Posted on Thursday, December 5, 2002

Rationalization of fiscal 
perks one way to narrow deficit

By Dave L. Llorito, Research Head and Kristine R. Payuan, Researcher

Conclusion

The first part of the series showed how a flawed tax policy implemented in bad times could wreak havoc on the country’s finances. The second part focused on how waived taxes due to fiscal incentives have been rising while the country’s coffers were sinking deeper into the red.

How can the government arrest the worsening budget deficit?

Dr. Rosario G. Manasan, economist and public finance expert of the Philippine Ins­titute of Development Studies based in Makati City, says Congress should immediately amend Republic Act 8240 or the National Internal Revenue Code of the Phi­lippines to allow for the indexation of the excise taxes on tobacco and alcohol as well as enact a law that would rationalize the use of fiscal incentives in the Philippines.

Indexation of the excise taxes to inflation would enable the government to collect higher taxes as overall prices of goods and services increase. Rationalization would mean having a shorter list of activities that would qualify for investments incentives. That would enable the government to recover billions of pesos worth of revenue foregone due to the unabated granting of fiscal incentives to many business activities.

In the 2003 proposed national budget, the Department of Finance has outlined two important legislative and administrative measures meant to generate an additional P17.5 billion.

Legislative measures are expected to yield P10 billion, and administrative measures, P7.6 billion. Legislative measures include the reclassification of the so-called sin taxes that are projected to provide P7 billion to the Bureau of Treasury. Among the tax measures to be implemented by the Bureau of Internal Revenue:

1. Restructuring of the excise tax on distilled spirits by having a single structure of tax rates for such products regardless of the raw materials used.

2. Indexation of the tax brackets and tax rates two years thereafter by the amount of the cumulative inflation for the two preceding years to ensure that the excise tax rates track the changes in price.

3. Immediate reclassification of alcohol and tobacco products based on their current net retail price and reclassification of these products two years thereafter.

There is also the proposal to “rationalize” the excise tax on cars by expanding the definition of “automobile” to include vehicles with 10 or more seating capacity, including the driver, to bring back Asian utility vehicles and sports utility vehicles into the tax net. Currently, AUVs and SUVs are exempt from excise taxes. This revenue measure is intended to generate an additional P2.5 billion. The government will also restructure the documentary stamp tax on debt instruments that is supposed to bring additional P500 million.

The administrative measures include efforts to improve the collection of the BIR so it could bring in P6 billion in taxes. The rest are measures to be implemented by the BOC meant to generate P1.5 billion. These are proceeds from forfeitable bonds, auction sales, proceeds from settlement and redemption of seized cargo among others.

Manasan’s proposals generally agree with most of the government’s proposed revenue measures. In her paper entitled Analysis of the President’s Budget for 2003, however, she stresses that some of the contents of the proposed revenue measures of the government are vague and incomplete.

“While the fiscal authorities talk about restructuring of the excise taxes distilled spirits and the indexation of the tax rates … it is not clear whether such indexation is intended to apply to excise taxes on fermented liquor and cigarettes,” notes Manasan during a research forum held at the PIDS yesterday. “Moreover the [proposed] budget is silent about indexation of excise tax on petroleum products.”

Manasan also endorses the lifting of the exemption of AUVs from the excise taxes on automobiles. Rep. Julio A. Ledesma IV had filed House Bill 5466 pertaining to this. But she doubts whether the ruling party could really push it through Congress.

“Given the proximity of the 2004 elections, moving these new [or proposed] tax measures through the legislative mill in their undiluted form will be a major challenge to both Congress and the Executive branch in as much as raising taxes will undeniably hurt certain sectors,” Manasan says.

Nevertheless, she believes there is something the government can immediately do to bridge the widening financing gap: a price survey of tobacco and alcoholic products to permit their reclassification for excise tax purposes.

“Such a survey is prescribed in RA 8240 but has not been implemented to date,” she says. “This move will provide temporary relief to the unmitigated erosion of revenues from excise taxes pending legislative action on indexation.”

She also stressed the need to strengthen tax administration particularly of the value-added tax as this has been one of the major sources of the higher tax leakages. VAT evasion may arise from the underdeclaration of sales and/or the overdeclaration of claims for input VAT. She says that the BIR could minimize the tax leakages from the overdeclaration of claims for input VAT through “the use of industry bench­marking.”

“It is notable that some 45 percent of the large VAT-payers were found to have exceeded their respective industry benchmark … by more than 50 percent,” observes Manasan. The “industry benchmark” refers to the ratio of VAT-able inputs to the value of VAT-able output.

Despite the huge losses from the granting of fiscal incentives, the government — particularly the Executive branch — appears to be ambivalent about giving out such perks to attract investors, Manasan says. However, she stresses that the government should confront the policy problem as it has, over time, “narrowed the tax base and increased the opportunities for avoidance.”

“[This is] primarily because of the wider scope of discretion in the administration of the incentives system,” says Manasan, “At present, there are some 150 laws the provide tax incentives to various industries and special interest groups. These are mainly in the form of tax credits and exemptions. (The second part of the report mentioned only 45 laws providing all sorts of incentives to firms and business projects). Those questioning the use of fiscal incentives point to its high cost in terms of revenue foregone, its ineffectiveness in promoting investments because of the reliance on non-performance-based incentives, “distortionary” impact on the economy, too wide coverage of the investments priorities plan, and the duplication and double-dipping of incentives from the various special laws.

The rationalization of fiscal incentives is part of the larger tax reform package introduced in 1997 in Congress to improve the country’s finances. The bill that was introduced to this effect never took off, partly because of lobbying by some interest groups as well as the internal policy conflict between the Department of Finance and the Board of Investments.

Part 1 | Part 2