POSTSCRIPT / April 28, 2005 / Thursday


Philippine STAR Columnist

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Solons busy protecting clients in VAT debate?

LONG WAIT: Since Congress is dealing mainly with numbers (pesos) in fashioning a comprehensive tax program, including an expanded Value-Added Tax, the legislative task should not be that difficult.

With super-fast computers at work, it should be easy to make a 10-year revenue “what-if…?” projection. It should be a cinch identifying revenue sources and allocating the money down to the last centavo to a myriad of obligations that must be funded.

Our ways-and-means experts have been in this racket long enough to be able to fine-tune the entire process. They also know, almost by instinct, how much each targeted source can reasonably cough up without spitting blood.

If so, why is it taking our congressmen and senators an eternity to decide, for instance, if the VAT should be 10 or 12 percent? If deadlocked, cannot they meet at 11 percent? Cannot a quick tap on their computers give them the instant answers?

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WHY THE DELAY?: The simple explanation for the slow drag is that some key players among them have paying clients or benefactors that they must protect.

The conflicting interests get in the way. Considering the various lobbies at work, lawmakers representing them must watch their favored version of the VAT bill as it goes through the mill. They fight back or negotiate when their clients are threatened.

That is why it is extremely difficult to gain a consensus on, say, whether VAT should be 10 or 12 percent and who among their favored friends will enjoy exemptions and to what extent.

Busy protecting their high-paying clients, hardly any one finds time to think of the ordinary taxpayer, the end-consumer that politicians claim to serve. You see, poor Juan Pasang Krus has nothing to offer to change the color of their jaundiced eye.

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ENLIGHTENMENT: How effective is a lobby? Ask people in the know and they will tell you that it depends mostly on the lobby’s logistics.

Remember that when President Arroyo delivered her last state of the nation address, she outlined an eight-point legislative program to raise the funds that she said would balance the budget and cure the fiscal malaise bedeviling the country.

One of her major revenue measures was for imposing a windfall tax on the fast-growing telecoms industry, especially the cellphone companies, and reimposing the franchise tax on them.

We all know what happened. The big guns of the telecoms industry met President Arroyo behind closed doors. When she emerged, apparently enlightened, she was smiling and singing a different tune.

She has dropped the telecoms from among her targets. Ganoon po kadali.

Now we end-consumers who sit helplessly at the end of the barrel of her VAT shotgun cannot muster the same expensive arguments that the big, fat telecoms wield to enlighten the President into dropping us from among her targets. Or at least lightening our tax burden.

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P65-B RABBIT: Judging from the way Malacanang explains VAT issues, it seems that it is enough for the government to raise the tax rate from 10 percent to 12 percent and, voila!, P65 billion will pop up like a rabbit from the hat.

Two points immediately come to mind:

  1. Since VAT is actually a pass-on tax, the end-consumer (that’s us) will shoulder the cumulative burden of the tax that keeps growing as the goods being traded pass from one taxable hand to another.
  2. Based on the BIR’s track record and the tax-avoidance mindset of the public, much of the VAT sought to be collected will not reach government coffers. The administration will be lucky to achieve a 60 percent collection efficiency.

The additional P65 billion from VAT is a pipe dream.

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LOOPHOLE: Here is one reason why collections will falter. Reader Rene Macalintal, a revenue officer II (RDO 52) based in Paranaque, points to one loophole in the VAT system that seems to have escaped notice since VAT came into being on Jan. 1, 1988.

Macalintal calls attention to Section 104 of the National Revenue Code, which says that a VAT-registered person shall be entitled to tax credit for input taxes on the following transactions: Purchase or importation of goods: for sale; or for conversion into or intended to form part of a finished product for sale, including packaging materials; or for use as supplies in the course of trade or business; or for use as raw materials supplied in the sale of services.

This provision implies, he says, that a person can already claim creditable input taxes even if his purchased goods are not yet sold but only intended for sale.

Not only input taxes on purchased goods can be credited, he adds, but all sources of input taxes in the course of trade or business can be deducted against the VAT payable.

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ILLUSTRATION: If ABC Company paid input VAT of P103,200 (for various items in its VAT returns) for April and collected only P77,000 in output taxes from buyers of some of its products, ABC can already subtract the P77,000 from P103,200 and claim a credit of P26,200 as excess input tax for the month.

Assume that this pattern goes on for one taxable year. Macalintal says that instead of the government being able to collect VAT from ABC, it is the government that ends up owing it money.

In a case like that of ABC, whose fault is it that the VAT collection of the BIR is ostensibly low (in fact negative in the case of ABC)?

Since this happens with many companies, can we expect the BIR to bring in the P65-billion that Malacanang said would be collected if the VAT rate were raised from the current 10 percent to 12 percent?

I am reminded at this point of the native “salawikain” (saying) that one must not count chicks before they are hatched.

Obviously, contrary to the claim of Malacanang, the 12-percent VAT is not the cure-all — the Bitter Pill, they call it — for the fiscal malaise that has sent this debilitated country to the intensive care unit.

Other measures, including motivational programs and the relentless prosecution of corrupt officials, will have to come into play.

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INPUT-OUTPUT VAT: For the benefit of those who came in only now (and begging the indulgence of those who heard this before), let me explain again that an “input VAT” and an “output VAT” come into play in the computation of the net VAT due the government.

“Input VAT” (or VAT on purchases) is paid on materials that a VAT-registered businessman buys. “Output VAT” (or VAT on sales) is the VAT collected by the businessman on behalf of the BIR when he sells his goods or services.

The businessman then subtracts the “input VAT” that he had paid from the “output VAT” that he had collected and remits the difference to the BIR.

But if, as in the example of ABC Company, the “input VAT” paid is actually bigger than the “output VAT” collected, the government ends up owing ABC some money at that point.

It is possible that some businesses would pad their claim for “input VAT” allegedly paid or would shave off some amounts from the “output VAT” collected. This is possible, especially with the collusion of corrupt tax officials.

How is this collection problem being addressed in the VAT bill pending in Congress?

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INTENTION TO SELL: In the example that Macalintal gave of ABC Company, the firm bought 10,000 pieces of canned goods at P100 per can, or a total purchase price of P1 million.

For that, ABC paid a 10-percent input VAT of P10 per can or a total of P100,000 VAT. With the tax tacked on, the canned goods’ value had gone up to P110 per can or P1,100,000 for the entire lot of 10,000 cans. (To simplify, no markup has been added in this illustration.)

But the company was able to sell only 7,000 pieces of the canned goods, realizing sales of P770,000 (or 7,000 cans x P110 per can). For that sale, ABC collected a 10-percent output VAT of P77,000 from the buyers.

To determine the VAT due the government on the canned goods, ABC subtracted the input VAT of P100,000 it had paid from the P77,000 output VAT that it had collected. The difference is a NEGATIVE P23,000, which is a claim or tax credit due ABC.

Instead of the government collecting VAT from ABC, it is ABC now making a claim against the government. That is because, according to Macalintal, the National Internal Revenue Code allows the claiming of credit even on goods that have not been sold but are still intended to be sold.

The canned goods are just one of the many items in the VAT returns of ABC. There are other expense and operations items on which VAT is due but I did not include them so as not to complicate the presentation.

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(First published in the Philippine STAR of April 28, 2005)

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