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Heed the people’s call against VAT

By Rosario Bella Guzman
Executive Director
IBON Foundation, Inc.

The Arroyo administration’s spin doctors have all come out in force to assure the people that the VAT increase will not affect the poor, claiming that it would actually benefit the people as the revenues would be channeled towards social services such as the construction of new classrooms and implementation of immunization programs. This claim is cheap propaganda, to say the least, since most revenues automatically go to debt servicing.

As the National Revenue Code says, the VAT “is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.” Hence, it is the end-consumer who bears the greater burden of the VAT, since the tax burden is shifted at every stage of the production and distribution process.

Any increase in prices of consumer goods and services would make life even harder for Filipinos, particularly families in the poorest income deciles, whose incomes are not enough to meet their expenses, forcing them to go into debt.

IBON estimates that with increased VAT, the deficit in the monthly budget of Filipinos in the lowest income deciles (earning an average of P2,200 a month) would increase by as much as 65 %. A huge shortfall in the monthly incomes of poor Filipino families would only mean more borrowing, and being further buried in debt.

The proposed VAT exemption on the sale or importation of petroleum products will also result to additional price hikes. The House’s claim that these price hikes will not be outrageous since “the Philippines has one of the lowest pump prices in the region” does not take into account the multiplier effect of such hikes on the prices of goods and services.

Filipinos have already registered their rejection of the hike in VAT rates and expansion of its coverage. Nearly two-thirds of respondents to the yearend IBON survey conducted on Dec. 20-29, 2004 said that they were against the proposed expansion of VAT coverage and increase in its rate.

Government should thus heed this call if it wants to ensure that its taxes do not impact the poor. Instead of increasing VAT rates, government can pursue more creative solutions to its fiscal problems like scrapping onerous debts, improving tax collection, addressing graft and corruption in government agencies, and going after big-time tax evaders. Even some government economic analysts argue that an improvement of VAT collection alone would eliminate the need for an increase in the VAT rate.

Government must also consider increasing tariffs on highly liberalized and sensitive agricultural and industrial products back to their pre-WTO levels, as the country is losing some P100 billion annually due to tariff reduction commitments.

Most of all, there must be a fundamental change in the government’s system of taxation. Taxes should be equitable—meaning they should be fair, just, reasonable and proportionate to a taxpayers’ ability to pay. Being an indirect tax, the VAT as implemented clearly violates this principle. The fundamental nature of the VAT itself means that it will have the greatest impact on the poor.

In underdeveloped economies such as the Philippines where income inequality is wide, it is more appropriate to levy direct taxes on income and property so that taxation would have a redistributive effect. Hence, government should focus on improving tax collection in these areas, rather than pursuing indirect taxes, if it really wants to ensure that taxes do not burden the poor. #

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