DOF rejects call to remove VAT on power generation charge

FINANCE Secretary Carlos G. Dominguez III disputed the claim of Energy Regulatory Commission Chair Agnes Devanadera that there is double taxation in the government’s imposition of valueadded tax (VAT) on power rates.

Dominguez said "no double taxation" exists in the electricity power industry as he argued that "VAT is imposed separately in each stage of the production" because the Electric Power Industry Reform (EPIRA) law mandated the pricing to be unbundled.

“But at the end of the day, if you look at the total bill, the entire electricity service is charged 12 percent VAT on the side of the consumer," Dominguez said in a statement.

“With this unbundled pricing mechanism, VAT is imposed on every level of the value chain and not integrated vertically like other sectors,” Dominguez said, which means “the VAT paid on the distribution charge only accounts for the value-added in distributing the electricity and does not include the generation and transmission of power," he added.

For double taxation to exist, two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character, Dominguez said.

The finance chief issued the statement in response to Devanadera’s proposal to the incoming Marcos administration to remove the 12-percent VAT imposed on the generation charge. The levy, she said, should be applied only on the distribution charge to avoid the supposed double taxation.

The Department of Finance (DOF) said the electricity price in the country remains high compared to other ASEAN (Association of Southeast Asian) countries because of the high costs associated with power generation.

Meralco’s first-quarter 2022 report shows that generation charge is the largest component of an electric bill across all customer classes, DOF added.

Dominguez also argued that VAT removal will not result in a 12-percent reduction in fuel prices.

He explained that Vat-exempt businesses do not charge output VAT and they also could not recover the VAT they pay on their own inputs so input VAT "becomes an additional cost to them and to recover this, it is passed on to the consumers.”

“VAT exemption is not the solution. If the intention is to unburden consumers, the next administration needs to review the existing policies on power generation pricing,” he said.

Moreover, he said the government cannot afford to give another VAT exemption because this will lead to "distortionary and less equitable tax systems" and it "creates discrimination among similar businesses."

Earlier, the DOF rejected calls to suspend fuel excise taxes amid the increase in prices, warning that this will slash government revenues by P105.9 billion or 0.5 percent of gross domestic product (GDP) in 2022, resulting in a higher deficit and debt for the government.

An increase in deficit and debt, in turn, will potentially raise interest rates on government debt, thereby reducing much-needed fiscal space for funding crucial social and economic programs, more so now when the government needs to sustain and even boost the domestic economy’s recovery from the lingering pandemic and Russia-ukraine conflict, it said.

It also pointed out that the suspension of fuel excise tax imposition will only largely benefit higher income households, and not the poor, given that the top 10 percent of Filipino households consume about half of the total petroleum products.