Effects of revenue measures in tax reform ‘muted’

Date Posted : June 12, 2017

Effects of revenue measures in tax reform ‘muted’

Date Posted : June 12, 2017

The effects of the revenue-enhancing provisions of the proposed Tax Reform for Acceleration and Inclusion Act (TRAIN) will be “muted” for ordinary Filipinos and will even provide for a family of four earning P25,000 a month an annual windfall of more than P15,000, the Department of Finance (DOF) said.

Finance Undersecretary Karl Kendrick Chua said that contrary to the erroneous and bloated computations made by critics, the effects of the reforms proposed in the value-added tax (VAT) and the excise tax system under TRAIN “will be minimal because complementary measures to mitigate any price increases arising from the tax adjustments are also provided under the bill. ”

For instance, the claim that a house rental of P9,000 a month would increase to more than P12,000 under TRAIN is false because there would be no increase at all under the bill that was approved by the House of Representatives before the Congress adjourned sine die last May 31. This is because the far majority of lessors have revenues below the VAT threshold and are therefore exempt.

Also, electricity rates for households consuming around 200 kilowatts per hour a month will only pay an additional P70 a month or P840 a year, which is far less than the puffed-up estimate of P3,600 as claimed by TRAIN critics, Chua said.

House Bill No. 5636 or the proposed TRAIN, was approved on third and final reading on May 31 by a 246-9 vote with one abstention last May 31. It is a consolidation of the original tax reform bill—HB 4774—filed by Quirino Rep. Dakila Carlo Cua, and 54 other tax-related measures.

“The DOF expects potential price increases to be muted and complemented with programs to mitigate any price increases under TRAIN. All in all, a family with a head of household earning PHP 25,000 a month and with two children can expect to benefit an additional P15,512 annually,” Chua said.

As for house rentals of P10,000 and below, Chua explained that while the VAT exemptions for this category were not explicitly removed under HB 5636, properties rented out by smaller property owners with annual revenues not exceeding the proposed VAT threshold of P3 million a year remain exempted.

“To illustrate how unlikely this is, a property owner with a rental of P9,000 a month needs to own at least a 28-door property, which is equivalent to a small building, to breach the VAT threshold. Given how unlikely this is, renters who pay P9,000 a month will effectively not be paying VAT under the proposal,” Chua said.

Chua said public transport fares are also supposed to remain the same because “legitimate public transportation operators with valid franchises will be covered under the government’s Pantawid Pasada program.”

HB 5636 provides for this Pantawid program, in which drivers of public utility vehicles will be given cash cards, to “offset the potential price increase in fuel, hence there would be no need for fare increases,” Chua said.

For liquefied petroleum gas (LPG), Chua said the increase per year under TRAIN will only amount to P548, significantly lower than the P776 estimate made by critics of the bill.

“A standard 11-kilogram tank of LPG contains around 20 liters. This is equivalent to a P60 peso increase per tank. According to a survey by the PSA [Philippine Statistics Authority], an average family consumes around 9 tanks annually. This is equivalent to an additional P548 a year,” Chua said.

“For electricity rates, small power utility groups, which supply power to the majority of Filipinos, have heavily subsidized rates and only a fraction of the generation cost will be affected by the excise tax. The DOF estimates that a household consuming 200 kWh will pay an extra P70 a month, which is P840 a year, in contrast to some critics’ estimate of P3,600 annually,” he added.

In all, taking into account other expenses such as rice, fish, sugar, coffee, milk and other food items and basic necessities, a family of four with two dependents will incur additional expenses of P4,488 per year, which will be offset by the P20,000 annual increase in their take-home pay or a net benefit of P15,512 as a result of the lowering of personal income tax rates under TRAIN, Chua said.

Chua made this clarification in countering the claim by certain TRAIN critics that the same family of four would have to cough up an additional P29,828.80 per year in expenses under HB 5636, adding that such calculations were made with computational errors like double counting.

He said the DOF estimates the inflationary impact of the oil excise only to be around 0.9 percent on top of the usual inflation.

“The DOF’s computation is even higher than the estimates of the Bangko Sentral ng Pilipinas of 0.6 percent increase, the authority on prices and inflation. The critics’ estimate is much higher at 5 to 6 percent, that’s why their price increase estimates for food items are significantly higher,” Chua said.

HB 5636 was passed before the congressional recess after President Duterte had certified the bill as urgent, given its design to help provide a steady revenue stream to his government’s ambitious high—and inclusive—growth agenda anchored on record spending on infrastructure, human capital and social protection for the poor and other vulnerable sectors.

Finance Secretary Carlos Dominguez III said the DOF will continue to hold dialogues with senators during the remaining weeks of the congressional break to explain to them the merits of tax reform package and convince them to retain the original DOF-endorsed version outlined in Cua’s HB 4774.

“I’m very confident that our legislators are very aware of what is needed in the country, and are very responsive to what the country needs. I’m very confident that we will all sit together, and reason together, and come to a bill that will be good for the country,” Dominguez said.

Dominguez said he hopes the Senate will retain the original features of TRAIN under HB 4774 to optimize the bill’s revenue gains, which were trimmed under the House-approved version.

An increasing number of international financial institutions have lauded HB 5636’s approval as a positive step to reforming the country’s tax system and boosting revenue, and a testament to the Duterte administration’s decisive leadership and firm resolve to pursue broad economic reforms and ensure the financial viability of its ambitious public investment program.

Moody’s Investors Service said in a credit outlook that the House approval of HB 5636 will boost the Philippines’ credit rating because it will provide the government with a fresh revenue stream and showed it can put reforms in place despite political controversies.

Fitch Ratings said the speed with “which the bill passed through the House—and President Duterte’s intervention to give it a push over the line—suggests that tax reform is a priority for the government.” The tax reform package approved by the House, it said, will “widen the tax base and boost revenue.”

Deutsche Bank said that “Beyond its fundamental economic benefits, [the tax reform bill’s] passage would send investors a strong signal that the administration has the political will to pass unpopular laws to institute long-term structural economic reforms.

Nomura said, “the timeliness of the vote and the decisive result again underscore the strong priority that Duterte places on the economic reform agenda and his strong control over Congress.”

In a sign of positive business sentiment for this tax reform package, the Philippine Stock Exchange index (PSEi) went up by 90.37 points or 1.15 percent to close at 7,927.49 last June 1, or the day after the House had approved HB 5636 on third and final reading.

On June 5, the PSE closed at its highest level for this year at 8,001.38 points, and PSE president Ramon Monzon was quoted in media reports as saying that this breach of the 8,000 level was driven by “optimism over the developments in the DOF’s CTRP.”

DOF estimates show that under HB 5636, the government expects to raise P115 billion in 2018 from the tax reform package, P219.2 billion in 2019, P257 billion in 2020, P235 billion in 2021, and P250.4 billion in 2022.

If the complementary measures such as the motor vehicle user’s charge and the proposed estate tax amnesty are included, the government is expected to raise P133.8 billion in 2018, P233.6 billion in 2019, P272.9 billion in 2020, P253 billion in 2021 and P269.9 billion in 2022, Chua said.

The revenues raised from HB 5636 will account for 0.7 percent of GDP in 2018, 1.1 percent in 2019, 1.2 percent in 2020, 1 percent in 2021, and 1 percent in 2022 without the complementary measures.

With the complementary measures, the revenues raised from the bill will account for 0.8 percent of GDP in 2018, 1.2 percent in 2019, 1.3 percent in 2020, 1.1 percent in 2021, and 1.1 percent in 2022.

Under the original DOF-endorsed package in HB 4774, the government would have raised P91.4 billion in 2018 from the tax reform package, P185.7 billion in 2019, P223.8 billion in 2020, P200.7 billion in 2021, and P219.2 billion in 2022.

With the complementary measures, which under the original package included the tax on sugar-sweetened beverages (this was included in the final version of HB 5636), the total revenue take would have been P157.2 billion in 2018, P249.2 billion in 2019, P291.4 billion in 2020, P272.7 billion in 2021, and P295.7 billion in 2022.

HB 5636 will yield P1.163-trillion net revenues from 2018 to 2022 with the complementary measures, compared to P1.266 trillion under the original proposal, Chua said.


Date Posted June 12, 2017

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