Former fiscal chiefs oppose VAT exemption on oil
By Doris Dumlao
Philippine Daily Inquirer
First Posted 17:27:00 08/04/2008
MANILA, Philippines – A group of top fiscal and public administration experts has opposed the proposed exemption of oil products from the 12-percent value added tax (VAT) as a means to ease the impact of sharply rising commodity prices on the poor.
The Public Finance Institute of the Philippines (PFIP), chaired by former finance secretary Roberto de Ocampo said in a statement Monday that the government could help the poor through other measures such as tightening the fiscal incentive system, broadening the VAT base to include services, plugging leakages in the tax on cigarettes and liquor, and rationalizing the subsidy system administered by government corporations.
The group includes former finance secretary and Philippine Deposit Insurance Corp. (PDIC) president Ernest Leung, former finance undersecretary and recent Haydee Yorac service awardee Milwida Guevara, former Bureau of Internal Revenue/Customs commissioner Guillermo Parayno and former chief of National Tax Research Institute Angel Yoingco.
It also includes economists such as Victor Abola (University of Asia and the Pacific), Filomeno Sta. Ana (Action for Economic Reforms) and Francis Varela (AB Capital).
"We do not believe that oil products should be exempt from the VAT. The VAT is a tax on consumption and we find no reason why consumers of oil products should be spared from sharing the costs of financing public goods and services. They are users of public infrastructure, especially roads, and the costs of road construction and maintenance should be proportionately shared by all taxpayers who use them," PFIP said.
Citing the logistical nightmare of a two-tiered consumption tax system, the PFIP also opposed a proposed reduction in the VAT rate on oil.
The group said it would be difficult for the Bureau of Internal Revenue (BIR) to administer a tax credit system where some input VAT would be computed at 10 percent and others at 12 percent.
The group added that a selective reduction of the VAT rate would introduce distortions in consumption and tax burden distribution, resulting in a tax system that would favor a group of consumers over others.
"A rate reduction to 10 percent on ALL commodities would be fairly straightforward and avoid distortion. However, the government does not have the confidence that it can generate revenues equal to what would be lost. It has relied heavily on the rate increase that eased the pressure on becoming more efficient," the PFIP said.
Using 2007 as a baseline, the group estimated that the government would lose about P45 billion if the VAT rate were lowered to 10 percent.
It noted that oil prices have increased by 89 percent since 2007 and if consumption remained constant, this should have translated to a proportionate increase in VAT collection from oil.
"Using the initial projection of government of P54.56 billion VAT from oil products in 2008, increasing oil prices should have jacked up collection to about P47 billion. This figure is almost equal to the revenue loss from a reduction in the VAT rate," PFIP said.
The group said a major worry was that the windfall would cease if oil prices dropped. The challenge for government under this scenario would be to take to heart its lateral attrition program, reduce incentives, generate more revenues from the audit program, and plug the loopholes in the collection of duties and excise taxes.
"Government can learn from a similar experience in 1993 when a package of measures was introduced in phases to compensate for the revenue loss from the withdrawal of the oil levy," PFIP said.
PFIP urged the government to implement a well-targeted subsidy system that would be systemic, well-planned, and transparent with internal controls and performance monitoring.
It urged government to phase out the "whimsical" and "unplanned" dole-out programs. The group warned that even a well-touted subsidy system such as the "Pantawid Pamilyang Pilipino" could introduce distortions into the education system.
"Without corresponding increases in expenditures on school buildings, additional teachers, and textbooks, this system will increase numbers but not the quality of learning. It will also result to huge dropouts once discontinued. A major part of the burden has been passed on to local governments that have to hire teachers at sub-standard rates, and build make-shift classrooms," PFIP said.
Using VAT revenues in ad hoc subsidies does more harm than good in enabling the public to appreciate that VAT is pro-poor, the group said.
"Public funds are spent on dole-out programs that do not give dignity to the poor and perpetuate the culture of political patronage. It is disheartening to see mothers with their children queue up under rain or under the sun to receive 'one-time' tokens from government. It is as if they are lining up for alms from government that is supposed to serve them," PFIP said.
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