BY EDISON JOSEPH GONZALES
A proposal to abolish the 12 percent value-added tax and replace it with levies on luxury goods, digital platforms, and wealth is raising alarms among economists who warn it could strain public finances and intensify inflationary pressures.
Dr. John Paolo Rivera, senior research fellow at the Philippine Institute for Development Studies, told BNC’s “Business 360” that the move, though politically appealing, is “economically risky.”
“VAT is one of the country’s most efficient and broad-based sources of revenue, especially in a consumption-driven economy like the Philippines,” Rivera said. “While the intent may be to reduce consumer burden and curb corruption, abolishing it without a credible and sufficient replacement could destabilize our fiscal policy.”
The 12 percent VAT currently funds about a quarter of government revenues. Replacing it with higher taxes on luxury purchases, digital services, or wealth, Rivera said, would leave a gap too wide to fill.
“Taxes on luxury goods, digital products, and wealth are progressive in theory,” he said. “But in the Philippines, they have a narrow base and are complex to enforce in practice.”
He added that the country still lacks the asset registries and administrative systems needed to make wealth taxation effective. “Without a well-planned transition or stronger compliance, the reform risks creating shortfalls in public resources,” he said.
Rivera warned that abolishing VAT outright would slash a dependable revenue stream and weaken the government’s ability to fund basic services.
“Abolishing VAT would cut a sure and broad-based source of revenue,” he said. “It will affect our capacity to provide for education, health, infrastructure, and other social services.”
But Rivera said the country’s tax problem is not only about how revenue is raised; it’s also about how it’s spent.
“The real issue is not just how we collect taxes, but how the government actually spends them,” he said. “Ghost projects and padded procurement erode what we call fiscal trust. Even the most progressive tax system will fail if people believe their money is being misused.”
Restoring credibility, he said, begins with transparency and accountability.
Rivera also cautioned that scrapping VAT could worsen inflation if introduced at the wrong time, undermining the Bangko Sentral ng Pilipinas’ (BSP) efforts to sustain growth through lower interest rates.
“If poorly timed, the total abolition of VAT can be inflationary,” he said. “It may undermine the BSP’s current easing cycle and upset efforts to stimulate demand through lower rates.”
The BSP recently trimmed interest rates to 4.75 percent after a series of cuts aimed at boosting consumption. But Rivera said fiscal reform must complement, not contradict, monetary moves.
“We can’t just boost growth through consumption,” he said. “We also need an investment push anchored on public trust, transparent spending, and less red tape.”
With inflation still below target but the peso weakening past P58 to the dollar, Rivera warned of “imported inflation” as higher import costs combine with stronger holiday spending.
“The holiday season brings higher demand, and when you pair that with a weaker peso, there’s a threat to inflation,” he said. “That may prompt the BSP to hold off on further rate cuts.”
When asked which economic factor ordinary Filipinos should watch most closely – inflation, interest rates, or tax reform – Rivera said: “Inflation remains the most immediate threat. It directly affects purchasing power, day-to-day expenses, and household welfare. Bottom line: people will feel inflation first.”
As corruption scandals dominate headlines, Rivera also said taxpayers deserve visible accountability.
“Filipino taxpayers deserve full transparency in how every peso is spent,” he said. “People want to see high-level politicians penalized – losing their positions, going to jail, and returning misused public funds.”
Such outcomes, he said, would rebuild confidence in government and send a message that the country is serious about reform.
“Convictions would signal to both Filipinos and foreign investors that the Philippines is a mature economy, one that penalizes those who harm its growth,” Rivera said.