THE government plans to increase the value-added tax or VAT on goods and services from 12 percent to 15 percent and raise the excise tax on fuel from P4.53 a liter of gasoline to P10 a liter to fund President Rodrigo Duterte’s first national budget of P3.35 trillion, which is 11.6 percent higher than this year’s spending plan.
Highly placed Palace and House sources said the Cabinet Revenue Cluster headed by Finance Secretary Carlos Dominguez is also considering lifting VAT exemptions on 30 products and services, and 13 types of transactions.
“Either we impose an increase on VAT to a maximum of 15 percent or we lift exemptions from too many VAT-exempt transactions. The country’s economic managers believe that there are too many exemptions on VAT [and] many of these… were without good rationale,” said a House leader, who requested anonymity.
The source also said the economic team noted that the petroleum excise tax has not been adjusted since 1997, and that raising this would offset losses to be incurred when the government lowers income tax rates.
The new tax impositions would raise a total of P500 billion in fresh revenues, the House source said.
Congress is also set to tax the rich more and lower the income tax on wage earners and the middle income bracket from 32 percent to 25 percent, which could result in government losing P92 billion a year in tax collections.
Tax efforts will also be focused on professionals such as doctors, lawyers and engineers as only 40 percent of them were found to be paying the right taxes.
Budget Secretary Benjamin Diokno will be in the House today to submit the Palace-proposed national budget for 2017.
The possible tax policy packages—a reduction in personal income tax and consumption tax, corporate income tax, property tax, and capital income and transaction tax— were described as “revenue losing measures” but that the economic managers included “offsetting measures” to cushion the impact of the lowering of taxes.
Personal income tax and consumption tax would be reduced from 32 percent to 25 percent but be offset by limiting VAT exemptions to raw food and other necessities.
The excise tax on oil could also be increased, the source said.
The corporate income tax will also be reduced from the prevailing 30 percent to 25 percent, but lost revenues will be offset by rationalizing fiscal incentives and granting companies incentives that are good only for a limited time.
The government has an option whether to lower the property tax (both on asset and transactions) or abolish the estate and donor’s tax and offset the losses by centralizing valuation of properties and increase valuation closer to market prices with a mandatory increase every five years.
President Rodrigo Duterte did not mention new tax impositions during his first State of the Nation Address but announced he plans to tax the rich more to fund salary increases for teachers, soldiers and policemen and social services program, such as a monthly rice subsidy for the poorest of the poor.
Three days after the Sona, the country’s economic team presented to the President a proposed tax reform strategy that would include reducing personal, capital and corporate taxes at the same time increasing the VAT to 15 percent and the excise tax on fuel by P5.65 a liter.
Congress was being given only three months within which to pass the tax policy packages, official government records show.
Banking on the President’s 91-percent popularity rating, the Cabinet Revenue Cluster convened in July to propose tax reform strategy that would raise some P500 billion to finance the government’s job creation and poverty reduction programs.
The economic team started this month discussing the draft tax system with select congressmen and senators to reach a consensus on the VAT hike.
Official documents from the DoF, a copy of which was obtained by the Manila Standard, show August is the target for consultation with stakeholders with the Department of Finance expected to transmit the final tax package proposal to Congress by September with the President convening the Legislative-Executive Development Advisory Council or Ledac by October and identifying the tax bills that will be certified as urgent.
Congress is expected to deliberate on the tax bills between October and December with the passage being eyed by January 2017 and effectivity by June 2017.
On the pessimistic side, the economic managers saw passage of the tax proposal by June 2017 and implementation by January 2018.
For this year, the Bureau of Internal Revenue was able to collect taxes on domestic goods and services amounting to P791 billion, official records show.
The BIR was also able to collect some P396 billion from VAT annually.
The three-percent increase in VAT or the lifting of exemptions would translate to an additional P80 billion in VAT collection annually, the source said.
The economic managers said to become a high-income country in a generation, the Philippines needs to invest seven percent of GDP or gross domestic product more every year.
This is equivalent to P1 trillion in 2016 prices, the economic managers said.
“Investments are needed in infrastructure, education, health and social protection, both rural and urban. Around 3.5 percent of GDP can be raised by improving tax administration and spending efficiency, as well as maintaining strong growth. The remaining 3.5 percent of GDP needs to be raised through tax policy reform,” the source said.
The government, the source said, plans to reform the tax system to achieve more inclusive growth.
By 2019, the source said, the government wants to raise three percent of GDP in tax revenues by improving the equity, inefficiency and simplicity of the tax system towards a low-rate and broad-based regime to support investment, job creation and poverty reduction.
“Immediate objectives for 2016 to 2019—raise 2 percent of GDP [P290 billion] from tax policy reform. Raise one percent of GDP (P145 billion) from tax administration reform, spending efficiency and high growth,” the revenue cluster document said.
The economic team also lamented that the Philippines had a low tax efficiency compared to other countries in the region.
For instance, they said that the Philippines has a VAT rate of 12 percent, while Thailand has a seven percent VAT, but they both collect the same revenues amounting to 4.2 percent of GDP. This was because the Philippines has tax efficiency of 35 percent compared to Thailand’s 60 percent, the economic team said.
Citing a study undertaken by the House last year, House Deputy Speaker Miro Quimbo, former chairman of the House committee on ways and means, said of the 36 million Filipinos working, only 6.8 million are taxed.
Quimbo said only 16 percent of all working Filipinos actually pay income taxes.
“The salary wage earners were 100 percent compliant. Only 40 percent of professionals [doctors, lawyers, engineers] are paying the right taxes while only 31 percent of the entrepreneurs—hardware and store owners—are paying taxes,” Quimbo said.
The corporations and those executives who are earning P10 million and above would be taxed 33 percent in individual income and corporate taxes but they would be given tax incentives for safety nets, he said.
“There is a reason why these people are not paying. But it doesn’t follow that if others refuse to pay, we have to squeeze those who have no choice like the wage earners,” Quimbo said. “That is not fair.”
Quimbo said the reason those with big salaries were not paying was because the system was “too complex, so complicated.”
“The tax rates are just too high. In fact, we are the highest in the entire Southeast Asia in both the corporate and individual income taxes,” he said. “Yet, in terms of tax collection, we are the lowest in Asean. What does that say?”
Quimbo said that when the tax rate is unreasonably high, compliance becomes all the more difficult.
“The higher the tax rate, the higher the tax evasion,” Quimbo said.
In the previous Congress, Quimbo said his counterpart in the Senate, Senator Juan Edgardo Angara, pushed to lower the tax rates because this was one of the reasons Foreign Direct Investment (FDI) in the Philippines was lowest in the entire Asean.
FDI creates jobs that address poverty, Quimbo said.
Quimbo said the reduction of the corporate income tax bill is part of the second phase of his income tax proposal. The first phase of the proposal is embodied in House Bill 20, which adjusts the individual income tax to inflation to give immediate social justice to salary workers.