VAT Reduction Act

Sinate TWENTIETH CONGRESS OF THE ) REPUBLIC OF THE PHILIPPINES FEB 26 P2:04 First Regular Session SENATE RECEIVED BY S. No. 1916 Introduced by SENATOR MARK A. VILLAR AN ACT REDUCING THE RATE OF VALUE-ADDED TAX (VAT) FROM 12% TO 10%, AMENDING FOR THE PURPOSE SECTIONS 106 (A), 107 (A), AND 108 (A) OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED EXPLANATORY NOTE Article VI, Section 28 (1) of the 1987 Constitution mandates Congress to evolve a progressive system of taxation.! A tax is progressive when the rates increase depending on the income of the person affected.? This gives meaning to the principle of theoretical justice in a sound tax system, emphasizing that tax laws should be based on the taxpayer's ability to pay. However, the Value-Added Tax (VAT), which is levied on the consumption of goods and services at every stage of production and distribution, is, by its nature, regressive since it does not consider the taxpayer's ability to pay. Consequently, VAT disproportionately burdens lower-income persons and hinders an effective redistribution of wealth. It has further been argued that the current VAT system diminishes purchasing power, narrows profit margins, inhibits entrepreneurship, constrains investment in ' CoNsT. art. VI, sec. 28 (1). 2 Tinio v. Duterte, G.R. Nos. 236118 & 236295 (2023). 3 Id. * Justin Delépine, "How VAT hinders effective redistribution of wealth," European Data Journalism Network (Apr. 29, 2021) <https://www.europeandatajournalism.eu/cp_data_news/how-vat-hinders- effective-redistribution-of-wealth/>.

capital, and significantly hampers economic growth. At present, the Philippines also imposes the highest VAT rate among ASEAN countries at 12%, as compared to 11% in Indonesia, 10% in Vietnam, and the 9% Goods and Services Tax in Singapore, which undermines our competitiveness. Therefore, it stands to reason that a reduction in the VAT rate from 12% to 10% would provide significant upsides to Filipino families and the Philippine economy. 6 This modest reduction will expand the annual disposable income of the average Filipino household by P8,000.00 and encourage business growth, job creation, and spur economic activity? Moreover, to ensure fiscal stability and offset potential revenue shortfalls, the President may be authorized to temporarily revert the VAT to 12% for a given year if the projected deficit target as a percentage of Gross Domestic Product exceeds the programmed deficit of the Development Budget Coordination Committee. In light of the foregoing, the passage of this bill is earnestly sought. zuri MARK A. VILLAR § Congressional Policy and Budget Research Department, Easing the Tax Burden: The Feasibility of a Reduction in the VAT Rate, Discussion Paper, Issue No. 2 (Jan. 2026). "Id. 7 Id.

Eclai TWENTIETH CONGRESS OF THE ) REPUBLIC OF THE PHILIPPINES ) 26 FEB 26 P2:04 First Regular Session SENATE RECEIVED BY 1916 S. No. _ Introduced by Senator MARK A. VILLAR AN ACT REDUCING THE RATE OF VALUE-ADDED TAX (VAT) FROM 12% TO 10%, AMENDING FOR THE PURPOSE SECTIONS 106 (A), 107 (A), AND 108 (A) OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:

SECTION. 1. Short Title. - This Act shall be known as the "VAT Reduction Act".

SEC. 2. Amendment to Section 106 (A). - Section 106 (A) of the National

Internal Revenue Code of 1997, as amended, is hereby further amended to read as 4 follows: "Section 106. Value-Added Tax on Sale of Goods or Properties. - (A) Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to [twelve percent (12%)] TEN PERCENT (10%) of the gross sales of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor-]: PROVIDED, THAT THE PRESIDENT, UPON THE RECOMMENDATION OF THE SECRETARY OF FINANCE, MAY TEMPORARILY REVERT THE VALUE-ADDED TAX 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, AS DETERMINED BY THE DEVELOPMENT BUDGET COORDINATION COMMITTEE (DBCC) IN THE PRECEDING YEAR,

BASED ON THE ANNUAL REVIEW OF THE MEDIUM TERM FISCAL PROGRAM."

SEC. 3. Amendment to Section 107 (A). - Section 107 (A) of the National

Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows: "Section 107. Value-Added Tax on Importation of Goods. - (A) In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to [twelve percent (12%)] TEN PERCENT (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs studies are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if anyL:]: PROVIDED, THAT THE PRESIDENT, UPON THE RECOMMENDATION OF THE SECRETARY OF FINANCE, MAY TEMPORARILY REVERT THE VALUE-ADDED TAX TO TWELVE PERCENT (12%) FOR A GIVEN YEAR IF THE PROJECTED DEFICIT TARGET AS A PERCENTAGE OF GDP EXCEEDS THE PROGRAMMED DEFICIT, AS DETERMINED BY THE DBCC IN THE PRECEDING YEAR, BASED ON THE ANNUAL REVIEW OF THE MEDIUM TERM FISCAL PROGRAM."

SEC. 4. Amendment to Section 108 (4). - Section 108 (A) of the National

Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows: "Section 108. Value-added Tax on Sale of Services, Including Digital Services, and the Use or Lease of Properties. - (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to [twelve percent (12%)] TEN PERCENT (10%) of the gross sales derived from the sale or exchange of services, including digital services, and the use or lease of propertiesE]: THAT PROVIDED, THE PRESIDENT, UPON THE

RECOMMENDATION OF THE SECRETARY OF FINANCE, MAY TEMPORARILY REVERT THE VALUE-ADDED TAX TO TWELVE PERCENT (12%) FOR A GIVEN YEAR IF THE PROJECTED DEFICIT TARGET AS A PERCENTAGE OF GDP EXCEEDS THE PROGRAMMED DEFICIT, AS DETERMINED BY THE DBCC IN THE PRECEDING YEAR, BASED ON THE ANNUAL REVIEW OF THE MEDIUM TERM FISCAL PROGRAM."

SEC. 5. Implementing Rules and Regulations. - Within sixty (60) days from

the effectivity of this Act, the Department of Finance, upon the recommendation of the Bureau of Internal Revenue, shall promulgate the necessary rules and regulations to effectively implement the provisions of this Act.

SEC. 6. Separability Clause. - If any provision of this Act is declared

unconstitutional, the remainder thereof not otherwise affected shall remain in full force and effect.

SEC. 7. Repealing Clause. - All laws, presidential decrees, executive orders,

letter of instruction, and administrative regulations that are inconsistent with the provisions of this Act are hereby repealed, amended or modified accordingly.

SEC. 8. Effectivity. - This Act shall take effect fifteen (15) days following the

completion of its publication in the Official Gazette or in a newspaper of general circulation. Approved,