Tax reform misstep may risk invest grade—DOF

By Riza Lozada

The Department of Fi­nance (DOF) warns of a higher budget deficit reaching as much as four percent of gross domestic product (GDP) that may weigh on the country’s investment grade ratings if the proposed tax reform program will not be passed on its orig­inal form.

Finance Undersecretary Karl Kendrick Chua, who said approving only the increase in the personal income tax (PIT) and not the revenue generat­ing measures, namely, the hike in the excise taxes on fuel and vehicles, would be detrimental to the state’s financial health.

“Passing only the PIT measure will lead to various degrees of revenue loss if there are no offsetting tax measures. This loss can undermine fis­cal sustainability and raise the deficit to as high as 4.0 percent of GDP,” he said in a state­ment.

The government has in­creased the cap on deficit level to three percent of GDP from two percent in the previous session as it increases invest­ments on infrastructure.

The House ways and means committee has ap­proved a substitute bill that consolidated the House Bill (HB) 4774, which mirrors the DOF’s Comprehensive Tax Reform Proposal (CTRP), and the 52 similar measures.

CTRP is targeted to allow the government to get addi­tional funding for infrastruc­ture, education, health and so­cial protection.

PIT is estimated to result to a decline in revenues by around P63 billion if the mea­sure was approved and imple­mented in the second half of this year as targeted.

For 2018, the revenue loss from the measure is seen to be around P138 billion and P152 billion in 2019.

These losses are the rea­sons the revenue-enhancing measures need to be ap­proved also, Chua said.

A hike of the share of deficit level to GDP may in­crease interest rates, which in turn is detrimental to the general public as this hikes interest rates, he said.

Chua said the worst case scenario is an increase of government borrowing by around P30 billion and by around P100 billion for the private sector.

He added that increas­ing the taxes on the ul­tra-rich alone, or those with net taxable income of above P800,000, is not enough since this segment is only about three percent of the individual taxpayer based.