Go signal for expanded VAT

The Supreme Court of the Philippines has finally resolved all legal challenges to the Expanded Value Added Tax law (EVAT). The Executive can now start implementing it.

Wikipedia has an informative (but badly written) article on VAT here. Think of a product going through stages of production, from raw material to final pick-up by the consumer. At each stage value is added to the product. Government slaps an VAT rate on all sales (whether business-to-business or business-to-consumer). The business is able to subtract the VAT it has paid for its inputs (input VAT), from its output VAT, so that it only pays the net VAT, i.e. effectively the tax is levied only on value-added.

In the Philippines there was a lengthy debate a few years back about shifting from sales tax to the VAT. That hubbub has died down, as everybody realized that the VAT - which is the norm in EU and many other countries - is superior to the sales tax from the administrative viewpoint. (An excellent discussion of VAT is found here.) Since a tax is slapped at multiple stages of production, the scope for tax evasion shrinks (whereas under the sales tax, if a retailer evades payment, the entire product goes untaxed.) However unlike the simple turnover tax, there is no "cascading effect", i.e. tax upon a tax.

The debate is actually about the VAT rates. In the Philippines the standard rate was 10%, with some key sectors being "zero-rated" (i.e. zero output tax, but able to claim input VAT.) The new law enacts a new standard rate of 12% (under certain conditions) effective next year, and removes zero rating of key sectors such as power and fuel.

Of course, there will be some short-term repercussions on prices (due to the increase in tax rate, and consequent increases in energy prices). Well, what do you expect, silly, if government collects 70 billion additional revenues from VAT, then of course households need to fork over that 70 billion in the form of higher prices. Duh. Moreover, VAT rates around the world (from the Wikipedia entry) are worse: 12.5% for India and New Zealand, 15% for Mexico, 17% for China, 18% for Russia and Turkey, to a whopping 24.5% for Iceland. So there is no clear-cut prognosis of economic disaster from raising VAT rates.

In fact, as the expanded VAT is the only significant revenue measure that has been enacted while the country's public debt balloons (now at 70% of GDP), economic disaster - on the scale of financial debacles of our neighbors in 1997, and Argentina recently - would have been a sure thing had the High Court voided the law.

As usual, we've escaped by the skin of our teeth.