Below Vatting Average: A Closer Look at the VAT Reform Bill

By Senator MAR Roxas

(taken from http://www.marroxas.com/speeches_07.php)

Juan dela Cruz is your average person, struggling with his average job in a factory, earning an honest day’s wages which he allocates for his family and savings. His friends tell him to go out of the country and look for a job that pays a lot more than his present one – say as a construction worker in Saudi, but Juan doesn’t want to leave his family. Besides, his job is earning enough for his family’s needs.

Juan and his family like to go out to the movies on Sunday after attending mass. They watch a family movie together and go out for lunch at Jollibee afterwards. Sometimes Juan buys toys for his children, a pair of shoes for his wife and a shirt for himself. This is when the pay is good and the bills are manageable.

Juan, like his fellow Filipinos, rich and poor, pay a little extra, called the Value Added Tax (VAT) for his shirt and the Sunday fun he spends with his family. Value Added Tax, by nature, is a consumption tax that is passed on to consumers of a variety of products and services. The burden in a VAT system is borne by end consumers like Juan, when he purchases certain products or avails of certain services. It is a tax we are most familiar with and part of everyday life.

When times are hard, Juan can defer from his Sunday fun to keep expenses down. But with the latest VAT reform bill that includes taxing the power sector, he too will plunge into the fiscal crisis that the country is experiencing. The underlying principle of my amendments is to ensure collection of the needed revenue by taxing the proper entities. By doing so, government does not hamper or impede the creation of both domestic and foreign investments.

At the onset, the proposal was to increase the existing VAT rate from 10% to 12% and to lift the exemptions. The items included with the biggest impact in the Senate version are power and petroleum. VAT on power will apply to all stages of the supply chain from generation to consumption.

From the very start, I opposed the imposition of VAT to the power sector. It is my belief that vatting power affects the broader economy. Compared to oil, electricity is a product that is so pervasive that it is needed for everyday life. Raising power rates affects anyone with any kind of relationship to a light bulb, power which affects everyone.

Not all taxes course their way through the economy in the same way. The difference is maybe the purchase of a shirt can be postponed, but the use of power, particularly by factories, which provide Juan dela Cruz his job cannot be postponed. Juan cannot defer his usage of electricity as he would with other vattable products such as his shirt and his wife’s shoes. However, companies like the factory Juan depends on for his income may choose to pack up and move their business elsewhere because the investment climate is no longer hospitable. If the factory closes its business, Juan will have to strive for a job in another country.

While we want to cushion the impact of this tax measure to the middle and lower classes, the fact is we need to create jobs and livelihoods. We need factories. We need businesses to operate. If power costs render us less competitive, then we would have a Pyrrhic victory, an empty victory. Jobs will be lost and there will be no VAT to collect if factories close down. When all is said and done, it is Juan dela Cruz who will pay for this. The Senate version of the bill operates instead as a disincentive to any kind of investment, domestic or otherwise.

Imagine the effect of the VAT on the power sector on the entire economy. The effect of the additional 10% is cumulative, it trickles downstream all the way from the generation companies to electric cooperatives to the end consumers. So if it is P280 billion, there will be a sum total of P28 billion in additional billing. However, the entire amount will not be collected because each segment of the chain will input/output whatever the increase was versus whatever they can charge downstream. In which case, the government will only collect anywhere from P11 to P15 billion, or maybe even as small as P8 billion. In other words, for a cumulative P28 billion as additional expenses borne by everyone, the government collects a mere net P11 billion – which is easily a losing bargain for everyone.

Not all battles are won on the legislative floor, yet many important ones are sometimes lost on the legislative floor too.

The benefits barely exceed the adverse effects of the VAT reform bill. But because the urgency for additional revenues is so great, I voted in favor of the measure, and only for this. The consequences of the bill on every Juan dela Cruz, however, foretell a grim future