THE Bureau of Internal Revenue (BIR) removed last week the value-added tax (VAT) on the allowable system loss charge in electricity bills to provide relief to consumers by lowering the tax component of their power costs.
With some of the highest electricity costs in Southeast Asia, we welcome any relief from high power bills. But the removal of the VAT on system losses is a far cry from the removal of system loss charges that President Ferdinand Marcos Jr. explicitly called for in his State of the Nation Address on July 27, a measure that will require legislative action to amend Republic Act 9136, or the Electric Power Industry Reform Act of 2001 (Epira), which has failed miserably in its stated goal to bring electricity costs down.
To put things in perspective, the system loss charge makes up only about 5 percent of the average Manila Electric Co. (Meralco) bill, and the VAT that the BIR has so magnanimously removed was a 12-percent consumption tax on a commodity that consumers never even consumed in the first place.
BIR Commissioner Charlito Martin Mendoza said removing the VAT on system losses “may be one part of a broader effort to bring down electricity costs, but it is relief that can be implemented under existing law.... While Congress continues to consider wider reforms on electricity charges and taxes, the BIR is acting on the measures within its authority that can reduce the burden on consumers.”
While the Senate and the House of Representatives are considering how they can amend Epira to benefit consumers, they ought to consider removing the tax burden on power consumers.
Exempting electricity from the 12-percent VAT is one of the most direct fiscal interventions available to ease inflationary pressure, support lower-income households, and boost national economic competitiveness.
Many arguments can be made to support such a proposal.
Electricity is an essential service, not a discretionary good. VAT is a consumption tax on commercial goods and services, but power is a nonnegotiable basic necessity for survival, sanitation and household productivity. Taxing electricity at the standard 12-percent rate regressively penalizes low- and middle-income families, who spend a disproportionately higher share of their monthly income on utility bills compared to high-income households.
The Philippines already has some of the highest power rates in Southeast Asia. Slapping a 12-percent tax on top of high generation and transmission dramatically drives up the cost of living. Removing — or at least significantly reducing — VAT provides immediate, tangible financial relief to millions of consumers without waiting for long-term grid updates or long-term energy infrastructure development.
Under the current pricing structure, VAT is applied indiscriminately across multiple bill components, including pass-through charges, environmental charges, and local franchise taxes. Taxing mandatory government fees and administrative pass-throughs amounts to double taxation (“taxing a tax”). Removing the VAT removes these distortions from the monthly bill.
High electricity rates are a major deterrent to foreign direct investment and place a heavy strain on local micro, small and medium enterprises. Lowering industrial energy costs by 12 percent directly reduces operational overhead for manufacturers, commercial establishments, and local service providers, allowing businesses to reinvest capital into expansion and job creation.
Energy prices also have a multiplier effect throughout the entire supply chain. Higher commercial power rates force food processors, cold storage facilities, transport hubs, and retailers to increase prices on end products. Stripping VAT from power generation and distribution suppresses input costs across agriculture and manufacturing, helping stabilize inflation.
Of course, we can expect the government’s economic managers to warn about revenue losses and what they will mean for social services. Removing VAT on system losses is estimated to cost the government P10 billion a year in forgone revenues. The total removal of VAT on the entire power bill would result in an estimated revenue loss of P60 billion to P90 billion.
At P90 billion, the forgone revenue represents just under 2 percent of all government revenues, using 2025 as a base for computation. But the net fiscal loss to the government will be far smaller than the headline loss of revenues because the tens of billions of pesos saved by households and businesses will be plowed back into consumer goods, retail, dining and business expansion, all of which will generate secondary VAT collections, corporate income taxes and local business taxes downstream.
Unlike targeted social welfare programs or cash transfers, removing VAT from electricity provides universal and instant price relief, even to lower- and middle-income families who often do not qualify for targeted poverty subsidies, yet spend a significant portion of their income on utility bills.
For far too long, the Philippines has consistently suffered from some of the highest electricity rates in Southeast Asia — a condition that Epira has failed to address. It is time Congress did something to correct that.
