Running on empty (VAT on fuel)
Being a son carries some important duties. After my eldest brother and father’s passing, I became the eldest child and the eldest son among four siblings, and such an important familial “position” carries with it quite a few responsibilities. I knew it would be up to me, with the help of my sisters of course, to look out for my mother’s well-being; since she lives in our ancestral home in Jones, Isabela, I make it a point to embark on the 10-hour drive to our hometown at least once a month, to spend some time with her and to make sure that she has everything she needs to make her life comfortable.
Of course, the chance to enjoy some peace and quiet away from the concrete jungle and the endless traffic jams while my mother fusses over me and serves me all my favorite foods should also not be missed—eldest sons do have some privileges, too!
Now, ten-hour road trips are no walks in the park, and these overland voyages require quite a few liters of gasoline to keep my car engine running. Because I do not relish the thought of running out of fuel somewhere along an unlit highway deep in the Sierra Madre mountains where cell phone signals are non-existent and there isn’t even a tiny sari-sari store or a single toilet facility in sight, I never leave Manila without enough gasoline in the tank to get me there and back—running on fumes is definitely not an option.
And so, I usually set aside P5,000 as my gasoline budget for those monthly Isabela trips. My cardiologist, I’m sure, is glad that I don’t spend half as much on the cholesterol-rich foods he’s ordered me to avoid—although I’m not so sure I like the idea that my car is a lot happier than I am.
Over the past year, however, I’ve noticed that my P5,000 gasoline budget for my Isabela trip buys me less and less fuel as each month passes—hence the inescapable conclusion that I am spending more on fuel than I used to. By the grace of God, I can still find ways to cope with rising fuel prices and their consequences. But what about Juan de la Cruz? It doesn’t take a rocket scientist to know that the man on the street, and by extension his family, is finding it increasingly hard to keep body and soul together in an economy that is so oil-dependent that retail prices tend to take a flying leap every time the price of fuel rises so much as hiccups.
It’s been just over a year—thirteen months, to be exact—since I wrote an essay suggesting that the VAT imposed on petroleum be suspended (PDI, “Suspending VAT on Petroleum,” 2 May 2011). I’m sure the proponents of the VAT probably weren’t too happy with me for writing it, given that the VAT contributes significantly to the country’s annual revenue take. However, I remembered that article while I was staring at my gasoline receipts one morning, and while it’s certainly true that a lot has happened since then, it can’t be denied that Juan de la Cruz is still feeling the pinch of an economic atmosphere that hangs on every centavo of the price of gasoline.
A few weeks ago, the Social Weather Station released a survey conducted last March that had some rather disturbing results: It seems that around 4.8 million families (not just individuals, but families!) have admitted that they experienced hunger at least once in three months. And that is a statistic that is definitely cause for concern. I can’t help but think that this revelation might mean that, despite certain measures implemented by the government, Juan de la Cruz has truly become hostage to petroleum prices that seem determined to coast somewhere in the upper atmosphere.
In an economy that depends heavily on petroleum, it’s a given that the prices of oil products will have a significant impact on the prices of goods and services. To manufacture goods, you need power, and to generate power, you need fuel. You also need raw materials, and to transport raw materials—whether by land, sea or air—you will need fuel. The need for fuel by every sector of the economy and every sector of society is so urgent that fuel prices have an impact on just about everything—and everyone.
Let’s consider a can of sardines, a staple for Juan de la Cruz. We all know that sardines aren’t related to flying fish, so fishermen need to hie off in their motorized bancas out into the open sea to haul in ton after ton of fresh sardines—fodder, as they say, for the canning factories. From the banca to the factory, however, is a rather long truck ride, before the sardines end up in snug little cans filled with tomato sauce. And from the canning factory to the supermarket is yet another truck ride, before the can of sardines finally ends up in a sari-sari store, there to be purchased by Juan de la Cruz. At every stage of the sardines’ journey, from the open sea to Juan de la Cruz’s table, fuel is needed to power the fisherman’s motorized banca, the fish dealer’s delivery trucks, the freight forwarders’ cargo trucks, the machines in the canning factories. It’s safe to say, therefore, that if fuel prices go up, that price increase will be felt at least four times in the sardines’ voyage from the sea to the dinner table. And you can bet that when that little fish finally ends up on Juan de la Cruz’s plate, the poor man will feel the impact of every centavo that went into the production of that single can of sardines.
Over the past few weeks, we’ve seen one or two rollbacks in fuel prices. (Frankly, I don’t know how much good it will do to roll back prices by around 50 centavos when the price hike that came before it was for P1.00 or more!) But the sad truth of the matter is that the prices of other commodities that went up with every fuel price increase do not come down when there is a price rollback. And while the government may have established some stop-gap measures, like the Pantawid Pasada program, this particular form of subsidy isn’t extended to every motorist or consumer of gasoline and other fuel products—it’s worth mentioning that farm workers and fishermen, who definitely have the least amount of disposable income, do not benefit from the Pantawid Pasada program. Remember the fisherman and his can of sardines? He has to pay the full price for every liter of gasoline he pours into his banca motor, and so do the fish dealers and freight forwarders and the canning factory owners—which, of course, will be reflected in the price of sardines. So, the poor fisherman will be hit by every fuel price hike twice over—first, when he buys gasoline for his banca motor, and second, when he actually buys a can of sardines.
When presented with the proposition that the VAT on petroleum products be suspended or reduced, the government argued that to do so would mean a drop in tax revenues, revenues that are needed for economic development programs. That may be true, but the reality of taxation, as illustrated by my former Harvard Professors G.P. Shukla of the Kennedy School and Oliver Oldman of the Law School, is this: If rising prices, stimulated by the imposition of taxes, begin to unduly burden the greater majority of the people, they may ultimately reduce consumption/usage of certain products or services—ultimately reducing the sales volume of the manufacturers/service providers and, as a result, decreasing the VAT and income taxes from such sales. Looking at it from this perspective, while the government may still get its tax revenues from petroleum products, there’s the very real possibility that collections from other products may yet suffer—and result in greater tax losses than if the VAT on petroleum was suspended or reduced. And there is this to consider: If the economy starts to shrink because of reduced spending, then manufacturers and other industries that make use of petroleum products will subsequently cut back on their consumption of fuel, resulting in the reduction of VAT revenues on petroleum that the government wanted to avoid in the first place.
While fuel prices have been rolled back by at least 60 centavos last May 21, there is no guarantee that they won’t rise again sooner or later. Oil prices are strongly influenced by the situation in the Middle East, and if the intransigence of the Assad regime in Syria is anything to go by, I doubt if we shall see anything approaching a rather fragile peace in the region anytime soon. There are also the ongoing conflicts in Iraq and Afghanistan, where anything resembling a reasonably sustainable “truce” between the insurgents and the US forces and their allies still seems a faraway dream. Restiveness in Egypt and the Persian Gulf states is also a persistent cause for concern for governments around the world, and suffice it to say that the situation in the Middle East is definitely akin to attempting to walk on eggshells. No wonder, everyone seems to be keeping a nervous eye on the price of oil these days.
All things considered, perhaps it’s time the government started to seriously think about suspending the VAT—or at least reducing the VAT rates—on petroleum products. It’s definitely the proverbial bitter pill to swallow, but surely, reduced VAT revenues for petroleum products would be preferable to witnessing a decrease in VAT revenues across several industries, to say nothing of a decline in income taxes if consumption goes down across all economic sectors.
Jean Baptiste Colbert, who had the unenviable task of serving as finance minister to the spectacularly spendthrift Louis XIV, once likened taxation to the art of “… plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Where the VAT on petroleum is concerned, though, or any tax for that matter, it definitely won’t do to pluck the goose until it’s completely de-feathered. The simple fact of the matter is that the people can only be taxed so far—all of us agree that taxes impose a necessary burden on the citizenry, but when that burden becomes a scourge and a bane in the man on the street’s everyday efforts to scrape together enough money to put food on the table, then it’s time to rethink the wisdom of imposing a particular tax or, at least, the rate at which it is imposed.
So when it comes to the VAT on fuel, perhaps it’s time to suspend the tax, or reduce the tax rate—before Juan de la Cruz winds up running on fumes. Or worse, running on empty.
(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 a senior partner of The Tax Offices of Romero, Aguilar & Associates and member of the MAP National Issues Committee and the MAP Tax Committee. Feedback at [email protected]. For previous articles, visit map.org.ph.)
