"Exemptions-Plagued" VAT System Costing Gov’t ₱539-B --- Study

Finance Secretary Benjamin E. Diokno said the government should annually collect up to P1.307 trillion in value-added tax (VAT) revenues if the tax system were not plagued with exemptions, let alone corruption.

Photo Insert: The Philippines' VAT system has an efficiency level lower than each of its neighboring countries at 0.40, despite having the highest VAT rate in the region at 12%.

A 2018 World Bank study cited by Diokno in a virtual briefing on Tuesday, May 30, said the government collected only P768 billion from VAT because of numerous exemptions that had resulted in foregone revenues of at least P539 billion.

Diokno also cited another study by the Organisation for Economic Cooperation and Development, which showed that the Philippines collected only P723 billion on average from VAT between 2016 and 2020, or 40% short of the expected revenues.

“So while the Philippines has the highest VAT rate compared to the other countries in this part of the world, our VAT collection is the most inefficient, only 40%. If it's perfect, it should be 100%, and that's because of a lot of exemptions,” the finance chief said.

In Southeast Asia, Indonesia has a 0.50 VAT efficiency level with an 11% VAT rate, and Singapore's efficiency level is at 0.71 with an 8.0% VAT rate.

Vietnam, on the other hand, has a 0.70 efficiency level and an 8/0% VAT rate, while Thailand has a 0.79 efficiency rate with a 7.0% VAT level.

In comparison, the Philippines' VAT system has an efficiency level lower than each of its neighboring countries at 0.40, despite having the highest VAT rate in the region at 12%. Diokno said the “ideal” VAT exemptions are limited only to essential goods and services, such as food, shelter, healthcare services, education, and selected medicines.

“Prior to the passage of the reforms, the Philippine tax code contains 56 lines of exemptions, of which 11 overlap with special laws, and 84 additional exemptions in special laws,” Diokno said, adding that the biggest VAT leakage is in cooperatives, which enjoy exemptions.

The Finance chief, meanwhile, defended the imposition of VAT on goods and services, citing its “pro-poor” approach to taxation. Describing himself as the “father of VAT,” Diokno said VAT is levied on consumption, not on income, which is currently the global trend.

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