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Duterte’s big bang reforms: Salceda bats for income tax cuts, higher VAT on fuel, vehicles but with safety nets

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Albay Rep. Joey Salceda is proposing a big bang tax erform aimed at lowering income taxes while expanding the excise tax base to boost income of taxpayers and raising additional revenues to finance President Rodrigo Duterte’s ambitious P1 trillion annual infrastructure spending in the next years.

Dubbed the Tax Reform for Acceleration and Inclusion (or TRAIN), Salceda said his House Bill 4688 would create a simpler and fairer, low rate and broader based tax system which would deliver Duterte’s real positive change for Filipinos.

“A window of opportunity exists to take the country to the next level of development. This window of opportunity, characterized by strong macroeconomic fundamentals, global recognition for the success of the country, and a popular new government, provides the necessary condition to realize the President’s vision for the country,” Salceda said.

The TRAIN is the biggest tax reform in the country since the adoptuion the Expanded Value Added Tax (EVAT) which included previously tax-exempt products such as petroleum, electricity and services in the tax base and the VAT rate increased from 10 percent to 12 percent.
The main engine driving the TRAIN is the proposal to rationalize the personal income tax bracket that would reduce the maximum income tax from 32 percent to 25 percent except for the highest income earners to maintain progressivity.

The Philippines currently has the second highest individual income tax rate at 32 percent in the ASEAN region, next to Thailand and Vietnam’s 35 percent. Salceda said the TRAIN would blow away the one of the most “horrific and protracted social injustices” in the cluntry and one of the key reasons why high economic growth has not trickled down to the masses.

“The Philippine personal income tax is the most regressive in the entire Asia. And we do this to the most dependable pillar of taxes — the employees whose share of nation-building is automatically withheld, with compliance at almost 99 percent since they have no choice,” Salceda said.

The second component of TRAIN is the expansion of the value added tax base by limiting exemptions to raw food and other necessities; raising tax rates on all petroleum products; and jacking up excise tax on automobiles.

This is expected to offset the foregone revenues from income tax cuts while boosting revenues to help government sustain high growth of at least 7 percent every year for one generation, shift the source of growth from consumption to investment, and heavily invest in our people through improved social services, such as public health and education systems, and in better infrastructure to improve connectivity and raise productivity.

He said these investments require an additional P1 trillion annually over the long-term, of which some P600 billion (3 percent of gross domestic product) was targeted by 2019.

To protect the poor, Salceda has proposed three safety measures to protect the poor and the working class from the impact of expanded VAT on food, power and transport services.

1) VAT increases will be indexed to inflation;

2) Annual inflation adjustments on petroleum taxes will not be implemented if the Dubai crude exceeds $85 per barrel;

3) 25 percent of the compensating revenues from petroleum taxes of PHP165 billion will be earmarked for subsidies in the next three years to the poorest 50 percent of household through fare vouchers and direct income transfers to be administered by the Department of Social Welfare and Development.

“All these can significantly reduce poverty incidence from 26 to 17 percent by 2022, or lifting some 10 million Filipinos out of poverty, and achieving upper middle income country status by 2022. Sustaining real positive change for one generation can eradicate extreme poverty and allow our country to join the ranks of advanced nations by 2040,” said Salceda.

The TRAIN is just stage one of Duterte’s big bang tax reforms with the the relaxation of bank secrecy and an absolute tax amnesty package next in line for legislation.