Originally published in the Manila Bulletin on 06 Feb 2005.
Authored by Alex S. Timbol, Maccess Corporation
Consumers' Post
Ethel Timbol
A VAT full of problems
THE VAT. Despite protests from consumers, economists, and some legislators, the Value-Added Tax increase bill has speedily passed through the House, and is now on its way to the Senate.
If it does not encounter significant opposition in the Senate, it will become law and consumers can expect an additional 2% hike for most items.
The administration says that the VAT increase is necessary to balance the budget. But will it?
"An increase in Tax rate works only if there is an efficient tax administration."
An increase in Tax rate works only if there is an efficient tax administration. Otherwise, the increase merely penalizes those who already pay the proper taxes, and encourages further tax evasion.
How exactly do tax cheats get away with it? In the Philippines, tax evasion has become a game with many businesses finding ways of avoiding having to issue the document that shows that they pay their taxes: The Official Receipt.
Oftentimes we are given an "Order Slip," or a "Delivery Receipt," or a "Sales Invoice," or a "Job Order," any of which, they claim, is as good as a receipt, but under the law is NOT!
Bars and restaurants are the biggest offenders in the "Sales Invoice" and "Order Slip" racket!
Most hope their guests are either is such a rush or too drunk to notice that these are not Official Receipts. Some bars even physically threaten guests who demand Official Receipts!
Other bars issue receipts so infrequently that they "qualify" for an exemption that allows establishments with sales below P200,000/year to opt for non-VAT registration.
Non-VAT registration means receipts are subject to a flat 3% turnover tax, without input tax credits.
It also means the receipt cannot be expensed as Input VAT, conveniently eliminating the main reason why the customer would want the receipt in the first place.
This would be fine if we're talking about neighborhood eateries, but we've seen non-VAT receipts from large bars and fancy restaurants!
That makes me wonder just what exactly do they serve in these places that tax inspectors believe that these multi-million peso establishments have sales of less than P200,000/year!
"Delivery Receipts" are the favorite of computer shops, particularly discount resellers. Since price competition is tight, these companies advertise prices as "VAT-exclusive," a clear violation of Tax law.
A receipt from them "costs" 10% over the advertised price!
It makes one wonder how these imported products get to our shores, since the VAT system is designed so that the importer pays most of the VAT.
The retailer, whose markup (or Value Added) is typically 5%, is liable only for a tenth of that, or half a percent of the item's price, and therefore shouldn't be too concerned about issuing official receipts since most of the VAT would have been paid by his suppliers.
Now, if the importer did not pay the proper taxes... eh, anong tawag duon?
"Job Orders," and "Service Orders" are the ploy of choice for repair shops and service providers, such as laundromats. Oftentimes, they just stamp Paid on the Job order without ever issuing the Official Receipt.
The only time an establishment should not issue an OR to the customer is when the purchase is paid by credit card, in which case it should issue a "Credit Invoice," instead.
The "Official Receipt" is issued to the card company instead. Good Luck getting banks to demand a receipt because it means the merchant will just move to another servicing bank.
The consumer, in turn, is supposed to get an Official Receipt from the card issuer.
In these days of electronic fund transfers, how will the consumer get his OR? If you've paid your credit card bill, your bank should send you an Official Receipt, not just a payment slip or deposit slip.
Remember, unless it says "Official Receipt," it is not a receipt and that establishment is one reason why the government is raising taxes.
Another problem is fake and unreported Official Receipts or Cash Invoices.
These are particularly bad for the tax collection effort, because ORs and Invoices are used as proof that the supplier has paid his proper taxes--creating a supposedly airtight chain ending with the consumer.
Have you ever bought pre-paid cards?
Today, you can buy pre-paid cards for many things, not just for cell phones, there are Landline cards, Internet Cards, Donation Cards, Gift Cards, and so on. Have you ever been able to get a receipt for any of these cards?
Many of the shops which sell these cards don't issue receipts, and our inquiries reveal that the distributors don't issue receipts either, because the suppliers of these cards don't issue them either. Yet many of these prepaid card issuers are claiming zero tax liabilities because of huge input tax credits with minimal reported output tax sales!
Perhaps the BIR should require that the pre-paid card itself be the official receipt!
That's both the elegance and liability of a VAT system.
The elegance is that if the supplier or importer or producer doesn't issue receipts, the distributor will still issue the receipt and pay the tax, or the retailer will issue the receipt and pay the tax.
The liability is that if there is collusion from the supplier or importer to the distributor to the retailer not to issue receipts, no tax will be collected at all!
Most of the 121 countries with a VAT system rely heavily on technology to validate input and output VAT claims.
We've said previously in this column that the government should look to free open-source software, not only because of potential savings running into the billions of pesos, but also because it will speed up the implementation of critical technology projects, such as a tax verification system.
Without an integrated system, the BIR has no way of verifying if VAT inputs were actually paid. Even the VAT reporting system is faulty, since the BIR does not require filers to provide the VAT registration of Input Tax claims.
Perhaps the BIR should start here: Requiring Input Tax claims to be documented with VAT registration numbers. This way, it can verify if suppliers are indeed declaring their sales.
Hopefully, our more responsible legislators and government officials will see that the real problem is inefficient tax collections, too many exemptions, and defective rules and procedures.
The Department of Finance estimates that tax leakages are almost as high as the actual tax collected. This means that the government could collect almost twice as much money if it can plug these leakages. This is certainly more than a 2% increase in the VAT rate may provide.
Perhaps our legislators should also review the exemptions under the VAT law. Some of these exemptions have no basis for being there.
It is interesting to watch these congressional debates: there is bound to be quite a few legislators lobbying that such and such industry, whose importance to the economy is often overstated, to lobby for "exemptions."
It almost like playing follow the money, where one wonders what the connection is between the legislator and the industry he is championing.
Please, Messrs. legislators, enough with the exemptions, we pay our taxes, and let?s make sure everyone else does, no matter how self-important they imagine themselves to be to our struggling economy!
Properly implemented, the VAT is no more onerous a tax burden than a turnover tax.
In many ways, a VAT system is superior to a turnover tax because it limits the total tax in the supply chain to the VAT rate, which in our case is 10%, and encourages the growth of small businesses and subcontractors. So why have exemptions?
All these exemptions make for a very complicated tax system.
More importantly, it allows discretionary judgements.
When does a business fall under an exempted category and when does it not? Is it up to the discretion of the taxman? Hmmm... I wonder how much it would take for a business to move from one category to another.
Also, all this complexity with exemptions, and now, multi-tiered tax rates threaten to further complicate the tax system. Complex system lead to lower compliance. Figure that out. The more convoluted the tax system becomes with all these exemptions, multi-tier rates, and what-not the more difficult and costly it is to collect the proper taxes.
Remove the exemptions, fix up the tax administration, have the BIR review its implementing guidelines, and try to collect most of that tax leakage before burdening us with a tax increase. We voted for you, Messrs. Legislators, and we?ll remember how you voted on these tax bills.
And to you, my fellow consumers:
Always demand a receipt when paying! I mean a real OFFICIAL RECEIPT, not a "Service Invoice," or "Order Slip," or "Job Order," or "Delivery Receipt!"
If the establishment demands an additional payment for an Official Receipt or steadfastly refuses to issue an Official Receipt, call the BIR?s call center to report the violation, making a note of the establishment?s name and VAT registration (which sometimes appears on the other documents to make them look official).
Tax evasion means HIGHER TAXES for those who do pay their taxes, ... and that usually means us!
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