To help ease the burden of rising electricity costs, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 97-2026, clarifying the removal of Value-Added Tax (VAT) on electricity system loss charges. It is important to note that the update does not remove the system loss charge itself from electricity bills. Instead, the change only removes the 12% VAT previously applied to such charges, which may result in lower electricity bills for consumers.
Electricity system loss charges refer to the cost of electricity lost while being transmitted and distributed before reaching consumers. These losses naturally occur due to factors such as resistance in power lines, equipment limitations, and other operational considerations. As part of the electricity billing structure, system loss charges remain a recoverable cost of distribution utilities.
Previously, VAT was imposed on system loss charges because these charges were considered part of the overall amount billed by electricity providers in delivering electricity services. Since they formed part of the total consideration paid by customers, they were included in the VAT computation.
However, concerns were raised on whether consumers should pay VAT on electricity that they did not actually consume. Unlike the electricity measured through a customer’s meter, system losses represent electricity that is lost before reaching the end-user. With the issuance of RMC No. 97-2026, the BIR clarified the updated VAT treatment, removing the VAT component on system loss charges while maintaining the charge itself.
The removal of VAT may provide some relief to households and businesses through reduced electricity bills. For companies with significant electricity consumption, even a small reduction may contribute to better cost management. However, the overall impact will depend on the amount of system loss charges reflected in each consumer’s bill.
The update also raises a broader discussion: should consumers continue to shoulder the cost of system losses? While some level of system loss is unavoidable in delivering electricity, there remains a need to ensure that losses are managed efficiently and that consumers are not burdened by avoidable inefficiencies within the system.
Moving Forward
Businesses and consumers should monitor further guidance and assess how this change affects electricity expenses. The removal of VAT on system loss charges is a step toward reducing costs, but achieving affordable electricity will continue to require a balance between consumer protection, efficient utility operations, and a sustainable energy sector.
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