DoF warns VAT rate cut could slash P1 trillion in revenue and risk credit rating downgrade

THE Department of Finance (DoF) expressed “strong reservations” regarding a proposal to lower the value-added tax (VAT) rate, warning it could cost the government more than P1 trillion in foregone revenues through 2030 and undermine its fiscal consolidation efforts.

- By Kenneth Christiane L. Basilio Reporter

In a position paper submitted to the House of Representatives dated Oct. 22, the DoF said House Bill (HB) No. 4302, which proposes to cut the VAT rate to 10% from the current 12%, would lead to substantial revenue losses over the next five years.

A copy of the position paper, which was signed by then-Finance Secretary Ralph G. Recto, was obtained by Business World on Thursday.

“The estimated impact of the proposed VAT rate reduction is at an annual average of P339 billion from 2026 to 2030... This proposal will translate to a higher fiscal deficit and derail the administration’s fiscal consolidation efforts and plan,” the DoF said.

“Introducing this proposal at this time would risk fiscal stability, equity and growth.”

Based on DoF estimates, the revenue impact of the proposed VAT rate reduction would reach a total of P1.694 trillion from 2026 to 2030. This includes P1.11 trillion in foregone revenues for the Bureau of Internal Revenue and P583.6 billion for the Bureau of Customs.

The DoF said reducing the VAT rate to 10% will increase the deficit by one percentage point of gross domestic product annually.