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Finance considering oil subsidy, lower VAT

Posted on March 09, 2011

SUBSIDIES and a lower value-added tax (VAT) rate are among the options being eyed by the Finance department to cushion the impact of rising oil prices on the public.

"We were ordered by Finance Secretary [Cesar V. Purisima] to study the current developments concerning oil and to give him recommendations," Finance Undersecretary Gil S. Beltran yesterday told BusinessWorld.

"All possibilities" are being considered, he said, including "subsidizing oil products consumed by the poor" and "reducing the value-added tax (VAT) on petroleum products."

"There was no timeline given but we are targeting to submit to him [the recommendations] as soon as he gets back," Mr. Beltran added.

Mr. Purisima flew to Jakarta last Monday with President Benigno S.C. Aquino III and other Cabinet members for a state visit. The group will proceed to Singapore on Thursday.

Oil prices have surged as uprisings in the Arab world have spread. Dubai crude, the Asian benchmark, hit $110.63 per barrel on March 7, up from an average of $99.92 per barrel in January.

The VAT and oil subsidy proposals, Mr. Beltran admitted, "would require congressional action... In the case of subsidies, the President may use his Social Fund if he wants [an immediate effect]."

The subsidy, he said, will be targeted at poor families and channeled through the oil firms.

"[M]ost of those who consume oil belong to the middle income bracket and up. We want to make sure that once we put this measure in place, only the poor will benefit," Mr. Beltran said.

"For instance, we can ask oil firms to increase their P1 discount on diesel to P5 but we would have to meet with the oil firms for that."

The plan, however, would require funding, something that may require a "supplemental budget" to be passed by Congress or "if the President wants it, he may use the President’s Social Fund," Mr. Beltran said.

The Social Fund is an off-budget account containing P1 billion sourced from collections of the Philippine Charity Sweepstakes Office and the Philippine Amusement and Gaming Corp. which the President may "use at his own discretion," Budget Secretary Florencio B. Abad said.

Mr. Beltran said another option was to "reduce the VAT on oil," but the "rich or upper income families will benefit the most if this will push through."

"[W]e have to study it carefully as this will have numerous effects such as causing domestic demand to increase and our supply to suffer," he added.

Import duties on oil are presently zero. Products most often consumed by the poor, such as diesel, liquefied petroleum gas and kerosene, are not levied any excise taxes.

A plan to reduce or scrap the 12% VAT on oil back in 2008 was rejected by the Finance department, essentially because of possible revenue losses, despite Dubai oil then rising to a record-high $131 per barrel.

Revenue losses from a lower VAT rate still have to be computed, Mr. Beltran said.

Sought for comment, Raul V. Fabella, an economist at the University of the Philippines, called the government’s planned actions "stupid," saying subsidies "would end up like the Oil Price Stabilization Fund" that bled the government.

The OPSF, established through Presidential Order 1956 issued by then President Ferdinand E. Marcos in 1984, was used to keep oil prices low by subsidizing oil companies hit by price fluctuations in the world market.

With the OPSF in deficit, then President Fidel V. Ramos signed Republic Act 8479 or the Downstream Oil Industry Deregulation Act of 1998.

Reducing the VAT, meanwhile, will result in huge revenue losses for the government, Mr. Fabella said.

"The government should just stand by and let the market move as it is," he said.

For his part, Mr. Abad said oil subsidies and a VAT cut were "policy issues" that "need to be discussed and decided upon by the President and the economic managers." -- P. P. Magtulis