Can Senate hold line against tax machine?
LINE OF DEFENSE: The Senate is emerging as the people’s last line of defense against an onrushing government train loaded with tax bomb bills wired to raised some P80 billion to pay for the management sins of inept and corrupt officials.
The latest car bomb to reach the Senate is the expanded Value-Added Tax bill that would blow the consumption tax on goods and services from 10 to 12 percent and broaden the tax base.
The Senate’s position, formalized by the ways and means committee headed by Sen. Ralph G. Recto, is to keep the rate at the present 10 percent rate, improve collection efficiency and remove or reduce some of the tax exemptions of some favored businesses.
The ensuing debate will be interesting, to say the least, considering that the House of Representatives — still smarting from the Senate’s outsmarting it on the passage of the 2005 national budget — has staked its reputation to raising the VAT rate to 12 percent as desired by Malacanang.
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RECTO SPEECH: As intro for the crowd waiting in the gallery for the fireworks, we reprint here the March 7 speech of senator Recto in submitting Committee Report No. 16 on Senate Bill 1950 on the VAT bill.
We found his speech to be very informative and laced with a touch of style. Also, it happens to echo our sentiments:
Mr. President, many of you here can think of a hundred reasons why we should not pass this bill. To these, I can think of only one good reason why we should.
By the time I would have finished this speech, the government would have borrowed more than P21 million. We borrow at a rate of P1,060,000 per minute. To pay our debt, P1.2 million is gone from the Treasury every 60 seconds.
In this greatest debt pile-up in history lies the greatest failure of our generation. Whether we are in the majority or in the opposition, we cannot escape the blame. There’s bipartisan guilt on this matter because in the revolving-door politics of ours, each one of us, one time or another, had sat on either side of the aisle. We both had the experience of being on the saddle, or toppling the one on it.
Thus, the debt problem is not caused by one group. If blame is to be assigned, let it be on a generation of leaders, our generation.
If we have created our own mess, then it is our duty to clean it up. If this problem was created by this generation, then it must be solved by this generation. And even if this problem was inherited by this generation, we must see to it that this problem ends with us.
It is a generational debt we must settle during our watch. We should not pass on to the next generation of leaders what had been passed on to us. The torch of leadership that we shall pass must not be wrapped in IOUs.
Why is it that as parents, we hate leaving debts to our children, but as politicians we want the national debt passed on to the next government?
We borrow recklessly knowing full well that those who will come after us will foot the bill. We refuse to live within our means so we borrow against future incomes. In securitization, we even pawn wealth to be created by workers yet to be born. We have not only mortgaged our children’s future, we have taken a second mortgage on their children’s future as well.
Our refusal to pay taxes, or compel their collection, will perpetuate this cycle, and guarantee that the next generation will be an indentured one.
And if that happens, our children will remember us, not with a debt of gratitude, but simply for the debt we have left them.
Many years from now, I fear that Aquilino Pimentel V, Frankie Pangilinan II, or Richard the Third of Olongapo will berate us from across the ages as they file past our portraits on the way to the session hall of the same Senate of their forebears to grapple with a fiscal crisis whose seeds we had planted.
At this juncture in our history, we have two choices: Be the greatest generation by paying our dues; or let the one after us claim that title for any generation who will clean up our mess will surely be worthy of that honor.
Thus, the liberation of our grandchildren from a crushing debt begins when we start living within our means, when we start funding our needs with revenues instead of borrowing, when we stop making many national vale that are payable in 30 annual gives.
We have started to create a better future for our children when we passed a law that increased the tax on sin products, and another one that would make honest men out of taxmen.
Now we are about to take the third and hardest step on our journey to fiscal salvation. The proposal at hand will raise the biggest revenue, and spare no one.
The VAT is so pervasive that it precedes our stay in this world and lingers on after we are gone. We are brought out into this world in value added-taxed carriages and are laid to rest in value added-taxed coffins.
If tax is the membership fee to a government, then a citizen pays his dues in the form of VAT many times in a day, from the moment he flushes the value added taxed-water down the toilet in the morning, to the time he brushes his teeth with a value added taxed – toothpaste at night.
The omnipresent trait of the VAT stems from the fact that it is a consumption tax, and man, well, is a consumption animal.
It is a sales tax, so every time a person buys a good or a service, he pays a tax on it. Value-added refers to additional inputs on a product, so that when a one-peso leather becomes a two-peso wallet, the added value is worth one peso, and it is the amount upon which the net value added tax of 10 percent is levied.
If that plain wallet gets reincarnated as a designer leather good then the difference between the purchase price and the sale price is subject to a 10 percent VAT.
The VAT chain can be compared to a product riding an LRT coach, with each station imposing a ten percent tax on whatever additional service it can provide within its segment, until the final stop, where the buyer foots the accumulated bill, taxes and all.
The government’s dependence on VAT collections is robust. Last year, it collected P139 billion in VAT, or 18 centavos for every tax peso.
Nobody can escape from VAT. Ka Roger may evade the military, avoids income tax and pays no franchise tax, but the long arm of VAT picks his pocket even in his mountain hideout because each time he buys a cellcard or a Lucky Me, he pays a VAT.
Mr. President, let it not be said that we did not submit this bill to public hearings. For the record, we held nine public hearings, lasting a total of 40 hours and which were attended by more than 1,000 persons.
If the committee was only after the bottom line, we could have rubberstamped our approval to the Executive’s request for a higher and broader VAT.
But we all know that a tax proposal is not made superior nor feasible by its promise of yield. Senators are not like pharaohs whose enchantment with the pyramids led them to turn a blind eye to the human cost.
We do not embrace tax measures like long lost loves. Public interest requires us to treat each with a healthy dose of skepticism, and the VAT bills were not spared of the cynical eye.
Because a good tax measure is forged in the anvil of criticism, the VAT bills were subjected to a battery of tests to establish whether they should indeed be adopted.
In our opinion, a VAT bill, or for that matter any revenue measure, worthy of our support must be fair and just.
A bill must not perpetuate an unjust system wherein a few firms that wallow in income do not pay tax while people who wallow in poverty do.
We can only get the people to pay a tax that will hurt them if they will see that those better off will also feel the pinch. People naturally despise paying taxes, but they will despise us more if they will see others who should pay, do not.
The cornerstone of any just tax system is the proportionate allocation of both pain and perks, of relief and rewards. In this regard, we had asked the government: Do the VAT bills spread out the burden or put it all on the shoulders of the consumers?
If it will be borne by the consumers, what can we do to lighten the load? If we can’t exempt them from the tax hike, can we at least soften the blow?
The committee hearings also gave us the opportunity to challenge the basis of exempting sectors from the VAT. What caused them to be beneficiaries of legislative grace in the first place? Was it to due to a sound economic idea or simple strength of political numbers? Is it economic sacrilege to tax them?
In examining the VAT system, we saw an inordinate number of leaks in the upstream sector of the economy, prompting us to ask our guests: Will plugging all these leaks or letting the VAT chain begin there, yield revenues for the government?
What’s the rationale behind exempting from VAT the most profitable firms whose profits are guaranteed by the government while subjecting to VAT mom-and-pop operations who have to sink-and-swim in the vagaries of the free market system?
How much taxable income are exhaled through these VAT loopholes was another question repeatedly asked, concerned as we are with foregone revenues.
If we are going to lift their VAT exemptions, will it cancel the need to raise the VAT rate and spare millions of people from paying a higher VAT? How about the ease of collection? Will it be easier to collect billions of pesos from a few VAT transactions than a few pesos each from billions of VAT transactions?
Have we tried to collect existing VAT assessments before putting additional pressure on those who have long been complying?
Does this round of VAT proposals improve the efficiency of the system? Does it involve leak repairs? Because if not, we will only increase the leak once we increase the water pressure, so to speak.
Are there any other taxes than can substitute for a higher VAT rate, or complement a slimmer version of the latter? Are we putting all our fiscal eggs in one VAT basket?
On the issue of multiple rates, will this scheme promote ease of collection and prevent distortion in the chain or will it lead to confusion and revenue loss?
In short, Mr. President, we were looking for a formula that would plug the leaks, expand the base, simplify collection, ensure transparency, yield buoyant revenues, and distribute the burden in the VAT system.
With the above as guideposts, we have come to the conclusion of discarding a higher VAT rate in favor of lifting VAT exemption of certain goods and services. It is a move that will not jeopardize the government’s need for additional revenues.
In VAT, the Department of Finance wants P71.24 billion. The House of Representatives says P71.21 billion. We counter with P81.8 billion.
The DoF and the House hit their targets using the double-barrel shotgun of a VAT rate increase and the expansion of the VAT coverage. I say we can hit ours with a single shot, of just expanding the VAT base.
Thus, under our proposal the VAT rate stays at 10 percent. In exchange, we let a few goods and services — 12 to be exact — to be covered by VAT.
Why increase the VAT on, say, 6,000 products and services, when VAT-ing 12 will do the trick?
This option is fairer to the taxpayer, and one that this government can live with.
A tax system that allows the most profitable company in the country, a coal-fired power plant, not to pay VAT, while a small store beside it is made to pay VAT, fails the fairness test.
There is injustice when a coal-fired plant that grosses P131.7 billion a year does not keep a book on VAT transactions, while a small store that sells on the average two cellcards, one case of gin, one ream of cigarettes, and half a case of beer a day keeps one.
Thus a “higher VAT” will simply assign the burden of shouldering the “added VAT” on those who are already saddled by VAT. A “higher VAT” will petrify the status quo, and preserve static, if not, sliding collections.
Our preference for a “wider VAT” over a “higher VAT” is also anchored on administrative considerations. Not only is it a superior policy from the point of view of principles, but from practical considerations as well.
We need a tax that will give “fast-acting relief “ to the fiscal woes of the government. Sectors exempted at present can provide the infusion of funds to this government, fast. The advantage of capturing the VAT from upstream industries such as fuel and power is that only a few players will be monitored, thus the ease of collection, and the least leaks, which are not possible in a diffused VAT base setup.
Mr. President, the committee recommends that power; fuel; airline and shipping fares; night and day clubs; services of doctors and lawyers; works of art; and non-food agricultural products join the VAT club.
We have taken the greatest care in what goods and services will be included in the VAT net.
Let me assure you that staples and basic necessities would remain VAT-free. Staple food and agriculture, health and education, low-cost housing and lease of residential units would stay VAT-free zones.
The result is that when a laborer eats his almusal at dawn, he can ball a fist of VAT-free rice to go with his VAT-free galunggongand VAT-free kamatis dipped in VAT-free bagoong with a VAT-free egg on the side, and cap it with a cup of VAT-free kapeng-barako made sweet by VAT-free muscovado while he scans lotto results in a VAT-free dyaryo .
While we are imposing VAT on these services and goods, we are proposing measures that will mitigate the impact on such a tax on consumers.
In the case of Independent Power Producers (IPPs), we exempt indigenous and renewable energy sources. We will not VAT the sun, the wind, the mighty river of Agus, the steam of Mount Apo, or the gas from the bowels of Malampaya.
However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out their franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain, we will however bring down the excise tax on socially-sensitive products such as diesel, bunker fuel and kerosene.
By reducing the excise tax on fuel to give room to VAT, we are giving up P11.5B in annual revenues a year. As to the franchise tax on electric utilities, its repeal will cost us an additional P5.69 billion. If relief has a price tag, it bears this number: P17.5 billion — a year.
What do all these exercises point to? These are not contortions of giving to the left hand what was taken from the right. Rather, these sprang from our concern of softening the impact of VAT, so that the people can cushion the blow of higher prices they will have to pay as a result of VAT.
As a result of these moves, fears arose that the VAT on power generation companies, electric utilities and electric cooperatives will cause a spike in power rates. Yes, there will be an increase, but not astronomically, as some fear-mongers would like us to believe.
Latest simulations made by Napocor point to only 40 centavos per kilowatt hour increase, as a result of the mitigating measures we are proposing such as the VAT-exemption of indigenous energy sources, the repeal of the franchise tax on electric distribution companies, and the reduction of the excise tax on bunker fuel.
On fuel, our proposal, as shown by the graph, is “gentler and kinder” than the DoF’s. Because an excise tax is fixed and impervious to the ebb and flow of gas prices, the VAT, while it will rise with gas prices, shares the same downhill ride when prices go down.
We have increased the non-VAT threshold to P750,000 a year so that any VAT-registered entity will not have to pay VAT if his average monthly gross income does not exceed P62,500 a month.
A doctor who does not make P62,500 a month will not pay VAT nor does a store owner, or a tailor, or an architect, or a couturier.
You can have an income bigger than what Ate Glo makes in a month, and still you will not pay VAT. P750,000 is the magic number. This is the natural inoculation against VAT. You don’t earn this in a year, you are automatically inoculated against VAT.
We also have a provision that responds to the challenge of plugging the leaks in the collection of VAT before raising its rates or widening its reach.
We propose to spread out of the creditable input VAT on the purchase and import of capital goods to 60 months, a move that will raise P22.6 billion a year.
The recouping of VAT payments will not be instantaneous, but is stretched to five years. Only VAT-on-VAT crediting will be allowed, unless one is an exporter, in which the credit can be applied to other tax liabilities.
This provision will finally cancel the zero-rated VAT privilege of IPPs, which some say was sneaked in through the side door of the bicameral conference committee on the EPIRA.
An IPP that is VAT zero-rated is not only VAT-exempt, it may also claim tax credits for VAT payments on purchases, including imports. The credits may then be used to offset other tax obligations of said IPP. The repeal of this privilege will free the government from the cash flow problems attendant to refunds given to the IPPs.
This demonstrates how, like a finger stabbed into a leaking dike, a simple plug can stop the hemorrhage in revenues.
It is at this point, Mr. President, that I would like to interject the reasons why we cannot agree to a multi-tier VAT as proposed by the House.
The internationally accepted doctrine is that for VAT to be effective, it must be broad-based as possible and hew to a single rate. All experts we have consulted have warned us that a multiple VAT rate system will be a nightmare to administer. It will become the playground of VAT evaders, they say.
One scenario painted before us is the possibility of the government ending up refunding VATable persons whose VAT input (purchase) is bigger than his VAT output (sale). Multiple VAT rates will create many Bermuda Triangles in the chain where VAT payments can disappear or diminish in size.
Businessmen lose too as they would have to maintain different books of account for articles subject to different VAT rates. Instead of attending to their businesses, they will be riveted to their books.
The beauty and integrity of the VAT chain, Mr. President, rely on a chain of invoices and receipts that can leave an audit trail. Tax compliance by self-confession does not apply on VAT, as the latter requires records of transactions.
VAT can be likened to a GPS that can track purchases, sales and taxes from point of production to point of consumption.
This is the tool that we need to monitor the petroleum industry given reports of large-scale smuggling in this sector, which had deprived the government of billions of pesos in foregone revenues a year.
VAT can validate and reconcile taxes paid at point of landing or production to what are paid at point of final consumption through an unbroken chain of invoiced transactions. At present, there is no way of knowing if a diesel bought from a gas station is excise tax-paid as all fuel that arrives at the retail outlet are assumed to be tax-paid.
But in VAT, you can now have a way of tracking the journey of a gasoline shipment, from the first drip out of an oil tanker to the last drop into a gas tank.
This VAT, Mr. President, will end the “Only in Da Pilipins” phenomenon of diesel use going down by 260 million liters a year at a time when 300,000 more dieselengine cars went on the road, or of national gasoline consumption plummeting by 880 million liters between 1998 and 2003 when the number of gas-fed cars actually jumped by 460,000 units during the same period.
All in all, the proposal of the Senate committee on ways and means will raise P64.3 billion in additional revenues annually.
However, not all of this will be wrung out of VAT. In fact, only P48.7 billion is from the VAT on 12 goods and services. The rest of the tab — P10.5 billion — will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should the latter bear all the pain?
The corporate world’s equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up to 2008 only. This will raise P10.5 billion a year. After that, the rate will slide back, not to its old rate of 32 percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief. We would like to assure them that not because there is a light at the end of the tunnel, this government would keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to share the burden.
To business, we are aware of the warning of a US statesman that governments likely to confiscate wealth are unlikely to find much wealth to confiscate in the long run.
We would like to assure you that the “capacity to pay” yardstick is applied to both the small man and big business. Taxes to extinguish debts of the state must not be so hard on the businessman that it would diminish his industry, or worse, extinguish his trade. Government cannot get milk from a dead cow.
But on the other hand government cannot be a milking cow of business also.
This is true in some segments of the power sector. To escape taxation, some power firms have wrapped themselves up in the flag, using this, together with “pro-people” and “patriotic” incantations, as some sort of an amulet against VAT.
But what kind of patriotism is one that is soluble in taxes? Dissolving easily at the polite request of the government to pay VAT, for after all, they continue to enjoy a raft of tax perks?
A Navotas power barge under contract with the government charges the latter - now hold your breath - P899 per kilowatt-hour last year. In La Union, a private diesel plant sells power at P13.36 per kilowatt-hour to Napocor. P18.31 is what the San Roque hydroelectric plant bills the government for every kilowatt-hour.
Twenty-two IPPs posted combined gross sales of P221.6 billion in 2003 but they paid only P6.57 billion in all kinds of national taxes that year.
That’s a tax burden of not even three percent, lower than what is exacted from a policeman.
In fact, income tax payments of one million national government employees are at least four times bigger the tax payments of the IPPs. Yet, the latter had gross sales bigger than the combined basic pay of those on the public payroll.
Based on their financial statements, many IPPs can absorb the VAT, or at least lower the cost of power, phantom or real, but that would be like asking Dracula to donate blood for a change, instead of drawing it from others.
Mr. President: This is the final episode of a taxing season. We have saved the hardest for the last.
This is a Senate that always tempers and never tops the tax proposals of the government. To every executive overture of a new tax, our reply has never been of ratification, but of restraint.
Voting for a new tax can never be a moment of triumph for us, although some in the other chamber may claim that it is for them. When we pass a tax measure, it is not our finest hour. We sponsor tax bills with no relish but with great reluctance, and always with a heavy heart.
Our prudence stands in stark contrast with the cavalier way by which the Finance department would like to wring more VAT payments out of our people.
If it would have had its way, it would collect P71.24 billion on additional VAT from the people — P28 billion by increasing the VAT rate to 12 percent and P43.24 billion by expanding the VAT net. Let me show the tale of the tapes here.
This demand is too steep. The DoF will be fomenting a crisis instead of ending one if it is allowed to go ahead with its plan.
It has been said that in levying taxes and shearing sheep, one must stop when one hits the skin. The duty of the Senate is to watch over the shoulders of the government so the latter like a good shepherd will shear the wool, not the skin. Too high and too many taxes can kill the flock. Looking back at the DoF demand, one can see no difference between the taxman and the taxidermist, only that the latter leaves the skin.
So this is where we find ourselves again, Mr. President. In the familiar ground of standing between the taxman and the taxpayer.
Our proposal Mr. President is feasible and fair, equitable and easy to collect; most important it is high in the compassion quotient. Our proposals have many values added on it.
The easy but low road is to go where the political wind blows, but in the end it will leave the people twisting in the wind. The high but hard road to take, is what may not be popular but is right. That is, after all, the function of leadership. Sometimes we serve our constituents not by pandering to their wants but in asserting what is proper over their objections.
The applause to our courage may not come now, but belatedly, as it reverberates from across the ages, coming from a grateful generation whose leaders, passing by our portraits on the way to this session hall would say: Once upon a time, never had the fate of so many depended on so few.