Senator Ralph Recto’s amendment to the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Bill seeking to permanently remove the value-added tax (VAT) on housing is not an effective way to develop the housing industry, local think tank Action for Economic Reforms (AER) said in a position paper released today. The position paper included a set of recommendations for alternatives to housing development which AER claims to be more transparent and effective than VAT exemption.

Senator Recto’s proposed amendments to CREATE are among the controversial final amendments to be tackled before the Senate can pass the bill, which was certified urgent by President Duterte in March of 2020.

“If Senator Recto really wants to push for more affordable housing, it shouldn’t be done through permanent VAT exemption for the sector,” AER said, citing that permanently removing the VAT on housing contradicts the tax reform objectives of reducing tax leakage and making the tax system more efficient.

The Tax Reform for Acceleration and Inclusion (TRAIN) Law, which took effect in 2018, addressed the rationalization of the VAT, lifting the exemption to housing. Thus, AER claimed that returning to the old regime of VAT exemptions for housing would be a step backwards. “VAT exemptions result in foregone revenues which otherwise could finance development programs, including housing. They create inefficiency in tax registration, resulting in further revenue losses,” AER said. The Department of Finance estimated that the permanent exemption of VAT for housing would result in a total revenue loss of PhP 32.5 billion from 2021-2024.

AER Coordinator Filomeno Sta. Ana III emphasized that VAT exemptions must be limited to essential goods and services that are consumed by the poor for them to substantially benefit. “VAT exemptions on housing, however, do not actually target the poor households; the sad truth is that it costs millions to have a decent house built, an amount that the poor cannot afford. Those who benefit therefore are the upper classes,” Sta. Ana said.

“Recto is irresponsibly funneling funds away from development programs for the marginalized, the most vulnerable during this period of pandemic and natural calamities. VAT exemption means foregone revenues, which Sen. Recto concedes, are revenues that could have been used to finance the fight against the pandemic or to finance disaster relief and mitigation,” said Sta. Ana.

What we really need, Sta. Ana said, are not VAT exemptions, but more funding for housing programs for the poor, especially in the light of the difficulties brought about by the pandemic.

“New public housing now has to address the high density of population and poor living conditions, making it difficult to meet minimum public health standards, such as social distancing and proper sanitation mechanisms,” he added. This simply adds to the problem of underfunded housing programs and the current housing backlog of 6.5 million.

AER urged Congress to strike down Recto’s VAT exemption amendment, although it said that suspending the VAT for socialized housing with a cap on values for a short and defined period would be a reasonable compromise. A suspension of the VAT during the pandemic can be part of the stimulus package, but AER stressed its temporariness.

“There are much better ways by which policy can help housing,” AER said, providing a set of recommendations for the housing sector. One of its recommendations is providing targeted, direct subsidies for eligible socialized housing beneficiaries through a voucher system. It said this has a bigger impact on beneficiaries and is more transparent, compared to VAT exemptions. Lastly, it recommended swift action from Congress to enact the comprehensive land use plan (CLUP), accompanied by simplification of the housing permit process as well as transparency and monitoring mechanisms.