Shift from gross receipts taxation to value added taxation on banks
Date
2003-10
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Abstract
A well-functioning financial sector is a critical factor to a modem economic system. In most countries, banking activities are subject to general taxation. Bank taxation is in many respects similar to taxation of other business sectors. Nevertheless, the tax authorities often treat banking services differently. On one end, these entities enjoy a favorable tax treatment. For instance, most financial services, or bank services in particular, are exempt from Value-Added Tax (VAT).
In. the Philippines, banks are subject to income taxes, percentage taxes, withholding taxes, documentary stamps tax, and, until recently, the Gross Receipts Tax (GRT). Pursuant to the Republic Act 8424 or the National Internal Revenue Code (NIRC) of 1997, the GRT was replaced by a new tax scheme, the Value-Added Tax (VAT).
The working hypothesis of the researchers is that the imposition of VAT on banks would yield lower revenues to the government and that GRT can be considered as amore equitable tax system than VAT, with regard to horizontal and vertical equity.
This study examines the possible effects of the shift in taxation system whether VAT on financial services will contribute to the general welfare, revenue collections that will help remedy the widening government budget deficit, the banking and financial institutions industry, and the consumers.
In computing for the net revenue yield brought about by each taxation system, the researchers used the data from the Bureau of Internal Revenue (BIR) which shows the net collections of both VAT and GRT for the first semester of year 2002 for GRT and first semester of year 2003 for VAT.
VAT is anĀ· alternative tax to the GRT and should therefore be easier to implement. But, this study believes that VAT entails harder implementation. In principle, it is possible to measure value-added in the banking sector by adding profits, wages, rent, and interest, or alternatively, by taking the difference between investment income and the cost of funds (interest expense plus the cost of equity financing) and other costs of the bank. The application of the invoice system, however, requires that the VAT liability be attributed to each transaction. This is not possible in the banking sector because most financial services provided
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Keywords
Taxation, Value added tax, VAT, Banks, Banking system, Gross receipt taxation, Value added taxation, Financial