Thrift banks not happy with 10% VAT

The thrift banking system considers the 10-percent value-added tax (VAT) as a "disincentive" which runs counter to the calls of the National Government for more loans to the small and medium enterprises (SME) as well as the microenterprises.

In a position paper, the Chamber of Thrift Banks (CTB) said the VAT "will adversely affect hundreds of thousands of housing loan borrowers and SMEs . . . since VAT on interest on borrowings must be passed on to the borrower."

The CTB is a national organization of thrift and savings banks and development banks. The thrift banking system accounts for almost 50 percent of loans to SMEs which, in turn, account for almost 60 percent of the country’s exports.

CTB president Susan R. Figueras sought a deferment of the new VAT regulations affecting all financial institutions. The implementation date was set for Jan. 1, 2003 although it was later moved to March 1. Figueras is also the president of Insular Savings Bank.

A second option raised by other members of the CTB was for the exemption from the VAT for all financial institutions "until a win-win situation" could be arrived at by government and the country’s financial institutions.

Bankers interviewed by The STAR argued that the imposition of the VAT would either force banks to pass on the increase in cost of transactions with the banks by consumers or endusers. Or the increase in the tax regime would be shouldered by the banks themselves.

The existing tax prior to the new ruling was the gross receipts tax (GRT) which amounted to five percent of gross transactions. The new ruling brings this up to another five percent.

Bankers explained that could be translated into a one to 1.5 percent increase in interest rates on loanable funds. They said this will lead to increased cost of borrowing for the SMEs and microenterprises which in turn will result in "not-too-encouraging ripple effects on the economy."

"The borrowers would either increase the prices of the products or services, or shy away from making new loans. That would then result in less products in the market resulting, in a worst case scenario, of inflationary conditions particularly in the countryside," a thrift banker from Laguna said.

The CTB president said the implementation of the VAT "will further impair bank capitalization at a time where the banking system is trying to improve its capital base."

Figueras added that it would reduce funds for lending which would then impair the ability of banks to support the effort of government to improve economic conditions through inducing the flow of credit to the various economic sectors."

The CTB added that the input/output ruling on VAT was not applicable to financial institutions unlike in the case of the manufacturing sector.