The new version of the proposed Tax Reform for Acceleration and Inclusion Act now under study by the House ways and means committee will make the tax system more “progressive” by exempting from the personal income tax (PIT) those with a net taxable income of P250,000 or below, while still retaining exemptions on the first P82,000 earnings of taxpayers from their 13th month pay and other bonuses.
Under House Bill 4774, the top PIT rates will also be reduced from 32 percent to 25 percent over time, except for the very rich, making the system truly progressive because low- and middle-income taxpayers will enjoy an increase in their take-home pay as a result of their would-be lower tax payments.
“The distribution of income is progressive under the tax-transfer reform. In fact, poorer households will benefit the most from the revised tax reform and transfer plan under Package One as shown by the higher increase in their incomes compared to those of richer households,” said Undersecretary Karl Kendrick Chua of the Department of Finance (DOF).
By 2020, only taxpayers with annual incomes of P13 million and above will pay higher taxes, he said, under the two-step plan to reduce PIT rates, primarily for the benefit of low- and middle-income workers.
The DOF also agrees with the HB 4774 proposal to retain tax exemptions for the first P82,000 earnings of workers from their 13th month pay and other bonuses, he said.
The revised Package One or the Tax Reform for Acceleration and Inclusion Act under HB 4774 covers the lowering of PIT rates and a corresponding set of revenue-compensating measures.
It was crafted and filed in the chamber by the House ways and means panel chaired by Rep. Dakila Carlo Chua, in close coordination with the DOF.
According to Chua, micro enterprises such as sari-sari stores, which are covered by an increased VAT threshold of P3 million under the revised tax reform plan, will be taxed a lower 8 percent on gross sales in lieu of the income tax and the VAT or the percentage tax of 3 percent.
The VAT threshold will be adjusted to inflation every three years under the House tax reform plan.
To expand the VAT base as proposed by HB 4774, exemptions to this consumption tax will be limited only to raw food and other necessities, such as education and health, as well as other items with a clear economic rationale for exemption under the House committee proposal, Chua said.
VAT exemptions will be removed, unless sold by firms whose gross sales fall below the VAT threshold, for the following: 1) cooperatives, except those selling raw agriculture produce, 2) low cost and socialized housing, 3) lease of residential units, domestic shipping importation, 4) Boy Scouts and Girl Scouts and 5) power transmission, where the VAT will replace the franchise tax.
Moreover, VAT exemptions granted by all special laws, except those for senior citizens and PWD, will be removed to level the playing field.
Chua said that as part of the House tax reform plan, the donor’s tax will be reduced and restructured to a single rate of 6 percent on net donations for gifts worth more than P100,000 annually, regardless of the relationship between the donor and the donee.
The estate tax will also be reduced to a single rate of 6 percent based on the net value of the estate, he added.
Adjustments in the fuel excise tax from zero to P6 per liter will be done on a staggered basis from July 2017 to 2019 for diesel, kerosene, bunker fuel, and LPG under the House-revised tax reform plan, Chua said.
Staggered adjustments from July 2017 to 2019 that will increase excise taxes for gasoline, aviation turbo fuel and other non-essentials from around P4.35 to P10 per liter will also be implemented, he said.
After the tax adjustments are made to reflect the cumulative inflation from 1997 up to the present, the fuel excise tax will be indexed annually to inflation by 4 percent starting in 2020.
“Under the House tax plan, there will be no indexation for the year if the average Dubai crude oil price in the month preceding the scheduled indexation exceeds US $100 per barrel,” Chua said.
As part of the tax reform package, automobile excise taxes will also be adjusted from 2 percent to 4 percent for cars with a net manufacturing or import price of up to P600,000.
Vehicles priced above P600,000 will be taxed higher, with those over P2.1 million to be charged P1,224,000 plus 200 percent in excess of P2.1 million, under HB 4774.
Separate bills indexing the motor vehicle user’s fee to the cumulative inflation rate from 2004 to 2017, reflecting an 82 percent increase, and granting amnesty on past estate tax cases will also be filed as part of the tax reform plan.
The House ways and means committee will likewise adopt HB 292 that seeks to introduce a tax of P10 per liter on sugar-sweetened beverages or SSBs, also as part of the tax plan.
Moreover, the revised plan also includes legislated administrative reforms in the Bureaus of Internal Revenue (BIR) and of Customs (BOC), such as the adoption of fuel marking to prevent smuggling, the use of electronic payment receipts, the mandatory connection of the point-of-sale system to the BIR, and the relaxation of bank secrecy laws for investigating and combating tax fraud.
“A simpler, fairer, and more efficient tax system is needed to promote investment, create jobs, and reduce poverty,” Finance Secretary Carlos Dominguez III said. “Not reforming the tax system will deprive the poor of the necessary social services that can lift them out of poverty and become more productive contributors to society.”
“The general rule in crafting the Duterte administration’s income tax reform plan is that the rich will have to pay more while poor and low-income Filipinos will pay less or none at all,” he said.
Dominguez has stressed that tax reform is indispensable to the government’s goal of investing some P1 trillion more each year on top of the current P1.3 trillion it plans to spend on infrastructure, education, health, social protection and other programs necessary to create enough decent-paying jobs for, and improve the living standards of, Filipinos and at the same time make the Philippines more globally competitive and attractive to foreign investments.
This additional P1 trillion annual investment, Dominguez said, would help realize the Duterte administration’s vision of transforming the country into a upper middle-income economy by 2022, with a per capita gross national income increases from $3,550 in 2015 to at least $4,900, close to where Thailand is today.
If this momentum is sustained, the country would be well on its way to becoming a high-income economy by 2040 with a per capita gross national income of a least $11,000, which is where Malaysia is right now, he added.