EXPLAINER: Proposed VAT cut—who stands to benefit?

A new proposal in the Senate seeks to lower the value-added tax (VAT) as rising fuel costs continue to push up prices of basic goods and services.

On April 16, Senator Bam Aquino filed Senate Bill No. 2047, which proposes reducing VAT from 12% to 10%, in a bid to ease the burden on consumers, particularly the middle class.

Aquino said middle-income households are increasingly feeling the impact of inflation but are not directly receiving government assistance.

Who belongs to the middle class?

According to a GMA News Feed explainer, middle-income families are those earning between P27,746 and P166,476 per month—about two to six times higher than the P13,873 poverty threshold, citing data from the Philippine Institute for Development Studies (PIDS).

PIDS classifies the sector into three groups:

• Lower middle class (P27,746–P55,492);
• Middle middle class (P55,492–P97,111); and
• Higher middle class (P97,111–P166,476).

Global tax policy expert Mon Abrea said the middle class can also be considered the working class, as most are salaried employees whose taxes are automatically withheld.

“The middle class, most of us, the hardworking citizens, we have no choice because our taxes are withheld at source,” Abrea said, noting that 80% to 82% of Bureau of Internal Revenue (BIR) personal income tax collections come from withholding taxes on compensation.

What is VAT?

VAT, or value-added tax, is a consumption tax imposed on goods and services. It applies to transactions such as purchasing, renting, exchanging, and importing.

At present, the Philippines imposes a uniform VAT rate of 12%.

Under the National Internal Revenue Code, VAT covers most goods and services, including groceries, imported products, vehicles, real estate, and digital services such as streaming platforms and online shopping.

Some items are exempt, including educational materials, unprocessed agricultural and marine products, medical and educational services, and select transactions involving senior citizens and persons with disabilities.

The tax is ultimately paid by consumers, collected by businesses, and remitted to the government.

Efficiency concerns

The Bureau of Internal Revenue (BIR) reported that in 2024, VAT accounted for 22.58% of total tax collections, or more than P643 billion.

A 2022 study by the Congressional Policy and Budget Research Department of the House of Representatives also showed the Philippines has the highest VAT rate in Southeast Asia, ahead of Indonesia (11%), Cambodia (10%), and Vietnam (8%).

However, Abrea said collection efficiency remains a concern due to leakages from tax evasion, smuggling, and administrative inefficiencies.

“While we are imposing a 12% rate, the government is only collecting half of that. The rest goes to leakages—tax evasion, smuggling, and inefficiency in tax administration,” he said.

Abrea estimated that reducing VAT could result in revenue losses of up to P339 billion, raising concerns over government funding.

Still, proponents say the measure could ease prices of goods and services, translating to about a 2% reduction in costs.

For example, a P100 item currently costs P112 with VAT. A reduction to 10% would bring the price down to P110.

Despite potential relief, Abrea warned that VAT reductions may disproportionately benefit higher-income households.

“Any reduction in VAT will benefit higher-income households more because it is a consumption tax—the more you spend, the more you benefit,” he said.

He added that linking VAT cuts solely to middle-class relief may be misleading, as wealthier consumers typically spend more and gain greater savings.

Alternative proposals

Instead, Abrea said policymakers should focus on increasing take-home pay through higher income tax exemptions and lower withholding taxes.

He proposed raising income tax exemptions from P250,000 to as high as P1 million over time, alongside immediate cuts in withholding taxes.

He also suggested short-term relief through interest-free loans from government institutions such as the Government Service Insurance System (GSIS), Social Security System (SSS), and the Home Development Mutual Fund or Pag-IBIG Fund. This is achieved by allowing borrowers to access cash without additional interest charges and helping ease financial pressure during the crisis.

“I don’t think the middle class is asking for money from the government. They need relief from the burden being passed on to them,” he said.

If VAT reduction is pursued, Abrea said the government must strengthen safeguards against abuse of tax exemptions.

He called for rationalizing the long list of VAT exemptions, which he said are vulnerable to abuse and weak monitoring.

He also pushed for the full implementation of electronic invoicing systems to reduce smuggling, underreporting, and unrecorded transactions, particularly in e-commerce and online trade.—MCG, GMA News