Finding P170 billion

During most of the first 60 days of Carlos “Sonny” Dominguez’s stint as Finance secretary, he’s been obsessed about finding at least P170 billion to augment projected losses from a planned (and promised) reduction in personal and corporate income taxes.

Beyond being merely an election promise by President Rodrigo Duterte, reducing income taxes makes economic sense. At a time when the Philippine economy is growing, bringing income taxes to levels competitive with other countries is always a good move.

For business, it means transforming the country into a more attractive haven for foreign investors, especially at a time when the global economy seems to be headed for better days.  

For Filipinos, especially those belonging to the middle class, better purchasing power from lowered income taxes would help spur economic growth and encourage savings. As the country’s economic managers point out, increased consumption leads to lower prices for goods and services.

Tinkering with VAT

One of the major proposals to augment revenue losses from the lowered income taxes was a hike in value added taxes, from 12 percent to 14 percent. This has been given a definite thumbs-down in recent days by the current administration, which puts pressure on finding new sources to augment projected revenue losses from lowered income taxes.

Retaining the 12 percent VAT is good news, especially since this is basically a consumption tax that penalizes consumers. However, a better idea would be to tighten the current VAT system and to plug collection loopholes.

There are strong overtures to remove the VAT exemptions on 30 domestic goods and services and 13 types of transactions, which would raise new revenues for the state coffers to the tune of P350 billion, enough to cover the “losses” from lowering income taxes, and help augment the estimated budget deficit next year of P350 billion.

However, tinkering with the current VAT system this way would still be tantamount to raising consumption taxes affecting the base population since many of the exemptions are regarded as safety nets for the poor.

Some of these tax exemptions involve the sale and importation of agricultural products and inputs, services by agricultural contract growers and private educational institutions, sales of cooperatives, export sales of small non-VAT businesses and low-cost residential rentals.

Strengthen rather than rate increase

To strengthen VAT collections under the existing system, removing the input-output mode of computation is strongly recommended, and instead replacing this with a straight no-nonsense VAT of, say, seven percent, which is done in a number of countries.

Aside from reducing opportunities for corruption, a straight VAT will decrease the number of personnel who have to check on filed claims against VAT collections – which, unhappily for businesses, have been mounting over the years.

Sugar and junk food ‘sins’

Another revenue booster the current administration is seriously looking at is taxing sugar and consumer products that use sugar. This is apparently inspired by the success of the 2008 Sin Tax Law on liquor and tobacco products.

Despite doomsday scenarios painted by tobacco and liquor manufacturing and retailing companies, the sterner taxation system on cigars and cigarettes, as well as brews and spirits, had successfully generated revenues for the state to boost health care, not just of those associated with abuse of the sin products.

Taking a page from this successful campaign, lawmakers are hoping to capitalize on the health issues associated with the consumption of excessive sugars in drinks and snacks, and the unhealthy high-sodium content in processed foods.

Although initial estimates on collections from sugar and junk foods are nowhere as impressive as those from tobacco and liquor, the benefits of a healthier citizenship should be worth the bother of going to Congress.

Sugar- and other junk food-related illnesses have continued to plague Filipinos, especially those belonging to lower income levels who have conveniently fallen for cheap “fruit juices” and carbonated beverages, as well as nutritionally inadequate chips, instant noodles and other snacks.

There is now a growing concern over rising obesity among children and the youth, and higher incidences of kidney problems and urinary tract infections because of higher sugar and salt consumptions.

There are also plans to revisit the original Sin Tax Law, but care must be taken against upsetting the working balance between taxation and consumption. After all, if tobacco and liquor are too heavily taxed, consumption may drop and totally obliterate the industry. Talk about killing the goose that lays the golden egg.

Caution on raising oil taxes

Living in an era of cheap oil, even if temporarily, should not be made as an excuse for arbitrarily raising excise taxes on petroleum products – or for removing exemptions on certain products like diesel and LPG.

In certain sensitive sectors of the country, many fuel products play a crucial role in the livelihood of people, as well as in keeping inflation on the macro side within manageable levels. And, oh yes, let’s not forget that LPG prices for household cooking is a sensitive issue for housewives.

But the biggest issue here will be power, which accounts for the bulk of diesel and bunker consumption in the country. Currently, the Philippines has the highest power rates in the ASEAN region, and is second to Japan in Asia.

Many local businesses trying to compete in other countries by exporting products have been citing the high cost of domestic electricity as a major reason for their failure. This is also partly a reason why many investors are not keen on establishing manufacturing facilities here.

If the Duterte government is hell-bent on raising taxes on petroleum products, let it be confined to those who are indeed capable of paying for what seems to be a doubling of excise taxes. Otherwise, we might end up opening a Pandora’s box that would just negate any ‘gains’ from reducing corporate and personal income taxes.

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