WB warns government against scrapping VAT on oil

The World Bank (WB) has warned the government against scrapping the value-added tax (VAT) on oil, echoing the position of the International Monetary Fund (IMF) and the Department of Finance (DOF).

The multilateral lender said that the impact of oil price increases in the Philippines has been dampened by the appreciation of the peso against the dollar.

It said that suggestions to reduce taxes on fuel products would not seem to be in line with the government’s objective of consolidating its fiscal position.

Sen. Manuel Roxas II has proposed the elimination of the 12 percent VAT on oil to help cushion the impact of skyrocketing crude prices on consumers.

Sen. Francis Escudero, chairman of the Senate ways and means committee also said that this would be more effective in cushioning the impact of high oil prices compared to slashing the tariffs on imported petroleum.

The lawmakers aired their proposals as the price of oil in the world market hit the dreaded $100 per barrel mark during the first trading day of the year.

The World Bank, however, said that taxing fuel is one of the easiest ways to raise revenue “both because collecting fuel taxes is relatively straightforward and because the consumption of fuels as a group is relatively price and income inelastic.”

The Washington-based institution also said that scrapping the VAT on oil would negatively affect the country’s image to investors.

 “From a fiscal standpoint, any measures taken by the administration that would weaken the fiscal stance will reflect negatively on markets and is likely to increase borrowing rates for the Philippines. Any such impact would have additional severed consequences on the fiscal situation,” the World Bank said.

Earlier, the IMF also reiterated results of a March 2007 study that the 12 percent VAT on oil has benefited the poor as it has passed on the burdened to the richer segment of the economy.

The IMF pointed out thar the government has been able to allocate revenue to social spending, particularly on education and health programs because of the VAT reform.

The Department of Finance (DOF), for its part, said the government will pursue a targeted spending strategy to ensure that only those who really need assistance due to rising oil prices would benefit from any government subsidy.

Finance Secretary Margarito Teves reiterated that the government stands to lose an estimated P54 billion in additional revenues every year if Congress will pass the proposed suspension of the VAT on petroleum products.

“These additional revenues would be used for social services such as housing, feeding, health, and education programs; and infrastructure such as irrigation and farm-to-market roads, which would directly benefit the poor,” he said in a statement.

Teves said that if Congress approves the proposed suspension of the VAT on oil products, the government will have less revenues to implement these projects which are focused programs for poor families.

In a paper submitted to the Committee on Ways and Means in the Senate, the DOF said that the main beneficiaries of proposed suspension are the higher income groups.

Based on the latest Family Income and Expenditures Survey of 2003, poor families with earnings of below P60,000 a year spend less than one percent of their income for oil and diesel.