Discounts in fare, basic goods planned for poor

By Luis Leoncio 

The proposed tax-reform package will provide “safety nets” for the poor, like coupons that could be used as fares or discount cards when buying basic goods and services, the government said. Finance Undersecretary Karl Kendrick Chua, a former senior country economist of the World Bank for the Philippines, said the safety-net proposal of the Department of Finance (DOF) would involve an increase in the excise tax on sin products while broadening the base for value-added tax (VAT) payments by removing some exemptions. 

The DOF’s proposed package of tax reforms aims to restructure the personal income-tax rate, expand the VAT base by reducing the coverage of its exemption, adjust the excise taxes imposed on petroleum and automobiles, and impose a new excise tax on sugar-sweetened beverages as a public-health measure.

Chua said the DOF will propose amendments to Congress that the reform package start next year, along with the amendments in the sin-tax law to allow an increase in levies on so-called “sin products,” primarily cigarettes, by next year.

“Once the current (sin-tax) law reaches maturity next year, we’re proposing to adjust rates,” Chua said.

He said higher sin-tax rates would result in additional revenue of P22 billion in 2018 and this would more than double to P46 billion by 2019.

Under Republic Act 10351, sin-tax rates are supposed to rise by 4 percent yearly starting 2018, following the implementation of unitary rates next year.

Chua said the proposal would be to adjust the annual increase to 8 percent; he said the rate under the law was “too low, given the excise burden.”

“Sin tax is a very effective health measure. But tobacco prices in the Philippines are still low compared with those of other countries. For instance, cigarettes in Singapore are 10 times more expensive. We think that for it (sin tax) to be a really effective health measure, we should increase excise taxes. Otherwise, we’ll continue to have health risks,” Chua said.

Chua said the target is to provide a subsidy scheme to protect the lowest 50 percent of the population from this increase in the excise tax. “We are also looking at providing a number of subsidies to commuters, like cash cards or upfront discount to offset the impact on the people,” Chua added.

The proposed tax-reforms package that the Duterte administration will submit to Congress will be the linchpin of a broader reform package to reduce poverty, restore peace and order, curb armed insurgencies and transform the Philippines into a high middle-income state by the end of the Duterte presidency, Finance Secretary Carlos Dominguez III said.

Dominguez said the two benchmarks in achieving the economic goals would be: attaining an economic growth of at least 7 percent each year, and stronger law-enforcement agencies.

Once attained, he said, these objectives would clear the way for the Philippines to become a high-income country in one generation.

Tax reform, he said, is crucial to this task of reconfiguring the Philippines economy to attain inclusive growth because the Duterte administration needs to enhance access to opportunities for all, reduce the disparities among regions, and gird up our youths for dynamic economic roles via superior educational and healthcare systems.

“Taxes are never popular. We are emerging from a history of chronically low tax efforts and damaged institutions. This history of weak and inefficient governance is a more significant factor than colonialism in explaining our underdevelopment,” he said.

Chua, who is the DOF’s chief economist, said the main revenue agencies, the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC), have been laggards in their collection targets mainly due to the built-in inefficiencies in the country’s tax system.

“Currently, the way we look at the tax system, even if the BIR and the BOC were to be 100-percent efficient, we do not think that they could achieve the targets that the budget has set. Why? Because the current tax system has built-in inefficiencies,” Chua said.

Chua said that among these inefficiencies was the failure to adjust fuel excise taxes to inflation, which had resulted in declining collections over the years.

He said, for instance, collections from fuel excise taxes as a percentage of the gross domestic product (GDP) has fallen from one percent in 1997 to the current dismal 0.2 percent.

Chua also said built-in exemptions and incentives for businesses, which are not time-bound, generated a loss of about 1.5 percent of GDP, based on estimates gathered by the DOF and experts from the World Bank and other institutions. Numerous VAT exemptions also create a lot of leakages.

Bank-secrecy laws have also prevented the BIR from conducting a proper audit on taxpayers, Chua noted.

“Because of these reasons, we believe that a reform of the policy is also needed to help the BIR and the BOC improve tax administration,” he said.

He stressed, however, that the DOF has also drawn up a social-protection package to cushion the impact of these tax-reform measures on the country’s most vulnerable sectors.

Chua said around a quarter to a third of the net amount of revenue of around P370 billion to be raised from the entire tax-reform program would be allocated for targeted subsidies.

“That is really how a tax system should work. The money we collect should be redistributed to those who will be needing it so that they will benefit (from the reforms),” Chua said.

The Management Association of the Philippines (MAP) said in a statement that it fully supports the tax-reform package since it would encourage voluntary compliance, lower the compliance cost, promote progressivity and expand the tax base while spreading the tax burden.

“Having fair, simple and easy-to-comply with tax laws will help improve the ease of doing business in the country and will encourage more local and foreign investments,” the MAP statement said.

MAP urges the enactment of a holistic tax-reform measure that will correct current inequities, simplify the tax system to encourage compliance, and pursue measures that would counter the effects of tax rate adjustments.

The MAP statement encouraged the DOF and the legislature to exhaust all possible means to make the tax system simpler to administer, fairer to taxpayers and more attractive to investors.