VAT expansion and hike, implications

Below are some facts about the new VAT law (RA 9337).
My comments indicated by ==>.

A. VAT expansion

A1. The following goods and services are VAT zero-rated:

(1) Transport of passenger or cargo by air or sea to a foreign country
(2) Services rendered to aircraft and vessels engaged in international transport
(3) Sale of goods supplies and fuel to aircraft and vessels engaged in international transport

==> Owners of local airlines and shipping lines playing international routes were successful in lobbying (if not bribing) the "right authorities" because they were VAT zero-rated, while other less-influential sectors are VAT 12%-rated.

A2. Other VAT-exempt commodities:

(1) agricultural and marine products in their original state such as vegetables, meat, fish, fruits, eggs and rice. These goods remain exempt from VAT even if they had undergone simple processes of preparation or preservation for the market (such as freezing, drying);
(2) educational services rendered by both public and private educational institutions;
(3) books, newspapers and magazines;
(4) lease of residential houses not exceeding P10,000 monthly;
(5) sale of low-cost house and lot not exceeding P2.5 million;
(6) sales of persons and establishments earning not more than P1.5 million annually, which could include sari-sari stores, carinderias and street vendors.

==> These somehow will spare the poor from VAT coverage and hike. But these will also encourage some persons and enterprises to remain small (#6 above) since the moment they become big, they'll be slapped with VAT. The same reason why many enterprises in informal economy remain there, so they can escape the government's (national and local units) multiple taxes, fees, permits and other regulations.

A3. The following goods and services are now subject to VAT (were previously exempted):

(1) Coal, Natural Gas and other indigenous fuels,
(2) Petroleum products and their raw materials,
(3) Power,
(4) Electric cooperatives,
(5) Domestic transport of passengers by air and sea,
(6) Medical services,
(7) Legal services,
(8) Cotton and cotton seeds; non-food agricultural products,
(9) Works of art, literary works, musical composition.

==> You or a member of your family gets sick, that will already drain a portion of your income and/or savings. Now government wants to further drain your savings. A consultation with a physician that currently costs say, P300/visit, will soon become P336. Your drugs and medicines will also become more expensive, courtesy of VAT coverage and hike.

==> Or your previous journey of twice a year visit to your folks in the Visayas and Mindanao may soon be cut to only once a year as domestic air fare and boat fare will be hiked by VAT. This is on top of hike in domestic airport terminal fee from P100 to P200 per person.

B. VAT Hike

The President increased the VAT rate to 12% starting this year since (a) VAT collection-to-GDP ratio for 2005 exceeded 2.8% or (b) the National Government deficit-to-GDP ratio for 2005 exceeded 1.5%

B1. For 2004, VAT-to-GDP ratio was 2.9%; National Government (NG) deficit-to-GDP ratio was 3.9%.

B2. For 2005, NG deficit = P180 billion; nominal GDP around P5,3 billion (low-end target)deficit/GDP ratio = 3.4%

==> This was more than double the 1.5% ceiling, so VAT was hiked by the President to 12%; it became effective February 1, 2006.

C. Total new or additional collections from VAT, 2006 = P82.6 billion

C1. From VAT expansion (reduction of exemptions) = P47.5 billion
C2. From VAT hike, 10% to 12% = P35.1 billion

==> That's P82.6 billion transfer from private citizens' pockets to politicians and the bureaucracy's pockets. But private citizens' actual cash outlay will be bigger than P82.6 billion if the costs of processing VAT payments are included -- hiring accountants and/or auditors, tax lawyers, runners/payers to BIR, bribes to BIR people if the latter will harrass taxpayers like disallowing certain tax and production inputs.