DoF worries over fund for subsidies drying up

Cabinet men clash over ‘Katas ng VAT’

By Ayen Infante and Riza Recio

10/06/2008

A major clash in the Cabinet happened over the reimposition of the tariff on imported crude oil that Finance Secretary Margarito Teves eventually won, saying the funding for President Arroyo’s “Katas ng VAT” program was drying up.

The government reimposed a one percent tariff on oil last month as the price of crude oil fell below $100 per barrel.

The subsidy program dubbed “Katas ng VAT” relies mainly on the excess VAT collections from the high price of oil and oil products. It was the main policy move of Mrs. Arroyo in response to the problem of rising prices and to ease possible social discontent over the worsening conditions of the poor.

Energy Secretary Angelo Reyes wanted to maintain the tariff-free importation of crude and finished petroleum products for the rest of the year or while the guidelines for oil tariffs were under review, according to a top government official who requested not to be named.

The source said issues discussed during the technical committee meeting of the Cabinet-level Tariff and Related Matters (TRM) body last week included the setting up of the right formula to reflect the real price of oil to guide the government’s tariff policy.

“They have talked about what measure to apply that would show what is happening in the market,” the official said.

The source said the Department of Energy (DoE) argued that the government had already raised huge tax windfalls during the period when oil prices were high for it to contribute further in jacking up the prices of oil and oil products.

Local oil companies did not lower the prices of oil products this week despite falling crude oil prices in the world market, citing the reimposition of the oil tariff.

Under the current situation, it is difficult for the government to determine the trigger prices on tariff rates due to the volatile price of oil.

For instance, he said “if you implement the rate in October and your basis was the September price, the numbers are no longer relevant.”

“So what happened, he said, most of the time figures that were reflected were not the reality,” he said.

The DoE is now pushing the amendment of the implementing rules and regulations (IRR) of Executive Order (EO) 691 in which the trigger prices were set to allow. The EO was signed by President Arroyo in January this year.

The DoE wanted to retain a zero duty on oil until the end of year since oil prices in the international market continue to drop as a result of a softening in demand due to the financial crisis in the United States.

“The government has already enjoyed a windfall in value added tax (VAT)

collection from oil when its price reached a high of $140 per barrel,” according to the source.

When oil breached the $135 per barrel ceiling in June, the one percent tariff was then removed temporarily by the government.

Teves, however, said excess revenues, mainly from the value added tax (VAT) on oil products is still needed by the government to cushion the impact of a worsening global economic situation through the subsidy and cash transfer programs of the government.

The cash transfer program of President Arroyo, which draws much of its resources from the windfall collection on VAT from petroleum, is suffering due to the falling crude oil prices and the weakening of the peso.

Teves expected VAT collections from petroleum products not to meet the targeted P18.6 billion as oil prices fall.

He added that for the first two quarters, the government collected P4 billion in VAT windfalls that was allocated to various cash transfer program of Mrs. Arroyo including the P500 for each poor family as subsidies for power, food and schooling, among others.

Teves said the projected windfall collection of P4 billion quarterly was based on a crude oil price of at least $115 per barrel and an exchange rate of 40 per dollar.

With this recent trend of world oil price going down and the peso strengthening, Teves said the government would have to expect windfall on vat collection to go down.

Teves said the government plans to review the EO on oil import tariff but he did not say if possible changes in the mechanism on the so-called trigger price for the imposition of tariff will be made.

He said, however, the planned revision of the existing guidelines on oil import tariff will be made in the light of the slowdown of price hikes of crude oil in the international market.

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