Incoming Budget Secretary Benjamin E. Diokno is expected to speed up infrastructure spending for the next administration, eyeing additional funds from value-added tax (VAT) adjustment.
“My personal position is that it’s better to tax consumption than income, for as long as food, in its original state ,is exempted from VAT. It is in this sense that our VAT system is slightly progressive, the burden is heavier on the rich. But this is the call of the incoming finance secretary,” Diokno told the BusinessMirror.
Although he clarified that the Executive branch’s proposal for tax reform would be up to the incoming finance chief, Diokno would be part of the economic-policy team of President-elect Rodrigo R. Duterte, who earlier asked him to head the Department of Budget and Management (DBM).
The University of the Philippines professor is known to be averse to underspending, and had earlier alleged the Aquino administration underspent at least P1 trillion in the past six years.
Government underspending in 2014 was the reason behind the low GDP growth of 6.1 percent in 2014, below the revised target range of 6.5 percent to 7.5 percent.
The proposed increase in the VAT is being floated by both the economic team formed by incoming Finance Secretary Carlos G. Dominguez III and by Finance Secretary Cesar V. Purisima as part of the tax-reform package that will supposedly ease the tax burden on those earning up to P1 million in annual gross income.
Under Purisima’s tax-reform study, to be turned over to the new administration, the main component of the tax reform is the exemption from income tax of the first P1-million annual salary of every individual wage earner, which will cost the government some P151 billion to P215 billion in foregone revenues.
Purisima’s proposal will also make the income-tax rate on self-employed individuals and professionals to a fixed rate of 25 percent on their taxable income, retaining the allowable itemized deductions or the optional standard deduction on gross income, but removing all other personal and additional deductions.
This would preclude the absurd situation wherein professionals, such as doctors and lawyers, are able to skirt the highest tax brackets through deductions on their gross income, which results in a lower taxable income than those who are working on a monthly salary basis.
The projected decrease in government revenues from the adjustments to be made on the income tax to be imposed on wage earners will be offset by an increase in the VAT rate from 12 percent to 14 percent, and the removal of all exemptions from VAT, except for goods and services relating to agriculture, health, banks and education.
However, there is strong opposition to the proposal to increase the VAT rate, which now seems to be the most popular alternative, among the policy-makers, to make up for the shortfall in revenues expected from the tax reform, although Mr. Duterte had earlier categorically dismissed the proposals to raise the VAT.
According to the Tax Management Association of the Philip-pines (TMAP), the proposed increase in the VAT rate is untimely at this time, and will result in minimal increase in VAT collection if the collection efficiency of the Bureau of Internal Revenue (BIR) does not improve first.
“Not now. Increasing the VAT rate at this time is uncalled for since the VAT effort is still very low,” TMAP President Benedict Tugonon told the BusinessMirror.
“The BIR has to improve the VAT effort and improve VAT-collection efficiency before increasing the VAT rate, otherwise, the rate increase will not result to substantial increase in revenue collection,” Tugonon added.
However, he said an increase in the VAT and the lifting of some of the VAT-exemptions should definitely be among the government’s options in increasing revenues.
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