CPBRD says slashing VAT rate to 10% is ‘advisable’ despite revenue loss concerns

By Kenneth Christiane L. Basilio, Reporter

LOWERING the value-added tax (VAT) rate to 10% from 12% is fiscally viable despite projected revenue losses, a congressional think tank said, adding that the reduction is even “advisable” despite opposition from the Finance department.

The Congressional Policy and Budget Research Department (CPBRD) said in a January report that revenue losses from a proposal seeking to slash the VAT rate would likely be offset by a boost in consumption spending and capital inflows.

“The proposed VAT reduction is fiscally manageable and likely to yield positive economic effects,” CPBRD said in a 12-page report, which was authored by David Joseph Emmanuel Barua Yap, Jr., Edrei Y. Udaundo and Jubels C. Santos. “A reduction in the VAT rate, in particular, would result in lower market prices and greater consumer demand across the board.”

Since 1988, the Philippines has imposed VAT on most goods and services, including essentials like food and fuel. Raised to 12% from 10% in 2005, VAT has become a key revenue source, though critics have argued it disproportionately burdens working-class Filipinos.

Batangas Rep. Leandro Antonio L. Leviste last year filed House Bill (HB) No. 4302 seeking to lower the VAT rate to 10%, arguing the current tax system is “regressive” and should be reduced to make taxation more progressive.

The proposal also allows authorities to hike the VAT rate back to 12% for a year if the projected deficit is expected to exceed the programmed deficit.

“Despite its simplicity, the passage of the proposal will be immensely consequential to the fiscal position of the National Government and, more importantly, Filipino consumers,” the think tank said.

The CPBRD said a cut in the VAT would make business operations more viable, boosting production and supply, creating jobs for Filipinos and accelerating economic growth.

“All these, in turn, would increase the number of transactions that can ultimately be taxed by the government,” the CPBRD said.

Marikina Rep. Miro S. Quimbo said the House Ways and Means Committee, which he heads, is open to discussing the proposal, but would need careful scrutiny given the Department of Finance’s (DoF) opposition to the measure.

“This is something we are absolutely looking at, but we are trying to tread very carefully,” he told a media briefing. “We will evaluate. If there’s room to reduce VAT, we will do so.”

The DoF had expressed “strong reservations” to Mr. Leviste’s proposal, warning it could cost the government more than P1 trillion in foregone revenues through 2030 and jeopardize its fiscal consolidation drive.

The DoF earlier said the government could lose an average of P339 billion in revenue collections yearly from the proposal.

However, the CPBRD countered the projected shortfall could be “less than P200 billion.”

“The seemingly small VAT rate reduction will provide all Filipino families significant savings as the reduction would apply to a wide variety of goods and services,” the think tank said, noting it could potentially add P8,000 in annual disposable income for an average household.

“Filipinos can expect to reap the benefits from the emergence of more viable businesses, the increase in the availability of jobs, and the intensification of economic activity,” it added.

John Paolo R. Rivera, a senior research fellow at the Philippine Institute for Development Studies, said there could be merit in the CPBRD’s assessment that a VAT cut might boost the economy enough to offset revenue losses, but stressed it should be paired with other governance measures.

“Sure, a VAT cut can boost consumption and improve purchasing power, which may partly recover revenues through higher volumes and better compliance… however, it depends on timing, targeting and credibility,” he said in a Viber message.

“Without strong growth, efficient spending and safeguards against leakages, short-term revenue loss is real and could widen the deficit… It must be paired with spending discipline and complementary reforms to be fiscally sustainable,” he added.

The CPBRD said the government should consider “right-sizing” to rein in bloated expenses when considering the VAT cut, noting that salaries accounted for one-fourth of the national budget.

“A 5% reduction of personnel and their accompanying costs would reduce government expenditures by P80 billion… [while] a 10% reduction could reduce government expenditure by P160 billion,” it said.

President Ferdinand R. Marcos, Jr. last year signed into law Republic Act No. 12231, also known as the Government Optimization Act, which grants him the authority to reorganize and streamline agencies under the Executive branch to remove redundancies.

The think tank said budget planners should temper the annual increase in the national budget to ensure projected revenues keep pace with rising expenditures.

“Potential revenue loss from lowering the VAT rate can also be substantially minimized through strategic base broadening measures,” it added, recommending that lawmakers consider amending VAT-exempted goods and services when discussing HB No. 4302. “The simplification of the tax system through reduced exemptions would lower compliance and administrative costs.”

‘CRITICAL FIRST STEP’
The CPBRD said cutting the VAT rate would be an important step toward restoring public trust, as the Marcos administration grapples with a multibillion-peso graft scandal.

“[It] can serve as a critical first step in restoring trust in government institutions in light of recent controversies involving the Department of Public Works and Highways,” it said.

Several officials, politicians and private contractors have been accused of pocketing funds meant for public works projects in the flood-prone nation.

Leonardo A. Lanzona, an economics professor at the Ateneo de Manila University, said maintaining the current VAT rate could be misguided amid widespread corruption allegations surrounding government spending.

“Given the corruption, it may be wrong to keep the current tax rates,” he said in a Facebook Messenger chat.

But the VAT rate reduction, he said, could weaken the government’s capacity to fund social protection programs aimed at building human capital.

“If the government had been more efficient and more effective in delivering public services, the taxes could have been a crucial mechanism for promoting inclusive growth,” said Mr. Lanzona.