Power generators, the National Grid Corporation of the Philippines (NGCP), and distribution utilities may soon exclude system loss charges from their gross receipts for value-added tax purposes, under a proposal by the Energy Regulatory Commission (ERC) that could lower electricity bills.

The ERC said Tuesday it has proposed classifying the System Loss Charge as a government-mandated pass-through cost that should be part of the gross receipts in computing the 12-percent VAT under the National Internal Revenue Code.

Once finalized and confirmed by the Bureau of Internal Revenue (BIR), the resolution would effectively scrap the VAT currently imposed on the System Loss Charge, removing an additional cost shouldered by household and commercial electricity users.

ERC Chairperson and CEO Francis Saturnino C. Juan said imposing VAT on electricity that consumers do not actually receive is inconsistent with the nature of the tax.

“System loss is electricity that consumers pay for but never receive,” Juan said. 

“Imposing VAT on top of a charge for electricity that was never delivered to consumers is fundamentally at odds with the nature of VAT as a tax on the value of goods and services actually rendered. This proposed Resolution addresses that and gives consumers the relief they rightly deserve.”

System loss refers to electricity that is generated and paid for but is lost during transmission and distribution before reaching consumers.

Under existing rules, consumers pay for the lost electricity and the VAT imposed on that charge.

The proposed resolution would amend provisions of ERC Resolution No. 20, Series of 2005, and ERC Resolution No. 14, Series of 2022, to reflect the regulator’s position on the tax treatment of system loss charges.

“This is a concrete and immediate step as directed by the President toward making electricity more affordable,” Juan said. “Working within our existing regulatory authority and in close coordination with the BIR, we are seeking to remove a layer of taxation that consumers have been shouldering for far too long.”

The proposal has yet to clear the public consultation process and secure BIR confirmation before the VAT can be removed.

The ERC will hold public consultations on the draft resolution on Aug. 25, with generation companies, distribution utilities, NGCP, consumer groups and the public invited to participate.

Stakeholders have until 18 August to submit written comments on the proposal to the commission.