Action for Economic Reforms
Reaction to Senator R. Recto’s Housing Amendments for the CREATE Bill
12 November 2020
The Path to Sustainable Housing: not the Recto way
The CREATE bill is a much-needed reform to help economic recovery amid the pandemic and to overhaul an antiquated tax incentive regime. However, Senator Ralph Recto is introducing amendments contrary to the bill’s essence in making taxation equitable and rationalizing incentives for businesses. One controversial amendment he is introducing is making VAT exemption for housing permanent.
We are one with Senator Recto and other legislators in developing our housing industry. In fact, the housing sector is one area wherein economic activities can be stimulated, especially during this downturn. According to the Subdivision and Housing Developers Association (SHDA), the property developments industry, particularly housing, has a 3.44 multiplier effect on the economy, propping up about 80 allied industries. It employs 5% of total employment, not including property brokers on a commission basis. The SHDA forecasts that for the post-pandemic period, the demand for housing remains strong.
Similarly, Jeff Ng, formerly the Chair of SHDA, said: “Housing should be considered as important as Build, Build, Build.” In housing, there are no right of way issues, and procurement processes to contend with.
Thus, the industry is a leading factor in pump-priming the economy.
In light of the consequences of the pandemic, housing development needs a new direction and orientation. New public housing 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.
In this regard, we reaffirm our commitment to the 11th Sustainable Development Goal (SDG) of “Sustainable Cities and Communities,” which aims to ensure access for all to adequate, safe, and affordable housing and basic services and upgrade slums.[1]
But the proposed amendment, from Senator Recto, is to permanently remove the value-added tax (VAT) on housing. This, however, contradicts the objective of tax reforms, particularly to reduce tax leakage and make the system more efficient.
If Senator Recto really wants to push for more affordable housing, it shouldn’t be done through permanent VAT exemption for the sector. The Tax Reform for Acceleration and Inclusion (TRAIN) legislation has addressed the rationalization of the VAT, including the lifting of the exemption to housing. A return to the old regime, it goes without saying, is a backward step.
VAT exemptions incur economic costs. They result in foregone revenues, which otherwise could finance development programs, including housing. And they create inefficiency in tax administration, resulting in further revenue losses. On principle, VAT exemptions have to be limited to the most essential goods and services that have an impact on the poor.
Prior to the TRAIN Law, residential lot valued at PhP 1,500,000 and below, house and lot, and other residential dwellings valued at PhP 2,500,000 and below were tax exempt, under RA 7279 or the Urban Development and Housing Act of 1992.[2]
Under the TRAIN law, the government expanded the VAT base, by limiting the list of VAT exemptions, to increase revenues. The World Bank (2016) estimates that the average VAT gap from 2006 to 2013 represented almost 63% of potential VAT revenues.[3]
The revenues gained from the increased VAT base serve to fund much needed reforms, such as the Build, Build, Build (BBB) program. Among the key features of the program is to create affordablehousing for the marginalized.[4]
What we need is more funding, and making permanent VAT exemptions defeats such a purpose. Particular to housing, the programs for the marginalized are largely underfunded.The government’s allocation of PhP 4 billion to address the housing backlog is measly. To date, it has been reported that the housing backlog is currently at 6.5 million and could balloon to 12 million by 2030, or 22 million by 2040 if not addressed.[5] There are much better ways by which policy can help housing, and these measures have been identified in Chapter 12 of the Philippine Development Plan (PDP) of the National Economic and Development Authority (NEDA). Some of it may need legislation, and others with a mere Executive Order.
Although permanent VAT exemption to housing is not the effective way to develop the housing industry, it is understandable to provide temporary tax relief during the pandemic as part and parcel of a stimulus package. But making the VAT exemption, as proposed by Senator Recto, is damaging in the long run.
Based on the proposed Recto amendments, the Department of Finance (DOF) estimates the following revenue losses:
Table 1: DOF Revenue Estimates on Recto Housing Amendment
We thus urge Congress to reject the Recto amendment of permanent VAT exemption. In the short run, during the pandemic, suspending the VAT for socialized housing is a reasonable compromise.
In terms of fiscal support, the more effective intervention is for the government to provide targeted direct subsidies through a voucher system for the socialized housing beneficiaries. This has a bigger impact on the beneficiaries, and is more transparent. Other effective measures are non-fiscal at all like simplifying permits, having a coherent land use policy, and promoting green technology.
Below, we summarize our main recommendations for the development of the housing sector.
As part and parcel of a temporary economic stimulus, a suspension of the VAT for socialized housing with a cap on values can be accommodated, in place of the questionable proposed amendment to have a permanent VAT exemption. Building safe and secure communities should not depend on tax incentives, unless there is a market failure that discourages private investments. The granting of tax incentives has to be subject to cost-benefit analysis to be done by the Fiscal Incentives Review Board (FIRB). In this regard, it is important to protect the integrity of FIRB.
The main form of fiscal support is through a direct subsidy to the eligible socialized housing beneficiaries through a voucher system. Putting this in place requires a data-driven approach to correctly identify those who are eligible, and match their needs — not just as households, but as communities.
The comprehensive land use plan (CLUP), which is determined by the National Land Use Policy, needs swift action from Congress to be enacted. It must integrate transparency and monitoring mechanisms to evaluate the housing programs, including the socialized ones. Simplification of the permits process for housing and shortening the process within 6-12 months will address critical bottlenecks.
In closing, to support the housing sector, we should employ a variety of policy tools, which will include fiscal interventions, but not the type that will lead to fiscal recklessness.
[1] United Nations Development Programme, Sustainable Development Goals. https://www.undp.org/content/undp/en/home/sustainable-development-goals/goal-11-sustainable-cities- and-communities.html#targets.
[2] Rosario G. Manasan, “Assessment of Republic Act 10963: The 2017 Tax Reform for Acceleration and Inclusion,” Philippine Institute for Development Studies Discussion Paper Series No. 2018-27 (2018), https://pidswebs.pids.gov.ph/CDN/PUBLICATIONS/pidsdps1827.pdf.
[3] Ibid.
[4] National Economic Development Authority, Accelerating Infrastructure Development,” The 2017-2022 Public Investment Program 2017, http://www.neda.gov.ph/wp-content/uploads/2018/10/PIP-2017-2022- 19.pdf.
[5] Senate of the Philippines, “Drilon underscores glaring disparity: P3.98B for housing sector, P9.5-B for confi and intel funds,” October 21, 2020, http://legacy.senate.gov.ph/press_release/2020/1021_drilon1.asp.