Reducing the value-added tax (VAT) rate to 10 percent from 12 percent could cost the government roughly P330 billion annually, derail fiscal consolidation efforts and disproportionately benefit high-income earners, the Department of Finance (DOF) warned.
While the proposal to cut VAT rate to 10 percent has gained public attention, Finance Undersecretary Karlo Adriano said the reduction is equivalent to one percent of gross domestic product or around P330 billion a year on average.
‘If we have a target of 5.5 percent fiscal deficit this year, with the reduction of VAT to 10 percent, our fiscal deficit will be at 6.5 percent. So definitely, we will not be able to do fiscal consolidation because our fiscal deficit last year was only 5.7 percent,’ Adriano said.
Adriano warned that a wider deficit could weaken the country’s creditworthiness and raise borrowing costs.
‘If we cannot show that we are capable of fiscal consolidation, what will happen? Interest payments will also increase because our credit rating will be lower. When it gets worse, all our debts will increase. And that’s a cycle of more debt,’ he said.
To offset the lost revenues, the government would either have to slash expenditures by the same amount, around P330 billion a year.
‘That means less government programs of around P330 billion every year. So those are the things that need to be considered given this proposal,’ he said.
Adriano also pushed back against the notion that the VAT system is regressive.
According to Adriano, all income groups pay the same percent, citing numerous exemptions such as those on food, which accounts for about half of the spending of the poorest households.
Because the poor already spend mostly on VAT-exempt goods, a rate cut would largely benefit high-income earners.
‘If we actually decrease the VAT rate, the ones who will benefit the most are the high-income (earners) because they are the largest consumers,’ Adriano said.
Adriano also acknowledged the struggles of middle-income earners who are not poor enough to qualify for subsidies but are burdened by rising costs.
While the personal income tax system is already progressive, he underscored the need for more efficient government spending to free up resources for programs that could assist the middle class. He cited leakages in social aid programs, including free college tuition, which sometimes benefit wealthier families.
‘As much as possible, the high-income classes don’t need a single peso. Channel all this peso that the high-income classes receive to the middle-income,’ he said, adding that conditional cash transfers have proven effective in reducing poverty and should remain targeted.
The DOF official also discussed other tax-related measures, including the extension of the estate tax amnesty, which Congress recently moved to prolong until 2030.
Adriano said this would be the third extension since the measure was first introduced under the Tax Reform for Acceleration and Inclusion (TRAIN) law in 2019.
‘It was extended the first time because of COVID. and then I believe it was extended again because there are many people who still want to avail of the amnesty,’ he explained.
On the proposed 12 percent VAT on digital service providers (DSP) such as Netflix and Spotify, Adriano said the levy could generate around P35 billion annually, though this is a conservative estimate.
More importantly, he said the measure is intended ‘to level the playing field between local DSPs and foreign DSPs,’ since domestic providers are already subject to VAT.