As a means to improve the government’s fiscal position, eight tax priority measures were proposed which includes the restructuring of the current Value Added Tax (VAT). VAT is an indirect tax levied by the government on the value added to a good or service which may be passed on to buyers, transferees or lessees. The VAT system in the Philippines was introduced and implemented in 1988 under Executive Order (E.O.) No. 273 and covered a limited number of goods and services.

On January 27, 2005, the Lower House approved House Bill 3555 also known as VAT Restructuring Act. This calls for the increase of VAT from 10 to 12 percent. With these developments, the pressing concern is how this VAT increase will affect the life of Juan dela Cruz.

Computations made by the National Statistical Coordination Board (NSCB) using the Input-Output Model indicate that an additional 2 percent increase on VAT will increase the cost of household expenditure by 1.4 percent; prices of commodities by an average of 1.8 percent; and total cost of production by 1.5 percent. Should HB 3555 be approved, the following effects are expected:

1. On household consumption expenditure, the highest increment would be on wholesale and retail trade with 0.3 percent. Other commodities that will experience the highest increase in prices are: restaurants and cafes (0.06 percent), banking (0.04 percent), cigarette manufacturing (0.04 percent) and manufacture of ready-made clothing (0.04 percent).

2. In terms of change in prices, the biggest increases are expected to come from cement with a 2.6 percent increment followed by artificial leather and plastic furniture and footwear both posting a 2.5 percent increase. The said commodities are expected to absorb most of the VAT increase since majority of its inputs are subject to VAT.

3. Meanwhile, the hardest hit when it comes to cost of production would be wholesale & retail trade (0.23 percent) construction (0.11%), petroleum refineries (0.05%) and manufacture of ready-made clothing (0.05%).

Should the lifting of the VAT exemptions and zero-rate privileges to the petroleum products, independent power producers (IPPs) and legal and medical services by professionals materialize, prices will increase by 2.3 percent on the average, the cost of production will increase by 2.1 percent and the household consumption expenditure would increase by 1.9 percent above the “normal” inflation rate.

For inquiries, please contact:

Ms. Vivian R. Ilarina, Ms. Marianne P. Abanilla or Ms. Eileen P. Capilit
Tel. No. (632) 896-5372
E-mail addresses vr.ilarina@nscb.gov.ph, mp.abanilla@nscb.gov.ph and ep.capilit@nscb.gov.ph