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By Melissa Luz T. Lopez
Senior Reporter

Tax reform seen key to inclusive growth

Posted on March 10, 2017

TAX REFORMS proposed by the Finance department will help economic growth stay above six percent in the medium term while reducing the burden of the poor, analysts at BMI Research said, even as they flagged risk from “growing divisions” in the Senate that could delay their approval.

Analysts at the Fitch unit said the proposed comprehensive tax reform program (CTRP) -- composed of four packages, of which the first one is being processed in the House of Representatives -- is designed to increase state spending in support of robust gross domestic product (GDP) expansion needed to lift more Filipinos out of poverty.

“In our view, the income tax reforms will not only simplify the income tax system for most taxpayers (thus reducing the cost of compliance), but will also help to shift the tax burden from the poor to the rich which will support more inclusive growth,” BMI said in a report published yesterday.

“We believe that the first out of four proposed tax reform packages [which the Finance department submitted to both chambers of Congress in September last year]... will be positive for revenue growth and will allow the government to push through higher infrastructure and developmental spending (in line with the PDP 2017-2022) without risking macroeconomic instability,” it added.

“This should help drive real GDP growth in excess of 6.0% over the coming years.”

The new Philippine Development Plan 2017-2022 approved last month aims to spur GDP growth to an annual average of 7-8% in that period from the 6.2% average in the six years under the preceding government of former president Benigno S. C. Aquino III, slash unemployment rate to 3-5% by 2022 -- when the current government steps down -- from 5.5% last year and achieve its bottom line of cutting the national poverty rate to 14% also by then from 21.6% in 2015.

GDP grew by 6.8% last year, near the top end of the state’s 6-7% target.

The first tranche of the CTRP, which is targeted to be implemented by July under House Bill No. 4774, is seen to “promote social equity,” with plans to reduce personal income tax rates while raising taxes on consumption -- particularly on fuel and cars -- alongside reduced value-added tax (VAT) exemptions.

In its current configuration, the first package will result in P139.6 billion in foregone revenues from lower personal income tax, estate tax and donor tax rates as well as raise P302.1 billion in additional revenues from reduced VAT exemptions, as well as increased excise taxes on cars and oil products, yielding P162.5 billion in net additional revenues in the first year of implementation.

At the same time, however, BMI flagged political risks which could stand in the way of the timely passage of such reforms.

“[W]e note that risks to the Philippines’ fiscal outlook are weighted to the downside as the passage of the tax reform bill could face further delays due to political infighting,” the report read.

It cited the apparently politically motivated arrest of Senator Leila M. De Lima on drug-related charges and the subsequent shake-up in the Senate that saw four of her allies in the minority stripped of key positions and some committee chairmanships earlier this month.

“[L]egislators from the Senate minority could hold the bill hostage in order to force the government into a consensus,” BMI analysts added.

There are only six opposition senators in the 24-man chamber, however, and any bill there will need just 13 votes to be approved.

The Constitution requires proposed tax laws to emanate from the House before they are acted on by the Senate. Both chambers must then reconcile their versions of the bill in a bicameral conference committee before it is sent to Malacañang for the President’s signature or veto.

As of this writing, the tax plan is yet to secure committee approval at the House.

BMI earlier cited “heightened risk” of political uncertainty due to legislative infighting that, in turn, could “disrupt policy formation.”