Philippines: VAT Relief on System Loss Charges Offers Modest Savings, Deeper Reforms Needed

By Justine Irish D. Tabile, Senior Reporter The removal of value-added tax (VAT) on allowable system loss charges will provide modest relief to electricity consumers, but broader power sector reforms are still needed to meaningfully bring down electricity costs, economists said. Former Finance Secretary Margarito B. Teves said the measure can be considered a “small win” for consumers, particularly as households and businesses contend with elevated inflation. “This would provide modest financial relief to Filipino households and small businesses in a time of elevated inflation,” Mr. Teves told BusinessWorld. The Bureau of Internal Revenue issued Revenue Memorandum Circular No. 97-2026, which clarified that allowable system loss charges within the cap approved by the Energy Regulatory Commission are not subject to the 12% VAT. The government estimates the measure could result in around P6 billion in annual savings for power consumers. The government is also expected to forego P10 billion in revenue. “The more challenging part is absorbing the fiscal cost of this policy without incurring more debt or reducing expenditures on productive sectors of the economy,” Mr. Teves said. He said the Executive branch and Congress would have to work together to identify “sensible revenue-generating measures” to help offset the revenue foregone. “Ultimately, the government has to continue bringing down inflation to manageable levels, especially on food items, to protect the purchasing power of consumers,” he added. However, Mr. Teves said removing VAT on system loss charges does not address the broader issues that are keeping Philippine electricity costs high. “A more comprehensive reform in the power sector is needed to address the high cost of electricity which remains one of the major deterrents to businesses investing in the Philippines,” he said. He said distribution utilities and electric cooperatives should reduce operational inefficiencies and invest in infrastructure upgrades, including smart meters and digital technologies that can help detect pilferage and illegal con-nections. Meanwhile, he said the government should review provisions of the 25-year-old Electric Power Industry Reform Act and address bureaucratic delays affecting power generation and transmission projects. Peter Lee U, associate professor and dean of the School of Economics of the University of Asia and the Pacific, said the impact on consumers would likely be small since system losses account for only a fraction of the total electricity bill. “I don’t recall the exact figure, but I think system losses are only a small portion of the bill. About 5.7% only of my last bill. Generation is largest at about 58%,” Mr. Lee U said via Viber. Mr. Lee U also noted the presence of a regulatory ceiling on the amount of system losses that distribution utilities can pass on to consumers. At the same time, bringing system losses down to zero is physically impossible, limiting how much further this component of electricity bills can be reduced, he said. Given the relatively small impact of the VAT removal, Mr. Lee U said policymakers should prioritize measures that encourage greater investment in power generation and transmission. “The more urgent battle seems to be how to incentivize generation and transmission investment,” he said, adding that a deeper study of the impact of system losses may also be warranted. IBON Foundation Executive Director Jose Enrique A. Africa said the P6 billion in estimated consumer savings is welcome, though relief will be limited. “Removing VAT on system loss charges provides limited relief at the margins but doesn’t really address why Philippine electricity is so expensive in the first place,” he said via Viber. “The P6 billion in estimated consumer savings… shouldn’t distract from the need to address the problems with power generation, transmission and distribution that make electricity so expensive,” he added. Mr. Africa said it was unclear whether households and small businesses would receive most of the benefits or whether higher-volume commercial and industrial consumers will reap a larger share of the savings. He noted that the estimated P10 billion in foregone government revenue is small relative to the government’s more than P4.8-trillion annual revenue target, while the P6 billion in projected savings is also small compared to total family income. “Reducing VAT is administratively and politically easier than restructuring an electricity system with concentrated corporate interests in generation, distribution and transmission infrastructure, and captured regulatory arrange-ments,” Mr. Africa said.