TITLE: Marcos Administration Ends VAT on Electricity System Loss Charges
The Bureau of Internal Revenue (BIR) has moved to eliminate the 12 percent Value-Added Tax (VAT) on allowable system loss charges in electricity bills, an administrative measure effective with the issuance of Revenue Memorandum Circular No. 97-2026 on September 14. The directive from the Marcos administration marks a direct response to persistent public grievances over the cost of power, targeting a component of bills long criticized as unfair taxation.
This policy adjustment is designed to offer immediate financial relief to millions of Filipino electricity consumers grappling with escalating living costs and inflation. While the precise reduction in individual bills may be modest, the government's action addresses a contentious charge that has for years levied tax on electricity that was never actually consumed, signaling a broader intent to ease economic burdens and reform the nation’s energy sector.
For years, the complex and often opaque nature of system loss charges has been a consistent source of frustration for households and businesses across the Philippines. System loss refers to the electricity that is generated and paid for by consumers but ultimately lost before it ever reaches its destination. These losses are broadly categorized into two types: technical losses, which arise from the inherent dissipation of power in transmission and distribution lines, transformers, and other equipment; and non-technical losses, primarily stemming from issues such as pilferage, illegal connections, and inaccuracies in metering. While a certain degree of loss is an unavoidable reality in any extensive power grid, the imposition of a 12 percent VAT on these unconsumed portions of electricity bills has been widely perceived by consumer advocates and some lawmakers as an unjust burden.
BIR Commissioner Charlito Martin Mendoza underscored that the decision directly aligns with directives from President Ferdinand Marcos Jr. and Finance Secretary Frederick Go, emphasizing the government's commitment to practical economic relief. "Every peso saved by consumers counts," Mendoza stated, highlighting the immediate financial benefit of the measure. He further clarified, "This 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.” He explained that the practical effect for consumers is straightforward: once the new rules are implemented, the 12 percent VAT will no longer be imposed on the allowable system loss portion of their electricity bill, directly leading to a lower amount being passed on to them.
Crucially, the new circular does not eliminate the system loss charge itself, but rather the VAT levied on it. Consumers will still be responsible for the cost of system loss within the caps approved by the Energy Regulatory Commission (ERC). Any losses that exceed these prescribed limits cannot be passed on to consumers and must instead be absorbed by the distribution utilities. To ensure transparency and compliance, the BIR circular mandates that generation companies, the National Grid Corporation of the Philippines (NGCP), distribution utilities, and electric cooperatives must now separately itemize the allowable system loss charge in their billing statements, allowing consumers to clearly see the removal of the VAT from this specific component of their bill.
Reactions to the BIR's decision have been predominantly positive, albeit often accompanied by calls for more comprehensive reforms. Senator Erwin Tulfo lauded the tax removal as a "long-overdue relief," asserting that the system loss charge, being a pass-through cost, should not incur additional taxation for consumers. Senate President Sherwin Gatchalian echoed this sentiment, describing it as a "major win for consumers and a concrete step toward bringing down the cost of electricity," while simultaneously stressing that "this should not be the end of our efforts."
However, the actual impact on consumer bills remains a subject of varying estimates. While the Department of Energy (DOE) had previously projected a potential reduction of 5 to 10 percent in overall power costs, some lawmakers and analysts, including Senator Bam Aquino, have noted that the immediate reduction in bills may be more modest. Estimates from these observers suggest a likely decrease in the range of 0.6 to 0.8 percent for most households. Senator Aquino, for his part, has advocated for a more far-reaching reform: the complete removal of VAT on all residential electricity, arguing that such a measure would deliver a more substantial 12 percent discount to households, providing a more impactful relief than the current partial measure. Senator Risa Hontiveros and the advocacy group Akbayan have gone further, urging the Energy Regulatory Commission to fully scrap the underlying system loss charge itself, a sentiment that aligns with President Marcos's earlier pronouncements during his State of the Nation Address regarding the need to lower electricity costs.
Power distributors, including electric cooperatives which serve a significant portion of the Philippine populace, have historically raised concerns about the financial implications of fully absorbing the costs of system losses if these charges were entirely removed. They contend that both technical and non-technical losses represent genuine costs incurred in the complex process of generating, transmitting, and delivering electricity to end-users. Without a mechanism to recover these essential operational costs, these utilities argue that their financial sustainability could be severely jeopardized, potentially impacting their ability to maintain service quality, invest in crucial infrastructure development, and ensure a reliable power supply across their networks. The current measure, by focusing solely on the removal of the VAT, offers some level of relief to consumers without directly shifting the entirety of the system loss cost burden onto the utilities, representing a delicate balance in policy.
This move by the Marcos administration is indicative of a broader strategic effort to tackle persistent economic challenges, particularly the rising cost of living and stubbornly high inflation rates that have pressured Filipino households. While the immediate savings for individual consumers might indeed be modest, the symbolic significance of removing a tax on an unconsumed utility charge holds considerable weight. It effectively signals a responsiveness from the government to long-standing public grievances that have festered over decades and actively opens the door for deeper legislative discussions on comprehensive reforms within the energy sector.
The ongoing dialogue in Congress, actively considering wider changes to electricity charges and taxes, suggests that this recent BIR circular is but one calculated step in a continuing, multi-faceted effort to make electricity more affordable and equitable for all Filipinos. The coming months are likely to see sustained pressure from various sectors, including consumer groups and opposition lawmakers, to build upon this initial relief, pushing for more profound adjustments that could truly transform the energy landscape for consumers and redefine how electricity costs are managed across the archipelago.