The untouchable VAT

Touted as the miracle measure that could salvage the Philippines from the tenterhooks of fiscal doom, the VAT law may also turn out as the last nail on the coffin as far as encouraging investment in the country is concerned.

Particularly, local entrepreneurs and foreign business chambers have been complaining about the 70 percent limit on input VAT that can be claimed to offset VAT that is paid.

Input VAT represents the amount of VAT a company pays in buying materials or services used for its usual course of business. These are deducted from the company’s output VAT or VAT liabilities.

Previously, almost the entire amount of input VAT could be credited against VAT liability, but this was reduced to 70 percent under the reformed VAT law that took effect late last year.

Businesses are complaining that limiting the amount of input VAT that could be deducted from an entity’s VAT liability is a de-facto additional tax imposed on businesses.

This is of course on top of three percentage point increase in the corporate income tax, which has also been mandated under the new expanded VAT law.

The VAT domino /B>

With the expanded VAT law, consumers are hit with a higher VAT that makes goods and services more expensive, effectively dampening consumer spending and in the end hurting corporate profits. Needless to say, this would also slow down economic growth.

Because businesses will be slapped with a higher income tax over a three-year period, this will essentially reduce earnings that could have instead been re-invested for expansion.

And things don’t stop there. Now, with the 70 percent input VAT limit in place, the government has effectively added more to the cost of doing business.

Will evat attract new investments?

We know too well how poorly we’ve fared in terms of attracting fresh direct investments. Existing businesses have been complaining about the high cost of doing business in the country. We’ve seen in the various international survey results that the Philippines is at the far bottom in terms of competitiveness.

Fiscal incentives have been very little. Power rates continue to be one of the highest in the region. The bureaucracy is tedious, corruption is so rampant, and politics is just unbearable. This unreasonable VAT input cap, therefore, is another complaint added on the list.

It seems that it is only the stock market that has been buoyant with the implementation of the EVAT. But, as I often remark, this represents money that can easily run away when the target gains have been achieved. In the meantime, new direct investments remain sluggish and are threatened further by this limitation on input VAT that can be used to offset VAT liabilities.

VAT on oil

In the face of all the negative effects of VAT at a time of high oil price levels, Malacañang came up with a statement through Mike Defensor, the president’s chief of staff, that the government is looking at suspending the 12 percent VAT on oil to help ease the burden of oil prices.

It may have been a cheap political stunt aimed at distracting, at least for a while, the consumers after oil companies announced they were increasing prices on a weekly basis. The impact, however, was manifested in other quarters. The following day, both the stock market and the peso fell, and no less than GMA had to state that VAT on oil products was to stay.

Why the backtracking? There are reasons for this Malacañang action. Based on estimates, about two thirds of the expected additional revenues from the new VAT law would come from petroleum products, and a suspension would surely lead to government’s missing its fiscal targets — a situation that, as threatened by international agencies, may even result in a credit rating downgrade for the country.

How costly would another rating plunge mean when already our debt papers have been rated below investment grade by the international community?

Actually, if one would seriously think about it, keeping the VAT at a time when oil prices are at record-high would result in windfall revenues for the government.

Senator Ralph Recto, staunch supporter of the VAT law, estimates that the government may reap windfall revenues of at least $220 million from higher VAT and record oil prices. With crude now higher by $15 per barrel, the 12 percent VAT if multiplied by 120 million barrels — representing the country’s annual consumption — would account for government’s windfall earning.

Would this then mean that the government is likely to overshoot its revenue collection target in the next few weeks while oil price is at its peak? If that would be the case, will we see a government that is awash with cash and is in a position to "pump prime" the economy?

No sir, not by a long shot. This government does not seem to make any effort to assure the general public that their sacrifices on account of higher taxes are going to good use. If our bureaucrats do not watch out, the backlash of unbearable taxation may just be strong enough to give this "strong republic" the shake.

‘Breaking Barriers’ with Dr. E. Ona of the Kidney Institute

Kidney disorders have gone up in ranking among diseases afflicting Filipinos, yet the budget of the National Kidney and Transplant Institute has been reduced again. Thousands of Filipinos undergo dialysis treatment daily, yet only less than 20 percent of public hospitals have the required dialysis facilities.

Thousands of Filipinos are suffering from renal diseases and kidney disorders without knowing it and therefore are not treated on time, yet there are no funds made available to educate and raise the level of public awareness of these diseases.

These problems are not specific only to kidney disorders and renal diseases. These reflect the deteriorating condition of the country’s overall health system caused by lack of sufficient funding. Since the government is confident that more revenues will be generated with the full implementation of the new reformed VAT, why not allocate a part of these additional revenues to uplift our deteriorating health system?

Increase rather than cut the budget of the National Kidney Institute. Or else, it may just be providing empty promises and false hope to the victims of these dreaded diseases.

Join us break barriers and gain insights into the views of Dr. Enrique Ona, Executive Director of the Philippines’ National Kidney and Transplant Institute, on issues related to the gripping problem of kidney diseases and what we can all do to arrest and bring back the health of many of our affected countrymen. Watch ‘Breaking Barriers’ every Wednesday (11 p.m.) on IBC-TV13.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected] or at [email protected]. If you wish to view the previous columns, you may visit my website at http://bizlinks.linkedge.biz.