Sunday, September 30, 2007

Take the EVAT Awareness Survey!

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This is part of a bigger effort to address the country’s budget deficit. We need to increase our tax collection to sustain the government’s delivery of basic services. While we can conceptually reduce government expenditures, we can only reduce it by so much because the public relies on government for these basic services, which includes education and medical services.

If we increase the VAT rate from 10% to 12% in 2006, we can raise as much as P35.12 billion more. On the other hand, if this measure is coupled with the repeal of the VAT exemptions mentioned above and other provisions of the VAT bill, we can raise between P97-105 billion assuming 70% collection efficiency. Raising these additional revenues is expected to translate to the strengthening of the Peso-Dollar exchange rate and better interest rates arising from improved investor perception of the Philippines.

The long term benefits from this E-vat law outweigh the short term costs. For one, the costs are equitably distributed, thus the poor will not suffer much with the additional tax expenses. The services that will bear fruit from these incremental revenues can in the long run bridge the gap between the rich and the poor.

The new EVAT law, GMA said, will entail some sacrifice in the short run but it promises lasting rewards in the form of more jobs and livelihood opportunities, better social services, more infrastructures, less debt, and more and better financing for rural programs.


Those labeled with Y are the goods that are VAT exempted. Notice that among our fellow Asian countries the Philippines has the highest number of goods and services which are VAT exempt at the rate of 10% VAT. Those that are highlighted such as the sale/importation of coal and natural gas; sale or importation of raw materials in the manufacture of petroleum products; importation of cargo vessels; sale by agricultural cooperatives; sale by electric cooperatives; gross receipts or multipurpose cooperatives; sale by non-agricultural, non-electric and non-credit coops; sale,imporation, printing or publications of books and newspaper, magazine;and services rendered by doctors of medicine and lawyers are among the goods and services which will no longer be VAT exempt after the implementation of the E-VAT law; in addition the rate will also be increased from 10% to 12%.

Comparing the VAT rates from across countries Cambodia has a 10% rate , Indonesia and Vietnam has a 10% VAT rate, Thailand and Singapore both have 7% VAT rates, Laos has a 3-15% sales tax rate, Malaysia has a 5%-10% Sales tax rate and Myanmar has a 5-30% sales tax rate.


a. Short-run

a.) Increase in prices

One of the immediate effects of the EVAT is the increase in prices of goods because the VAT rate was increased from 10% to 12%. In addition, the other goods and services which were previously VAT exempt became subject to VAT.

b.) Measures to cushion the impacts

Seeing the immediate effect that the implementation of EVAT, some procedures have been formulated in order to lessen the effect that it will have. One of which is to remove the franchise tax on power distribution utilities which serves to temper the effects of imposing VAT on power. In addition, the manufacturers of products such as sardines, milk, noodles, cooking oil and sugar are also allowed to credit against their output VAT a presumptive input VAT equivalent to 4% of the value of their purchases of primary agricultural products which are used in the production of these goods. In terms of petroleum products, there will be a reduction of excise tax on petroleum products such as kerosene, diesel and bunker fuel oil. The technicalities of the effect of the reduction of excise tax on petroleum products is illustrated below

o DOE figures as of June 30, 2005

As the table shows, there will be a lesser percentage increase in the final price because of the reduction of the excise tax. With these measures the burden that the EVAT will have especially on the poor consumers will be minimized. As a matter of fact, according to the research that was conducted, the poor will not really be heavily burdened with the implementation of the EVAT because most of the goods which the lower income households consume are VAT exempt. Usually, households with an income below Php60,000 spend only 0.02% of their expenses on taxes while those who spend more than Php250,000 annually spends 4.10% of their expenditures on taxes at the minimum. Some of these goods are agricultural and marine products in their original state such as vegetables, fish, meat, rice and the like which remain VAT exempt despite undergoing simple preparation processes or preservation for the market. Educational services by both public and private schools are also VAT exempt, as well as educational and informational materials such as books, newspapers and magazines. In terms of housing, the sales of low-cost house and lots which do not exceed Php2.5 million and the monthly lease of houses which do not go beyond Php10,000 monthly are also VAT exempt. Finally, sales of persons and establishments such as sari-sari stores, carinderias and the like which do not earn more than Php1.5 million annually are also free from VAT.

Better tax collection would allow deeper fiscal adjustment and additional public services for growth and poverty reduction. This could lead to another virtuous circle of tax collection and better government services. The rationalization and transparency of public expenditures as well as credible measures against corruption will increase the trust of citizens in the state. Public support for adequate taxation will increase.” –World Bank

b. Long term effects

The rewards of an expanded value-added tax will be reaped in the long-run, long after its costs are experienced. The benefits are experienced after a long time because the development of programs for which the funds are going to be used takes a long time. Nevertheless, its effect on the fiscal condition of the country will take its toll when taxes are collected. With a larger pool of funds, potential economic crises are avoided and market confidence is increased. Government borrowing costs are reduced and savings in interest payments will increase. The gains in interest savings, according to Asian Development Bank, far outweigh the pain of additional tax payment. In addition, with additional revenues for the government, the need to borrow will be lessened. Thus, the phenomenon of crowding-out is eliminated because there will be no need for the government to compete with the private sector for loans.


a. Costs

a.) VATable items

Since the implementation of the E-VAT law, some of the items which were not taxed before are now subject to VAT. Among the products which are now VATable are coal, natural gas and other indigenous fuels as well as the petroleum products and their raw materials. In addition power and electric cooperatives are charged with VAT. Medical and Legal services are also not VAT exempt anymore and the domestic transport of passengers by air and sea will also be charged with VAT. Raw materials like cotton & cotton seeds, non-food agricultural products as well as works of art, literary works and musical compositions will also be subject to VAT.

b.) Macroeconomic Perspective

Looking at it in the macroeconomic scale, the E-VAT will also have an effect in both the GDP growth rate and in the inflation rate.

2005 Half-year*


GDP, growth rate



Change in inflation



Source: NEDA

When the E-VAT law was implemented it was forecasted that the GDP growth rate would decrease by 0.08% and the rate would further decrease to 0.42% by the year 2006. This might have been brought about by the decrease in consumer spending because of the higher prices of goods. In terms of the change in inflation, there was an increase by 0.84% during the bottom half-year of 2005 and this further increased to 0.97% in 2006.

c.) Tax rate increase

Since the emergence of the E-VAT the corporate tax rate increased to 35% and will continue up to the end of 2008 but this rate will be automatically reduced to 30% by 2009. This would have an effect in the corporations and businesses and might translate to higher prices for the consumers.

There will also be increases in the gross receipts tax from 5% up to 7% on royalties, rentals of property be it real or personal, profits coming from exchange and all other items which are treated as gross income, of banks and non-bank financial intermediaries. And in line with the increase in the tax rates, the tax exemption of PAGCOR will also be removed.

d.) Effect in the Business Sector

Due to the higher tax rates and higher costs of input, E-VAT made the cost of doing business rise. It may encourage previous honest local businessmen to evade taxes and there would be a slow but continuous capital flight not only in from the local businessmen but from foreign investors as well. Investments might slow down because other countries might become more attractive and would make the Philippines very uncompetitive with respect to its neighbors in the long run.

b. Benefits

a.) Incremental revenues for infrastructure

Although the expanded value-added tax implementation will entail monetary sacrifices in the short run, the benefits of this legislation will bring lasting rewards to the Filipinos. The incremental revenues that will come from the additional tax collection will add up to the country’s budget for reforms and infrastructure development. In particular, 50% of the share will be allocated for the purposes of public education, health premiums, environmental conservation and agricultural modernization. With proper implementation of tax collection and budget allocation, the government will be able to address the primary needs of the citizens. Investments in health and education will carry on the benefits of tax revenues to the future generation. At present, Senator Mar Roxas is vying for a People’s Fund—a special account in the National Treasury where 30% of the additional tax revenues will be allocated in order to direct the funds to programs on education and health.

With larger funds allocated for agricultural modernization, infrastructures in the provinces are expected to improve. In the long run, improvements in agriculture will increase the income opportunities in the rural areas. With the construction of farm-to-market roads and irrigation facilities, markets become more accessible and production costs are decreased. People in the province will not be forced to find greener pastures in the overcrowded cities and instead can be involved with farming. Increased farming activities will provide a food source for the cities and will result to stable price levels of goods because the people will not depend on imported goods anymore. Thus, the additional funds wil increase the gross national product of the country and promote more stable prices.

b.) Equitable tax collection

Aside from additional revenues for the government, the implementation of RA 9337 also promotes an equitable system of tax collection. Although it cannot be avoided that the increase in tax rate will also affect the lower-income households, the E-vat law recognizes the economic poverty of the poor by making some exemptions to the law. Most commodities that the poor consume are exempt of the expanded tax. More particularly, these goods are the following:

1. Agricultural and marine products in their original state such as vegetables, meat, fish, fruits, eggs and rice. These goods remain exempt from VAT even if they had undergone simple processes of preparation or preservation for the market (such as freezing, drying, salting, broiling, roasting, smoking or stripping);

2. educational services rendered by both public and private educational institutions;

3. books, newspapers and magazines;

4. lease of residential houses not exceeding P10,000 monthly;

5. sale of low-cost house and lot not exceeding P2.5 million;

6. Sales of persons and establishments earning not more than P1.5 million annually, which could include sari-sari stores, carinderias and street vendors.

Most of the goods in the poor’s consumption basket are VAT-free. In addition, the bottom 50% of the population will contribute only 2.3% in the additional tax revenues. The E-vat law is estimated to bring a very small increase of 1 peso per day in the poor’s expenditure. On the other hand, the richest 10% of the population will contribute 39% of total VAT revenues. The total percentage contribution of the non-poor will be 83%, whereas the the remaining 17% will come from the poorest 50% of the population.

With tax revenues mostly coming from the rich, the E-vat law is actually an effective program that can address the problem of inequality through indirect income redistribution. As funds coming from the higher-income huseholds are used to improve the situation of the lower-income households, the benefits of EVAT will equalize the distribution of wealth. In the long run, a more equitable tax collection will help bridge the gap between the rich and the poor.

c.) Improved tax collection system

In order to effectively implement RA 9337, the Bureau of Internal Revenue has developed a new, more organized system of tax collection and account registration. This system will help facilitate a more transparent tax system. With the tax collection system, each taxpayer is given an identification number. In addition, tax declaration forms and other recording documents are provided and are downloadable from the BIR site. With more accessible materials, taxpaying will be more convenient and records are less susceptible to manipulation and corruption.

The Bureau of Internal Revenue has also developed a benchmarking method in order to check if the taxes being declared are not manipulated. The benchmarking provides a method of comparison of the performance level of businesses from the same industry. Outliers are then checked in order to ensure that the taxpayer is declaring the right amount of income.

d.) Increase in GDP and government services


GDP at constant prices

Government consumption at constant prices

Budgetary appropriation for Philippine Educational System

















SOURCE: National Statistics Coordination Board

With the implementation of the E-VAT law in July 2004, additional revenues for the government have been coming in. As a result, bigger budget allocations for social sevices such as education and health have been experienced. From 2004 to 2005, gross national product increased by 4.87%, whereas it increased by 5.45% the following year. Part of the increase in total gross domestic product can be attributed to an increase in government consumption by 1.6% and 6.13% respectively. As such, the budget appropriation for education also increased by 6.20%. Aside from this, the inflow of incremental revenues from the expanded value-added tax also brought about an increase in money supply, as shown by the data from the Central Bank. From 2004 to 2005 the supply of money increased by 8.79%. The growth rate in 2006 further increased, reaching up to 24.39%.


Money Supply







SOURCE: Bangko Sentral ng Pilipinas


To know the level of awareness of Ateneans regarding the Expanded Value Added Tax (EVAT) law our group has conducted a survey among 50 students of the Ateneo de Manila University. Through our data we found out that there are many students who are aware that such a law exists in our country having 44 out of the 50 respondents say they are aware that such a law is in effect but when asked on what the law really does most are only aware of the 2% increase in tax on the food that they buy especially the ones they buy on fastfoods having 42 respondents say that it is what is greatly affected among the things they regularly purchase. We also found out that not too much students are aware that petroleum products and utilities would also be greatly affected by this law. Furthermore when asked about the effects EVAT could possibly bring to our country most students are a bit pessimistic that it could really improve and help the country’s present situation having only 17 respondents say that they think it would have a positive effect for the economy. Also a lot of students think that this new tax measure is only an added tax burden for the people especially to the poor in society and that this only leads to more funds available for those in government to corrupt. When asked when corporations’ tax rate would also be affected or only those of the citizens only 7% knew that the tax rate that the corporations have would also increase is affected by this law. (See appendix for complete survey results.)


a. There is a need to consider amending the E-VAT by exempting certain transactions where there is a major impact on the consumers. Particularly, sales of low-cost housing and rentals of apartments or residential buildings generally to lower and middle class families, who have no output VAT against which they can credit the VAT on the rentals passed on to them by their landlords, should be considered as exempt.

b. Government should implement a much more extensive and continuous public educational E-VAT program, using specific graphic examples in the print media.

The Philippine Chamber of Food Manufacturers, Inc., Cosmetic Toiletry Fragrance Association of the Philippines, Inc., Effective Consumer Response Philippines and the Soap and Detergent Association of the Philippines, Inc., together asks for the amendment of the EVAT law saying that the costs of this tax measure out weighs its benefits and that some provisions like Section 110 (B) providing for input VAT limitation equivalent to 70% of output VAT (“70% cap”), Section 110 (A) (2) providing for amortization of input VAT on capital assets for 60 months if aggregate acquisition cost is more than P1 Million, and Section 27 (A) providing for the increase in the corporate income tax from 32% to 35% saying that these sections are deterrent at least if not destructive to businesses in the country.

The Freedom from Debt Coalition (FDC) Philippines is known for being a nationwide multi-sectoral coalition which makes use of advocacy work to be able to achieve a common framework and agenda for economic development. The members of this coalition are concerned individuals and different organizations that want to work for amend policies, programs, structures and relations. According to their platform, they are concerned with the following: (1) human development (2) equity, economic rights, economic justice (2) democratizing the economy (4) sustainable economy (5) economic growth (6) role the state must play in the economy (7) economic sovereignity and national self-reliance and (8) global economic realations. The coalition is against the EVAT law and still continue to condemn the decision of the Supreme Court to push through with this. Ted Aldwin Ong, a member of FDC, stated that “Electricity rates will increase by not less than 50- centavos per kilowatt-hour due to EVAT. Worst, almost 80% of the so-called revenues to be generated from it will not only go debt-servicing of which are illegitimate and from onerous transactions”.

Anakbayan is a national democratic comprehensive organization of the youth masses that brings together young workers and students that are concerned with the country and how it is being exploited and abused by those that are in power. This organization believes that the youth has an important role in society and this implies that they have a right to express their opinions on the issues our country is experiencing. Eleanor de Guzman, their national chairperson, considers that the tuition fees would increase not only due to the EVAT but also because of some school owners and administrations that would likely impose unnecessary miscellaneous fees in private schools.

Another well-known organization is the Anakpawis which is a party that gives voice to marginalized workers of society that aspire to change the political system so that it would work for the interest of all Filipinos and not just the political elite. Anakpawis representative Crispin Beltran warned the government that due to the implementation of the EVAT, there would be a sharp rise in the current levels of social unrest. He believes that a lot of people would react negatively towards this decision of the government to push through with the implementation.

In a press conference in Intramuros, Manila Archbishop Gaudencio Rosales said that the approval of the EVAT would bring about further hardships for the poor. The Supreme Court should have given consideration to the needs of the poor. He noted that the government might need money to pay for the debts of the country but the poor’s needs are more and so the government needs to start with rehabilitating these people.

In a democratic country like the Philippines, the citizens are the most important part of the nation because they are the ones who influence the decisions of the government. When the EVAT law was implemented, there were lots of objections and criticisms from the Filipino people. There were striking reactions from three individuals in the Philippine government forum online:

“If the government really need to raise revenues, at least it should be wise enough to spare the 10% vat and leave it at that. The long term effect of this tax would make the Philippines very uncompetitive with its neighbors with respect to foreign investments and would further encourage local businessmen to try to evade taxes the more. If the President could recall this tax measure and put it back to 10%, I believe all these rallies will have no adverse effect to her government because many silent supporters would continue to support her. But once this 2% increase of tax is implemented, I believe the Philippines will go down the drain even further. There would be a slow but continuous flight of capital especially from foreign business and more corruption on the side of local businessmen. Add to that the possibility that she would be unseated thru mob rule. Maybe the government would do well if it impose tax on gasoline incrementally like 1% tax every 2-3 months until it reaches its goal of 10%.

Let us be efficient and let do with 10%. More than that is inefficiency already. We don't want a Philippines that is inefficient forever. Let's help build this country and not slowly destroy it thru inefficiency. If this 10% vat is just implemented properly like letting every business pay its dues, the government would do well. Tax evaders multiply when they see that other businesses escape tax. On the other hand, they are encouraged to pay correctly if they see the government is serious about it and collect from everybody.”

“I would gladly pay E-VAT (regardless of how many percent ) when (1) We are NOT 107th Most Corrupt Country in the world...(being in the 50th below or lower is reasonable..)We should aim for the top 10 least corrupt. (2) We see the government anti-corruption campaign is VERY sincere. (3) We see the government doing it's part on "pagtitipid" - Bakit puro SUV at Luxury cars ang gamit ng mga Gov officials (4) We see the taxes being used to build infrastructure to support our economy (5) BASIC Services to the people are adequate and excellent (transportation, education, crime fighting , etc.) Unless people see and feel these BASIC government services without or at very minimal corruption, it would be VERY difficult to "swallow" this bitter pill E-VAT, that the useless lawmakers and government officials are ramming on our throats!”

“I think EVAT should not be implemented because it only makes us poor people suffer. It's okay IF and only if we are guaranteed that these thing will come back to us instead I'm sure 60% or more of the money collected from these taxes go to the government officials for their own personal good...I SAY DOWN WITH EVAT...”

From the reactions of the people, we can see that a great majority of them is against the EVAT law because of the implications it would give the citizens. The tax is said to be for the political interests of those in power because they are the ones who would be making use of this money, especially the corrupt ones. With the reactions of the citizens, we could see that there is no sense of trust on the government mainly because it is corrupt and underhanded by the officials that run it.


Given that Malacanang has a great number of allies in the Congress it is understandable that there are a number of supporters for the new EVAT law like House deputy speaker for Mindanao Gerry Salapuddin who is very much optimistic with the results of this law and said that “the strength gained by the peso and the stock market recovery are the initial positive effects on the economy of the EVAT law. Salapuddin noted that the new tax law's longer-term impact is more economic opportunities for Filipinos. However, he cautioned that this would hinge on the government's ability to effectively implement EVAT and other taxes, and thus sustain the financial market's renewed confidence.” Antique Representative Exequiel Javier on the other hand is also optimistic of the EVAT law but know that it does not simply end with the implementation of this law but says that other measures should also be undertaken for its effective implementation. “Let us take advantage of this optimism from the EVAT to work for its efficient implementation. We must follow through with better tax collection efficiency if we are to build this positive response into a sustained economic uptrend".

Still there are those people in government who are ambivalent to what the EVAT could do to our economy and to the society and still there are those who directly oppose this law. Albay Representative Joey Salceda, chairman of the House committee on economic affairs, is one of those who oppose this law saying that the DOF was being insensitive to the plight of the poor in maintaining its stand on slapping the EVAT on the energy sector. Salceda likened the possible devastation to the economy brought by the EVAT law to the wake of destruction left by Hurricane "Katrina" which struck New Orleans in the United States “Given the escalating food prices, transport fares, water rates, electricity tariffs, gasoline pump prices, LPG (liquefied petroleum gas), and kerosene even before it (the EVAT), DOF’s callous insistence on oil and power combined with the Department of Labor and Employment’s pronouncement of no wage hikes makes the specter of a New Orleans a very real risk”. The Justices of the Supreme Court on the other hand has been ambivalent when it comes to the EVAT law and they think some of the provisions within this law are unconstitutional but still none of these provisions received the eight votes needed to declare it unconstitutional. An example would be Associate Justices Reynato Puno, Consuelo Ynares Santiago and Romeo Callejo Sr. who voted to dismiss the petitions questioning the standby powers granted to the President, saying they were premature. Furthermore, Associate Justices Angelina Sandoval Gutierrez and Renato Corona believed Sections 4,5, and 6 that granted these powers are unconstitutional. Also, Chief Justice Hilario Davide, Jr. and Associate Justices Artemio Panganiban, Sandoval Gutierrez, Adolfo Azcuna and Corona said Sections 1, 2 and 3, dealing with income tax rates, were unconstitutional.

When it comes to the banking and financial sector there seems to be more optimisim with regard to the economic gains the EVAT law could bring although they fear that the poor might be severely affected with this new law unless the government places safety nets for the protection of the poor. Institutions like the Asian Development Bank and the International Monetary Fund were one in cautioning the government against possible loopholes in the system that may dilute the projected gains from the EVAT law. World Bank manager Joachim von Amsberg urged the Philippines to stay the course with the tax measure, saying it is "quite desperately needed to bring financial health back to the Philippine state."

Looking at the private sector again we see two kinds of reaction with some saying that it would not be beneficial to our economy and some saying that it is much needed by our country. The Philippine Chamber of Commerce and Industry which conducted a survey among its members regarding their outlook with this EVAT law and the Philippine economy and the rusts said that only 8% said that they think this new tax measure would improve the business conditions in the country, also the respondents are more concerned of the political crisis this law might produce having 7 out of 10 respondents saying that the political turmoil has disrupted their business operations. The American Chamber of Commerce supports the EVAT in principle but would like to raise some points to be considered by everyone involved:

A. The E-VAT is not a new system. It merely expanded the coverage of the 10% VAT which has been with us for more than 8 years. The VAT is a well tested system and has work efficiently in the European Union and in Asian countries like Korea and Taiwan. Indeed, countries in the Asia Pacific Region are moving towards VAT or a similar system.

B. VAT, if properly implemented, should simplify tax administration since VAT has replaced or is intended to replace all various kinds of excise and percentage taxes, which with different rates and tax basis would be difficult to administer, such as caterer’s tax, carrier’s tax (on goods), franchise tax, lending investor’s tax, and non-life premium tax. In terms of tax administration, the Government can thus, direct its enforcement resources only on two major taxes-income tax and the VAT.

C. The E-VAT should not, by itself, be the basis of the increase in the prices of commodities. From reports, it appears that stores and markets have jacked up the prices of basic commodities. Agricultural and marine products, in their orginal state, were exempt under the old VAT and continue to be exempt under E-VAT. Most of the basic manufactured food products are subject to VAT before, so the E-VAT should not cause any drastic increase in their prices. For example, under the E-VAT, freight for the transport of goods (freight for transport of persons is still VAT-exempt) is now subject to VAT. If the carrier will pass on the 10% VAT to the seller of these goods, it should not cause any significant increase in the latter’s prices. If the E-VAT is neutral in its application, in the sense that it should not result in lower or more income to the seller of goods or services, the carrier should take into account that before E-VAT, it was paying 3% carrier’s tax on its gross receipts without any credit for VAT paid on its purhcases of spare parts, etc. (the so-called input VAT); now, the 3% tax was replaced by the 10% VAT based also on its gross receipts but with an input VAT credit.

Furthermore, to the extent that the taxpayer has sufficient output VAT against which the input VAT on previously VAT-exempt transactions can be credited, the E-VAT should not result in additional costs to the taxpayer. To illustrate, rentals of real property were previously VAT-exempt but are now subject to the 10% VAT under the E-VAT Law. If a trader’s monthly gross sales is P10M and assuming he has no input VAT, he is liable for VAT of P1M. If the trader is leasing business space for P500,000 a month, under the old VAT, the rental is VAT-exempt. Under the E-VAT, the rental is subject to a VAT of P50,000 which the lessor will pass to the trader. The trader, in turn, can deduct as input tax the P50,000 from his P1M output tax. He pays the BIR only P950,000. Thus, effectively, no additional cost should result to the trader.

D. It is unfortunate that seller of goods and services have used the E-VAT to increase their price either because they do not understand how the VAT works or they deliberately used it to generate more income when the E-VAT is intended not to result in lower or more income to the seller.


On September 1, 2005, the Supreme Court (SC) declared Republic Act (RA) No. 9337 (the new value-added tax, or VAT, law) as valid and constitutional. RA No. 9337 is projected to generate, for the government, additional revenues of PhP64.3 billion annually.


In the five cases separately filed before the Supreme Court, petitioners claimed that RA No. 9337 is unconstitutional because of:

1. Breach of constitutional procedures by the bicameral conference (Bicam) committee:

    1. No amendment rule after the third reading of bills. (Article VI, Section 26[2], Constitution).

Although Senate Bill (SB) No. 1950 and House Bill (HB) Nos. 3555 and 3705 had already been passed on third reading, the Bicam committee still deleted from said bills the “no pass-on” provisions, and inserted the 70% cap on input tax credit and the President’s standby authority to increase the VAT rate from 10% to 12%.

    1. Revenue bills to originate exclusively in the House of Representatives. (Article VI, Section 24, Constitution). The Bicam committee adopted certain tax measures in SB No. 1950 that are not found in the House bills.

2. Breach of substantive rights and duties:

The provisions of RA No. 9337 pertaining to the President’s standby authority to increase the VAT rate to 12%, the 70% cap on input tax credit, and the 5% creditable VAT withholding on government transactions allegedly contravened the following constitutional policies:

a. Uniform, equitable, and evolving progressive taxation (Article VI, Section 28 [1], Constitution);

b. Non-delegation of legislative power (Article VI, Section 28 [2], Constitution), with regard to the President’s standby authority to increase the VAT rate to 12%; and

c. Due process and equal protection clauses (Article III, Section 1, Constitution).

Supreme Court ruling

The SC dismissed the petitions and upheld the constitutionality of RA No. 9337, based on the following:

On the procedural issues

1. The Bicam committee followed the Constitution and Congress’ internal rules.

First, the SC noted that Article VI, Section 16(3) of the Constitution recognizes that Congress has the intrinsic power to “determine the rules of its proceedings.” Pursuant to the doctrine of separation of powers, the SC is wont to deny a review of the internal proceedings of a co-equal body. Congress is the best judge of how it should conduct its own business expeditiously and in an orderly manner.

Second, under the enrolled bill doctrine, the signatures of the Speaker of the House and the Senate President on the bill, and the certification by the secretaries of both Houses of Congress that such bill was passed, are conclusive of its due enactment.

Third, the Supreme Court explained that the “No Amendment Rule” under Article VI, Section 26(2) of the Constitution refers only to the procedure to be followed by each House with regard to bills initiated in each of the Houses, before said bill is transmitted to the other House for concurrence or amendment.

Fourth, the creation of a Bicam committee is a legislative practice sanctioned by the rules of both the Senate (Rule XII, Section 35) and the House of Representatives (Rule XIV, Sections 88 and 89). Apparently, this addresses the absence of constitutional procedures to be followed in cases where the two Houses of Congress find themselves in disagreement over changes introduced by the other House in a legislative bill. Hence, if a change is desired in the practice of the Bicam committee, it must be sought in Congress since this question is not covered by any constitutional provision but is only an internal rule of each House.

The SC explained that Article VI, Section 24 of the Constitution requires that the revenue bill – not the law itself – should originate exclusively in the House of Representatives. This has been complied with by the introduction of HB No. 3555 and 3705. A bill originating in the House may undergo changes in the Senate that may result in a rewriting of the whole and for which a distinct bill may be produced. The Senate has the power not only to concur with amendments and propose amendments, but also to propose its own version, even with respect to bills that are required by the Constitution to originate in the House.

Under RA No. 9337, however, a person can credit his or her input tax only up to 70% of the output tax. The Court clarified that a creditable input tax is not a property or property right within the constitutional purview of the due process clause, but merely a statutory privilege, which the State may change or take away by amendatory or superseding law. With respect to the 5% creditable VAT withholding imposed on payments made by the government for VAT-taxable transactions, the Court emphasized that such provision is only a method of collection for a simplified VAT withholding system. Equal protection clause requires equality among equals as determined according to a valid classification, that is, the grouping of persons or things similar to each other in certain particulars and different from all others in these same particulars. Here, Congress intended to treat differently taxable transactions with the government, and such is a valid classification.

The Court also expounded that uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times. RA No. 9337 uniformly provides a standard 0% or 10% (or 12%) rate on all goods and services. It does not distinguish as to the type of industry or trade that will bear the 70% limit, five-year amortization on capital goods, or the 5% creditable VAT withholding by the government. The SC also reasoned that RA No. 9337 is equitable as it is equipped with threshold margins. The VAT rate of 0% or 10% (or 12%) does not apply to gross annual sales or receipts equal to or below PhP1.5 million.

Under RA 9337, basic marine and agricultural food products in their original state are still not subject to tax. Excise taxes on petroleum products and natural gas were reduced. Percentage tax on domestic carriers was removed. Power producers are now exempt from paying franchise tax. Congress also increased the income tax rates of corporations from 32% to 35%.

Taxation is progressive when the rate goes up depending on the resources of the person affected. The Court yielded that the VAT is an antithesis of progressive taxation. By its very nature, it is regressive and, at the end of the day, it is really the lower income group or business with low-profit margins that is always hardest hit. But the Court noted that the Constitution does not prohibit the imposition of indirect taxes, like VAT. What it simply provides is that Congress shall “evolve a progressive system of taxation.”

Finally, the SC admitted that “taxes are the lifeblood of the government… The Court is neither blind nor is it turning a deaf ear on the plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other cases, the Court cannot strike down a law as unconstitutional simply because of its yokes.”

In closing, the SC held that the assailed provisions of RA No. 9337 involve legislative policy and wisdom. And, so long as there is a public end for which RA No. 9337 was passed, the means through which such end shall be accomplished is for the legislature (not the Court) to choose so long as it is within constitutional bounds.


a. Benchmarking Method of BIR

To further intensify its fight against tax cheats in the country, BIR has instituted the use of “benchmarking method” to define the standards in measuring the taxpayers’ compliance per industry group. Benchmarking is actually the process of determining and comparing the performance level of taxpayers in a given line of industry as far as Net VAT Due and Income Tax are concerned, in relation to gross sales/receipts vis-à-vis profit margin rate for the purpose of setting an industry standard of taxpayers’ performance /compliance.

Through benchmarking, Revenue District Officers would be able to easily indentify taxpayers who are declaring Income Tax and net VAT dues lower than the minimum amount set per industry group. To implement the benchmarking method, BIR issued Memorandum Order no. 4-2006. The benchmarking activities covered the top 200 taxpayers per industry per district office based on gross sales, as reflected in the tax returns, or the actual gross sales/receipts as determined from sources within and outside the BIR. The coverage will increase until all taxpayers of all industry groups have been fully covered, which is targeted to happen on or before the end of fiscal year 2008.

b. DoF and DBM working on revenue monitoring mechanism

Department of Finance and Department of Budget and Management (DBM) have worked on reporting mechanisms to address the public’s concern on the utilization of the Expanded Value Added Tax (EVAT) revenues. In a report to President Gloria Macapagal-Arroyo, ScretaryTeves said the Department of Finance (DoF) have been keen on the implementation of the two percent EVAT increase (from 10 to 12 %) starting February 1 of 2006, once appropriate official data are available. DoF, hand-in-hand with DBM, started to develop reporting mechanisms on the utilization of EVAT proceeds to engender strong public support by institutionalizing transparency and accountability.

They also have been working out a comprehensive action plan to further enhance the revenue collection efficiency of the Bureau of Internal Revenue and the Bureau of Customs by improving both customer service and enforcement. Furthermore, to address concerns over bleeding and perennially losing government-owned and controlled corporations (GOCCs), DoF has also started developing performance contracts for selected GOCCs that contain mutually agreed upon performance criteria and "deliverables" they are expected to achieve.


The provisions in the EVAT law (RA 9337) are concerned mainly with the following

1. VATable activities

2. Zero-rated sales

3. Exempt sales

4. Input tax

5. Invoicing

6. Corporate Income Tax

Vatable Activities

The law raises the Vat rate from 10% to 12% given the condition where VAT collection exceeds 2 4/5% of GDP of previous year; or, government deficit exceeds 1 ½% of GDP of previous year.

Former activities that weren’t subject to EVAt before are now vatable. These are:

1. Common carriers by air and sea, for the transport of passengers within the Philippines

2. Sale or importation of coal, natural gas, petroleum products, and of raw materials for the manufacture of petroleum products

3. Sale of nonfood agricultural products, marine and forest products, and cotton

4. Sales of electricity by generation companies, transmission, and distribution companies, and electric utilities

5. Services rendered by doctors and lawyers

6. Persons whose gross sales or receipts for the past12 months exceed Php1.5M.

Zero-rated sales

Under this law the following are subject to 0%VAT

1. Activities considered as “export sale”

2. Services to international air transport operators including leases of property

3. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country

4. Sales of power or fuel generated through renewable sources of energy (biomass, solar, wind, hydropower, geothermal, ocean energy and other emerging energy sources using technologies such as fuel cells and hydrogen fuels)

5. Services to international air transport operators including leases of property for use thereof

6. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country

The law states that for activities to be zero-rated services must be “rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed.”

Exempt sales

The following are exempted under the law:

A. Sale of copra

B. Sales of residential lot valued at Php1.5M and below, and of house and lot valued at Php2.5M and below

C. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts

D. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations.

Input tax

According to the law, “the amount of input tax, inclusive of excess input tax carried over from the previous quarter that may be credited in every quarter, shall not exceed 70% of the output VAT. Input tax on purchase or importation of capital goods may no longer be claimed as a refund. Such input tax shall be spread evenly over a period of 60 months beginning on the month of acquisition if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds Php1 Million. If the estimated useful life is less than 5 years, the input VAT shall be spread over such a shorter period.” However, input tax attributable to zero-rated sales may still be refunded.


This law also discusses proper processes as regards invoice and liabilities if not complied with properly. The following are the stated procedures:

1. “The amount of VAT shall be shown as a separate item in the invoice or receipt.

2. If a person who is not VAT-registered issues a VAT invoice or receipt, he shall be liable for VAT on his sales, without the benefit of any input tax credit, and a 50% surcharge based on the amount of VAT due. In turn, the purchaser may laim the VAT as an input tax credit, provided that the requisites for a valid VAT invoice or receipt are present.

3. If the sale is exempt from VAT or is subject to zero percent (0%) VAT, the term “VAT-exempt sale” or “Zero-rated sale”, as the case may be, must be written or printed prominently on the invoice or receipt.

4. If a VAT-registered person issues a VAT invoice or official receipt for a VAT exempt transaction, and fails to display the term “VAT-exempt sale”

E. Prominently on the invoice or receipt, the issuer shall be liable for VAT.”

Corporate income tax

Under this law, regular corporate income tax rate was raised to 35% given that regular taxable income shall go down to 30%. “Foreign corporations will be subject to final withholding tax of 15% on gross dividends derived from Philippine sources, provided that the country in which the non-resident foreign corporation is domiciled, shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid equivalent to 20% (previously 17%). Interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession, trade or business may be claimed as a deduction from gross income, provided that the allowable deduction for interest expense shall be reduced by 42% (previously 38%) of the taxpayer’s interest income which was subjected to final tax.