Gov’t tax reform to cost P173.8B in lost revenue

Chris Schnabel
Gov’t tax reform to cost P173.8B in lost revenue
To offset the loss, the government is planning a series of measures such as eliminating some VAT exemptions and fiscal incentives

MANILA, Philippines – The tax reform package that the Duterte administration is preparing will cost it almost P200 billion in revenue, although it plans to recoup it through a package of new taxes and incentive cuts.

“The 10-Point Socioeconomic Agenda revolves around the need to maintain sound macroeconomic and fiscal policies, invest in the people, and address the binding constraints to investment and job creation. This is why we need tax reform,” said Finance Secretary Carlos Dominguez III during the first appropriations committee hearing on the proposed 2017 budget of P3.35 trillion. (READ: Balanced budget ‘impractical’ for the PH until 2022 – Diokno)

The Department of Finance (DOF) is currently working on a tax reform package that looks to cut individual tax rates from 32% to 25% and corporate tax rates from 30% to 25%. It is expected to present it to Congress in September.

Dominguez added: “Foregone revenue due to lower tax rates may reach P173.8 billion. Lowering income tax rates will bring down revenues by approximately P139 billion while lowering of corporate income tax rates will bring down revenues by around P34.8 billion.”

To offset this, Dominguez said the government is planning a few measures, including eliminating some VAT exemptions and zero-rated transactions as well as removing a few fiscal incentives while trying to broaden the tax base. 

It is also looking at imposing additional excise taxes which would encourage healthy lifestyles such a “sweet tax” on sugary drinks and fatty food.

“In our present tax system, the VAT system captures approximately half of GDP and the self-employed easily escape the tax net, largely due to bank secrecy laws,” Dominguez said.

“It is a system that causes inequality, economic distortions, and discourages investments.”

Dominguez added that the government is looking to adjust fuel excise tax, which he said stands at P4.35 per liter. “This was set in 1997. The amount should be roughly an increase of P5.65 per liter or a total of P10.”

“As a general rule, the rich will have to pay more in taxes while the vulnerable sectors of society will be protected through highly targeted subsidies and the conditional cash transfer program,” he added.

Potential for higher revenue

Finance Undersecretary Gil Beltran said that based on the DOF’s estimates so far, the government could even collect more revenue following the reform.

For instance, he said, “We estimate that we can net a P164.4 billion from broadening the tax base through VAT-based expansion, for the sweet tax we can gain about P18 billion, and then rationalizing fiscal incentives has the potential to net P33.8 billion.”

Beltran also pointed out that there are measures being put in place to improve revenue collections that should be able to net an additional 1% of GDP over 6 years or about 0.3% of GDP per year in revenue.

“Consultations on these measures are currently ongoing so there might be some changes to the numbers,” he said.

Despite this, a number of congressmen questioned whether this would generate enough revenue to support the massive infrastructure push the Duterte administration is planning.

Budget Undersecretary Laura Pascua noted that the government’s plan to raise deficit spending would help achieve this.

She said that raising deficit spending by 1% of GDP is manageable because of the existing fiscal space and would complement the measures to improve revenue collections.

“In fact, even with this higher deficit, we will be able to lower the debt-to-GDP ratio on the assumption that the economy will keep growing as we project it to and faster than the borrowing terms,” Pascua said. –

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