POSTSCRIPT / March 1, 2005 / Tuesday

By FEDERICO D. PASCUAL JR.

Philippine STAR Columnist

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12% VAT on power enough to kill industry

PASSED-ON BURDEN: Value-Added Tax is a pass-on consumption tax that grows as taxable goods and services move on in the distribution chain — finally ending on the lap of the end-users.

The same cumulative increase in the VAT component of prices of most goods will be felt if the tax is slapped on power companies as envisioned in the expanded VAT bill about to be passed by Congress.

Like the electricity they generate, the proposed VAT on Independent Power Producers (IPPs) and other power generators will be transmitted to the distributors — notably the Manila Electric Co. (Meralco) — and inevitably passed on to the consumers.

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HIGH COSTS KILL: While it is true that government can increase its net VAT intake to about P15 billion a year by imposing VAT on the power sector, it will do so at the expense of industrial and residential electricity users and of the economy in general.

Power is an expensive variable input of industry. Assuming other elements remain the same, increased power cost will translate to a marked rise in production cost and in the price of most manufactured goods.

Producers selling at comparatively higher prices cannot compete with their rivals in neighboring countries enjoying cheaper electricity. Swamped with cheaper imports, they will have to close, lay off workers and kiss their investments goodbye.

New or additional taxes sometimes seem to pump life into a faltering economy, but extortionist and ill-conceived impositions could just hasten its collapse.

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SEIPI OBJECTS: No wonder local semiconductors and electronics makers who see a 12-percent VAT in the horizon are warning of possible contract cancellations, lower export receipts and job losses.

Semiconductors and Electronics Industries of the Philippines Inc. (Seipi) said that while it supports the government’s moves to raise the VAT rate from 10 to 12 percent, imposing that rate on sensitive sectors such as IPPs could lead to bigger problems.

Based on Seipi’s computations, a 12-percent VAT would raise the cost of energy, especially for large industrial users, by 22 percent. It pointed out that this would bloat manufacturing costs, making electronics and semiconductor firms less competitive.

With the cost of manufacturing in the country on the rise, it would be more difficult for the government to keep foreign investors and attract new ones.

Even without the impending increase in power costs, many local firms are already losing contracts with foreign buyers, who have started to source their requirements from China and other Southeast Asian countries.

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FCP & FPI OBJECT: The electronics industry is crucial to the local economy as semiconductor exports bring in some 60 percent of the country’s dollar receipts from its merchandise trade.

In 2004, exports of electronics and semiconductor products fetched $26.64 billion, making possible the expansion of exports by 9.3 percent and contributing to the impressive 6.1-percent growth in the gross domestic product.

Companies facing potential export losses would have to lay off personnel. The industry employs 366,000 engineers, technicians and operators. Imagine what would happen to these workers if power costs cripple their employers’ competitiveness.

Seipi’s concern was echoed in the refusal of the influential Foreign Chamber of the Philippines and the Federation of Philippine Industries to support the proposed 12-percent expanded VAT.

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ALARMING RATE: FCP said that with electricity rates in the Philippines already among the highest in Asia, “we are concerned that significant rate increases will harm Philippine competitiveness as a location for manufacturing.”

It added: “Foreign firms considering expansion of existing manufacturing operations in the Philippines or locating here for the first time will be deterred from investing by higher power rates, in addition to other existing inefficiencies in the cost of doing business.

“We support an increase of VAT to 12 percent and a reduction in the sectors now exempt from VAT. But raising the cost of manufacturing by making electricity subject to VAT will result in a loss of jobs.”

While the FPI also supports the government’s objective of improving its fiscal position, it expressed reservations whether a simple increase of the VAT rate from 10 to 12 percent without plugging the leakages in the system and/or reducing VAT exemptions will actually result in increased revenues.

Instead of lifting the exemption of VAT on Napocor and IPPs outright, the House of Representatives has decided to carry out the increase gradually with a 4-percent VAT in the first year, 6 percent in the second, 8 percent in the third, and finally 12 percent in the fourth year.

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EFFECT ON MERALCO: Computations have shown that a 12-percent VAT on ther National Power Corp. and IPPs will raise electricity rates by an average of P0.44/kilowatt-hour nationwide.

The 6 million member-consumers of electric cooperatives pay between P4 and P8.25/kwh. Thus, subjecting Napocor and IPPs to a 12-percent VAT would raise electricity rates of electric cooperatives to between P4.44/kwh and P8.69/kwh.

Meralco’s residential consumers pay around P8.74/kwh, including the power firm’s national and local franchise taxes that are passed on to them. Meralco said that a 12-percent VAT would mean another rate increase of P0.58/kwh.

If you are using 100 kwh per month, which is normally billed at P575, a 12-percent VAT would mean your bill will grow to around P633. This increase cannot be prevented since VAT is a pass-on tax.

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RAW REPORT: Detractors of GSIS President and General Manager Winston Garcia are feasting on a preliminary report of a team that reviewed transactions of the Government Service Insurance System and, as expected, raised questions on some items.

The procedure is for the agency head to first comment on the internal report before the Commission on Audit head office finalizes or ratifies its content. But even before Garcia could react within the time given him, the audit memorandum was already being publicized by his usual critics.

Garcia is asking COA chairman Guillermo Carague how come this “obvious demolition job” is ongoing and if the preliminary internal report’s publication is with the COA boss’ knowledge and permission. He asked that his side be heard first.

The GSIS president noted that the audit team head, Leonor Boado, was the same auditor who he said “struck from nowhere and made wild accusations” about the Juan Luna masterpiece “Parisian Life” that GSIS won in an auction in Hong Kong two years ago.

Garcia said that an honest report sanctioned by the COA head office will show that the GSIS under him has improved vastly its financial condition, chalked up record profits, upgraded benefits for members and streamlined procedures.

He noted that his troubles started when his reforms broke the syndicates feeding on the hitherto topsy-turvy records of the state insurance firm. He asked if the leaking of the one-sided preliminary internal report was part of the syndicate’s retaliatory moves.

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(First published in the Philippine STAR of March 1, 2005)

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