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WHAT YOU NEED TO KNOW ABOUT THE VAT REFORM LAW


(RA 9337)
What is Value- Added Tax (VAT)?
VAT is a consumption tax imposed on the sale or importation of goods and services in the ordinary course
of business.
Is this a new tax?
No. Most goods and services are already subject to VAT. But we still need the reforms in the VAT system
(RA9337) to increase government revenues.
Why do we need RA 9337?
The government needs to raise additional revenues to provide basic public services (like education, health,
etc.) for the growing population and to immediately address the countrys debt that has accumulated
through the years.

In 2004, for every peso earned by the government, 86 centavos go to debt servicing 37 centavos go
to interest payments and 49 centavos to principal payments.
For every peso spent by the government, 11 centavos are spent on infrastructure such as roads, bridges,
schools, buildings and other public needs.

What are the salient features of the RA 9337?


The 10% VAT rate is retained; however, the President shall increase the VAT rate to 12% in 2006 if
(a) VAT-collection-to-GDP ratio for 2005 exceeds 2.8%, or (b) the National Government deficit-to-GDP
ratio for 2005 exceeds 1.5%.
The following goods and services are now subject to VAT:
Petroleum products and other indigenous fuels
Power and electric cooperatives
Services rendered by doctors
Services rendered by lawyers
Domestic carriage of passengers by air and sea
Non-food agricultural products
Works of art, literary works, musical compositions
RA 9337 TAKES EFFECT NOVEMBER 1, 2005
Why should the VAT rate be increased from 10% to 12%?

This is part of a bigger effort to address the countrys budget deficit. We need to increase our tax
collection to sustain the governments 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 include 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 up to P81.41 billion assuming a 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.

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Why RA 9337 is NOT anti-poor.


RA 9337 recognizes the needs of the poor and exempts basic commodities and socially sensitive products
from VAT.
Among these VAT exempt commodities are:
Agricultural and marine products in their original state such as vegetables, meat, fish, fruits
eggs and rice
Lease of residential houses not exceeding P10,000 monthly
Educational services rendered by both public and private educational institutions
Books, newspapers and magazines;
Sales of persons and establishments earning not more than P1.5 million annually, which
could include sari-sari stores, carinderias and street vendors.
Will pump prices of fuel increase due to VAT?

Pump prices of fuel will increase slightly. But to cushion the impact of imposing VAT on fuel, RA
9337 put in place a reduction of excise tax on kerosene, diesel and bunker fuel oil so that what would
otherwise result in a 10% increase in pump prices of these products would be minimized. Thus, pump
prices of petroleum products will increase between 2.8%-8.4% only, instead of a full 10%. For
example, LPG costing P470.00 per cylinder will increase to P505.97 per cylinder instead of P517.00
per cylinder. Kerosene costing P34.01 per liter will increase to P36.12 per liter instead of P37.41.

Est. Pump
Petroleum Price* as of
Product
11/01/05
(in Peso/Liter)
Unleaded
35.45
Regular
33.97
Diesel
32.35
Kerosene
32.91
Bunker
21.38
LPG
458.00
(per cylinder)

Mitigation
Excise

Tariff**

New
Pump
Price

0.00
(0.45)
(1.63)
(0.60)
(0.30)
0.00

(0.52)
(0.46)
(0.57)
(0.57)
(0.35)
10.03

34.93
33.06
30.15
31.74
20.73
447.97

10%
VAT

Final
Pump
Price

3.49
3.31
3.02
3.17
2.07
44.80

38.42
36.37
33.17
34.91
22.80
492.77

Price
%
Increase
Increase
(in Peso/Liter)
2.37
6.6%
1.80
5.2%
0.22
0.7%
1.40
4.2%
0.82
3.7%
22.77
4.8%

*With ROLLBACK of P0.6/Ltr. On all products except for LPG, with rollback of P1.00/kg or P11.00/cyl.
**Based on October 1-20, 2005 MOPS/CP+. Pump prices may vary based on location, company and
other factors.
VAT is a consumption tax. Those who consume more will be taxed more. In the case of fuel, for example,
the richest 30% of Filipino families consume about 65% of the total fuel used in the country while the
poorest 30% only account for about eight percent of the total consumption. This means that a bigger share
of the tax burden will be borne by those who consume more fuel.
What is the impact of VAT on power rates?
The government is doing everything to mitigate the impact of VAT on power rates. The franchise tax on
power distribution utilities was removed so that the increase in power rates is less than 10%.

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Existing Ave.
Estimated Ave.
Distribution
Resd'l. Rate
Resd'l. Rate with VAT
%
Utility
(No VAT) (Peso/kwh
(Peso/kwh)
Increase
Meralco (NCR)
6.6366
7.1547
7.8%
VECO (Cebu)
6.2173
6.5167
4.8%
CEPALCO (Cagayan de Oro)
5.3046
5.5519
4.7%
Davao Light (Davao)
4.8402
4.986
3.0%

DOE figures as of October 28, 2005


Estimate for Meralco is based on weighted average rates of residential customers 50 1,000 kwh;
VECO estimate assumes a 70% zero-rated generation for NPC; Davao Light estimate assumes a 75%
zero-rated generation for NPC; CEPALCO estimate assumes a 60% zero-rated generation for NPC.

If the Department of Energy proposed scheme is approved by ERC, it is estimated that there will be no
power rate increase for Meralco residential customers, for example, who consume not more than 200 kwh
per month (lifeline customers). Power rates for residential customers who consume more than 200 kwh but
not more than 999 kwh per month shall increase by P0.73/kwh. For residential customers who consume
1,000 kwh or more per month and commercial and industrial customers, power rates will increase by
P0.85/kwh.
What is the impact of imposing VAT on petroleum products to VAT exempt agricultural food
products?
It is estimated that VAT exempt agricultural food products such as rice, corn, fish, vegetables, chicken and
pork will increase by not more than 1% due to the imposition of VAT on petroleum products.
Will the prices of goods already subject to VAT increase due to the imposition of VAT on petroleum
products and power?
The imposition of VAT on petroleum products and power will have minimal impact the prices of goods that
are already subject to VAT.
To further minimize the effect of VAT on sardines, milk, noodles, sugar and cooking oil, the VAT system
allows manufacturers of these products to credit against their output VAT a presumptive input VAT
equivalent to 4% of the value of their purchases of primary agricultural products used in the production of
these goods.
How will the incremental VAT collection be used?
RA 9337 addresses the delivery of basic services by earmarking the equivalent of 20% of the incremental
VAT collection for the following purposes: public elementary and secondary education, health insurance
premiums, environmental conservation and agricultural modernization, equivalent to the following:

Public Elementary and Secondary Education


Health Insurance Premiums
Environmental Conservation
Agricultural Modernization
TOTAL

20% of incremental VAT collection*


6%
4%
6%
4%
20%

*For illustration purposes only

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Sector

2006 Physical Units*

Public Elementary and Secondary Education


Health Insurance Premiums
Environmental Conservation
Agricultural Modernization

521 single-story bldgs w/ 5 classrooms


3.1M indigents to be newly covered
9,190 hectares for reforestation
1,012 kms of farm-to-market roads

*Funds will be available to the LGU after three years in accordance with the Local Government Code
An additional P15 million was earmarked to Public Information and Education program that will explain
clearly to businesses the administrative requirements under the VAT.
Also, starting 2006, 30% of the incremental VAT collection for the year will be used for capital
expenditures. This amount will be increased by 5% yearly until it reaches 50% in 2010.

Portion of incremental VAT Collection that


will go to investments in social services
and governement capital expenditures

2006

2007

2008

2009

2010

30%

35%

40%

45%

50%

What other measures mitigate the impact of RA 9337?

reduction of excise tax on gasoline, diesel, kerosene and bunker fuel


removal of franchise tax on domestic airlines and common carriers tax on domestic shipping
increase in presumptive input VAT of agro-processors from 1.5% to 4%
increase the VAT marginal threshold from P550,000 to P1.5 million per year; rental threshold from
P8,000/mo to P10,000/mo; real property threshold from P1 million to P2.5 million

Who will bear the heavier burden of VAT?


Since VAT is a consumption tax, its burden is heavier on those who consume more VATable goods and
services.
Most of the goods consumed by lower income families are VAT exempt.
Based on the spending profiles of Filipino families across income classes, those families spending not
more than P60,000 annually spend only 0.2% of their expenditures on taxes (VAT, excise and other
taxes). This is largely because of their purchases of VAT-exempt goods (such as foodstuffs consumed
at home, which constitute more than 60% of their purchases).
On the other extreme, those families spending upwards of P250,000 annually spend at least 4.10% of
their expenditures on taxes, largely because they consume more VATable goods and services.
Will consumers bear the whole burden of RA 9337?
RA 9337 introduces a burden-sharing scheme among the different sectors of society to address the
countrys financial problems.
Corporate income tax was increased to 35% until end of 2008, then it will be reduced to 30%.
Gross receipts tax was increased from 5% to 7% on royalties, rentals of property, real or personal,
profits from exchange, profits from exchange and all other items treated as gross income, of banks and
non-bank financial intermediaries
Income tax exemption of PAGCOR was removed
What is the government doing to address corruption and tax evasion?
Operation: RATE (Run After Tax Evaders) was launched to prosecute tax evaders, while
Operation: RATS (Run After the Smugglers) was launched to prosecute smugglers. RIPS (Revenue
Integrity Protection Service) was also launched to prosecute corrupt revenue officers and employees.

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It is also important that citizens help ensure that the VAT they paid will go to the government. One way of
doing this is by asking for official receipts every time payment is made for VATable goods and services.
Cant we just improve tax collection efficiency instead of imposing new taxes?
The Department of Finance is introducing a more efficient tax collection system. But this is not an easy
task, including the implementation of the solution to the problem. For example, due process requirements
in our Constitution demand a careful investigation, prosecution and removal of corrupt government
officials and employees. Now, we need to immediately address the fiscal problem of the country,
especially the countrys debt. We expect that the RA 9337 will address this most immediate need of the
country.
Who can consumers and taxpayers call for questions about price increases due to VAT or general
queries on RA 9337?
DOE Consumer Welfare and Promotions Office Hotline No. 840-2267. Complaints should be directed to
retail marketing Division, Oil Industry Management Bureau. For LPG, call 840-2130. For Liquid Fuels,
call 840-5669.
DTI To report any abnormal or drastic increase in prices of goods attributed to VAT, call 751-3330.
BIR For queries on VAT and other BIR-related concerns, call 981-8888.
You may also visit www.vatreform.gov.ph for more information on RA 9337.
DA For questions on VAT and agricultural products, call 920-9178, 920-2216, 371-2050.