FIRST PERSON - Alex Magno (The Philippine Star) - October 23, 2012 - 12:00am

Too bad Sen. Ralph Recto allowed himself to be bullied and bamboozled by his very allies in the administration into resigning as chair of the Senate Ways and Means committee.  No one else in that chamber comes close to his grasp of the dynamics between taxation and economics.

Recto is with the Liberal Party. Not even that spared him from the sort of wrath heaped by the power-that-be on anyone who does not deliver exactly what they want. He was called names and accused of having been bribed — without, we hasten to add, an iota of evidence offered. He is victim to that mean attitudinal streak native to this administration.

Recto, we will recall, stood courageously for the expanded VAT as a means to stabilize public revenues. He was intensely vilified for his otherwise sane fiscal position, subsequently losing in his first bid for a Senate seat. This time around, he stood fast for a saner excise tax schedule that will spare domestic manufacturing from annihilation. He was accused of betrayal.

Strangely, the DoF changed its position on excise taxes shortly after Recto resigned. Instead of insisting on an excise tax schedule that would yield P60 billion, the finance authorities declared they are be willing to settle for a P40 billion yield. That implies a more moderate tax hike — exactly what Recto was arguing for to avert a “tax shock” and all its unhealthy consequences.

It is now for someone else to craft the legislation that might please the Palace and yet spare the domestic economy from a “tax shock.” A bitter Recto decided he will no longer be in the unpopular business of legislating taxes.

Even the lower additional tax yield indicated by the DoF might not be workable. Sen. Edgardo Angara notes that, as things stand, the domestic alcohol and tobacco industry pays P45 billion in excise taxes on a total profit take of only P12 billion. A sharp 750% hike in excise taxes will undermine the viability of manufacturers.

This is especially so because the excise tax scheduled proposed by the DoF asymmetrically distributes the tax load. The much smaller tobacco industry will bear much of the load and the larger alcohol industry will be spared the “tax shock.”

House Bill 5727, in its present amended form, features an 85%-15% sharing of the tax burden between tobacco and alcohol products. This is a substantial departure from the historical pattern where the tax burden was evenly distributed.

At present, tobacco manufacturers pay the highest effective tax rates at 44%. By comparison, alcohol producers have an effective tax rate of 29.8%, telecoms 10.7%, power utilities 4.85%, automobile makers 3.02% and oil companies only 2.41%. Tobacco manufacturers pay the highest effective tax rate even as they make the lowest revenues compared to the others mentioned above. The proposed new excise tax schedule will make the disparities in effective tax rates even more overwhelming.

Preferential treatment for alcohol producers becomes more glaring on closer study of the draft legislation. While new excise taxes will take effect immediately, the lower tax increases for beer will not take effect until two years after. Even when that takes effect, the taxes will still be disproportionally distributed.

Proponents of the massive hike in excise taxes need to tell us why they want to punish smokers severely and drinkers only slightly. They might have good reason to do so — but they ought to make that reason explicit. One “sin” product cannot be more injurious to the public than the next one.

Indecent haste

Sometimes, our regional trial courts behave strangely, rushing to judgment while related cases are pending in the Court of Appeals or even the Supreme Court. It is as if the lower court attempts to preempt rulings by superior courts.

In one recent case, Branch 3 of the Batangas RTC issued an order last month drastically converting the rehabilitation proceedings involving Steel Corporation of the Philippines (SCP) into one of corporate liquidation. In its rashness, the trial court sounds the death knell for the country’s last remaining integrated flat steel manufacturing plant.

The Batangas court order was issued notwithstanding the fact that several related cases are pending at the Court of Appeals and the Supreme Court. These are cases filed by the steel company as well as by some of the creditor banks. Judicial courtesy should have dictated the trial court await rulings on related cases by the superior courts.

In issuing its order, the Batangas court used provisions in the Financial Rehabilitation and Investment Act (FRIA). This Act was passed in 2010. The case involving SCP’s rehabilitation was in court in 2006 under the Interim Rules on Corporate Rehabilitation. The Interim Rules does not authorize the court to order liquidation of a debtor company.

By acting according the provisions of FRIA, the Batangas court rehabilitation court makes the recent law apply retroactively. That runs against a basic principle forbidding retroactivity in application of laws to the detriment of defendants. In fact, the Supreme Court has yet to promulgate implementing rules and regulations for the FRIA.

The Batangas court obviously acted with indecent haste on this case and with incomplete information. Only one of many creditor banks appears the beneficiary of this rash order. The other creditor banks will be disadvantaged. The manufacturer, for its part, will be forced to shut down, foreclosing all possibility of a financial workout.

How is it at all possible for a mere trial court to issue an order based on a new law for which implanting rules and regulations still have to be promulgated? The Supreme Court should tell us.

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