VAT reductions seen viable with exemption crackdown

By Justine Irish D. Tabile, Reporter

THE GOVERNMENT will have to expand the tax base to make the proposed reductions in value-added tax (VAT) sustainable, and may need to resort to a crackdown on transactions currently exempt from VAT, analysts said.

Raymond A. Abrea, founding chairman and chief executive officer of the Asian Consulting Group (ACG), said the proposed reduction of the VAT rate from 12% — the highest rate in Southeast Asia — to 10% will help ease the burden on consumers.

“The Philippines currently has the highest VAT rate in ASEAN, yet our collection efficiency is only around 35-40%, far below the global average of about 57%,” Mr. Abrea told BusinessWorld via Viber.

“This clearly shows that the real problem is not the tax rate — it is inefficiency and leakages in the system,” he added.

ACG said the ASEAN average VAT rate is 10%, with Thailand imposing the lowest at 7%.

Indonesia imposes 11%, Cambodia and Laos 10%, and Vietnam and Singapore 8%.

Collection efficiency was highest in Thailand at 71%-79%, followed by Singapore at 71%, Vietnam 70%, Cambodia 66%, and Indonesia 45%-50%.

This puts average ASEAN collection efficiency at 57%.

As such, many members of the Philippine Congress have filed bills aiming to reduce the domestic VAT rate to 10%, including Senator Mark A. Villar with Senate Bill 1916.

Currently in committee, the bill says a VAT rate reduction could expand disposable income in the average household by P8,000 a year.

Former Finance Secretary Ralph G. Recto warned last year that reducing the VAT rate could cost the government P339 billion in revenue per annum.

“While (foregone revenue) of P339 billion annually is a legitimate concern, this can be mitigated by rationalizing more than 30 existing VAT-exempt transactions,” Mr. Abrea said.

“Many of these exemptions are non-refundable, compliance-heavy, and vulnerable to abuse, contributing to an estimated P539 billion in foregone revenue according to the World Bank,” he added.

He said exemptions granted to senior citizens and persons with disabilities should be looked at.

“(These) are poorly targeted, often benefitting those with higher spending capacity rather than the most vulnerable,” he said.

“Direct support mechanisms — such as target coupons, cash transfers, or a universal pension — would deliver assistance more efficiently and equitably,” he added.

Foundation for Economic Freedom President Calixto V. Chikiamco said that the tax base should be expanded to compensate for a lower VAT rate.

“(This can be done by) removing the tax exemptions on some products, such as sales by cooperatives,” he said via Viber.

Cielo D. Magno, associate professor at the UP School of Economics and a former Finance undersecretary, said at tax forum:

“If you really want to reduce VAT from 12% to 10% to 8%, it is actually possible. But we have to block the leakages and remove the other exemptions. We have to broaden the tax base with respect to VAT.”

ACG’s Mr. Abrea said that the government should also strengthen VAT administration through electronic invoicing, digital monitoring, and stricter enforcement.

“The path forward is clear: broaden the VAT base, rationalize exemptions, and modernize tax administration,” he said.

“Fiscal integrity does not come from imposing the highest tax rate in ASEAN, but from a fair, efficient, and technology-driven tax system that actually works,” he added.