Consumption taxes to affect rich the most, not poor households, says DOF

Department of Finance in Manila, Philippines (Photo: Edgar Dann Alcantara, Sheena Thea Alcantara/Wikipedia)

MANILA – It is a “fallacy” to believe that the proposed expansion of the value-added tax (VAT) base and adjustments to the excise tax on petroleum products under the proposed comprehensive tax reform program are anti-poor because being consumption taxes, these will impact the most on affluent Filipinos who make use of more goods and services, rather than the poor, low-income and even the middle-class households, the Department of Finance (DOF) said.

DOF Undersecretary Karl Kendrick Chua said the Duterte administration’s proposed Tax Reform for Acceleration and Inclusion Act, which contains these VAT and fuel excise tariff proposals, would even shield poor and low-income consumers from the effects of these tax adjustment proposals because the new government is committed to providing highly targeted direct transfer programs and indirect subsidies to them.

“Rather than being anti-poor, the tax reform plan will actually correct the injustice of only a few enjoying the benefits of growth. Our primary goal here is to give everyone a better chance of building a more stable future by equalizing opportunities for all through the adoption of a simpler, fairer and more efficient tax system,” Chua said.

Chua pointed out too that the imposition of an excise tax is always hinged on a two-pronged objective, which, in the case of petroleum products, is to raise revenues and the other equally important goal of addressing pollution and the other negative environmental effects of using fossil fuels.

“Given this, everybody should be responsible, both rich and poor. Equity considerations, therefore, should not figure in imposing the tax on petroleum products. What should be considered is how the tax will be adjusted to improve equity,” Chua said.

For instance, he noted that although diesel is widely used by both the rich and the poor, not doing anything to adjust its excise tax and indexing it later to inflation benefits the rich far more than the poor because the top 10 percent of households in the country consume almost 60 percent of oil products and the top one percent consume 20 percent.

“Not adjusting the tax would mean continuing to subsidize the rich who can well afford to pay for fuel,” Chua said. “The use of highly targeted transfers that benefit the poor and other vulnerable sectors is the better and more effective option in addressing equity concerns.”

He also corrected the false assumption that the proposed adjustment on the diesel excise tax would be P10 per liter, as the DOF proposal is only P6, which represents the accumulated inflation since this tax was last adjusted 20 years ago.

“The paramount goal of the DOF tax reform plan is poverty reduction as it aims to help the government raise enough funds for accelerated spending on priority projects under President Duterte’s 10-point socioeconomic agenda, which aims to transform the Philippines into an upper middle-income country by 2022,” Chua said.

These priority investments are in the areas of infrastructure, human capital and social protection for the most vulnerable sectors so as to make growth truly inclusive and let the Duterte administration achieve its goal of drastically reducing poverty, he added.

An additional P1 trillion is needed per year, said Chua, to fund these priority projects, which, when sustained, would put flesh into the Duterte government’s vision of transforming the Philippines into a high-income country in one generation by 2040.

“The poor will benefit from better roads, both urban and farm-to-market roads, public schools, health centers, and improved social services. The accelerated spending on infrastructure, human capital and social protection will equalize opportunities and give better chance to the future generations of Filipinos,” Chua said.

As for the expansion of the VAT base, Chua assured the public that there would be no increase at all in the tax rate and that all seniors and persons with disabilities would continue to enjoy their VAT exemptions on essentials such as raw food, education and health services, including medicine.

The VAT threshold would also be raised for micro and small scale enterprises from the current limit of P1.9 million to the proposed P3 million, so that purchase from small businesses like sari-sari stores where the poor buy their needs will remain exempted from VAT payments.

“Again, it is a fallacy to believe that the revenues from expanding the VAT base would be mostly coming from the poor. In fact, the principle of VAT lies on how much one consumes – meaning the more VATable items one consumes, of course, he/she would have to pay more tax,” Chua said.

For instance, better-off families who use air-conditioners would have to pay more taxes than their low-income counterparts who normally use electric fans to cool themselves at home, Chua said.

The same is true, he added, for people with two or more cars, or those who dine out, which are amenities that the poor cannot afford.

“Even then, we should not forget that the income tax relief included in the proposed tax reform plan would be beneficial most especially to the low- and middle-income taxpayers with modest living conditions,” Chua said.

Earlier, President Duterte’s economic managers formally guaranteed highly targeted, direct and indirect transfer plus other social protection initiatives to shield the poor and low-income households from the impact of the proposed adjustments in excise fuel taxes under the initial comprehensive tax reform program that the government submitted last September to the Congress for its approval.

In a joint statement, Secretaries Carlos Dominguez III of the Department of Finance (DOF), Benjamin Diokno of the Department of Budget and Management (DBM), and Ernesto Pernia, the director general of the National Economic and Development Authority (NEDA), said these “highly targeted transfer programs” would help cushion the impact of the proposed indexing to inflation of the excise taxes on oil products on “the poorest 50 percent of the population.”

A main feature of the first reform package submitted by the DOF to the Congress last September is that personal income tax (PIT) rates would be cut from 32 percent to 25 percent that will in effect exempt 4.7 million taxpayers, which already include the current 1.7 million minimum wage earners, from paying income taxes. An additional 3 million taxpayers with taxable incomes of P250,000 and below would be included in the batch that would pay zero taxes.

Another 450,000 taxpayers as gathered from the 2013 database of the Bureau of Internal Revenue (BIR) would pay only 20 percent of the excess of P250,000 of their net taxable income.

For those with a net taxable income of P400,000 but not over P800,000, the highest tax that they would pay under the new DOF tax reform plan is P130,000, compared to the current system where they are now shelling out a maximum of P221,000 for PIT.

Based on the 2013 BIR database, this bracket consists of 357,875 taxpayers representing 4 percent of the total tax base for individuals, includes government workers under Salary Grades 18 to 25.

For individuals with net taxable income of P800,000 but not exceeding P2 million, which covers 114,856 individuals or 3 percent of the tax base, the maximum PIT paid under this bracket would only be paying P490,000 in the first year of implementation, compared to P605,000 under the current system.

Some 28,000 individuals earning P2 million to P5 million, representing 1 percent of the tax base would be taxed P490,000 plus 32 percent of their annual gross income in excess of P2 million.

The maximum PIT under this bracket is P1,450,000 compared to the current system where one has to cough up P1,565,000 for earning P5 million a year.

The last bracket of ultra-rich taxpayers comprising less than 6,000 individuals earning over P5 million would have to pay a tax of P1.45 million plus 35 percent of the amount in excess of P5 million.