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(written December 1994 by Arturo C. Boquiren under a University of the Philippines Faculty Grant)

 

 

VALUE-ADDED TAX (VAT) IN GENERAL

 

              VAT is collected in every stage of production or transfer of goods and services as value is added. According to Villegas and Abola (write-up was based on an article by Jose Mario Cuyegkeng and Carmelo Enriquez, CRC Staff Memo No. 1, 1986), there are two ways of calculating tax liability under a VAT system: the  subtraction method and the credit method. In the subtraction method, valued-added is determined and then multiplied by the VAT tax rate. The one adopted by the Philippines is the credit method in which gross tax liability is determined by multiplying the VAT tax rate on total sales. [1] Actual amount of  tax paid to the BIR is reduced, however, if receipts are presented to the BIR and VAT taxes paid by suppliers of inputs are deducted or credited.

 

THE EXPANDED VAT LAW

                                          

              The Expanded VAT Law (Republic Act 7716 signed on 5 May 1994) is a follow-up to Executive Order 273 of 1988 that introduced VAT in the Philippines.  RA 7716 was supposed to be implemented beginning 28 May 1994 but a restraining order from the Supreme Court prevented this.  The law will be implemented once legal questions are settled. Currently, there is a movement to repeal the law via "people's initiative" provided for under the Philippine Constitution. To force a referendum on the matter, the Constitution requires the signature of at least 10% of the total voters and at least 3% of the voters in each of the country's 200 legislative districts.

 

WHY DO WE HAVE AN EXPANDED VAT LAW

 

              Several newspaper reports and literature indicate that the Expanded VAT Law resulted from pressure of the International Monetary Fund-World Bank. VAT as a system of taxation was first suggested by the World Bank in 1984.[2] The current Expanded VAT Law  is a result of  lobbying by the IMF as early as 1990. This is clear in one of the news titles of page 17 of the 5 December 1990 issue of the Philippine Daily Inquirer: "IMF Wants Congress OK on New Taxes." This is further affirmed in page 26 of the 9 May 1994 issue of the same paper: "Improvements in the structure and administration of the country's tax system are part of the impositions of the International Monetary Fund in exchange for a new exit program for the Philippines." The same news report pointed out that the VAT is the cornerstone of the reforms in the Philippine tax system.

 

              Viewed from another angle, the immediate reason why there is an  Expanded VAT Law  is that government lost in its bid to raise the price of oil in view of budget deficits resulting from reimbursements being made by oil companies from the Oil Price Stabilization Fund. The IMF required as a condition for its loan and seal of approval for "good housekeeping" that government reduce its budget deficits. Faced with a strong opposition against the oil price increase from the Kilusang Rollback, government cooked up the VAT.

 

EXPANDED VAT LAW IN BRIEF

 

              The Expanded VAT Law widens the tax base of the Philippine VAT.  Transactions previously exempt from under Executive Order 273 of 1988 are now subject to VAT.  Establishments subject to VAT include the following:

 

hotels, inns, resorts and similar establishments	restaurants and other eating places, including clubs and catering services	dealers in securities and lending investors	taxicabs, tourist buses and rent-a-car companies
common carriers for transport of goods or cargoes	non-life insurance companies (except crop insurance)	franchise of telephone, telegraph, television, radio, and other franchises (except electricity, gas and water)	books, magazines, newspapers (except on newspaper circulation income)
pesticides	importation of meat	real properties sold by real estate developers and similar agencies	advertisements & announcements on TV, radio, newspapers & magazines
use of patents,  copyrights, trademarks, trade-names and similar property rightss, as well as any industrial, commercial or  scientific equipment	enterprises under PD 66 (EPZA Act),  PD 972 (Coal Mining Act), PD 529 (Petroleum Act), PD 1491 (PHIVIDEC Export Oriented Industries),  Omnibus Investment Code of 1987, RA 6938 (cooperatives except the electric cooperatives)		lubricating oil, processed gas, grease, was, petrolatum, including  raw materials in the manufacture thereof

 

 

GOODS AND SERVICES EXEMPTED FROM VAT

                                          

              Among those exempted from VAT are the following:

 

rice, corn, raw cane sugar, fish, shrimps & other seafoods, chicken & eggs, pork & beef, vegetables,  fruits	petroleum products like LPG, gasoline, diesel, kerosene (any change in prices are subject to approval by the Energy Regulatory Board	education services, tuition fees and textbooks sold by schools	businesses with gross receipts not exceeding P500,000 per annum
medical and dental services	dwelling places below P2,750	jeepney, bus & tricycle fares	water & electricity

 

 

 

CORRECT BILLING OF VAT UNDER THE EXPANDED VAT LAW

 

              Item #29 page 15 of the guidelines on VAT produced by the Bureau of Internal Revenue last May 1994 clarifies how receipts or invoices should be written under the VAT taxation scheme: "The VAT taxpayer is required to show only the total invoice amount (gross amount of gross selling price or gross receipts, inclusive of the VAT) without disclosing the amount of VAT as a separate item in the invoice."  This means that the VAT  taxpayer shold not separately indicate VAT in the invoice or receipt issued for every sale.

 

              For example,  suppose a producer or seller wants his goods to be sold at P1,000.00 net of VAT. This producer or seller must charge consumers P1,100.00 and reflect P1,100 as the amount of sales on the receipt or invoice he issues. It is incorrect to reflect on the receipt P1,000.00 as sales and then add a VAT of P100.00.

 

COMPUTATION OF VAT  UNDER THE EXPANDED VAT LAW

 

              In our example, a sale of P1,100 is taxed by a rate of 1/11 as the output VAT. If the producer or seller's total purchases for the good was P550.00, he is entitled to a credit of an input VAT of P50.00 and the VAT payable is P100-P50 or P50.00. This is explained in Item #17 page 10 of the May 1994 BIR guidelines.

 

VAT REGISTRATION

 

              An annual registration fee of P1,000.00 will be required from  both VAT and non-VAT persons engaged in the business of selling select goods and services.  Persons with gross anuual sales/receipts amounting to less than P100,000.00 are however exempted from the registration fee.

             

ADVANTAGES[3] ACCORDING TO TEXTBOOKS

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

      services are subject to tax under the VAT system 

      the VAT system is said to be biased in favor of investments because expenditures are deducted from the tax base

      the VAT system motivates firms to be more conscious in getting official receipts of purchases so they can be entitled to tax credits

      compared to the retail tax, tax evasion is more difficult under the VAT system because tax is collected at every stage of production

 

ARGUMENTS FOR AN EXPANDED VAT LAW

 

              Proponents argue that the Expanded VAT Law will enhance tax collections and at the same time constitute as a progressive method of taxation. Proponents have used critic's arguments on the low collection rate of taxes as a major justification on why the Expanded VAT Law should be implemented. Dr. Rosario Manasan, Research Fellow of the Philippines Institute for Development Studies (PIDS) argues that with the Expanded VAT Law, "only 2.35% of the tax to be collected will be borne by the poorest decile (income decile 1) while 32.52% will be shouldered by the richest decile (decile 10)."[4] The Philippine Journal of 27 August 1994 reports that Manasan said that from deciles 1 to 9, there is a drop in the proportion of tax to be borne by each decile and the increase will only be experienced in decile 10. 

 

              Meanwhile, Economic Planning Secretary Cielito Habito argued that the VAT would only be increasing the budgets of expenditures of the lowest income group by about P50.00 a month or about a little less than 3% of their total budget; it would be 4.5% for the top income groups, which in peso terms is more than P1,300.00 a month.[5]

 

(for criticisms on the VAT, see Handout 22)