Fantasy Islands

Imagine, if you will, Harry Roque rushing alongside President Duterte to greet the administration’s Tax Reform Acceleration and Inclusion Law as it crests into view.  “De TRAIN, de TRAIN!”  The TRAIN, signed into law by the President last December 19 and effective on the very first day of 2018, is trying to prove that it is the little engine that can, but in the children’s story, the engine that pulls the loaded train up a mountain agrees to do so when other engines refused in order to prove something to itself.   This TRAIN, though, needs to prove itself to the Filipino people.

Tax laws were last reformed in 1997, so a lot of people would agree that TRAIN was long overdue.  Before TRAIN, the Philippines had the highest value-added tax rate in Southeast Asia side-by-side with the lowest tax collection efficiency in the region.  That will change.

First among the reforms is the exemption from payment of personal income tax of workers earning P250,000 annually.  Then, it increases excise taxes on specific goods; excise taxes are those paid on the production, sale or consumption of a commodity on a country. For example, the TRAIN will impose a tax of P3 for kerosene, P2.50 for diesel and P1 for liquefied petroleum gas; as for coal, there will an excise tax of P50 per metric ton for the first year, P100 for thesecond year and P150 for the third year.  Sugary beverages, too, will be subject to excise tax:  P6 per liter for juices and energy drinks and P12 per liter for drinks with high-fructose corn syrup.

For tobacco products, from the original rate of P30, the excise tax will be increased to P32.50 from January 1 this year to June 30; P35 from July 1 to December 31, 2019; P37.50 from 2020 to 2021; P40 from 2022 to 2023 and four per cent increase per year thereafter.

Vehicles will also face higher excise taxes.  For vehicles fetching up to P600,000, the tax will be 4%; for those worth over P600,000 up to P1 million, the tax is 10%.  For vehicles costing over P1 million to P4 million, the tax is pegged at 40%, and 50% for those over P4 million.

So, expect your colas and cigarettes to cost more in the coming months.  How much more expensive everything will be is what the people who engineered these reforms are debating.  Excise taxes, by their nature, are indirect taxes, that is, they are imposed by the taxing powers on the producer or merchant; in turn, the producer or merchant will pass on the cost to consumers.  This means that, in paying for a certain commodity, a buyer is paying for the excise tax without even realizing it because it forms part of the purchase price.

The thing about raising taxes and lowering taxes and adding or deleting exemptions is that these have a domino effect.  When you raise the price of gasoline, for instance, common carriers will have to increase their fares to cope with higher fuel costs.  Food prices will also go up because it will cost farmers more to bring their produce to the city from the provinces.  This is only a snapshot, but the message ought to be clear that the cost of everything is interrelated, such that when the prices of basic goods go up, expect the price of services to go up as well.

The Duterte administration is trying to manage the narrative by assuring the people that price increases will not be as painful as many predict.  But the results can be contradictory.  Already, auto industry experts have noted that the TRAIN actually makes mid-range cars—the Toyotas, etc. that most Filipinos can afford—more expensive for prospective buyers  while the price of luxury vehicles have actually gone down.  According to reports, before TRAIN, thetop-of-the-line Land Cruiser cost P5 million; after TRAIN, it now costs P4.65 million.

The middle class will be able to absorb the effects of TRAIN; as for the rich, well, nobody is worrying about them and for them.  The poor, meanwhile, may have to suffer the cost of inflation and higher cost of living.  Since they don’t pay income taxes anyway, the exemption will not benefit them in any way, shape or form.  Those income-earners who are now exempt will see the money they have left from being exempt be consumed by rising prices of basic goods and services.

In other words, TRAIN is a very charged subject.  From Congress, it has now passed to the Supreme Court where petitions have been filed questioning its constitutionality.  It is argued mainly that the law is void because it was passed without a sufficient quorum when it was
presented for ratification at the House; allegedly, there were only 10 to 15 lawmakers present at a quarter to 11 in the evening of December 13 last year.  Between you and me and the rest of the country, I doubt the petition will prosper.  An entrenched principle in law states that taxes are the lifeblood of any nation, so its collection will never be stopped.  I see no reason for the Supreme Court to digress from this.

President Duterte and Harry Roque both think that this is one TRAIN that can.  Oh, to be so certain.





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