By Milwida M. Guevara
A tax program is long overdue. The last Comprehensive Tax Reform Program (CTRP) was formulated during the Ramos administration. Contrary to what people say, the CTRP was not just the 1996 Tax Reform Program. It started as early as 1991 with the initiative of Secretary Ramon del Rosario adopting specific taxation on the taxation of fuel, cigarettes, and alcohol. Its formulation and legislation were hastened by the deregulation of the oil industry.
Secretary Bobby de Ocampo suggested that the subsidy on oil products could be phased out in tandem with a revenue stream. The LEDAC agreed in principle to expand the VAT to include services, withdraw tax incentives, reform income and excise taxation, and adopt measures to strengthen tax enforcement at BIR and BOC.
The CTRP was formulated by a multi-sectoral group and underwent several tax summits that were chaired by President Ramos. The package however was chopped into pieces by the Lower House and the measures were legislated separately. I was tempted several times to recommend a veto by the President especially when several tax rates were adopted for excise taxation and the automatic indexation was dropped. But Senator Enrile cautioned me and said that the reform process is not done in one sitting. Since he had many more years in the Senate, he promised to continue what was begun. Of course, history took a different course. Despite its flaws however, the entire package raised the tax effort to 17%.
Come now the TRAIN which is aimed to boost revenues to finance the “Build, Build, Build” program. But I have felt ambivalent towards it from the very beginning.
- It moves the country away from greater reliance on direct taxes, especially the income tax. The income tax is a good fiscal instrument. It is fair because it is based on the ability to pay. Since it is borne by the taxpayer who is named in the law, its features can be tailored to exempt the poor and those who have more needs than the others. Thus, additional exemption is given to those who have more dependents. In some countries, additional credit is given to those caring for handicapped persons. It is a buoyant revenue source since collection increases automatically with income.
The DOF estimated some P136.3 billion in revenue loss from the tax collected from wage-earners. It cuts the revenue stream from the income tax by 46%. This is a bit scary considering that the expected revenue-raisers are a bit iffy – i.e. R43.8 billion from improvements in tax administration.
- The TRAIN moves us towards greater dependence on indirect taxes. My beef about indirect taxes is that it is difficult to know who will bear them. The adjustment in fuel taxes is certainly necessary and is estimated to have less than 1 percentage point increase in inflation rate. But transport costs will increase by 2.8% (DOF estimate) and by 4.39% for sea and inland transport (our own estimates). Those increases are significant even for middle income groups. The DOF promises subsidies and vouchers, but their administration will take time and involve inefficiencies.
To cushion the impact on fuel prices, Senator Angara proposes to phase-in the increase in three years. For gasoline, the proposal increases the tax rate from P4.35 to P6.00 in 2018; P8.00 in 2019; and P10.00 in 2010. The DOF proposed rates are higher by P1.00 every year.
- The DOF adopts a tax on sweetened beverage. Purportedly, this is a health measure to prevent obesity and diabetes. However, the tax is based on a per liter of consumption instead of on sugar content. Sugar-laden beverages will be taxed in the same manner as beverages with lower sugar content. Powdered concentrate has 47.5 grams of sugar per 100 ml. (11.3 teaspoons of sugar) compared to soft drinks with 10.60 grams per 100 ml. (2.5 teaspoons of sugar). More importantly, studies show that a tax on soft drinks will bear heavily on the poor since there is a very slight difference in their consumption pattern. Soft drinks take up about 1% of the expenditures of the poor and 1.2% of the wealthy.
- The inequity in the distribution of the tax burden between the self-employed and the wage-earners is not addressed. The proposed 8% tax on gross sales for small businesses (i.e. below P3.0 million) may even discourage small traders from paying their income tax. Currently, their effective tax burden is very much less than 8%, i.e. from 0.9% for those in retail and 3.6% in construction. Even granting that they will not pay the turnover tax of 3%, their resulting tax burden will still be higher.
The bill is strong in its withdrawal of the VAT exemptions which have sprouted through special laws. It will grant income relief to taxpayers. But this will not mean much to the 40% of our labor force who are already exempt from the income tax because their wages are equal or below the minimum wage. They will receive no benefit from the TRAIN and will bear the brunt of the increase in indirect taxes.
Part 2 will be discussed next week.