House Ways & Means chair proposes simple 6% VAT

Mandanas: No need to hit toll fees with EVAT, govt collections will double

House of Representatives Ways and Means Committee Chairman Hermilando Mandanas believes his House Bill 1970, which would impose a 6 percent “Value Simplified Tax” or VAST in lieu of the present 12 percent Valued Added Tax (VAT), will quickly solve the government’s revenue problems
and obviate the need to do things like levying the VAT on toll fees. He told The Manila Times the VAST is so simple, BIR collection of VAST due will double what the bureau now gets from the VAT.

Simplicity and cutting out all possibilities for BIR collectors and examiners to use their discretion in assessing the final VAT a person or a company had to pay is the key, Rep. Mandanas said.

House Bill No. 1970 changes the Value-Added Tax (VAT) system to the Value Simplified Tax (VAST), and reduces the tax rate from 12 percent to 6 percent applicable to the same goods and services now subject to VAT.

All the exemptions under the VAT system will continue under the VAST. In fact, VAST would not only exempt senior citizens and persons with disabilities. It would also exempt retired Armed Forces servicemen, retired policemen, retired Customs policemen and Bureau of Jail Management and Penology officers.

In Mandanas’ computations and studies, VAT-tax evasion and shaving happen because the VAT-liable companies and persons are allowed to deduct refunds and tax credits from their VAT payments. HB 1970 would eliminate all and “any tax credit mechanism or scheme” that are now allowed under the VAT system.

The removal of these deduction mechanisms and schemes, in computing which the government agent can enter into a negotiated settlement with the VAT-liable company, would increase tax collection efficiency and even double the government’s VAT revenues even if the VAST rate is only 6 percent or half the VAT’s 12 percent.

“Simplifying the collection system will reduce opportunities for corruption, removing the input tax provisions” will make it difficult to escape paying or altering the VAST amount to be paid,” Mandanas said. “Discretion and interpretation of what should be paid because of deductible expenses and tax credits open the way for corruption and even outright misdeclaration.”

Asking The Times not to mention their names, Mandanas told this writer some major firms whose profits are in the billions whose VAT payments are almost zero because of the input tax provisions of the present law.

Mandanas’ bill also favors small and medium entrepreneurs by increasing the amounts of sales or leases that would not be subject to VAST.

Under the present law for the VAT or EVAT, sales of small sari-sari stores or restaurants with sales of more than P1.5 million per year are subject to the 12 percent VAT. These same small enterprises would only be subject to the 6 percent VAST if their sales exceed P2.5 million. If their sales are below P2.5 million, these enterprises will only be levied a 3-percent VAST.

VAST on real estate transactions kicks in only if the price is higher than the present VAT ceilings. Land sold for less than P2.5 million and a house and lot sold for less than P3.5 million would be VAST exempt. The ceilings under VAT are P1.5 for land and P2.5 for house and lot transactions.

In congressman Mandanas’ computations, with a much lower VAST of just 2 percent, the government collection will equal the present total VAT collection of 12 percent. This is because all transactions subject to VAST would be paid without resistance and corruption.

With the 6-percent VAST, Mandanas sees revenues going higher, even double, what VAT now collects.

VAT payments are now the second largest source of government tax revenues. In first place is revenue from corporate and personal income taxes.
After the VAT are collections from excise taxes (the so-called “sin” taxes from alcohol and tobacco and also excise taxes from petroleum and mineral products) followed by percentage taxes (those from banks, insurance premiums and amusement).

If his proposed law were passed, Mandanas also said, a framework to facilitate further reduction of the VAST rate would be established by further simplifying and reducing complicated and discretionary tax provisions.

Mandanas is sure the VAST will make the people develop a friendlier perception of government tax impositions.

The VAST, he said, gets rid of the present system that creates a situation of loopholes and leakages that increase occasions for corruption.

It will also make foreign investors view the Philippines more favorably for having a low VAT tax rate. Most of the most successful economies have low VAT rates—like Singapore.

Reaction from Finance

An undersecretary of the Department of Finance, however, told The Times Mandanas’ proposed law would “push the Philippines back to ‘primitive times.” (See story “DOF Usec: VAST would push RP back to “primitive times” by Assistant Business Editor Likha Cuevas Miel.)

Undersecretary Gil Beltran of the DOF said House Ways and Mean Committee Chairman Hermilando Mandanas’ proposed VAST law would not be easy to implement in a more sophisticated economic environment like the Philippines.

He said such a simple “sales tax” system was good only for “economies that do not produce value-added products (i.e. processed goods) and just import all of their needs. These are countries that have single-crop economies, with minimal manufacturing.”

The Fair Tax proposed in the US

Simple taxation systems are, however, also being proposed in the United States, a more sophisticated economy than the Philippines
Respected governance experts, lawmakers and economists are proposing the abolition of all taxes— especially the income tax and the VAT—and replacing these with one single and simple tax to provide all the necessary government revenue.

This is called “The Fair Tax.”

It is a single broad national consumption tax on retail sales.

It has been proposed in bills filed in the US Congress.

The tax would be collected once at the point of purchase or point of sale on all new goods and services for personal consumption.

The proposal also mandates a monthly payment to all family households of legal US residents as an advance rebate, or a ‘prebate’, of tax on purchases up to the poverty level.

This would protect poor families.

Wikipedia explains that the sales tax rate would be 23 percent of the total payment including the tax ($23 of every $100 spent in total—calculated similar to income taxes). This would be equivalent to a 30 percent traditional US sales tax ($23 on top of every $77 spent—$100 total). This rate would then be automatically adjusted annually based on federal receipts in the previous fiscal year.

“With the rebate taken into consideration, the FairTax would be progressive on consumption, but would also be regressive on income at higher income levels (as consumption falls as a percentage of income).” –RENE Q. BAS EDITOR IN CHIEF, Manila Times