VAT's adoption depends on IMF, not on the people
ANGELES CITY — The government will collect practically the same revenues from the 10-percent Value-Added Tax as from a straight 3-percent sales tax on the same goods and services.
The big difference is that forcing VAT on the market will raise prices by about 10 percent, and possibly kick up a mini-storm — while a simple 3-percent sales tax will nudge prices by only 3 percent.
Another big difference is that VAT entails a complicated process of collecting a 10-percent “output” VAT from the buyer then allowing the seller to deduct from it 70-percent of the “input” VAT that he had paid his supplier — and remitting the difference (around 3 percent) to the government within three months.
In contrast, if a 3-percent sales tax were imposed instead of a 10-percent VAT, the sales tax would simply be slapped on the goods, period, and the tax collected is forwarded to the government without crawling through a minefield of opportunities for cheating.
These were some of the negative implications of VAT explained yesterday by Bataan Gov. Enrique T. Garcia Jr. at the weekly Kampus Kapihan at the Angeles University Foundation here. He is one of the petitioners asking the Supreme Court to reconsider its recent decision upholding the validity of the VAT law (RA 9337).
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DEBT SERVICE SPLIT: If a VAT regime is that bad, why is the Arroyo administration insisting on it at the risk of inciting civil unrest?
Garcia said it could not be only because the administration wants to raise big money to chip away at the consolidated public debt estimated by independent monitoring organizations at P6 trillion (those are 12 ciphers!).
There are many other ways to raise substantial revenue or plug the leakages in collection without getting caught in price spirals, he said.
With automatic debt servicing through the budget alone, the country pays creditors some P1 billion each day every day of the year. One-third, or P340 billion, of the proposed P1.053-billion budget for 2006 would go directly to debt servicing instead of to essential services.
But that is only HALF of the story. The debt servicing allocation IN THE BUDGET is only for INTEREST on loans falling due.
To deflate the huge figures that government has to cite when asked about debt servicing, Congress has set aside in separate appropriations OUTSIDE THE BUDGET for paying the PRINCIPAL almost the same amount as inserted in the budget for interest payments.
How much then is the debt burden per Filipino? I do not want to be the bearer of this harrowing information. You can calculate the nation’s per capita indebtedness by dividing the P6 trillion consolidated debt by our population of 85 million.
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IMF PRESSURE: In reply to a question, Garcia suggested that the Arroyo administration has been under pressure from the International Monetary Fund to impose VAT over the widespread objections.
He recalled that then President Ferdinand E. Marcos resisted IMF pressure for him to adopt the VAT system at the risk of earning American displeasure. He stood fast until he was deposed in 1986 in a People Power Revolt over other issues.
Garcia said that when President Cory Aquino took over and abolished the Batasang Pambansa under a revolutionary regime, she issued an Executive Order levying the first VAT just five days before a new Congress was to convene.
He blamed IMF pressure for Ms Aquino’s rushing the VAT order instead of waiting for the upcoming legislature to act on the matter. For her to have waited would have been logical considering that there was no urgency and taxation was/is a legislative function.
Interference by the IMF is manifest, he added, since right after the VAT system was adopted, the credit standing of the Philippines was raised — as if as a reward for doing as told. There were no other economic indicators to warrant an upgrade, he said.
In contrast, note how our credit standing was pulled down by raters, apparently operating as IMF enforcers, when the constitutionality of the VAT law (RA 9337) was questioned before the Supreme Court and the tribunal suspended its implementation.
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CAP ON CREDIT: When Congress, in an attempt to plug collection loopholes, ordered a 70-percent cap or ceiling on the amount of input VAT credit that businessmen may claim, Garcia said, VAT ceased to be a value-added tax and became in effect a sales tax.
He said the VAT law should be struck down as unconstitutional, because it is oppressive, regressive and confiscatory.
There is no country in the world, according to him, using the VAT system that has placed a cap on the input VAT that a merchant may deduct (and retain) from the output VAT paid by the buyer.
Normally, businessmen may deduct from their VAT collections from sales all the input VAT they had paid suppliers, but Congress placed a 70-percent cap after noting that cheating had resulted in about half of VAT collections vanishing.
But when only 70-percent of input VAT is credited to businessmen, government revenues from VAT would go down to only 3 percent — while bloating retail prices by as much as 10 percent.
“Why not just impose then a simple 3-percent sales tax and rein in price increases to about 3 percent?” asked Garcia
The answer, it seems, is that because the IMF insists on the VAT system being adopted.
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VAT VS. SALES TAX: To illustrate how VAT compares with a 3-percent sales tax, Garcia took oil firms’ figures pertaining to fuel prices as affected by the 10-percent VAT and by a theoretical 3-percent sales tax.
For premium gasoline, as of last July 1, the adjusted per-liter price of the oil companies was P29.74. If a 10-percent VAT were added, that would go up to P32.72.
(“Adjusted” means the price had been reduced to reflect the removal of excise tax on fuel and the reduction of duties from 5 to 3 percent. The government did this to cushion the impact of VAT on prices.)
Add to P32.72 the dealer’s markup and the pump price after taxes would be P33.79 per liter.
But if the same liter of premium gasoline were simply slapped a 3-percent tax, the retail price would be only P32.55, or a retail price lower by P1.24 per liter.
The pump prices would be lower if a 3-percent sales tax were adopted, but the revenue accruing to the government would still be the same.
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RECOUPING LOSS: In the above computation, the dealers actually suffered unrealized profits arising from their being allowed to claim only 70 percent of the actual input VAT they had paid and for which they should be credited in fairness.
You think the dealer will absorb this loss with a smile? Expect them to raise their prices to recoup this loss representing unrealized revenue, which averages 82 centavos per liter of premium gasoline sold.
Do not be surprised if they would try to get back more than 82 centavos per liter to cover unutilized or disallowed VAT credit. Many of them have been openly talking about doing this.
Garcia recalled that in the Supreme Court hearing, Chief Justice Hilario Davide Jr. himself told complaining oil dealers that they could always raise their prices to recoup that “loss” resulting from the 70-percent cap on VAT credit. We do not know if he was talking in jest.