The VAT Increase And World Bank's Meddling

World Bank was recently the object of disaffection among many senators and congressmen, especially that of Senators Edgardo Angara and Juan Ponce Enrile.

“They cannot tell us how we will pass the law. We will pass the law according to our judgment of what it should be.” These were the strong words let off by Senator Enrile against the “pakialamerong” World Bank.

Huhmmm, what we see now are quarrels in the high places. We thought only children could bash each other with such passion.

Apparently, what started the mean tongue was an urging by President Gloria Macapagal-Arroyo to speed up the new VAT increase from 10% to 12% now pending in the Senate. The president mentioned to the lawmakers that the World Bank wanted “high-quality” VAT legislation and administration, which according to her would mean higher VAT rates.

And so the lawmakers’ temper exploded due to what appeared to be an undue interference by the World Bank. Surely, the senators and congressmen did not want to be told on what to do, for they should know better. Nobody wants to be told on what to do, isn’t it?

I think this rumpus should not have become such a strain in the senses if only parties examined the root of the whole hullabaloo. Speaking after the recently concluded Philippine Development Forum, World Bank Country Director for the Philippines Joachim Von Ambsberg had only expressed the willingness of many donor agencies to put more money in terms of aid and grants to our economy only if certain fiscal restructuring are implemented by the government in the soonest possible time and this would include the newer “high-quality” VAT legislation, as well as better tax administration and tax collection by our revenue collecting agencies. In some view, this may be meddling but I guess we can give the benefit of a doubt to Mr. Ambsberg since his choice of language were not actually threatening or disrespectful at all to our lawmakers, but merely an expression of commitment and intention by donor countries to further give assistance to this ailing economy of ours.

Now we ask, is the new VAT measure really a result of arms wrestling and intermeddling by World Bank? It may be or it may not be but I guess, every other entity that is aware of our problem on the burgeoning budget deficit would have to advise or suggest to us to find more revenues and income sources. Our burgeoning budget deficit stood at nearly 200 Billion pesos even as we speak now.

We are like a house that spends 100 pesos a day but whose income is only 80 pesos a day. So we keep on borrowing 20 pesos a day to cover the differential and as we borrow and borrow, our debts increased just as well, and with interest payment growing exponentially, we become imbedded in a financial hell if we do not do something radical any moment now. So anyone who observes the manner of expenditures in our house, especially the neighbors who we approach for help every other time, would surely say “hoy, tutulungan kita uli pero gumawa ka naman ng paraan para ma-augment yung revenues ng bahay niyo.”

So gagawa nga tayo ngayon ng paraan.

And so we come to the need for more tax legislation. Last year we had to implement a newer version of the so-called “sin taxes” and this year we are embroiled in this endgame on the matter of increasing our revenues through the VAT system.

The house version of the new VAT system found rough sailing when it finally reached the Senate floors. Apparently, the Senate Committee on Ways and Means headed by Senator Ralph Recto rejected the version of the lower house which would have increased the VAT rate to a uniform 12% rate. There were actually two versions submitted to the Senate. The other version would have broadened the tax base dramatically, meaning to say items and services not covered before may be already covered later on.

Senator Recto had made it clear that a general increase in VAT rate from 10% to 12% would be highly inflationary and would harm the economy more than it benefits it. He proposed that instead of increasing the rate to 12%, the new VAT system should remain at 10% but the tax base would just be broadened dramatically to include such items or taxable subjects as electric cooperatives, professional services (such as that of doctors and lawyers), petroleum products and many other items and services exempted in the present VAT system. Senator Recto also proposed the increase of the corporate tax rate from 32% to 35%. All in all, the senator concluded that the Senate version would generate nearly 80 Billion pesos in just one year and do away with the difficulties of administering a VAT system that would maintain variable tax rates. The house version includes variant of rates that would increase annually until they reaches the maximum 12%, and this according to some analysts, is hell in terms of the difficulty in administration.

If in fact, Senator Recto could prove by mathematical computation that the government could actually get sizable revenues without increasing the tax rate, then his proposal would be just as palatable and would make President Macapagal-Arroyo grin just the same.

Yet despite the formulation presented by Senator from Batangas, Malacañang is still hell bent in pushing the 2% general increase in the VAT rate. Many sectors have also come forward in order to point out the fickleness of the Senate version. For example, semiconductor companies in the special export zones have expressed their apprehension that making electricity a vatable item would highly hamper their production. The Philippine Chamber of Commerce on the one hand pointed out that increasing the corporate tax rate would discourage more foreign investments and drive away business from our country while the Tax Management Association of the Philippines (TMAP)---composed of corporate auditors, lawyers and executives---said the government could raise the VAT rate, but should not cover goods and services regularly purchased by low-income and middle-income earners. Senator Recto’s version is too broad to include even sardines and instant mamis, as well as generic medicines---items mostly patronized by the poorer sector of our population.

I guess there is really no perfect formula for a better VAT taxation but one thing is sure, the government of President arroyo needs it in order to achieve its target of reducing our deficit to a zero figure by 2010, the year her administration ends. Under the “narrowing window” principle espoused by World Bank’s Joachim Von Ambsberg, the Philippines should bite the bullet now and make the “painful” changes while the economy is growing at more than 6% of our GNP. Mr. Joachim believes that the populace now has more income in their pockets than years ago with the expanding economy and any inflation brought about by this “painful” tax legislation may be cushioned somewhat by the growing economy. He believes that the changes may be painful now but if the government would not make the painful moves now, and allow the deficit to grow into uncontrollable figures, the poor will suffer more in the future. If we do not resolve the problem of a ballooning budget deficit at this point in time, there there would be fiscal hell in the years to come for our economy.

What Mr. Ambsberg is saying is that the people may suffer some now but if it would not take any sacrifice, the pain would be more unbearable in the future.