San Beda College College of Arts and Sciences Department of Legal Management

ECO 28: FISCAL STUDIES

How is value-added tax different from other ASEAN-member countries? (Philippines and Thailand)

Submitted to: Prof. Ramon Benedicto N. Marcelino Submitted by: Katreena Ysabel M. Radovan 3-CLM March 2011

How is value-added tax different from other ASEAN-member countries? (Philippines and Thailand) Abstract Value Added Tax or VAT is levied on top of the cost of a product or service and generates revenue for a government. It is a special type of indirect tax in which a sum of money is levied at a particular stage in the sale of a product or service. Vat was first imposed France during 1954 that VAT system constituted a substantial share of the governments revenue in the French economy, and due to the ease of payment and ready

comprehensibility, the system was adopted by different nations across the world. The VAT being in nature of an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services.

Keywords VAT (Value Added Tax), generates revenue, levied, system, regulates

Introduction Tax as defined by law is the blood of the economy, for it regulates the financial aspect in a state. As to peoples perspective, tax is burdensome to the payers for it adds to another expense excluded from the legal tax they pay. However, no matter how onerous the system maybe to its payers, it is an advantage for the government to regulates its expenses and generates revenue as the core reasons of implementing such system. Implementation of the VAT system to different states who have adapted when it generally helped to address the various problems associated

with the conventional tax system. The value added tax system deals with these problems quite efficiently. As VAT is imposed on value addition - at every single stage - there is no incidence of cascading. In this way, the final consumers bear the burden of paying value added tax. This system involves absolute transparency at every stage of taxation, thereby making the tax system quite comprehensible and simple. This paper aims to determine and come up with an analysis of the effectiveness and efficiency of the system to the government. Output and conclusion would be a result from the comparison of the differences and similarities of the implementation of the VAT system to three ASEAN countries.

Analysis VAT is intended to be levied or charged whenever there is some value addition to raw material. The taxpayers on the other hand, will get credit for the amount of tax paid off at the stages of procurement. The value added tax system has proven to be effective in avoiding problems that normally might arise out of the double taxation of goods and services. The value added tax system is designed to address various problems associated with the conventional sales tax system. In sales tax, there is no provision for input tax credit, which means that the end consumer may pay tax on an input that has already been taxed previously. This is known as cascading and leads to increases consumer tax and price levels, which increases the rate of evasion and can be detrimental to economic growth.

The value added tax system deals with these problems quite efficiently. As VAT is imposed on value addition - at every single stage - there is no incidence of cascading. In this way, the final consumers bear the burden of paying value added tax. This system involves absolute transparency at every stage of taxation, thereby making the tax system quite comprehensible and simple. In some countries like India, the system of VAT has been designed to change the existing system of sales taxation. Value added tax is different from the conventional system of sales tax, because VAT is charged at every stage of value addition - whereas sales tax is imposed on final value of transaction only. VAT (E-VAT ) in Philippines In the Philippines, VAT system was adopted in 1988 of the sales/

turnover tax and a host of other taxes. Such advantage of VAT is that revenue is secured by being collected throughout the productions/distribution process and production decisions do not get distorted due to the tax credit provisions. In May 2005, the system was reformed to expanded VAT (E-VAT) and was implemented to provide the following: (a) the expansion of coverage of the VAT, (b) reduction in the exercise tax on certain petroleum products, and (c) increase in the corporate income tax rate. From the ten percent (10%) VAT rate it was raised to twelve percent (12%) in January 2006. This provision effectively makes the Philippine VAT an income-type VAT where producers will effectively bear a tax on their capital purchases that is equivalent to the cost of money. This will tend to distort producers decisions and discourage

more capital-intensive type of activities/sectors and technologies. While this bias might be less of a concern in a labor-surplus economy like the Philippines, it is important to remember that an income-type VAT would introduce some element of tax cascading.

The VAT coverage and the mitigating measures. Under the E-VAT law, the exemptions of certain transactions from the VAT were lifted such as sale or importation of coal and petroleum products; sale of electricity by generation, transmission and distribution companies; services rendered by doctors of medicine and by lawyers; sale of cotton and cotton seeds in their original state; sale of nonfood agricultural and marine and forest products in their original state; and sale of works of art, literary works, musical composition and similar creations. Thus, the VAT base is effectively broadened. Moreover, with this change in the previous VAT rate some that were find to be onerous were changed or removed for consideration of the tax payers considering the principle of consumer vigilance and to avoid taking advantage of probable confusion on the effect of broadened VAT coverage to justify unreasonable increases in the price of basic commodities. The reformed VAT law aims to generate additional revenue equivalent to 2.5 percent of the projected GDP for 2005 to address the current fiscal condition. Based on the estimates from the Department of Finance, the E-VAT will generate additional revenues amounting to more than P80 billion in 2006, a large part of which is expected to come from the lifting of VAT exemptions with potential revenues amounting to P39 billion. All of these projections, though, are based on a 70 percent collection efficiency.4 Thus, the

deteriorating collection effort needs to be addressed and strengthened to ensure the success of the reformed fiscal measure. Those exempted in the paying of the E-VAT are the citizens governed by the act promulgated on 2010 signed by President Arroyo, which is the Expanded Senior Citizen Act of 2010.

VAT in Thailand The VAT system was introduced in Thailand in 1992 that is to say at the same time than the Special Business Tax (SBT). In a nutshell most transactions (exchange of goods or services) that are occurring in Thailand are either subjected to VAT or to the SBT.The principle of VAT is simple, any business which having a turnover of more than 1,800,000 THB per annum, and that is not subject to the Special Business Tax, must register for VAT within 30 days of the date they reach 1,800,000 THB in sales. The primary reason for introducing a VAT is that existing indirect taxes such as Thailand's business taxhave a "cascading" effect. As an ad valorem tax levied on every transaction, the business tax accumulates along the chain of production. Thus, an initial tax rate of 10 percent can lead to an effective rate of over 25 percent. Furthermore, the effective rate will vary across goods depending on the number of intermediate stages in their production. This leads to at least two problems. First, the business tax distorts production decisions by causing the tax rate to vary across goods. Second, it creates an incentive for vertical integration. Finally, the business tax discriminates against exports. Even if exporters are exempt from paying the

tax, they pay tax-ridden prices for their inputs, which undermine their competitiveness in world markets. We choose a multi-sector, general equilibrium model for this analysis because it captures the very effects we wish to study. As a result of the incomplete coverage of Thailand's VAT, the total tax burden will not be equal across-the-board, but depend on the input-output structure of production. Hence, a multi-sector model, incorporating the economy's intermediate demand pattern is called for. For the same reason, we model the credit system explicitly, rather than assume the VAT is a tax on value added. This is also why we choose a general, rather than partial equilibrium model for this exercise. Furthermore, as a tax instrument, a VAT affects the economy through its influence on prices and incentives. The VAT works trough a system of VAT debits and credits. For example a business subjected to VAT will receive VAT credits anytime it is purchasing goods and services from suppliers that are also into the VAT system. Same business will receive VAT debits anytime it is selling services or good to its customers. Every month the company will balance the VAT it paid (credits or input) against the VAT it receives (debits or outputs) If the company has more VAT credits than VAT debits, the payment of the VAT will be done through a compensation between recorded VAT credits and VAT debits meaning that the amount of the VAT credits available will be reduced from the amount of VAT debits due for the month. If the balance results in more VAT debits than credits then the company will actually have to pay the difference to the Revenue Department.

VAT system is established based on a monthly calendar. VAT return POR POR 30 must therefore be filed on a monthly basis within 15 days of the following month together with the VAT payment. If a company has more than one place of business, each place of business must file the return and make a payment separately unless there is an approval from the DirectorGeneral of the Revenue Department. As explained above services utilized in Thailand supplied by service providers in other countries are also subject to VAT in Thailand. In such a case, service recipient in Thailand is obliged to file VAT return (Form POR POR 36) and pay tax, if any, on behalf of the service providers. With regard to the companies that do not carry business in Thailand, can also be subjected to VAT but when a foreign company not carrying business inside the state is liable to pay. In Thailand, there are different rates depending on the nature of different transactions. Thailands official VAT rate is ten percent (10%) not seven percent (7%) but it was reduced back to seven percent (7%) caused by the crisis that happened in 1997. All sales of goods or services rendered in Thailand and all import of goods (but for exempted goods). Imported goods are subjected to both custom duties and VAT Are subjected to the 7% VAT rate. Aside from the seven percent VAT rate, the state also has zero percent VAT rate (0%) Many foreign investors have wondered about the significant of a zero percent VAT. Except of simply exempting the transaction from VAT. Is

it not one of those red tape measures, which Thailand is famous for. It is not and the truth is that the VAT 0% rate system gives more benefit to the exporters than a simple exemption. A business qualifying for zero percent VAT is entitled to earn credits for its input tax, and may eventually apply for a VAT refund. The VAT rate is 0% for the following transactions: export of goods; provision of services performed in Thailand and used in foreign countries; provision of international transport services by aircraft or sea-going vessel; sale of goods and provision of services to the authorities or state enterprise under a foreign loan or assistance project; sale of goods and provision of services to the United Nations Organization; sale of goods and provision of services between one bonded warehouse and another. Regarding exemption: the sale of goods which is not an export, or provision of services under (1) Section 81 (1) which includes sale of agricultural produce, animal and animal feeds, fertilizer, chemical products for eradicating weeds, sale of newspaper, inland transport service, rental of immovable property; or under (2) Section 81 (2) such as sale of agricultural produce, animal and animal feeds, fertilizer, chemical products for eradicating weeds, sale of newspaper, etc. Finally are exempted from the VAT small business where tax base does not exceed 1,800,000 Baht.

Comparison According to Adam Smith applying his Canons of Taxation, using such

to for the comparison between the two taxing systems will be showed in Table 1 below. Canons of Taxation Economic Philippines VAT It strengthened governments Thailands VAT the It increases revenue but revenue neutral.

financial not

capability, reduces fiscal That would not result to deficit and allow more a uniformed tax rate resources and increase across their economy, in revenue. VAT is not given inflationary. Equity the myriad

exemptions of the zero-

rated sectors. There is equity in the VAT will have a slightly implication of the VAT to favorable effect on the different including sectors, distribution of income in the Thailand because the

exemptions, mitigations, winning sectors employ and aggravations of a greater share of the

taxes to its subjects with poor than do the losing specifications. sectors

Certainty

merely a stopgap measure at the expense of the taxpayer but doesn't in fix the core

Such vat is still prone to corruption for theres no difference with tax rate. and have not balanced

problems today

government

factors which may not Convenience As its cause complicity. makers As perceived by many

have viewed it, they they view taxes as not have laid down the an advantage, for its

specifications to whom it nature being additional is advantageous and to what the tax payers

vice versa to the other. pay. Most who are affected would say it is not fair for the wrong

connotations attached to it

Conclusion Method of Taxation regarding the VAT is just as important as the amount. Although people usually do not like taxes, especially this VAT, that government can become corrupt and misdirected that people may revolt

against paying taxes at all, there is still a basic need for some public services, funded by sort of taxation and one example of this is the VAT that helps and gives solutions to problems arising from taxation more efficiently. This system involves absolute transparency at every stage of taxation, thereby making the tax system quite comprehensible and simple. Bottom line is that the introduction of VAT, or any tax for that matter, can never, by itself, lead to a sustained increase in the rate of change in the price level.

List of References:

Ecoomy Watch: Value Added Tax (VAT) viewed 6 March 2011 http://www.economywatch.com/business-and-economy/vat.html Gillis, Malcolm, Carl S. Shoup, and Gerardo P. Sicat.1990. Value Added Taxation in Developing Countries World Bank, viewed 6 March 2011

Tait, Alan A. 1988. Value-Added : McGraw-Hill. September 2009 Devarajan, Jitsuchon, Sussangarn 2008 A value added taxt in Thailand: Who wins who loses? Vol. 6 No. pp. 12-16 viewed 10 March 2011 http://www.info.tdri.or.th/library/quarterly/text/m91_3.htm Crouch 2005. Philippines Propeller Club: ADB Philippines Partnership and the Economy, Slides 59-66 Economic Issue of the Day Vol. VI (January 206) URL: http://www.pids.gov.ph Department of Finance. Briefer on VAT Reform Law. [Online] Available at http://www.vatreform.gov.ph/ Manasan, R.G. 2002. Industry benchmarking for improved VAT administration. PIDS Policy Notes No. 2002-17. Makati City: Philippine Institute for Development Studies THAI visa: VAT in THAILAND , 2006-2010 viewed 12 March 2011 http://www.thaivisa.com/thailand_vat.0.html ATP: Asia Business, Trade & Publishing Post: VAT in Thailand viewed 12 March 2011 http://www.asiatradingonline.com/taxvat.htm 2008 Additional 2% E-VAT Microsoft Philippines Community viewed 12 March 2011 http://msforums.ph/forums/p/31806/111992.aspx Smith, Carina 2010 ExineMark.com: Possible Effects of Value Added Tax on low to Middle Income Families viewed 12, March 2010 http://business.ezinemark.com/possible-effects-of-value-added-tax-on-low-to-middleincome-families-31a777663d3.html A. L. Pellas & Associates, Philippine CPA Firm The Philippines: Introduction to Taxation viewed 12 March 20110 http://alpellas.com/philippine-tax.html

WORD COUNT: 2695 words excluding Introduction and Analysis