Sunday, September 04, 2005

Should we keep exempting oil products from EVAT?

I've written about this before, here and here. I'll write about it again: there is no good reason to keep on exempting oil products from EVAT.

Even some proponents of EVAT have backtracked on imposing EVAT on oil products. The reason? Rising prices of oil.

Now why was the implementation of VAT on oil products advocated in the first place? (Suppose we assume away the higher oil prices, for the sake of analysis). I can think of two reasons:

1. EVAT on oil products will raise revenue;
2. Exemptions on oil products represent a "distortion" which should be corrected by a more even application value added taxes on goods. The distortion arises from artificial cheapening of oil products, which provokes excess consumption and indirectly penalizes other production sectors who must pay VAT.

Okay now: the VAT flip-floppers are implicitly arguing that higher price of oil vitiates these two arguments. What could possibly be the reason? Let's deal with the common ones articulated in media sound bites:

1. Imposition of EVAT would drive inflation rates up to unacceptable levels.

Really now? Last year's increase in oil prices (where Dubai crude shot up by 44%), was estimated by a BSP study to have accounted for only 0.6 percentage point increase in last year's inflation rate of 8.6%.

What about EVAT? The maximum additional increase of oil prices should be 10%; in fact they should less than that, given that EVAT is imposed on value added only, and that other taxes on oil products will be scrapped. MBC research indicates regular gasoline to go up by 6.6%. This is comparable to the cost increases imposed by soaring international crude oil prices.

Another BSP document tallies estimates by forecasters on the impact of EVAT on inflation in 2005. Their estimates average at around 0.8% percentage point increase. As I have argued repeatedly, impact of either EVAT or oil price increases on overall inflation will be mild this year, to moderate next year. But crisis rhetoric drowns out sober analysis anytime.

2. Our people are already paying too much for oil prices.

This ignores the very reasons why VAT imposition was justified in the first place. The direct consequence of removing VAT exemption is higher government spending or lower government borrowing. Presumably it was worthwhile to impose VAT on oil products to get these benefits. It is still worthwhile to get these benefits despite higher oil prices. What is it in higher oil prices that changes the relative worth of these various benefits and costs? I cannot for the life of me think of the reason.

Go ask the VAT flip-floppers.

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