DOF reiterates opposition to Value Simplified Tax

December 10, 2010 press release by the Department of finance
VAST will make exports less competitive; revenue collections more challenging, says Usec Gil Beltran
On December 7, 2010, the Committee on Ways and Means of the Lower House of Congress approved House Bill No. 1970HB 1970 proposes to replace the current 12% Value-added tax (VAT) with a 6% Value Simplified Tax (VAST).  The main change that VAST will introduce is the abolition of the input VAT credit mechanism that is currently employed under the VAT system.  Without this mechanism, VAST is therefore equivalent to a turnover type of sales tax.

According to Finance Undersecretary Gil Beltran, the VAST, as a turnover tax, can cause prices of goods and services to increase.  “A six percent VAST will now be imposed at every stage in the production and distribution of goods without removing the tax element paid at a prior stage.  The VAST will now form part of the selling price at every stage.  So the VAST, in effect, causes the tax to cascade, what is commonly referred to as a “tax on tax” situation.  Consumers will definitely be put at a disadvantage,” added the undersecretary. “While a consumer is expected to see only a 6% VAST on his receipt, what is not obvious is that the basic price of the good will contain all the taxes that had to be paid at every stage that the good had to pass through before reaching the hands of the consumer, which could average about four stages for an ordinary consumer good involving the importer, manufacturer, wholesaler and retailer.”
For example, an importer imports a good and is taxed at 6% for VAST (for example P100 x 1.06 = P106).  The importer passes on the imported good to a manufacturer for further processing at P116.60 and another 6% is imposed (P116.60 x 1.06 = P123.60).  The manufacturer sells the manufactured goods to a wholesaler distributor for P135.96 and another 6% is imposed (P135.96 x 1.06 = P144.12).  The wholesaler sells to the retailer for P158.53 and another 6% is applied (P158.53 x 1.06 = P168.04).  The retailer sells to the final consumer at P184.84 and the final 6% is imposed (P184.84 x 1.06 =P195.93).  In the example, where mark-up is assumed to be 10%, the VAST actually increased the total selling price by P41.75 or 22.59% of the final selling price, much more than the nominal rate of the VAST of 6%.  Under the VAT system, the final consumer pays only a tax equivalent to 12% of the price, i.e. equal to the nominal rate of the VAT.  This is made possible through the input VAT credit mechanism which takes away the tax paid at prior stages.
Undersecretary Beltran further states: “the VAST can also make the country’s exports less competitive.  The tax that our exporters will pay on their inputs will now be included in the price of exports since exporters will no longer be allowed to recover it as currently practiced under the VAT system.  Our exports will become more expensive by the amount of the tax.  Currently, exports are VAT zero-rated and this status allows exporters to recover any VAT that they have to pay on their inputs.”
The more immediate impact of VAST and which creates a serious concern, according to Undersecretary Beltran, is the immediate reduction in the revenues that are collected at the ports.  Whereas currently BOC collects 12% VAT on imports, this will drastically be reduced to only 6% under the VAST system. This will create extreme pressure on the government’s finances and will make fiscal consolidation in the short-term even far more challenging.  Even the envisioned increase in tax take due to increase in prices which VAST is going to trigger may not be sufficient to recover the potential revenue loss at the port, Undersecretary Beltran adds.