“MAPping The Future” Column in the INQUIRER – 30 August 2010
E-VAT Hike for Juan dela Cruz
by Anthony Alden S. Aguilar
Around the world, the Value Added Tax (VAT) has been identified as a mechanism for securing
macroeconomic stability and growth by the establishment of a sound system to domestic revenue
mobilization. Try to tell Juan dela Cruz about this and you might get a blank face. But believe it or not, the
introduction of VAT Law brought in key changes to taxation in the Philippines.
Can you still remember the days when it was not a practice to ask for receipts when people purchase
goods or use services? This behavior was reinforced by the enactment of the VAT law. It is important to note
that the Expanded Value Added Tax (E-VAT) is based on the same VAT Law; an expanded version of VAT.
The disgust for E-VAT resurfaced recently when immediate past Secretary of Finance recommended
to the next government to take measures in taxation including increasing the VAT rate from 12% to 15% and
reducing corporate and income tax rates for the purpose of securing fiscal sustainability. This was
immediately opposed by President Benigno Aquino III calling the proposition, “an easy way out.”
What exactly does the E-VAT mean for the common Juan dela Cruz? One thing people should know
is that the word “expanded” in the E-VAT does not automatically mean increase in tax rates. What is really
being expanded is the coverage of taxation. Particularly, the VAT Reform Act (Republic Act 9337), also
known as the E-VAT law passed by Congress in May 2005, provides not only for the expansion of the VAT
coverage but also for the reduction in the excise tax on certain petroleum products, and increase in the
corporate income tax rate. The principle behind VAT and E-VAT is the same. VAT, as I have been
discussing in my previous articles, is a form of sales tax. It is a tax on consumption levied on the sale of
goods and services in the Philippines. Simply put, sellers act as tax collectors. VAT, or tax on value added, is
collected and remitted to the government by businesses that sell taxable goods and services.
Advantages of VAT
Ideally, taxation must be progressive in a way that the rate goes up depending on the resources of the
person being asked to pay. The truth is VAT is the contradiction of this since it is regressive by nature.
Individuals with low earning and businesses which earn low profit are the hardest hit. The law, however,
does not make imposition of indirect taxes, such as the VAT, illegal but only mandates Congress to “evolve a
progressive system of taxation.” That is, those who earn more should be taxed more than those who earn
lesser. VAT, on the other hand, is a regressive tax. Under the VAT, a rich man who buys a cigarette pays the
same tax as the taho vendor who buys the same commodity.
Although regressive in nature, we are also able to enjoy its advantages. Yes. You heard it right. First,
the VAT made sure that everyone shares the burden of taxation proportionally, making taxation fairer and
more equitable. The concern that user charges limit the access of the poor to critical public services is
misplaced. The impact of E-VAT, for example, on the prices of prime commodities would be minimal and
limited only to the transport component and warehousing portion of the cost of these commodities. It
redounds only to not more than a few pesos or centavos. More goods and services in the VAT system lead to
efficiency gains as it reduces tax cascading (further making the tax system more regressive than before).
Second, VAT promoted efficient and simplified tax administration not to mention that it is a
universal taxation system, adopted in more than 150 countries in the world. It replaced a number of sales
taxes and percentage taxes previously imposed on goods, services and business transactions. There is now a
single system, instead of a multiple and complicated network of business taxes.
Third, VAT promoted honesty in tax payment. Businessmen now demand accurate receipts from
sellers to accumulate more input tax credits that will minimize their output tax liability. Since it encouraged
issuance of receipts, these receipts left an audit trail or evidence for the Bureau of Internal Revenue (BIR)
monitoring purposes, resulting to more effective tax administration. It minimized the level of tax evasion
and tax fraud.
Fourth, VAT established a wider tax base including goods, properties and services consumed by
those who can afford to shoulder more taxes which enabled the government to generate much needed
revenues. Finally, E-VAT supported a more efficient public administration.
Unpopular and Untimely
Obviously, being associated with the E-VAT, more so with its increase, is unpopular for any leader
or official of the government. Take for example the case of a former Senator, who knowing that an increase
in VAT was necessary to improve the Philippine credit ratings and increase government revenue to address
the fiscal deficit, supported and sponsored the increase from 10% to 12% of the VAT. In a past election, he
lost the senatorial race. The truth is he saved the Philippine economy from collapsing and yet he was hated
for his remarkable act.
Five years ago, the E-VAT law was enacted as a measure to curb the rising foreign debt of the
Philippines and to improve government services, such as education, health care, social security, and
transportation. It was part of a group of policies that the former government endorsed to help improve the
government’s fiscal position and reverse the credit rating downgrade that certain rating agencies had given
us.
The ideal equation was (and still continues to be) the more taxes that the government can collect, the
more services and programs the government can implement. And we will live happily ever after. The E-VAT
law gave former President Arroyo the stand-by authority to raise the tax from 10% to 12% under certain
conditions, which she found to be existing at that time. Back then, she stated that the P120 billion expected to
be generated a year by the measure represents an unprecedented revenue increase in the country’s fiscal
history. It sounds grand, isn’t it? Whatever happened to that? It was projected to increase government funds
which will help alleviate government deficit to address inflation rate and unemployment.
In adopting this measure three years ago, it was emphasized that this law will entail sacrifices in the
short run due to tax increase that is being imposed but its long-term benefits for our country and the Filipino
people will be immeasurable and far-reaching in the form of more jobs and livelihood opportunities, better
social services, more infrastructures, less debt, and more and better financing for rural programs as part of
the plan for a “Strong Republic” that will make the Philippines a first world country in 20 years.
The tax measure was expected to bring the government several billion pesos in monthly revenues
which can ease the deteriorating budget deficit and national debts dragged by rising oil prices and constant
political turbulence.
Imagine the amount of government revenue that E-VAT is generating up to now. I am not an
economist but common reasoning would dictate that it is huge enough to effect immediate changes to our
country. Where have all these promises gone? Up until now, government services are poor. If not for some
heroic individuals or groups who use kariton to bring education to some street children, many of our children
still do not have access to education. Where is government effort there? Our good roads are semi-privately
owned. Our transportation system, particularly in Metro Manila can torture anyone who uses it.
Now, how can you tell Juan dela Cruz that the E-VAT increase is necessary? I think that the promise
of E-VAT several years ago has not yet been fulfilled. But who cares? We are a country of broken promises,
aren’t we? It was projected five years ago that we can raise as much as P120 billion a year. Imagine that.
Today, there is no urgent need to increase E-VAT rates. Relative to the situation five years ago, the situation
of the economy now is more stable.
I am one of those who would like to see the E-VAT trail. Before anything else, the government
should be able to show where all these taxes have gone. Which particular project was Juan dela Cruz able to
help? A transparent and honest (get real) report on where these taxes went and how they were spent will be
necessary. Good news to Filipinos, another hike will entail time to be passed since it is a legislated policy.
Not to mention the fact that no lawmaker might sponsor it and sacrifice his whole political career simply
because it is famously unpopular. A senator did several years ago sacrificed his political career to sponsor the
unpopular policy to save the then collapsing economy. Today, no one has to do any sacrifices (since no one
will be willing). It is unnecessary.
Addressing the Root of the Problem
Tax is unpopular especially for the worker who comes to his office or site everyday riding a public
vehicle jammed in traffic because a construction of the road that has commenced many months ago is still
ongoing or a pipeline is being installed. In the afternoon, he goes to the grocery or a nearby restaurant, and
he is charged with E-VAT. A taxpayer can rant all day long criticizing the laws and his ranting may never
end. But hey, the truth is the greatest problems of the Philippine tax systems lie not in the legal structure, but
in its administration. Again, we have good tax laws so to speak. The Filipinos will have to live with taxes. It
is an inherent power of the state. There is no issue about that but let them feel and see that these taxes are
going to the right places and working for them.
If another increase in VAT is enacted without first addressing the root of the problem, we will see
more and more unsatisfied Filipinos who think they are being exhorted their blood and sweat and collected
fees from, which only goes to corruption. I hope this administration will be true to its promise of no
corruption.
Our experts and scholars may argue that we need this increase in VAT now to address our fiscal
problems but the reality is we only need to improve tax administration by enforcing the rules strictly. This
has been realized by fiscal planners and economists around the world; it is irrelevant to increase the tax rates
or impose new taxes if only tax evasion is minimized, if not prevented by improving tax administration.
Corruption, which results to tax evasion and loss in revenue, should be curtailed.
In 2005, the government backed up by experts and economists asked the Filipinos to make the
sacrifice for long term benefits through the E-VAT hike. And yes, Filipinos did. Before they get asked again
to sacrifice for the good of the universe, I think that government should first let the Filipinos savor these
concrete benefits (e.g. jobs, livelihood opportunities, more infrastructure, better social services, etc, etc.) that
E-VAT was projected to effect.
The government should be more sensitive to the plight of the Filipinos. For most people especially
the masses, the 15% VAT will mean the last nail of their coffin. We have not yet recovered from the 12%
increase and yet another increase is surfacing. Thus, I say again and again that taxes will not look evil if only
they are translated to efficient government services and projects as they should be.
(The article reflects the personal opinion of the author and does not reflect the official stand of the Management
Association of the Philippines. The author is Tax Partner of Endriga, Manangu & Associates, CPA's and Management
Consultants. Feedback at map@globelines.com.ph. For previous articles, please visit <map.org.ph>.)
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