APRIL 25, 2006
 (STAR) By Paolo Romero and Aurea Calica - Malacañang is exploring the possibility of suspending the imposition of the 12-percent value-added tax (VAT) on local petroleum products after world crude oil prices continued to soar to record highs.

Presidential chief of staff Michael Defensor said President Arroyo has tasked her economic team to study the possibility of suspending the VAT, along with scrapping tariffs on imported petroleum products and other tax incentives for oil companies, to ease the burden of the people.

"These are the options being considered," Defensor said.

Cabinet members were also tasked to hold dialogues with all concerned sectors and to draw up plans to mitigate the effects of surging oil prices, which have reached a record high of $75 a barrel.

Defensor stressed the suspension of VAT on petroleum products is among the "drastic options" being studied by the Cabinet.

Other plans include the reduction of three-percent import tariffs, and declaring the locations of oil refineries as economic zones to allow oil firms to partake of incentives.

"We may have to ask Congress to pass a joint resolution to suspend the VAT on oil so that our local pump prices would not be affected so much by the surge in world oil prices," Defensor said.

Defensor, however, ruled out the possibility of price controls and fuel rationing.

"All of these options are still being studied and worked out on what we have to do, (such as) taxes, giving incentives to working out the VAT on oil so as to shield the price of basic commodities (from) rising oil prices," he said.

Cabinet members that include Energy Secretary Raphael Lotilla, Finance Secretary Margarito Teves, Budget Secretary Rolando Andaya Jr. and Defensor reportedly met with the President yesterday to finalize moves to cushion the effects of rising oil prices.

One of the President’s economic advisers, Albay Rep. Joey Salceda, revealed his plans to "reactivate and update" his proposed measure from September last year.

Salceda had proposed to suspend the imposition of VAT on petroleum products until global oil prices have stabilized at $65 per barrel or until Dec. 31 this year.

The proposal could reduce the per liter price of unleaded gasoline by as much as P3, he said.

Salceda admitted, however, that the suspension of the VAT on oil products would mean a revenue loss of P20 billion a year or P14 billion over the next eight months.

To offset the revenue losses and allay fears of foreign creditors over the possible VAT suspension, Malacañang must suspend implementation of the rationalization of the bureaucracy and accelerate the privatization of government assets to reduce any risk of higher borrowings, he said.

"We realize the tradeoffs but we can’t afford to be insensitive to the increased pain an oil price shock imposes on the poor and working families as well as on an economy that is essentially consumption-driven," Salceda told reporters.

"It is far better to forgo these revenues where users can directly benefit than collect them and spend them as subsidies whose benefits could be filtered and reduced by bureaucratic rent since the policy imperative is to give relief," he said.

Salceda called on the government to postpone the P13-billion expenditure for Executive Order 366, which allows an early retirement program in the bureaucracy.

And to further mitigate creditor backlash, the government must accelerate sales of assets to reduce any risk of higher borrowing, he said.

Salceda pointed out that among the assets that the government can sell are its power-related facilities, equities in private corporations such as San Miguel Corp. and surrendered and sequestered Marcos properties such as television networks RPN-9 and IBC-13 and a huge tract of land at the Ortigas Center in Pasig City.

Salceda stressed it is far better to forgo revenues from VAT on fuel and power than to collect them and spend them as subsidies.

Defensor, for his part, predicted Salceda’s proposal would be approved by Congress.

Press Secretary Ignacio Bunye said the President had tasked the Cabinet to hold dialogues with concerned sectors and maximize the use of existing mitigating measures before resorting to more drastic ones.

"It is imperative that we first exhaust all means to mitigate the impact of rising oil prices and to provide relief to the people under existing crisis management mechanisms," Bunye said.

Defensor added the government is currently looking at the possibility of importing oil from Russia and other countries, instead of just relying on traditional sources in the Middle East.

Defensor joined Bunye in appealing to Congress to speed up the passage of all pending legislation aimed at reducing the country’s dependence on imported oil.

Both officials also appealed to concerned sectors to expand the use of alternative and renewable sources of energy. Undoing the mistake Lawmakers crossed party lines yesterday in agreeing to suspend or scrap the 12-percent VAT on fuel and power.

Opposition congressmen led by House Minority Leader Rep. Francis Escudero (Sorsogon) said they will push for the scrapping of the VAT on oil products and electricity altogether.

"We will push for the scrapping of this tax. In the first place, it was wrong to include fuel and power in the coverage of VAT. These are among the most socially-sensitive products," Escudero said.

He said the administration made a mistake in slapping VAT on fuel and power.

Escudero pointed out that the few billions of pesos that the government expects to realize annually from VAT on fuel and power could easily be offset by better tax collection efforts, reduced graft and corruption and a more serious campaign against smuggling.

He proposed that VAT on oil products and electricity should be suspended "temporarily or permanently" through a joint resolution by both chambers of Congress.

A joint resolution would have the force and effect of a law that does not require the signature of the President, he explained.

If the resolution is not passed before the next congressional adjournment on June 9, Mrs. Arroyo should call Congress to a special session "in which we in the opposition are willing to participate just to approve it to ease the suffering of our people," Escudero said.

Majority Leader Prospero Nograles of Davao City said "with the agreement of Malacañang and the Senate, we can approve a joint resolution within the 10 days that we will be in session from May 15 to June 9."

"That is the fastest way we can do it. A bill or a simple resolution will take more time. There is no need for a special session, in which sufficient attendance is not certain," he said.

Nograles expressed his agreement to work with his colleagues in the opposition to legislate and contain the effects of skyrocketing crude prices.

Nograles noted that the current crude prices are expected to climb further to $95 a barrel. "(The high oil prices) are hazardous to our health," he remarked.

Nograles said Salceda and more than 100 congressmen had filed last year a resolution seeking the suspension of VAT on fuel and power before the rate was increased to 12 percent.

Sen. Ralph Recto, on the other hand, warned against plans to restore the oil industry’s exemption from VAT coverage, saying the move would have severe repercussions on the economy.

Recto pointed out that it was Malacañang that made the mistake of imposing the tax on the oil industry in the first place.

At this time, Recto said the proposed 2006 national budget would be affected by such a move since the expected revenues would primarily come from the VAT collection on oil products and power.

Of the VAT collected by the Bureau of Customs from the importation of oil by the oil firms alone, Recto pointed out that the government could lose at least P40 billion in expected revenues if it pushes through with its plan.

Recto based his P40-million figure on the current level that the country imports — at least 100 million barrels of oil per year at $70 a barrel.

This does not include the revenues coming from the collection of VAT by the Bureau of Internal Revenue (BIR) on the processed oil products of the oil firms, he said.

"If we amend the VAT law there may be repercussions on the budget of the President. What happens to the budget? Where will we take away the P40 billion?" Recto said.

Recto claimed some areas in the proposed budget would have to be realigned if VAT exemption were restored to the oil and energy sectors. These include spending on education, health and infrastructure, he said.

Apart from the immediate impact on the national budget, Recto said the exchange rate, interest rates, the stock market and credit ratings of the country could also suffer from Malacañang’s proposal.

He said all of the economic gains from the implementation of the VAT law could be lost if the law is amended.

Recto further predicted the peso would weaken anew after managing to reach the P50 to $1 level in the past few months.

Interest rates, which had dropped to their lowest levels in more than three decades, could go back up again, he said.

All of these, Recto noted, would adversely affect the fiscal position of the government and consequently bring down the credit ratings of the country and dampen investor confidence.

"Either or, there will still be pain. But that is the call of the President. If the President does not need the P40 billion and for as long as we will not be borrowing this money anyway, it’s okay with me," he added.

The VAT on oil has assisted the Departments of Finance and Energy in effectively monitoring the prices imposed by oil firms on their products.

By removing the VAT on oil, Recto said this valuable paper trail of the oil firms’ importation to retail would be lost and there would be no way for government and consumers to find out if the firms are overcharging or not.

Recto further argued that the proposed re-exemption of VAT might not be the only way to provide relief to consumers from continuing oil price increase.

"It will take more than a repeal of VAT on oil to cushion the impact of skyrocketing oil prices. If diesel hits P60 per liter, shaving P6 out of it as a result of VAT cancellation will only bring slight relief," he said.

One way to help ease the burden, according to Recto, would be to pass the bill on individual income tax reform, which aims to bring down the income tax rates of low- to middle-wage earners.

He also emphasized the proposed bills calling for the mandatory mix of biofuel or fuel derived from agricultural products such as sugar should be passed as soon as possible.

Apart from the long-term gains foreseen by the crafters of the bill, Recto noted that there would also be immediate benefits in agricultural productivity and investments in the sector. - With Jess Diaz, Marvin Sy

Chief News Editor: Sol Jose Vanzi

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