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October 01, 2022

Incoming admin urged to lift VAT exemptions

The Department of Finance (DOF) has urged the incoming administration of President Ferdinand “Bongbong” Marcos Jr. to prioritize the lifting of value added tax (VAT) exemptions to enhance tax administration by widening the tax base.

DOF chief economist Gil Beltran said that the next administration could adopt the consolidation proposal prepared by the Department of Finance (DOF) that seeks to remove VAT exemptions, defer tax cuts, and impose new taxes.

The DOF is pushing for the lifting of exemptions on VAT, retaining the coverage to a select few only, including agricultural, food and medical products to generate about P142.5 billion in incremental annual revenues.

“Despite advances in digitalization, tax administration could be undermined by the complexity of tax policies. For instance, the presence of numerous exemptions makes tax administration more challenging,” Beltran said.

The Finance department has been pushing for the lifting of some exemptions to broaden the tax base and facilitate tax administration.

Currently, the effective rate for VAT stood at just five percent last year, far from the legal rate of 12 percent mandated by the law.

“If tax administration was to contribute to more revenue collections, tax policy should expand the VAT base by doing away with some more exemptions,” the chief economist said.

On the other hand, the government could provide relief to taxpayers by slashing the VAT rate at an opportune time.

The DOF proposed last month that the VAT rate be reduced to 10 percent depending on how much revenue losses the government can bear.

Based on estimates, the government forfeits P64.1 billion for every one percent reduction in the VAT rate using the 2021 base of P769.9 billion in VAT collection.

Either way, the government will gain additional revenues for as long as exemptions are revoked in the process.

According to the agency, the series of tax measures could bring in at least P349.3 billion in new revenues every year to be used for debt payments.

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