Lowering VAT to 10%: Building a Fairer, Simpler, and More Competitive Tax System

Introduction

Congressman Leandro Leviste has filed a proposal to reduce the Philippine Value-Added Tax (VAT) rate from 12% to 10%. Supporters argue this will ease consumer burden, stimulate spending, and align the country with ASEAN peers. But what does this really mean for businesses, consumers, and government finances? As a CPA law firm committed to pro-business growth, equitable taxation, and fiscal sustainability, we’ve taken a closer look.

Why VAT Matters

VAT is one of the largest sources of government revenue. It’s collected every time goods and services are sold, making it a tax most Filipinos feel daily. At 12%, the Philippines currently has one of the highest VAT rates in Southeast Asia. Lowering the rate to 10%, as proposed by Rep. Leviste, would align us more closely with countries like Vietnam and Cambodia (10%), and closer to Thailand (7%) and Singapore (9%).

Potential Benefits of a 10% VAT

• Lower Prices, Higher Spending Power: A cut from 12% to 10% translates to a 2% drop in prices for most goods and services. This means families can stretch their budgets further.

• Boost to Business Competitiveness: Lower VAT makes local products and services more attractive, both for domestic consumers and regional markets.

• Improved Compliance: High rates often encourage tax evasion. A moderate VAT could reduce the incentive for practices like ghost receipts, which hurt both government revenue and honest businesses.

Risks and Fiscal Impact

The challenge lies in revenue. A 2% cut could reduce annual government collections by around ₱200 billion. Without safeguards, this could affect funding for education, healthcare, and infrastructure. To make the reform sustainable, the government must:

• Streamline VAT exemptions that benefit only a few.

• Strengthen enforcement through tools like e-invoicing.

• Explore compensating measures, such as wealth or luxury taxes, to ensure those with greater means contribute more.

Legal and Administrative Readiness

Transitioning to a lower rate requires amending the tax code and clear guidance from the Bureau of Internal Revenue (BIR). Businesses will need to update accounting systems, contracts, and pricing structures. The simpler the rules, the less room there will be for disputes and abuse. Strong enforcement against fraud must accompany the rate cut.

Equity Considerations

VAT is regressive—it hits the poor harder than the rich. Lowering it to 10% directly benefits low- and middle-income households who spend most of their income on VAT-inclusive goods. Paired with taxes that target high-income individuals, the reform can shift the burden upward, making the overall system more progressive and fair.

Lessons from ASEAN

• Vietnam: Maintains a 10% VAT, but has temporarily cut to 8% to stimulate the economy.

• Thailand: Legally at 10%, but has applied a reduced 7% rate for decades to support consumers.

• Indonesia: Recently raised VAT to 11%–12%, focusing on broader coverage and stricter enforcement.

These examples show that VAT is more effective when paired with efficiency and compliance, not just a higher rate.

Conclusion

Rep. Leandro Leviste’s proposal to lower VAT to 10% can be a step toward a fairer, simpler, and more competitive tax system. It offers relief to consumers, helps businesses, and aligns us with regional peers. But it must be done responsibly. With stronger enforcement, fewer exemptions, and compensating measures, the Philippines can achieve a tax reform that balances relief, fairness, and fiscal sustainability.

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✍️ By Atty. Yasser Aureada, CPA