VAT on system loss may be removed by November – ERC

The Energy Regulatory Commission (ERC) has announced that the value-added tax (VAT) on the system loss charge, widely criticized by consumers, may be removed from electricity bills as early as November. This potential change follows a decision by ERC Chairperson Francis Saturnino Juan, who stated during a congressional budget hearing that the Bureau of Internal Revenue (BIR) is finalizing the necessary documentation to implement the VAT exemption. According to Juan, the process hinges on the release of a Revenue Memorandum Circular (RMC) by the BIR, which is expected to follow the ERC’s Resolution No. 26, Series of 2026. That resolution classified system loss as a government-mandated pass-through cost, meaning it should not contribute to the VAT base of electricity generators, the National Grid Corporation of the Philippines (NGCP), or distribution utilities. The BIR confirmed it is preparing the RMC and plans to issue it after the 15-day period following the publication of the ERC resolution. Once the RMC is released, the ERC will instruct distribution utilities to update their billing systems and formats accordingly. Juan noted that while the earliest possible implementation date is November, the actual rollout might depend on whether the BIR issues the document in October. He remarked, “If it comes out in October, the earliest implementation can be in November.” The proposed VAT removal aims to alleviate the financial burden on consumers, particularly since system loss charges have long been a point of contention. BIR Commissioner Charlito Martin Mendoza explained that the change acknowledges system loss as a cost passed on to consumers rather than an income for utility companies. “In simple terms, consumers should not be paying VAT on electricity that never actually reaches their homes or businesses,” he said in a statement. Despite the anticipated relief, the complete elimination of the system loss charge itself remains a separate challenge. During the hearing, Akbayan Representative Chel Diokno questioned officials about when consumers could expect the charge to vanish entirely. Energy Secretary Sharon Garin emphasized that this task requires a phased approach, involving substantial investment and collaboration among electric cooperatives and other stakeholders. “This will take time, a lot of work for the electric co-ops, and also money,” she warned. System loss is categorized into two types: non-technical and technical. Non-technical losses include instances such as electricity theft, illegal connections, faulty meters, and billing discrepancies. These issues often stem from human actions or administrative inefficiencies. Technical losses, on the other hand, result from the natural degradation of electrical infrastructure as energy travels through transmission and distribution networks. Reducing these losses typically involves upgrading equipment and optimizing grid designs. The Department of Energy (DOE) has previously estimated that addressing both types of losses will require approximately P7 billion in investments. This figure reflects the scale of the challenge, as improving efficiency across the entire electricity distribution system demands coordinated efforts and sustained funding. While the VAT exemption represents a step forward, the broader goal of eradicating system loss charges remains a complex and long-term endeavor. As the BIR prepares to finalize the RMC, attention turns to the next steps. If the document is issued as planned, the impact on consumer bills could become visible within months. However, the path toward fully eliminating system loss charges will likely unfold over years, requiring ongoing policy support, regulatory oversight, and public engagement. For now, the focus remains on ensuring that the VAT relief is implemented effectively and transparently.