DOF Usec: VAST would push RP back to ‘primitive times’

The proposed law to change the value added tax (VAT) system to value simplified tax (VAST) would throw back the Philippines to “primitive times” and undo the fiscal and economic progress that the country has achieved so far, the Finance department said. Gil Beltran, Department of Finance (DOF) undersecretary, told The Manila Times that House Ways and Mean Committee Chairman Hermilando Mandanas’ proposed VAST law looks and feels like sales tax—a measure that only small Pacific island nations use in this era of globalization. Sales tax, he said, are 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.

He said 120 out of the world’s 140 countries use VAT.

“If you remove all input VAT provisions, the VAST looks like a sales tax. A sales tax has problems of cascading. This will discourage specialization because instead of you buying different parts from different suppliers, put them together and sell them—wala na yun. You have to do everything in one factory kasi ita-tax ka,” the official said.

According to Beltran, VAT is also a sales tax but the difference is that VAST is a turnover tax where the input-output mechanism is absent.

Congressman Mandanas, a certified public accountant who has spent long years studying Philippine taxation and finance both in the private sector as a banker and later as an entrepreneur and as a provincial governor and a member of the House of Representatives, authored House Bill 1970 which would simplify the VAT mainly by removing all “input and output deductions” allowed by the present VAT law.

The lawmaker attributes the poor VAT collections from these “input-output deductions” to the relatively low remittances of VAT to the government by corporations and sellers who have collected the 12 percent VAT from their customers. This is because, Mandanas has told The Times (see banner story), the final amount of the these “input-output” are arrived at by negotiation between the seller corporation and the BIR examiner or collector.

“Every sale at every stage of the production you pay 6 percent. So from the whole production to the entire distribution chain until it reaches retail—every step of the way—is subject to a 6 percent tax. But in VAT, everything was already bracketed,” he said.

Essentially, this tax system is cascading—a tax on tax, Beltran explained.

For example, the wood that a carpenter would buy to make a table is already taxed 6 percent. Then when he makes the table and sells this to a middleman, the government would impose another 6 percent tax. When the middleman sells this to a store in a mall, another 6 percent tax is collected. By the time the end-user buys this table from the mall, the price of the table has already been taxed 4 times.

“We’re going back to the primitive ways, except that in the previous sales tax system prior to VAT, we have several rates but here we have single rate but it still cascades,” Beltran said.

Business with small margins, like supermarkets, would be hit badly by VAST. Beltran said supermarkets for example have a 3 percent margin, which would be subject to a tax double its margin.

VAST also has inherent bias against capital-intensive industries like power and infrastructure because VAST, Beltran said, is an “imbedded disincentive” because the input-output crediting in VAT has already been removed.

“Kasi upfront binenta mo yung equipment tapos i-install mo pa, five years mo i-install eh di natulog na yung pera mo, nag-pile up na yung [utang] mo,” he said. Why would anyone propose this system? he asked.

“Kasi gusto nyang ishort-cut yung VAT. May problema yung proposal niya. Dahil dito aalma ang private sector,” the undersecretary said. “And to think ang pinaka-unang premise nya is to reduce the burden to consumers kaya maganda ipapakita yung effect nyan VAT versus VAST in a one single transaction, yung chain.”

According to DOF Assistant Secretary Ma. Teresa Habitan, the proposed law is “attacking the wrong problem.”

VAST would bring more headaches to the government and hurt the economy, she said.

For one, the cascading effect of the 6 percent tax would push inflation as prices of goods and services would escalate fast. This is also a disincentive for private sector to invest and produce.

“Madugo ang revenue collection kasi hindi siya magiging transparent. Kasi yung input crediting yun yung magpapalitaw ng VAT—eh kaso wala sa VAST eh,” Habitan said

Therefore, there would be a big possibility for tax leakages because businesses would not see the need anymore to issue receipts because of the absence of the input-output crediting. Under the current system, suppliers have to issue receipts to show the buyer—which may be an assembler—the amount of VAT they have paid that can be credited later on in their own costs when they sell to their customers.

Another problem for the government, Habitan said, is that they have to monitor every step in the supply chain to see if the vendors are correctly paying the 6 percent tax. Or the absence of receipts would encourage collusion between suppliers and buyers to remove the tax and make everything “off the books.”

Beltran also warned that VAST would hurt exporters, even though they were exempted from the tax scheme.

“What will happen is yung inexempt nya yung magsusupply sa isang exporter, right now zero-rated yun eh. What will happen now to the input VAT of these suppliers? Kasi right now naka-zero-rate, they can claim that as input VAT. But now they are exempt based on the proposal, hindi nila pwedeng i-claim na input VAT yun. Ipapasok nila yun sa presyo nila, na mapapasa sa exporters. Then in the final analysis, yung exporters ang mayayari. Mas mapapamahal ngayon ang supplies nila,” he said.

With all these negative impacts, the lawmakers have to really think well about this scheme, he said. –LIKHA CUEVAS-MIEL ASSISTANT BUSINESS EDITOR, Manila Times