Tax Articles

Value-Added Tax (VAT) is a tax on final consumption, levied at each stage of the production and distribution of goods and services. The impact and burden of VAT are ultimately shouldered by end consumers.

In the Philippines, where the economy is driven by consumption rather than production, the effect of VAT is keenly felt by ordinary Filipinos. As the value of goods and services increases, the impact of VAT also increases. Consequently, the purchasing power of Filipinos decreases. Ultimately, the economy suffers as the number of transactions is restricted.

With this in mind, there is a need to jumpstart the economy by encouraging ordinary Filipinos to spend more by decreasing the value of goods and services.

It is worth noting that the twelve percent (12%) VAT in the Philippines, which is a portion of a commodity's price, is the highest in Southeast Asia. In comparison, neighboring countries impose VAT at lower rates: 11% in Indonesia, 10% in Laos, 10% in Cambodia, and 10% in Vietnam.

Even when compared to other indirect taxes imposed by neighboring countries, the twelve percent (12%) VAT in the Philippines remains the highest. Malaysia imposes a 10% Sales Tax, Singapore a 9% Goods and Services Tax, Thailand 7%, Myanmar a 5% Commercial Tax, and East Timor a 2.5% tax on imported goods.

With this in mind, lawmakers filed Senate Bill No. 1552 and House Bill No. 4302, or the “VAT Reduction Act of 2025.” In both bills, the lawmakers proposed reducing the VAT from 12% to 10%, subject to the President's power to revert it for a given year should the need arise.

However, opposition was raised against the proposal for VAT reduction. The Department of Finance (DOF) has raised concerns that the proposal to lower the VAT rate could severely impact the government’s ability to fund essential operations, potentially forcing it to borrow more for even basic expenditures. The DOF even expressed that “[t]he estimated impact of the proposed VAT rate reduction is at an annual average of P339 billion from 2026 to 2030… This proposal will translate to a higher fiscal deficit and derail the administration’s fiscal consolidation efforts and plan.”

It should be noted that a reduction in the VAT rate does not produce a proportional (straight-line) decrease in tax revenue, nor will it necessarily prevent the government from financing its expenditures.

First, VAT is a tax on consumption. The lower the prices of commodities, the livelier the market may become. Consequently, taxpayers are encouraged to buy due to an increase in their spending power, resulting in an increase in transactions that generate VAT. Although there will be a decrease in the VAT rate imposed, the increase in transactions can make up for the government's target collection.

Second, a lower VAT rate makes the Philippines more geographically competitive within the Southeast Asia region. A reduction in VAT decreases a company's cash outflow and allows more opportunity for reinvestment. It also reduces production costs, such as electricity and raw materials, thus resulting in higher profitability. Although the VAT rate imposed will decrease, it will encourage more investors to put their capital in the Philippines, creating development and job opportunities.

Third, reducing the VAT rate encourages the government to reduce tax leakage and improve its efficiency in collecting other taxes, including one-time transaction taxes (Donor’s Tax, Capital Gains Tax, and Stock and Transfer Taxes). Considering that there will be a reduction in the VAT rate, government should improve efficiency in collecting all taxes that are due. Focus should no longer be limited to consumption taxes which greatly affects the low and medium but to all taxes in general.

Fourth, the proposed bills, which reduce the VAT rate, have a safety mechanism authorizing the President, upon the recommendation of the Secretary of Finance, to revert the VAT to twelve percent (12%) for a given year if the projected deficit target as a percentage of Gross Domestic Product (GDP) exceeds the programmed deficit. Should the reduction of the VAT rate therefore impair the government’s ability to fund essential operations, the proposed law provides a corrective remedy.

Taking all of these into consideration, the proposed reduction of the VAT rate is a welcome development in Philippine taxation. In a time when inflation and the cost of living are high, a lower tax rate gives citizens room to breathe. It also makes the Philippines regionally competitive compared to its neighboring countries. Lastly, the reduction of the VAT rate embodies the constitutional mandate to establish a progressive tax system that promotes equity and social justice.