Income tax cut, but prices seen to go up

MANILA, Philippines — Wage earners can expect bigger take-home pay – but also bigger expenses on fuel, fares and goods such as sweetened beverages after President Duterte signed into law yesterday the first package of the Tax Reform for Acceleration and Inclusion (TRAIN).

Critics have warned that the higher value-added tax (VAT) on fuel and other goods stipulated in the TRAIN would offset whatever savings ordinary wage earners would derive from lower income tax.

With TRAIN expected to push fuel prices higher, corresponding increases in transport fares and electricity rates will not be far behind.

Also enacted into law yesterday was the General Appropriations Act (GAA) for 2018.

“Two laws that I signed today are the fulfillment of my campaign promise to institute genuine fiscal reform that will be felt by every Filipino,” the President said.

“The implementation of these laws will serve as our national, initial step towards cutting the poverty rate (to) 14 percent and making the Philippines an upper middle class (country) by 2022,” he added.

The TRAIN will impose a P6 per liter tax on drinks containing caloric or non-caloric sweetener and P12 per liter tax on drinks containing high fructose corn syrup or combination. Milk and three-in-one coffee will be exempt from the beverage tax.

The law will also provide for a staggered increase in oil excise tax by up to P6 per liter over a three-year period, with lower rates for diesel, kerosene and liquefied petroleum gas.

It will also adjust automobile excise tax based on net manufacturing or importer’s price: four percent for P600,000 or below, 10 percent for P600,001 to P1 million, 20 percent for P1,000,001 to P4 million and 50 percent for vehicles priced above P4 million.

Hybrid cars will be taxed at 50 percent of the equivalent automobile.

The TRAIN will raise the rate of coal excise tax from P10 per metric ton to P50 next year, P100 in 2019 and P150 in 2020.

The new law will also double the mining excise rate to four percent from two percent, increase the documentary stamp tax to 100 percent from 50 percent except for property, savings and non-life insurance, increase the final tax on foreign currency deposit units from 7.5 percent to 15 percent, impose a five percent excise tax on cosmetic procedures, increase the capital gains tax of non-traded stock to 15 percent from five to ten percent, and raise the stock transaction tax to 0.6 percent from 0.5 percent of the transaction value.

Budget Secretary Benjamin Diokno said workers would immediately enjoy bigger take-home pay next year.

Cushion negative impact

Trade groups called on the Duterte administration to come out with programs and other measures to cushion the negative impact of the TRAIN on workers’ purchasing power.

Julius Cainglet of the Federation of Free Workers (FFW) said the additional tax exemption provided under TRAIN for employed workers would not be sufficient to compensate for the projected increase in prices of basic commodities.

“Additional excise taxes for fuel will increase transport fares and the cost of LPG. Increase in power rates is also expected as well as the prices of food,” Cainglet said.

“Aside from food, power and transport fares are sensitive to workers. The increase in these costs will not only nullify any gains from tax exemptions, but it will push workers to get more loans and be victimized by loan sharks,” he added.

Associated Labor Unions (ALU) spokesman Alan Tanjusay said the government should also provide assistance to informal workers, who are expected to bear a heavy financial burden as a result of the TRAIN’s implementation.

Tanjusay noted the newly signed law does not include programs for those likely to be adversely affected.

He added the government should improve its social safety net protection for underground economy workers to keep them from falling deeper into “extreme poverty.” 

ALU-Trade Unions Congress of the Philippines also warned  that 15.6 million underground economy workers “will be run over by TRAIN.”

These are the independent, self-employed, small-scale producers and distributors of goods and services, including jeepney, tricycle, pedicab and taxi drivers, all kinds of vendors, sales attendants, barbers, cooks, waiters, dishwashers in carinderias and canteens, tailors, sewers, porters and street sweepers, it said.

“Underground economy workers will be impacted by the rise in prices of commodities and the increase in the cost of services caused specifically by the TRAIN’s excise tax on fuel, sweetened beverages and coal,” the group said.

It admitted though that the TRAIN would benefit millions of wage earners by raising the amount of annual tax-free income from P50,000 for a single taxpayer to P150,000 for a working spouse with four dependents to a uniform P250,000, and tax-free yearend bonuses from P82,000 to P90,000.  

Militant women’s partylist group Gabriela also warned about the TRAIN’s adverse effect on women.

“TRAIN will directly impact over six million Filipino women with higher prices of basic commodities but who will not get any income tax gains out of it,” Gabriela said.

It said that while the bill would reduce the income tax of 7.5 million salaried workers, “this still leaves an estimated 6.2 million Filipino women who are unemployed, self-employed who are not paying taxes and unpaid family workers who will not benefit at all from the income tax reduction.”

The sector “will be slapped with higher prices of basic commodities and services,” the group said.

“Higher taxes on petroleum products, most sugar-based beverages and other goods and services will be imposed across the board and will largely be shouldered by women who must budget meager family incomes to keep up with rising expenses,” Gabriela stressed.

The 6.2 million women seen to be adversely affected by TRAIN comprise one million jobless women, three million self-employed but not paying taxes and 2.2 million unpaid family and farm workers.

Major relief 

But Sen. Sonny Angara, chairman of the Senate ways and means committee, said the new tax reform measure would greatly ease the financial burden of millions of Filipinos.

“Next year would mark the beginning of a new, simplified and fairer income tax system. We hope we have fulfilled our ultimate goal to provide millions of Filipinos relief from their tax burdens that would put more money in their pockets to help them spend for their families and loved ones,” Angara said.

He also thanked the Department of Finance (DOF) headed by Secretary Carlos Dominguez III “for working very hard and making this a truly collective effort.”

He said the ultimate aim of the TRAIN is improve the lives of Filipinos.

In a statement, Dominguez said the passage of the TRAIN is a “sign of maturity” for the Philippine economy, as it proves it is now ready to meet the challenges of fixing structural problems in the tax system while generating more revenues at the same time.

“It is also the first of five packages that will once and for all start fixing the structural problems of the tax system that has become unfair, complex and inefficient. This tax reform will also raise the revenues needed to make real positive change for our people,” Dominguez said. 

The finance chief said this was the first time the government passed into law a tax reform bill not in response to a crisis or external pressure. He said this was also the first time the government was giving up P150 billion in revenues as tax-relief for Filipinos paying personal income taxes.

“I don’t think this ever happened before. Never in the past has the government given up revenues. We have here almost P150 billion, first time ever. First time ever we did a tax reform without anybody forcing us to do it. So I am saying that we are making history,” Dominguez said.

Unlike the enactment of the Expanded Value-Added Tax Law in 2005, which was done to stave off a fiscal crisis under the Arroyo administration, Dominguez said the TRAIN was passed at a time when the country is enjoying strong macroeconomic fundamentals, a sound fiscal policy and a high GDP growth rate.

Christmas gift

Dominguez said the passage of the TRAIN is the government’s biggest Christmas and New Year’s gift to the Filipino people.

According to the finance chief, the TRAIN provides Filipino taxpayers with much-needed relief as it would exempt the first P250,000 of their annual salaries from personal income tax.

He said the TRAIN also aims to raise significant amount of revenues to fund the government’s priority infrastructure and social protection programs. This will ultimately help the government achieve its target of reducing poverty to 14 percent by 2022 from the current 21.6 percent.

Seventy percent of the incremental revenues under the TRAIN will help support the government’s infrastructure modernization program, while 30 percent will go to social services including the cash transfer program for the poorest 10 million households.

The DOF also allayed concerns the approved tax reform measure would cause significant increases in the price of goods, saying the inflationary impact of the measure will only be at 0.7 percent, lower than the initial estimate of 0.9 percent.

For think tank Capital Economics, the comprehensive tax reform program stands as the most important legislative achievement of the current administration over the past 17 months.

While “the increases in indirect taxes are likely to push up inflation,” Capital Economics said the overall adverse impact on the economy would be minimal. It pointed out the changes would be done gradually.

“The changes are likely to put some upward pressure on headline inflation but, as they will be phased in over several years, the effect is not likely to be large,” he said.

The new tax revenues, it said, would greatly help fund the administration’s ambitious infrastructure programs.

“These projects should increase capacity, reduce bottlenecks in the economy and actually ease inflationary pressures over the medium term,” Capital Economics added, referring to the tax revenues which it said would represent one percent of GDP.

Dismayed

While the enactment of the TRAIN has drawn praises from most lawmakers, Sen. Manny Pacquiao expressed dismay at what he called last minute inclusion in the law of  “low” tax on tobacco products.

Pacquiao, an administration ally, said he was taken aback by the decision of the bicameral panel to adopt a lower tax on cigarettes even while the Senate has yet to pass its own bill raising excise taxes on tobacco products.

Pacquiao earlier filed Senate Bill 1599 proposing to increase the current tobacco tax rate of P30 per pack to P60 in 2018 and nine percent per year thereafter.

Sen. Joseph Victor Ejercito, chair of the Senate committee on health, had also filed a bill aimed at raising tobacco tax. His Senate Bill 1605 seeks to increase the tax on tobacco to P90 per pack in 2018.

Pacquiao said the measures – if and when enacted into law – will prevent 200,000 individuals from becoming new smokers next year. It will also reduce the number of smokers by one million by 2022. Currently, 150,000 Filipinos die each year due to smoking-related diseases.

Ejercito said he strongly believes the tobacco lobby caused the insertion of the much lower excise tax rate in the Package 1 of the TRAIN so that the much higher proposals in the Senate and in the DOF would no longer be included in the second tranche of the tax reform measure.

The senator said that unlike the taxes on sweetened beverages and petroleum, tobacco tax is not inflationary.

He said he will push for higher taxes on tobacco products in the crafting of Package 2 of the TRAIN.

The Action for Economic Reforms (AER), a non-government organization, has warned the last-minute insertion has taken away the right and opportunity of the people and the Senate health champions to push for even higher tobacco tax rates.

Meanwhile, Senate finance committee chair Loren Legarda called the 2018 GAA a “a pro-people budget that places heavy importance on providing for the actual needs of the Filipinos, such as education, healthcare, livelihood, shelter, peace and order and other support and services to the public.”

She said that at P3.767 trillion, the 2018 GAA is the biggest budget so far the government has ever had. It “will also be the biggest amount our government would invest on its people,” she pointed out.

“I am optimistic that the 2018 GAA and TRAIN Law will both usher in more stable growth for the country, growth that is sustainable, resilient and inclusive,” she said. – Paolo Romero, Mayen Jaymalin, Mary Grace Padin, Lawrence Agcaoili and Alexis Romero