Scrapping VAT may trigger crisis — analysts

Economists and tax experts warned that scrapping the value-added tax (VAT) may trigger a fiscal or even an economic crisis, as the Bureau of Internal Revenue (BIR) collected PHP 487 billion in the first eight months of 2025.

“Abolishing VAT will put the country in fiscal crisis, drive up inflation, constrain government spending for social welfare and other vital programs, and cause a ratings downgrade,” Foundation for Economic Freedom President Calixto V. Chikiamco told BusinessWorld in a Viber message.

“Feasible but insane.”

VAT is a 12% tax slapped on sales, leases, barters, and imports of goods and services in the Philippines. VAT collections account for around a fifth of the BIR’s total revenues.

Cavite Rep. Francisco A. Barzaga filed a bill on Monday seeking to remove the 12% VAT on goods and services, citing its disproportionate impact on low- and middle-income households amid elevated inflation and rising cost of living.

Mr. Barzaga had suggested that any revenue shortfalls could be offset by imposing “wealth taxes” and increasing excise duties on “nonessential and luxury goods,” including cigarettes, alcoholic drinks, vehicles and gambling activities.

Filomeno S. Sta. Ana III, coordinator of Action for Economic Reforms, said Mr. Barzaga’s “incredulous” proposal will result in an economic collapse.

“Removing VAT will not just result in a fiscal crisis. It would lead to an economic crisis,” he said in a Viber message.

Raymond “Mon” Abrea, chairman and chief executive officer of the Asian Consulting Group called the lawmaker’s proposal “reckless and populist.”

“The real issue is not the tax, but the billions lost to leakages and fake exemptions, including an estimated P88 billion abuses of PWD (persons with disability) perks in 2023,” he said in social media post on Tuesday.

Mr. Abrea said the “more prudent approach” would be trimming the VAT rate to 10% while eliminating unnecessary exemptions such as broadening the tax base, curbing abuse, and safeguarding fiscal stability without placing additional burden on consumers.

He earlier estimated that a 2% VAT reduction could cost the government around PHP 200 billion annually, while saving households roughly PHP 7,000 per year.

Mr. Abrea’s proposal to cut the VAT rate to 10% aligns with the bill filed by Batangas Rep. Leandro Antonio L. Leviste, who argued that the current tax system is “regressive.”

However, Mr. Chikiamco said lowering VAT will still have the “same bad effects although to a lesser degree.”

Eleanor L. Roque, a tax principal of P&A Grant Thornton, said abolishing VAT altogether is not feasible as the government relies on the VAT as a major source of tax collection.

“Congress can look at lowering the VAT rate and compare it with our peers in the ASEAN (Association of Southeast Asian Nations) region if they are looking for ways to help the taxpayers,” she said in a Viber message.

The Philippines’ 12% VAT rate is relatively higher compared with Southeast Asian countries. For instance, Indonesia’s VAT is at 12%, while Cambodia, Malaysia, Vietnam and Laos are at 10%; Singapore at 9% and Thailand at 7%.

Jose Enrique “Sonny” A. Africa, executive director at think tank IBON Foundation, said scrapping VAT would “ease the disproportionate tax burden on ordinary Filipinos.”

“Abolishing it and compensating with stronger billionaire wealth, corporate and wealthy family income taxes will make the tax system much fairer and more equitable,” he said in a Viber message.

Mr. Africa said that implementing a “billionaire wealth tax” could yield PHP 500 billion to PHP 600 billion in government revenues annually, and would be enough to supplement the funding shortfalls from the removal of VAT.

However, proposals to abolish VAT or amend the VAT law are unlikely to get the support of Finance Secretary Ralph G. Recto, who authored the legislation that raised the VAT rate to 12% in 2005.

Meanwhile, the BIR said it collected PHP 487.12 billion in VAT as of end-August period, up 8.87% from PHP 447.42 billion a year ago. However, this was 1.64% short of the BIR’s PHP 495.26-billion VAT collection goal for the January-to-August period.

VAT collection accounted for 22.77% of the agency’s total revenues of PHP 2.14 trillion during the eight-month period.

In an e-mailed document to BusinessWorld, the BIR said VAT collection from “government investments in healthcare, infrastructure and agriculture” helped drive overall revenue collection so far this year.

The BIR is expected to collect PHP 796.87 billion from net of VAT refunds this year, climbing to PHP 1.3 trillion by 2028, the latest Budget of Expenditures and Sources of Financing said.

Meanwhile, the Bureau of Customs is projected to generate PHP 589.5 billion from VAT on imports in 2025, with collections reaching PHP 695.77 billion by 2028.

Earlier, the World Bank said that the Philippines can boost its revenue collections by expanding its VAT base and improving tax administration.

World Bank Country Director for the Philippines, Malaysia, and Brunei Zafer Mustafaoğlu said the country has “substantial space to increase VAT revenues by improving compliance and reducing exemptions and special rates.” — Aubrey Rose A. Inosante, Reporter with Kenneth Christiane L. Basilio