May 31, 2016
Early
morning yesterday, I was sitting in the comfort of a chair in the office
conference room reading the day’s paper on an article of the government’s
indecisive plan to increase the Value Added Tax (VAT) for sale and services when
coincidentally I was handed a copy of my pay slip for the preceding month. I
was taken aback at the sight of the seemingly hefty figure reflected under Tax
Witheld for income. As I gathered my thoughts, my curiosity was once again
awakened. As a taxpaying citizen, do I prefer to be taxed more on what I earn
or on what I buy or consume? I am not yet fully convinced that now is the best
time to raise the VAT to the proposed 14% from the present 12% - but if this
will mean lower income taxes particularly for individuals, then I might be
willing to consider it, provided however, that existing exemptions will be
maintained mainly for senior citizens and PWD’s. After all, lower income taxes
mean higher take home pay and more money in people’s pockets. And more income
coupled with moderate consumption, also to avoid paying more VAT, can result in
higher savings for low to middle-income groups.
But,
can the increase in VAT collection sufficiently offset or cover any drop or
fall in income tax collection? Moreover, will lower income tax encourage
spending and actually result in increased consumption, and thus higher VAT
collection? In the same manner, will lower income taxes encourage compliance
and mitigate tax avoidance and evasion, and thus boost collection?
Nothing
is certain, of course. However, raising the VAT to 12% from 10% in the Arroyo
administration did help increase government revenues. In fact, that unpopular
and politically difficult initiative was even positively cited by international
banking and finance officials and gave due credit to the country’s economic
managers then.
It
makes me wonder, however, why the Aquino government itself did not also raised
the VAT to the proposed 14% and instead just opted to recommend it for the
incoming administration to implement. If the VAT hike is not really necessary,
then why is the Aquino government even recommending it to the incoming
administration?
Perhaps
the VAT hike was really necessary, or at the very least, would have been
helpful. But, the Aquino government had opted to just limit government spending
to keep the deficit in check and its credit ratings positive. Also, perhaps the
government preferred not to push a VAT hike so as not to negatively impact the
Liberal Party’s chance of winning the 2016 elections.
At
this point, the incoming Duterte Administration doesn’t appear to be interested
in winning the popularity contest. That said, it may be more inclined than in
the Aquino administration to push a VAT hike and lower income taxes. One hopes, however, that the 17th
Congress, the new House of Representatives and the Senate, will also be
inclined.
Already,
incoming Finance Secretary Carlos Dominguez has reportedly put together a team
to detail the Duterte administration’s tax reform plan. But, he stressed that
the lowering of personal and corporate income tax rates would be proposed,
forgone revenues would “not necessarily” be offset by a higher VAT.
Mr.
Dominguez, at this point, is more inclined to recover revenue losses through
“streaming the tax design and tax administration” to improve tax collection.
Outgoing Finance Secretary Cesar Purisima had noted a higher VAT could rise as
much as P299 Billion on its first year, against expected revenue losses of up
to P222 Billion from lower income tax rates.
Mr.
Dominguez and his team are expected to play things safe. No point in rocking
the boat this early. Moreover, tax reform is not really the ambit of the
Executive. It can only recommend to Congress possible amendment to tax laws. In
the end, state legislators are to decide on whether to raise the VAT and to
lower income taxes and by how much.
On
one hand, a 14% VAT from 12% may seem steep if not unreasonable when other
ASEAN countries like Singapore and Thailand charge a VAT or sales tax only of
7%. Malaysia charges a range of 0-6%, while Indonesia’s VAT is a flat 10%.
Cambodia and Vietnam also imposes a 10% VAT, while Brunei doesn’t have any VAT
or sales tax.
This
is also considering that income tax rates in these ASEAN countries are
relatively lower than in the Philippines. Singapore’s corporate income tax is
only 17%, and individual income tax is 22% at its highest. In Thailand its 20%
for corporations and 0-35% for individuals. In Malaysia its 25% corporate tax
and 26% individual tax. Indonesia covers 25% and 5-30% on individual tax. Cambodia
imposes 20% both for corporate and individual taxes. While Vietnam has 20% and
5-35% for individual tax, Brunei has 20% for corporations and 0% for
individuals.
Changes
in taxation, particularly those requiring legislation, take time to implement. Officials,
legislators, economic managers, and private sector tax and finance experts
should all start weighing in now on the issue. Papers, studies, and simulations
should be made available to a wider audience to pave the way for a more
involved public as well as a more informed decision.
