Proposed cut in VAT exemptions

The administration’s tax reform program moved an inch in Congress after the House of Representatives’ ways and means committee endorsed it recently.

But there is still a long way to go for the measure that seeks to rationalize the country’s tax system and raise the funds needed to bankroll the administration’s so-called “golden age of infrastructure.”

The House committee on appropriations has to take a look at the bill and give its comments before a final report can be submitted for deliberation at the plenary.

A significant component of the tax restructuring scheme is the removal of the existing exemptions from the value-added tax (VAT) of some commercial transactions and organizations.

According to the Department of Budget and Management, these exemptions deprive the government of millions of pesos in revenue that could otherwise be used for important government projects.

The following VAT exemptions are proposed to be removed, unless the gross sales fall below the VAT threshold: (a) exemptions found in special laws, except senior citizens and persons with disabilities (PWDs); (b) cooperatives, except those selling raw agriculture products; (c) low cost and socialized housing; (d) lease of residential units; (e) power transmission; (f) domestic shipping importation, and (g) boy scouts and girl scouts.

Initially, the DBM wanted to remove the VAT exemption granted to senior citizens and PWDs, but backtracked in the wake of strong opposition from the public.

Even if the DBM did not shelve that idea, it is doubtful if the lawmakers would have agreed to its removal. They will not risk being labeled as oblivious to the welfare of their constituents who look to the VAT exemption as an indirect form of assistance from the government.

Except in the case of the boy scouts and girl scouts, the removal of the VAT exemption from the other transactions earlier mentioned would inevitably result in an upward adjustment of their prices.

At the end of the day, the increase would be passed on to the consumers. It’s wishful thinking to expect the business entities concerned to shoulder the financial consequences of the restoration of the VAT on their products or services.

Incidentally, the exemption from the VAT of the scouts’ organizations is a puzzler. Considering their limited activities, there is hardly any plausible rationale to put them in the same league as the senior citizens and PWDs or, for that matter, the other VAT-exempt commercial activities. Whoever was behind the exemption must have been very influential with the lawmakers.

Cooperatives, other than those engaged in the sale of raw agricultural products, have reason to protest the removal of their VAT exemption.

Judging from past statutory enactments, Congress has recognized the effectiveness of cooperatives in improving the lives of the marginalized sectors of our society through collective pooling of personal funds and services.

In fact, to strengthen the cooperative system, the law grants juridical personality to cooperatives upon their registration with the Cooperative Development Authority. Unlike other business entities, they do not have to register with the Securities and Exchange Commission to earn that corporate status.

While it is true that some cooperatives are being used for purposes other than for which they were organized, or have become financial fiefdoms of their officials, the majority of cooperatives in the country have contributed significantly to the improvement of the economic wellbeing of their members and their families.

On this point, it is reasonable to ask if the value of the “savings” that would be earned from lifting the cooperatives’ VAT exemption far outweigh the benefits that their members receive by reason of their membership in the organization.

If there is no difference, or is even less, then there is no point in removing a tax privilege that enables the cooperatives to meet their socioeconomic development mandate.

The removal of VAT exemptions may look good on paper, but there are hidden consequences in doing so because at the end of the reception line is the consuming public who stands to be adversely affected by that action.