How not to do a tax reform

By Milwida M. Guevara

We splurged on a Frank Sinatra concert when the Supreme Court issued a Temporary Restraining Order (TRO) on the expanded VAT(value added tax) in 1994. Our tears flowed freely when Mr. Sinatra sang "Send in the Clowns." All our work in defending the imposition of the VAT on services went down the drain.

Months before the EVAT was approved, Secretary Bobby de Ocampo exhorted BIR and BOC to prepare the tax forms, streamline processes in tax filing, and train their personnel. He wanted to avoid incidents where its first day of implementation would be a day of confusion. He turned quite prophetic. The first day of EVAT implementation became a bedlam. The taxpayers were so furious and their uproar resulted into a TRO which lasted for almost a year.

Government does not seem to learn from experience. It was not prepared for the implementation of the TRAIN. It was implemented even before the Implementing Rules were formulated. Gasoline prices were on the rise and the value of the peso relative to the dollar was plunging. There were also the NFA inefficiencies which resulted to a shortage of rice in the market. The result, a continuous increase in inflation rate.

Inflation is experienced when you can buy less from your peso because of the increase in prices. With an inflation rate of 4.5%, goods that used to cost P100.00 before will now be bought at P104.50. It is worse for the poor where the inflation rate is higher at 5.3%. Another way to look at it is that their P100 is only worth P94.70 today. Their shopping bag has become smaller, the goods have become fewer, and rice and vegetables have become more costly. Inflation punishes savers because the value of the peso continuously declines. An additional income from a 1.0 % interest rate can hardly compensate for a 4.5% decrease in the purchasing power of the peso. It would be better to invest in gold, jewellery and real properties. Or, panic buying can result if one is afraid that prices will continue to rise. It is better to stock them up!

Government has blamed developments other than the TRAIN for the spike in inflation. It alleged that vegetable harvest declined because of the typhoon. The closed season in fishing led to scarcity in fish catch. But simple logic will tell you that if the tax on gasoline is increased, there will be a spike in prices. There are no buts and ifs. Diesel now costs P2.50 more per liter. The prices of all goods and services which use fuel will cost more. Did we expect producers to absorb the increase in their production costs? Some transparency and admitting the truth will help.

Government may have been too busy or too excited to collect the revenues from TRAIN that it forgot how important it is to prepare for its implementation. How a tax is implemented is equally important, if not more important, than the tax policy itself. Bad administration means bad policies. All the excel formula on the results of the TRAIN on prices and income distribution will come to naught when producers and taxpayers are left on their own to adjust to changes in tax rules.

The experiences of Taiwan come to mind when it implemented the VAT in 1986. Rules and regulations, accounting procedures, manuals and forms were prepared, and put together in a Handbook for VAT. Tax collectors were fully trained. Massive tax information campaigns were launched for manufacturers, retailers, consumers, and students. Workshops were held for businesses to simulate how goods were to be priced with the VAT.

Timing for the VAT introduction was planned so that it would not coincide with the Chinese New Year or the tourist season when spending was heavy. Government avoided the typhoon months when supply of food was low. A normal month, April, was chosen as its launching date. Government went all the way to reduce tariffs, and introduce a price freeze in the costs of public transport, and public utilities. The effects of the VAT on prices exceeded all expectations. Prices did not only remain stable but the consumers price index dropped by 0.25 percent.

Next year, more price hike is expected with an additional P3.00 increase in pump prices of gasoline. Learning from the Taiwan experience is not an impossible dream. At the very least, government has to listen and consult. It has to learn though that consulting is different from presenting, explaining, and rationalizing.