A problematic tax

The new tax package approved by Congress is far from satisfactory. Before delving into this, let us first summarize the main features of the package, to wit:

  • Maintain a 10% value-added tax (VAT), but give the President the power to increase the rate to 12% in January 2006, subject to certain conditions that, at any rate, will surely be met (i.e., a National Government deficit of 1.5% of gross domestic product).
  • Broaden the VAT coverage, including domestic transport of passengers and cargo by air and sea common carriers; sale of electricity; services of franchise grantees of electric utilities; sale of nonfood agricultural products, raw marine and forest products; sales by electric cooperatives; services rendered by doctors and lawyers; etc.
  • No VAT for several goods or services such as sale of goods, supplies, equipment and fuel to international shipping or air transport operations; services rendered to persons outside the country (outsourcing); and transport of passengers and cargo by air or sea to other countries.
  • Exempt from VAT several goods and services like sale, importation, or lease of passenger or cargo vessels and aircraft and spare parts for domestic or international transport; importation of fuel, goods and supplies by persons in international shipping or air transport.
  • Increase the corporate income tax from 32% to 35%, provided the rate will be lowered to 30% in 2009.

The main argument against the increase in the VAT rate is that it will have a negative impact on the poor and low-income groups. But the faculty of the UP School of Economics has countered that the VAT is “mildly progressive” because “almost 40% of the VAT is due from the richest 10% of the population, while only 17.1% is due from the poorest half.”

This point, however, is different from the poor’s ability to pay. Relative to that of the rich, a higher proportion of the poor’s income is going to be eaten up by an increase in prices arising from an increase in the VAT. Almost half, or 45.9%, of the spending for goods used by the poorest 10% is subject to VAT. In fact, the burden for the poor and low income groups gets heavier. For we have to consider the big increase in oil prices, electricity rates, and water tariffs; in general, the overall rise of inflation even as wages and public spending for essential services have shrunk in real terms.

Yet, even if we set aside the debate on equity, the law that Congress passed will not generate the much-needed revenues in a timely manner. The resolution of the fiscal crisis is an immediate, nay, an urgent matter. The collection of, say, an additional P30 billion in revenues cannot be postponed to January 2006.
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The sad fact is that the expected revenues from previously approved measures will be meager. While the indexation of the excise tax on sin products could have yielded a heftier amount of P9 billion, the law was compromised to accommodate vested interests. Hence, the potential yield has been reduced to about P6.7 billion. In the meantime, government, for lack of will amidst a highly politicized climate, is not ready to deliberate on the proposal to increase the excise tax on petroleum products, admittedly a source of buoyant revenues, with a projected yield of P28 billion.

Government and its technocrats, as well as the mainstream economists, are not keen either on having a reasonable import surcharge or tariff increase. Even a small increase in tariffs across the board – and Philippine tariffs are significantly below the bounded rates of the World Trade Organization – yields a substantial amount. A 2% surcharge, says Rosario Manasan of the Philippine Institute for Development Studies, can yield P16 billion. A tariff increase also has the advantage of addressing the equally serious crisis of employment. Politically, such a proposal can consolidate support from Filipino industrialists and workers.

Another reason that makes the new VAT package a bad measure is that just like the recent legislation on the adjustment of the excise tax on sin products, the revised VAT accommodates vested interests. The owners of airlines and shipping lines are the biggest gainers from VAT exemption or a zero-percent rate (see listing above). It is perhaps no coincidence that Mr. Lucio Tan, the owner of Philippine Airlines as well as of Fortune Tobacco and Asia Brewery, also benefits from a watered-down version of the excise tax on sin products.

Giving favors to the likes of Tan, Gokongwei, and Aboitiz while burdening the powerless, disorganized low-income and middle-income groups makes the VAT measure all the more indefensible.

Businessmen, too, are complaining about the increase in the corporate income tax. While there are a few bright sectors that have driven economic growth, the majority of firms are simply trying to keep afloat. Many could ill afford a higher corporate income tax in a climate of noncompetitiveness.

In sum, the administration has to get back to the drawing board and come out with new ways to generate the revenues. It may have no choice, but to impose new tax measures, to include an increase in the excise tax on petroleum taxes and a recalibration of tariffs.

Wishy-washy politics marks this administration’s handling of the fiscal crisis. It cannot afford any more blunders; its survival is at stake.

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