LOWERING the value-added tax (VAT) rate to 10 percent would trigger a chain of economic and fiscal consequences, according to a top official from the Department of Finance (DOF).
Speaking at the recent Philippine Tax Academy’s (PTA) convention, Finance Undersecretary Karlo Fermin S. Adriano said that reducing the VAT rate to 10 percent from the current 12 percent will reduce revenues to about P330 billion annually, equivalent to around 1 percent of the country’s gross domestic product (GDP).
This would widen the fiscal deficit from the 2025 target of 5.5 percent to about 6.5 percent, reversing fiscal consolidation efforts.
‘So, definitely, we will not be able to do fiscal consolidation because our fiscal deficit last year was only 5.7 percent,’ Adriano said.
‘And, if we do not do fiscal consolidation, if we cannot show that we are not capable of fiscal consolidation, what will happen? Interest payments will also increase,’ the DOF official added.
Because of this, Adriano said the country’s credit rating could be downgraded, which would then push up borrowing costs and increase debt servicing.
‘All of our debts will increase and that’s a cycle of more debt,’ Adriano said.
If the government is really keen on lowering the VAT rate, the other option, Adriano said, is to decrease government expenditures of around P300 billion a year. However, this means government programs will also be lessened.
‘Definitely, there are some positives, but there are also some negatives,’ Adriano noted.
The House Committee on Ways and Means is currently studying the proposal to reduce the VAT rate from 12 percent to 10 percent to ease inflationary pressures and give Filipino households much-needed relief.
Batangas 1st District Rep. Leandro Leviste filed House Bill 4302, or the proposed VAT Reduction Act of 2025, to help households save an estimated P7,000 annually.
‘This bill is about giving ordinary Filipinos a break. The VAT is regressive, hitting the poor and middle class the hardest. Lowering it makes our tax system more progressive,’ Leviste said.
However, Adriano said the country’s VAT system is not regressive, based on a World Bank study.
Adriano said many VAT exemptions already exist, particularly for food, which accounts for around 50 percent of the poorest of poor households’ spending.
‘That’s why it’s not regressive because we have so many exemptions,’ Adriano noted.
If the government were to actually decrease the VAT rate, Adriano said higher-income households would mostly benefit since they consume more goods and services subject to VAT.
Data from the Bureau of Internal Revenue and Bureau of Customs show VAT collections have increased nearly eightfold-from P156.67 billion in 2005, when the rate was raised to 12 percent under the Expanded VAT Law, to P1.20 trillion in 2024.
The Philippines currently imposes the highest VAT rate in Southeast Asia. In comparison, Vietnam and Cambodia charge 10 percent, Indonesia 11 percent, Singapore 9 percent (GST), and Thailand 7 percent. Malaysia, Laos, and Myanmar impose between 5 and 7 percent.