VAT vs excise: Which fuel tax cut gives more price relief?

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MANILA, Philippines — As global oil prices surge, policymakers in the Philippines are weighing whether suspending the 12% value-added tax (VAT) on fuel may provide greater relief at the pump than cutting excise taxes.

The debate comes as disruptions in the Strait of Hormuz drive up crude prices, pushing domestic pump prices higher.

Under the 2017 Tax Reform for Acceleration and Inclusion (TRAIN) law, fuel is subject to a fixed excise tax — P10 per liter for gasoline and P6 per liter for diesel and kerosene — followed by a 12% VAT applied to the total price, including the excise tax.

This structure means consumers effectively pay a tax on top of another tax.

The debate has taken on added urgency after President Ferdinand Marcos Jr. signed Republic Act 12316 on March 25 granting him authority to suspend or reduce fuel excise taxes during periods of high oil prices or national emergencies.

The measure, earlier certified as urgent and passed by Congress, allows the president to intervene more quickly when global oil shocks threaten domestic prices.

However, the law covers only excise taxes and does not address VAT, leaving observers to question whether the levy offers more immediate relief.

VAT vs excise: How they differ

Excise taxes are fixed amounts per liter, regardless of market prices.

VAT, by contrast, rises as fuel prices increase because it is computed as a percentage of the total cost.

Industry officials say this makes VAT suspension more responsive during periods of high oil prices.

Tanya Samillano of the Independent Philippine Petroleum Companies Association told lawmakers that removing VAT at importation would "directly lower fuel costs" by eliminating upfront tax payments.

Shell Pilipinas President Lorelie Quiambao-Osial also said suspending VAT is easier to implement than adjusting excise taxes and provides larger relief when prices rise.

Using a sample diesel price of P100 per liter, the reductions are as follows:

Scenario Computation Resulting Price

Current price (with excise + VAT)	Base + P6 excise + 12% VAT	P100.00
Remove excise only	Subtract P6, VAT still applied	~P93.75
Remove VAT only	Subtract 12% VAT on total price	~P89.29

In this simplified example, removing VAT results in a larger price reduction than removing the excise tax, because VAT applies to the entire price, including the excise.

Fiscal trade-offs

The Department of Economy, Planning and Development has estimated that suspending excise taxes could reduce diesel prices by about P6 per liter and gasoline by P10 per liter.

However, revenue losses could be significant.

Estimates presented to Congress show that a three-month suspension of fuel excise taxes could cost the government about P43.3 billion, rising to around P106 billion if extended through September.

Economists also caution that removing VAT may disrupt the tax credit system, as oil firms would no longer be able to claim input VAT on imported equipment and services.

Some economists favor targeted subsidies instead of broad tax cuts to limit fiscal impact while still supporting vulnerable sectors.

The choice between VAT and excise tax relief ultimately reflects a trade-off between immediate price reduction and long-term revenue stability.