VAT law, Republic Act 9337, allowed the President to increase the VAT rate if the budget deficit-to-GDP ratio exceeded 1.5%, and if VAT collections-to-GDP ratio reached 2.8%. BITTER PILL NECESSARY Press Secretary Ignacio R. Bunye appealed to the public "to give the VAT a chance." "We should look at the overall picture, that VAT and the higher VAT rate are a crucial component in our fiscal reform program. It is a bitter pill we need ..." he said. If revenue agencies are able to meet collection targets, the government is sure to generate P75 billion this year from the VAT. This, the Budget department Tuesday said, would go a long way in improving social services and spurring economic activity by way of increased capital spending. Budget Undersecretary Laura Pascua told a press briefing on the VAT rate increase Tuesday that 30% or P22.5 billion of the expected revenues from the VAT law will be spent for basic services and capital expenditure. The remaining 70% will be used to reduce the budget shortfall, estimated to reach P125 billion this year. The share of basic services and capital spending will be increased 5% every year until it reaches 50% in 2010, while the 70% of the incremental VAT collection will be reduced 5% every year to reach 50% in four years. Under the proposed national budget for 2006, the P22.5 billion will be divided as follows: economic services (P20.2 billion) and social services (P2.3 billion). Economic services includes the building and or improvement of roads, airports, ports, irrigation systems and other productivity enhancing investments, while social services includes "new and better programs for education, health and for peace and order." "The full implementation of the VAT will generate the revenue needed to ensure that all Filipinos feel the gains we have made as a nation. "This additional revenue will enable government to pump additional expenditure into the economy to build needed infrastructure to create new jobs, improve people’s incomes and provide better health, education social services," Ms. Pascua said. "We have already made great strides in restoring our fiscal stability and generating the revenues needed to fight poverty," the Budget official added. Ms. Pascua said the additional revenues from the VAT will help the government increase the capital expenditure to gross domestic product (GDP) ratio to 2.3% this year from 1.85% in 2005. This is still low, however, compared to the 5-7% in neighboring Thailand and Malaysia. For 2006, the government has allocated P133.7 billion for capital outlay, up from last year’s P96.7 billion. Of this, P96.6 billion will be spent for infrastructure alone. The coverage of VAT was expanded in November to include the transportation, electricity and some other previously exempt industries. Starting Wednesday, the VAT rate will be increased to 12% from 10%. "The VAT reform law has done more than simply generate additional revenues to invest in services and infrastructure. The passage and implementation of the VAT law has been instrumental in improving the country’s fiscal and economic health and in changing perceptions of the international investment community. "The changed perceptions will help generate higher levels of foreign investment that will also create jobs and drive economic growth," Ms. Pascua said. Meanwhile, in Fort Magsaysay, Nueva Ecija Tuesday, Mrs. Arroyo ordered the Trade department to closely monitor prices and discourage traders from profiteering. "We have to make sure there is no profiteering and that nobody takes advantage because of lack of information," she said. She downplayed the effect of the VAT rate increase on prices, saying "it is a very small increase, if you have to be mathematical about it ... if there are sudden, unusual price increases, these are not justified." PROTESTS READIED In response to the VAT rate increase, civil society groups, notably the Freedom from Debt Coalition and the Laban ng Masa, will hold a protest rally in Plaza Miranda Wednesday morning and will march onwards to Mendiola near Malacañang at noon. Coalition vice president Wilson Fortaleza said they are against not only the VAT rate increase but the VAT itself, which he said is a regressive tax that does not distinguish between poor and rich. "It imposes the same rate on goods and services, whether the consumer is poor or rich. It does not make distinctions based on status," he said. "We would also like to debunk the government’s claims that a higher VAT rate would enable it to extend more services to the people. The Finance department has admitted this year’s VAT collections would go mainly to debt servicing," he added. The government, Mr. Fortaleza said, should concentrate on collecting income and corporate taxes, which he said are progressive taxes, as well as on plugging tax leakages and prosecuting tax evaders and smugglers. – Judy T. Gulane and Karen L. Lema/BusinessWorld