VAT hike affected poor most — study

A think tank backed by the state-owned University of the Philippines said proposals to again increase the sales tax or the value added tax (VAT) to 15 percent from the current 12 percent to resolve the back-to-back budget blowouts last year and this year of around P300 billion a year may further increase the number of Filipinos living below the poverty level.

Finance Secretary Margarito Teves said among his terminal recommendations to the next president was an increase in the VAT to address the widening budget gap.

UP Open University and Code: Reforms for Economic Development (Code Red) cited a study by Newhouse and Zakharova which found that in 2006, the increase in VAT rate to 12 percent and the broadening of the VAT base to include petroleum products, electricity, and professional services reduced consumption value among poor Filipino households by 2.4 percent, while households in the top quintile lost 2.7 percent.

“This finding, while consistent with the consumption patterns of poor households that tend to rely more on unprocessed agricultural products that are exempt from the VAT, should not disregard the fact that the poor population experiences disproportionately greater suffering from reduction of consumption and volatile income swings,” a joint statement from both groups said.

For people living in poverty across the globe, increases in prices of goods result in consumption cutbacks in nutrition or education which negatively impact human development, it noted.

The increase in number of poor families from 4 million in 2003, to 4.7 million 2006 is attributed to insufficient rise in personal income for the said period and to increased prices of food and non-food basic needs following the rise in oil prices and the expansion of VAT coverage in November 2005 and the imposition of higher VAT rate in February 2006.

While VAT reforms in 2005 include mitigating tax measures and increases in social spending (which aimed at reducing the average income loss from the VAT reform across all households by about 25 percent), households in the bottom quintile enjoy only about 15 percent of the benefit from the package of tax cuts and spending increases, while households in the top quintile enjoy about 30 percent of the benefit. The reductions in energy and franchise taxes, which account for over 40 percent of the total mitigating package, are particularly poorly targeted, with the bottom quintile receiving only 7 percent of the total benefit and the top quintile receiving 43 percent.

The current proposal to hike VAT rate to 15 percent calls for expansion of social safety nets such as the conditional cash transfer (CCT) to cushion the lower income groups from impact of tax increase, it said. It added, however, there are several issues that have to first be addressed in order to devise and implement an effective CCT program. –Daily Tribune