As the end of the current global crisis remains uncertain, the call to reduce value-added tax (VAT), particularly on fuel, continues to gain support from various sectors. The argument is simple: lower VAT to ease the burden on consumers who are already dealing with rising prices. Indeed, there is merit to this, as the current VAT rate of 12% in the Philippines is often said to be among the highest in the region.

On the other hand, economic managers warn that reducing VAT will have long-term effects. VAT is one of the government’s main sources of revenue. A big reduction may affect the government’s ability to fund infrastructure projects, social services, and even day-to-day operations. Government cannot run properly without a steady and reliable source of income.

Some legislators have pointed to the government’s economic team as the reason why VAT reduction has not moved forward. But true enough, this view is not fully correct as the Congress has the power to pass a law reducing VAT if it chooses to do so, subject only to the President’s veto. Economic managers may give advice and recommendations, but they cannot stop Congress from approving such a measure.

From a legal and constitutional point of view, the power clearly lies with the legislature. Congress can very well reduce the VAT rate or even abolish it if there is enough support from its members. Economic managers only play an advisory role in policy discussions.

While Congress is at liberty to do so, to my mind, the decision to reduce VAT should not be rushed or based only on short-term pressure. Taxes are often called the lifeblood of the government. These fund the services and projects that support economic growth and social stability. A sudden or poorly planned reduction in VAT could create budget gaps that may eventually force the government to borrow more or cut important programs, both of which can create other problems. After all, a solution to a problem that creates the seed of the next problem is not a good solution.

So, a more careful and balanced approach is therefore needed. Instead of hastily reducing VAT across all goods and services, policymakers may consider expanding the coverage of VAT exemption. For example, certain basic goods may be exempted from the coverage of VAT. Fuel is a strong candidate from exemption since it affects transport and production costs. Other basic needs such as food, electricity, and public transport may also be reviewed for possible relief.

Another option is a temporary or conditional VAT reduction that may be conditioned on clear parameters such as high fuel prices or high inflation. When conditions improve, the VAT rate can return to the standard rate. This gives consumers relief when needed while protecting government revenue in the long term.

At the same time, if VAT is reduced, the government must look for other sources of income. Any loss in revenue should be replaced through better tax collection, stronger enforcement, and programs reducing tax leakages. Improving efficiency in collection may likewise help recover a significant amount of lost revenue.

It is important to review the current VAT system itself. While there have been improvements in simplifying VAT rules, there may still be exemptions that need to be reassessed. Poorly designed exemptions can weaken both fairness and efficiency in the tax system.

Also, any discussion on VAT reduction should be based on data and careful study. I believe there have been a lengthy study and thorough review on the application of the current rate of 12% but of course, we can always revisit this in light of the current crisis that we are facing. Policymakers should not only look at the immediate effect on prices, but also the wider impact on businesses, jobs, and the economy as a whole. It is important to ask whether the rate reduction will truly reach consumers or be absorbed along the supply chain. The effect on government debt should also be considered.

In the end, the goal is to find the right balance. Each one of us needs relief from rising prices, but the government also needs stable funding to continue providing services. Ultimately, the challenge is not just about reducing VAT, but doing it in a way that is responsible and sustainable. It requires both political will and sound economic judgment to ensure that relief today does not create bigger problems in the days ahead.