COST-BENEFIT ANALYSIS OF E-VAT

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*	2006*
GDP, growth rate	-0.08%	-0.42%
Change in inflation	0.84%	0.97%

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

Year	GDP at constant prices	Government consumption at constant prices	Budgetary appropriation for Philippine Educational System
2003	1,084,072	74,419	109,987,773
2004	1,154,295	75,455	108,433,272
2005	1,210,497	76,669	114,480,287
2006	1,276,435	81,371	121,600,330

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%.

Year	Money Supply
2004	556,420
2005	605,320
2006	752,973

SOURCE: Bangko Sentral ng Pilipinas