World Bank estimates show that leakages from the value-added tax (VAT) exemptions for seniors could reach close to P10 billion this year, which is why the Department of Finance (DOF) is proposing expanding the VAT base instead and channeling the revenues collected from them to directly target indigent elderly citizens who need financial aid the most.
Finance Undersecretary Karl Kendrick Chua, the DOF’s chief economist, said the Department’s plan is to transform some of the VAT exemptions into a system that would provide social protection to those who deserve them, which are indigent seniors and other vulnerable sectors.
The proposed lifting of the VAT exemptions excludes raw food and other essentials, such as education and health care.
“We are proposing to really target the benefits only to the poor and the vulnerable, so that we avoid the leakages which is very rampant in our estimate. The World Bank estimated [close to] P10 billion in leakage in the senior citizen [VAT] discounts,” said Chua during a recent technical working group meeting in the Senate on the DOF’s proposed tax reform plan.
Using data from the 2012 Family Income and Expenditure Survey (FIES), the World Bank estimates the leakage from the VAT exemptions granted to senior citizens at P4.9 billion to P7.1 billion in 2012.
“This includes non-seniors who benefit from the seniors’ VAT exemption,” Chua said.
“The estimated nominal growth of consumption is around 35 percent between 2012 and 2016, thus the 2016 estimated leakage is around P6.6 billion to P9.6 billion,” added Chua, who was a former senior economist of the World Bank for the Philippines.
‘”So, what we are proposing is to just transform it into a system where the target [subsidies] only go to those who really deserve to be protected,” he said.
A significant portion of the revenues to be collected under Package One of the DOF tax reform program will go to subsidies and other forms of social protection for vulnerable sectors.
“To mitigate the impact of the tax increases on the poor and low income households, earmarking for highly targeted subsidies is proposed to fully protect the poorest 50% of households and partially protect the working class,” according to the DOF-proposed tax bill submitted to the Congress last month.
For instance, a quarter of the incremental revenues to be generated from the excise tax increase on petroleum products will be used to fund highly targeted subsidies for vulnerable sectors, while the remaining 75 percent will go to other social and infrastructure expenditures.
Earlier, DOF spokesperson Paola Alvarez stressed that the 20 percent discount enjoyed by all senior citizens would remain and that some of the VAT exemptions would be replaced instead by better alternatives to shield poor and low-income seniors from the impact of the tax reform plan.
These better alternatives are in the form of social protection programs that include expanded pensions and conditional cash transfers (CCT), she said.
“A much better option that would effectively provide aid to our indigent seniors are targeted cash transfers, expanded pensions, free rice and other subsidies that the government has been giving them under the Pantawid ng Pamilyang Pilipino Program or 4Ps,” Alvarez said.
She said the VAT exemptions that the DOF is planning to lift are those granted to seniors when dining in restaurants because such discounts are usually enjoyed by affluent senior citizens who can well afford anyway to do away with this privilege.
“To illustrate, a senior citizen who can afford to eat at a fancy restaurant that charges him with a bill of 1,000 pesos, the exemption from VAT he will get is 120 pesos,” she said. “Now, this amount of 120 pesos is something he doesn’t really need because he can afford to spend 1,000 pesos for a meal.”
“Now if we compare this to a senior citizen who has to make ends meet for him to be able to afford his maintenance medicine, the 120 pesos saved for VAT would go a long way. This is how we want to distribute a little wealth through taxation,” she stressed.