DOF open to cutting VAT rate, but with a condition

The Department of Finance (DOF) may consider slashing the 12-percent value-added tax (VAT), but only if all existing exemptions are removed.

“At this particular time, we have to be very careful about reducing the VAT rate,” Finance Secretary Carlos G. Dominguez III told reporters recently, noting the government needed to collect more taxes to finance the higher capital requirements of the ambitious “Build, Build, Build” infrastructure program.

“All of that can be subject to discussions. There might be a possibility to reduce the rate by eliminating all exemptions—that is one possibility, but we haven’t calculated that yet. Definitely, we have to look at all the alternatives,” he said.

Dominguez was asked to comment about the “Bawas VAT Bill” filed by Sen. Risa Hontiveros, which sought to reduce the rate to 10 percent next year in order to “provide relief for the lower economic deciles of the population affected by the TRAIN [Tax Reform for Acceleration and Inclusion] law.”

Dominguez noted that while the Philippines’ VAT rate was higher than Thailand’s 7 percent, both were equivalent to 4.7 percent of the gross domestic product. This meant the Philippines was not as efficient in its collections.

“If we can bring up our collection rate to, say, 7 percent [of GDP] by eliminating exemptions, of course, we are open to reducing the rate of VAT,” Dominguez said.

“Unfortunately in the past, VAT has been used as a fiscal incentive, which is really wrong. There is no other country in the world which has so many [VAT] exemptions,” according to Dominguez.

The DOF had moved to broaden the VAT base by removing most exemptions as proposed in its first tax reform package. However, lawmakers did not agree to removing the perks being enjoyed by senior citizens and persons with disabilities, among other sectors.

The TRAIN law signed by President Duterte in December even increased the VAT-exempt threshold for self-employed individuals and professionals to P3 million from P1.9 million previously.

Under Hontiveros’ bill, the VAT rate will be further cut to 8 percent in 2022 for as long as the revenues collected reach at least 4.5 percent of GDP.