I.

Introduction The value-added tax (VAT) has been a topic of public interest since the government had raised the rate from 10 to 12% to aid for the growing fiscal deficit. It is believed that VAT is more administratively feasible than other taxes since it is collected after every sale by establishments which act as agents of the government so it is expected that government revenue would increase by levying it. However, the levy of VAT on services, sales of goods and importation had painstakingly burdened the consumers of these goods. Businesses pass the taxes to the consumers by increasing the price of goods to cover for VAT that is remitted to the government. Taxes were imposed so the government would have funds for administration and the promotion of social welfare so this entails that the benefits of the imposition of VAT must exceed the cost of administering it and the cost of taxes to the people. VAT as an indirect tax is generally assumed to be shifted from direct taxpayers, which are the business, sectors to other people which are usually the consumers. For import VAT, it is not always certain whether the tax burden is shifted from direct taxpayers to others. For example, final consumers, who import consumption goods, may be liable to directly pay import tax or VAT, meaning it is they who bear the tax burden. More generally, the incidence of taxes depends on various economic factors, including demand and supply elasticity and the competitive conditions of the markets. However, indirect taxes are actually shifted in many cases and final consumers often bear the burden. Thus, there is a need to examine the effects of VAT on the different sectors where it is imposed.

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II.

Objective of the study The purpose of this study is to: a. Cite the common issues regarding the imposition of Value-added Tax on the importation of medicine; b. Determine the effects of VAT on the Importation of Medicine; and c. Share the proponents view on VAT on importations.

III.

Scope and Limitations This study defines what value-added tax is and what goods are subjected to this tax. This focuses only to the effects of value-added tax on importation to the prices of medicines in Philippines and to determine whether government policies that address problems on high prices of medicine in the Philippines are making medicines more accessible to the community.

IV.

Definition of Value-added Tax (VAT) VAT is a form of sales tax. It is collected on the sales of goods or the rendering of services in the ordinary course of trade and on importations. Since it is and indirect tax, the cost of this tax can be forwarded by the seller to the buyer. The current rate for VAT in the Philippines is 12%. On importation the 12% rate is applied on the total value assessed by the Bureau of Customs in determining tariffs and duties, or the total landed cost which includes costs incurred prior to the release of the goods from customs custody.

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A. General Effects of VAT on Importation The effects of price increase of goods, due to VAT, are more visible on the importation of goods where additional duties are also paid aside from the 12% VAT on the landed cost. Philippines levy three custom duties on the importations of goods and services: the custom duty or tariff, the ad valorem tax, and the 12% value-added tax. The rationale behind the imposition of duties and tariffs on importations is to protect the local industry by having the businesses increase prices on imported goods to cover for duties so that local businesses could sustain a healthy competition by offering locally produced goods on lower prices. However, since the Philippine economy largely imports to meet the strong demand for raw materials, intermediate goods, industrial upgrades and infrastructure related capital goods (Philippine Imports, 2010), the imposition of VAT on the imported raw materials of local industries also increases the costs of products. This further subjects the consumers to higher prices even though input VAT is creditable. VAT will be less advantageous for Philippines because the import tariff increases the consumption tax. A country using a broad-based tariff deploys excises on selected domestic goods, through VAT. Also, trade relations with other were affected by increases on VAT on importations. Since VAT credits are not allowed when there are no VAT receipts to be presented, losses may also be incurred when receipts got lost.

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a. Inclusion of costs incurred prior to release from customs on the basis of VAT Another issue to be addressed on import VAT is the inclusion of costs for the basis of tax prior to release of goods from customs. Although it increases revenue of the government such costs might discourage investors. Although VAT can be passed on to customers the high mark-up on goods to cover VAT may strain the businesses customers. Higher VAT means higher domestic prices of imported goods and less affordability for the consumers. This deprives some citizens to acquire quality products from abroad because of the high prices. b. Using VAT to aid for deficits due to tax-collection inefficiency Despite of strong oppositions from the public increase of VAT rate to 12% has been approved by the government. This may be attributed to the fact that the second largest source of revenues of the government come from VAT which follows Income Tax. Because of inefficiencies in collection of other tax the government had covered deficits through increasing the burdens of consumers through VAT. c. VAT as a regressive tax There is also the issue whether VAT is a regressive tax, meaning the poor pay more, as a percentage of their income, than the rich. Defenders argue that excising taxation through income is an arbitrary standard, and that the value-added tax is in fact a proportional tax in that people with higher income pay more at the same rate that they consume more. However the 12%VAT every citizen pays on the goods he purchase may be more onerous to a poor man than a citizen that earns excess income for a year.
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To analyze the effects of tax on medicines the succeeding section provides a background on the health situation and the accessibility of medicine in the Philippines.

B. Effects of VAT on the Importation of Medicine The more prominent effect of VAT is on the importation of medicines. Although the government provide exemptions on VAT, medicines are not one of them. The government impose taxes and duties on essential medicines thereby increasing the burden of citizens who are poor and sick. Thus, sick people has to pay the highly marked-up selling price on medicines plus the additional 12% VAT on its purchases. Only the senior citizens were given discounts on these medicines. So the government earns when people get sick because of VAT imposed on medicines. This is contrary to the avowed goal of cheaper medicine for the poor by the government. Furthermore, drug manufacturing in the Philippines is also primarily dependent on imported raw materials and chemicals. About 95% of the materials compounded in the country are imported. Most of the pharmaceutical companies in the country do not produce active drug substances and instead, import the raw materials from chemical producers abroad for local manufacture of the finished products. These imported raw materials are also subjected with 3% to 5% import duties. Medical equipment such as magnetic resonance imaging (MRI), chemotherapy and CT-scan are all imported and are subject to the same import duties and VAT. These high cost of importing medicines and medical equipment

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makes cost of specialized medical examination and treatments being far beyond the reach of the ordinary Filipino. The absence of a fine chemical industry has prevented the country from manufacturing certain medicines and thus made the country reliable on imports for such medicines. The only items available for pharmaceutical manufacturing from local sources are refined sugar, starch, glycerine and alcohol; and materials for packaging such as glass bottles, plastics, caps, droppers, and paper labels. Because of this, additional costs were incurred in importing the products and thus the basis of tax becomes higher. C. Accessibility of Medicines According to a survey on drug prices of public and private sectors by the World Health Organization (June 2002), compared with international index prices for generics 15 innovators brand name versions of generics were found to be priced almost 16 times the international index, for the profit sector. The cheapest and most expensive items were found to be 3.3 times and 72.4 times the international index price respectively. In the Public Sector, when drug prices were compared with the international index prices for generics, 5 innovator brand name versions of generics were found to be priced 18.2 times the international index. Fifty percent of these innovator brand drugs surveyed were in the range of about 10 times to 19.5 times this index. The cheapest and most expensive items were found to be 7.1 times and 21.4 times the international price respectively. All but one of the

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drug surveyed was priced lower than the reference price. In general, innovator brands are more expensive than their generic counterparts. Furthermore according to a more recent article written for the United Nations Population Fund (UNFPA) in 2006, the medicines in Philippines are sold 40-70% higher than its neighbouring Asian countries and is 18 times more than those of the same variety in Canada. This figure is overwhelming since it would mean that mark-ups on medicines is more than a tenfold. The high prices of essential drugs is partly attributable to the VAT imposed on the imports of raw materials of local pharmaceutical companies and the licensing fees paid by local pharmaceuticals for patent of medicines originally manufactured abroad and reproduced by the local industry, and for distribution licenses of imported goods. This is to say that if the government removed the 12% VAT applied to imported medicines or raw materials of medicines, the price of 10 cotrimoxazole 480mg tablets (generic) purchased in the private sector could fall from PhP14.90 to PhP13.30. The PhP1.6 savings are significant where millions of people live in poverty. The 5% import tax and 12% VAT make the medicines 17% more expensive. For instance, an imported medicine with a landed price of P20 per tablet, after the import tax and VAT have been applied, will immediately have a pre-retail price of PhP23.52 per tablet (Oplas,2011). Government is responsible for PhP3.52 price increase via taxes alone. If the government can not abolish import taxes on medicines and vaccines, they should at least cut off taxes to make them more affordable to the poor.

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Another problem on VAT on importation is the imposition of this tax on donations to Philippines. Unless the VAT Law is amended to allow the tax-free treatment of importations/donations by government agencies and NGOs, they shall remain liable to pay the VAT. The department may opt to avail of the deferred payment scheme under Department of Finance (DOF) Department Order No. 31-77 which allows government agencies to withdraw their importations from Custom's custody without the prepayment of taxes and duties provided that automatic appropriation of taxes and duties is requested with the DBM and included in the ensuing year's budget. This method discriminates the policy against the release of imported goods from customs custody without payment of the said customs duties.

D. Government Action The Philippine Government, through the Cheaper Medicines Law or RA 9502, tried to lessen prices of medicines through drug price controls and passing resolutions on Intellectual Property Rights laws like drug patents, which the government issued in the first place, by allowing local industries to try to reproduce drugs imported and allowing distributions of such upon the expiration of patents of the innovator brand. This law also allowed parallel importation. Senate Bill 2263 was also approved on January 2007 for lowering costs of medicines through importing patented medicines of branded drugs from India to provide lower-priced medicines for public hospitals and pharmacies. The purpose of this parallel importation programme is to influence multinational pharmaceutical companies to
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reduce the cost of the drugs sold in the Philippines. This project was strongly opposed by a coalition of pharmaceutical companies which filed a case against the government in 2000. Despite this opposition, the Philippine International Trading Corporation (PITC) succeeded in imported low-cost drugs from India to an amount of PhP 30 million between 2002 and 2004. However price controls of medicines and parallel importation have not resolved the problems on accessibility of branded drugs and medical equipment. Instead, consumers turn to generic alternatives which are much cheaper the branded medicines, and still continue to shoulder high health care or treatment costs due to VAT on importation of equipment. Notwithstanding these important steps, the cost of drugs in the Philippines remains one of the highest in Asia. Therefore, more measures need to be taken to ensure the realization of the human rights to health right to life and for and social justice. V. Analysis and Conclusion The imposition of VAT on goods, services and importations provide the government with ample income to be used for public administration and for addressing problems on economic deficits. However when such tax is imposed on the primary needs of the community, it becomes burdensome to the citizens. Such is the case in the imposition of VAT on the importation of medicine which cause prices of medicines in the Philippines to be significantly higher than the prices of the same medicines in other countries. By wanting to raise revenue for the social welfare of the people the government had inconvenienced the poor and sick and had violated its own goal of cheaper medicines for the poor. The duties, which include tariffs, customs

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duties and value-added tax, on medicines and medical equipment, are highly regressive and encumber the society. In attempting to improve the affordability of treatments, the government tend to focus interventions on the manufacturers selling price, mark-ups in the supply chain and other causes of high prices. However, they should lead as an example and remove all taxes, duties and other government-imposed charges on medicines, then monitor the impact to ensure patients benefit from lower prices. In this way thousands of lives can be saved in the Philippines as medicines for lethal illnesses are made more affordable.

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