VAT exemptions eroding tax base, think tank says

THE Congressional Policy and Budget Research Department (CPBRD) of the House of Representatives said excessive value-added tax (VAT) exemptions are significantly reducing government revenue, and urged policymakers to review and rationalize the slate of tax incentives.

In a policy brief, the CPBRD noted that despite the country’s 12% VAT rate, among the highest in ASEAN, actual revenue collection remains below potential due to the wide range of exempt goods and services.

It said the VAT system has structural weaknesses linked to the current exemption regime.

On the issue of revenue, the CPBRD said that VAT exemptions result in large foregone revenue, which limits funding for public programs.

On the equity aspect, it said that while exemptions are intended to help the poor, they are not always effective because the wealthy also benefit. According to the study, “richer households also benefit from several VAT-exempt categories,” especially in private education and insurance.

Items exempt from VAT include basic food, health and education services, some medicines for serious illnesses, and public transportation.

However, the study concluded that food exemptions have the greatest benefits for poor households.

Meanwhile, in terms of efficiency, the CPBRD said the excessive number of exemptions distorts the design of the VAT system. VAT should be focused only on taxing final consumption, but because of the exemptions, there are unintended effects on production, prices, and business decisions, the brief found.

In response, the policy brief recommended the rationalization of VAT exemptions by retaining only the essential exemptions and reviewing the others. It also recommended broadening the VAT base to improve collection.

It added that reforms should be accompanied by more targeted assistance such as direct cash transfers to protect the poor, instead of relying solely on broad tax exemptions.

The study found that broadening the VAT base can help increase tax collection and improve the performance of the system. It also concluded that a more streamlined and comprehensive VAT system could open the possibility for a reduction in the VAT rate in the future if sufficient levels of government revenue are maintained. — Pexcel John Bacon