POSTSCRIPT / February 22, 2005 / Tuesday


Philippine STAR Columnist

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VAT just another way of skinning the carabao

IGNORANCE NOT BLISS: It is amazing how too few Filipino taxpayers know what Value-Added Tax is. Imagine government asking the people to pay a tax it does not even bother to explain!

The widespread lack of understanding of this new imposition is one of the reasons why many of us are against VAT, or any new tax for that matter.

Follow me in this self-test on what VAT is. I will try to explain what I think VAT is and see where I miss or hit it.

First, I think there should be a hyphen between “Value” and “Added” (i.e., “Value-Added”), because I see it as a tax on the value that is added to a product being sold or a service being provided.

(But the hyphen is a minor detail. It should not provoke the same debate as the occasional hyphen in “Filipino-American” and “Gloria Macapagal-Arroyo.” Will the stylists and social arbiters please advise us on which form is preferred?”

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VAT STAGES: Note that the VAT being proposed in the Congress does not cover essential goods, such as food in carinderias, farm crops, raw materials in non-commercial quantities, and such basic items.

That is how it should be, because no value has been added yet to the raw materials. No value added, no tax.

If you have the heart and the skill for it, strip the skin off a carabao and try selling it (the skin). There is no value added to the raw skin or hide, so there should not be any VAT tacked on to its selling price.

But when a tanner buys it and converts the same carabao hide into leather, some value would have been added to it, di po ba ? If the hide was bought for P100 and the tanner is able to sell it as leather for P180, the value added is P80.

The value added, which in this case is P80, is slapped a VAT. The present rate is 10 percent. Under the amendment being pushed in the Congress, this 10 percent VAT is to be raised to 12 percent.

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AIMING HIGH: At this point, I am confused. Is the 10 percent VAT to be computed based on the whole P180 selling price of the leather, or just on the P80 value that was added? But if I know the mental state of taxmen, they will aim for the bigger target, which is P180.

If this cruel assumption is right (most likely it is), the selling price with VAT will be P198 — which is P180 + 10 percent, or P180 + P18.

Assuming a shoemaker then buys the piece of leather for P198 and makes a pair of sandals using the material, if he now sells the sandals for, say, P300, he has inputted an added value of P102.

In short, the leather bought for P198 has been transformed into another product (sandals) and is now priced at P300 — or a value of P102 added to the leather. When the sandals are sold, the price will be P300 + 10 percent VAT, or a total price of P330.

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TAX AT EVERY TURN: Note that VAT is imposed at every stage of the process or distribution chain as value is added to the item at every turn.

So the thing is taxed relentlessly as it keeps rolling on in the market, resulting in a total tax that might even exceed its original raw cost? Yes. Unfair? Maybe.

It is the same thing with, say, food items. You catch a tuna and sell it for P300 right on the beach. There is no value added to the poor fish, so no VAT is paid or collected.

Also, no taxman is looking so…. Besides, small-time fishermen, farmers, and the like are too insignificant to tax. Or are they?

But if a cannery operator buys a whole load of tuna and processes the fish into canned tuna, he adds value to the raw fish and renders himself or his canned goods subject to VAT. We see again the same principle as applied in the carabao skin-to-leather-to-sandals case.

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SYSTEM FAILURE: At this point, I have to pause and beg the indulgence of the experts. Am I explaining it right, or am I just adding to the confusion? Please write in and tell me.

If this explanation is more or less correct, it means that there should be monitoring throughout the entire passage and permutation of the raw materials to the finished product to its final form before it reaches the ultimate consumer.

Otherwise, the VAT system fails.

And it has failed miserably, since revenue people and legislators have told us that of the 10-percent VAT that the present law seeks to collect, only half of it (5 percent) is actually realized.

Ladies and gentlemen, you know this already, but I will repeat it: There is massive VAT-evasion all over the place, abetted by connivance among sellers and buyers, and merchants and revenue personnel.

If the 10 percent VAT is raised to 12 percent as threatened, all other things being the same, I expect a collection success of only 6 percent.

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FOREIGN-DICTATED: Of course 6 percent is better than the current 5 percent, but why do we have to divide this nation for a measly 1 percent improvement in collections?

Did I hear somebody suggest that we raise the VAT rate to 200 percent so we can finally collect 100 percent?

This brings us back to the oft-repeated line that maybe what we need is not a 2-percent increase in the VAT rate, but a firm do-or-die resolve to improve our collection efficiency and compliance standards.

Ms President, is it a good idea to force this extra bitter pill of a tax on the long-suffering population — hoping to collect an extra 1 percent! — on the say-so of foreign money-lenders and their credit-rating collaborators?

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CONSUMPTION TAX: Those brushing up on their VAT background may want to add this entry found in the Internet:

“Value Added Tax is a general consumption tax assessed on the value added to goods and services.

“It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer.

“It is not a charge on companies. It is charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain. It is collected fractionally , via a system of deductions whereby taxable persons (i.e., VAT-registered businesses) can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities.”

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ALTERNATIVE: In Congress, Camarines Sur Rep. Arnulfo Fuentebella is proposing an alternative to imposing a VAT on the power industry that he says will raise even more revenues for government.

Instead of legislating the removal of VAT exemptions on power firms, he said the administration should push for a power rate increase by the Energy Regulatory Commission.

He said his proposal may result in a P0.52/kwh increase in electricity bills of end-users and raise P32 billion for government, which he noted is bigger than the P26 billion sought to be raised from the VAT on power generators.

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TAX IPP INCOME: My attitude is to continue with the VAT-exemption of power generators, as they will pass this on anyway to us captive consumers. No VAT, no tax to pass on to us.

Imposing VAT on power generating plants using coal, natural gas, bunker, and diesel will increase the price of electricity, because the new tax will be passed on to consumers.

Instead, when the tax-exemptions granted to independent power producers (IPPs) expire next year, such tax holiday should not be renewed. Let these power generators, whose annual revenues run into billions, pay corporate taxes and share their windfall with the people.

And make provisions for their not being able to pass on corporate taxes to consumers via increased power rates. Income taxes are corporate expenses, not operating costs like fuel.

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CONSUMERS’ BURDEN: As a tax on consumption, VAT will constitute a pass-on charge to the consumers who are already reeling from the continued rise in the prices of petroleum products and basic commodities.

Some estimates show that residential rates will increase significantly (P0.81/kwh) from VAT alone. This is in addition to the 98-centavo increase granted by the ERC last November.

Industry players and industrial consumers have objected to any additional cost that will increase their power rates. Our electricity rates are the second highest ($0.12 or about P6.60 @ P55:$1) in Asia, second only to Japan.

Consumer and Oil Price Watch chairman Raul Concepcion has proposed that instead of imposing a 12-percent VAT on IPPs, the government must first plug the VAT leakages and non-payment of taxes, keep VAT exemptions to a minimum, and rationalize the grant of fiscal tax incentives and the three-year BOI Investment Priorities Plan.

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(First published in the Philippine STAR of February 22, 2005)

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