Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law that Congress passed several weeks ago took effect New Year’s Day 2018. Four days into the new tax legislation, I deem it best to reserve judgment. The law’s intended effects and consequences should be given time to take hold and manifest themselves.
I have been supportive of the law, to the extent that it had intended to streamline income taxation — that is, make things less complicated for the ordinary taxpayer. However, I have also been vocal against its calibrations in various consumption taxes. In particular, I was not in favor of significant increases in fuel taxes, as well as the new tax on sweet drinks.
Former Finance secretary Gary Teves, a friend as well as a colleague in the consulting field, recently shared with friends and associates his thoughts on TRAIN and how it could impact on taxpayers and consumers. I wish to pass on to you, our readers, his comments on the new tax law. I find his reflections very interesting, and I believe you will, too.
Gary described what he called “Winners and Losers under TRAIN” and noted that the gainers include salary earners as well as SEPs or self-employed individuals and professionals, and MSMEs or micro, small and medium-sized businesses. All three tax-paying segments are bound to enjoy “more disposable income” as a result of reduced income tax rates and new tax exemptions.
The threshold was set at P250,000, and those earning below this — or roughly P20,000 monthly — are exempt from paying income taxes. As for those working for themselves or are earning professional fees, as long as their annual income is not below P250,000 and not above P3 million, they can opt to pay tax using the new tax brackets — ranging from 20% to 35% — or an 8% flat tax on gross sales or receipts.
I am uncertain, but I believe the latter may replace the present mechanism using Optional Standard Deduction (OSD) of 40%, which effectively places the highest income tax bracket for SEPs at roughly 18% of gross sales (or 32% of the taxable income of 60% of gross sales or receipts). A flat tax of 8% is definitely a big benefit particularly to SEPs with relatively low income.
As for MSMEs, which reportedly account for 98% of the businesses in the country, the value-added tax (VAT) threshold was raised to P3 million from P1.9 million. Thus, MSMEs that gross below P3 million annually will no longer be required to charge VAT to their customers. In this line, I presume that those making anywhere between P1.9 million and P3 million will have to revise their tax registrations to non-VAT taxpayers.
The other good news is that socialized housing units costing P450,000 and below, and low-cost housing priced P3 million below, will continue to be VAT-free, even if only until 2020. The better news is that other than retaining VAT exemptions of senior citizens, the TRAIN also reportedly included a provision that would VAT-exempt the sale of drugs and medicines.
But, a sore point in the new tax law, in my opinion, and what I deem to be a regressive rather than progressive move, is the lowering of the excise tax on “luxury” vehicles, or those priced P2 million and above. Luxury vehicles like big SUVs tend to occupy more road space, consumer more fuel, and contribute more to pollution.
Why Congress opted to lower the tax on such vehicles to 20%-50% from the present 40%-60% is beyond me. In effect, starting 2018, luxury car buyers may yet enjoy a discount on their purchases. In fact, a price list doing the rounds in social media show that a car like an Innova will see its price go up by around P50,000 in 2018 compared to 2017, while that of a luxurious Land Cruiser will go down by about P200,000.
If this is truly the case, one can only wonder how Congress justified the big increases in fuel taxes, including diesel — which is also used by public transportation — while lowering the tax on big, expensive gas guzzlers. Isn’t it that higher fuel taxes intended to mitigate traffic congestion and pollution? How does this tie in with price discounts for bigger and more expensive cars that consume more fuel?
There is a downside to TRAIN, of course. Income tax has been, traditionally, the largest contributor of tax revenues. By exempting more income from tax, the government will be hard-pressed to look for revenues elsewhere. And this is where consumers can expect additional burden starting this year. No pain, no gain.
Some quarters also expect TRAIN to adversely impact on business confidence and investments, given the doubling of excise taxes on minerals, mineral products, and quarry resources; doubling of documentary stamp taxes on documents, instruments, loan agreements and papers such as bank checks; and, a higher tax on stock transactions as well as a higher capital gains tax on the sale of stocks not traded in the stock exchange.
For consumers, electricity rates may go up given the higher tax on coal, which serves as fuel for a large number of power plants around the country. The burden will be on all those who consume electricity, or industries, businesses, and residences alike. And, with higher taxes on fuel, transportation fares are bound to go up as well. This higher tax burdens both motorists and the riding public.
So, while lower taxes on income aim to put more money into our pockets, the same money — or more of it — will just end up paying for more expensive fuel, electricity, and public transportation. People will also have to pay more for some nourishments, as sweetened beverages will be charged between P6 and P12 per liter of beverage.
TRAIN was passed primarily to help raise more money for public infrastructure. But, even this intent appears to be in peril. Around 70% of the incremental revenues under TRAIN is to go to infrastructure, and the remaining 30% to social services. But, as Gary points out, infrastructure “will get lower than originally planned. TRAIN will yield about P90 billion, lower than the initial estimate of P130 billion. This means only around P63 billion will go to infrastructure spending instead of P91 billion if the original projected collection was attained.”
As a consequence, he adds, “the government will have to borrow more to cover the shortfall and be able to finance infrastructure and social projects as well as new spending commitments in the 2018 budget (e.g. free college tuition in SUCs, police and military pay increase, free irrigation, etc.).”
Perhaps the TRAIN is as good as it gets — for now. It has its pros and cons, but only time will tell whether Congress crafted a wise, practical, and realistic legislation. Although, from where I sit, at this point, I have my doubts. The tax burden, it seems, was simply shifted from tax-paying income earners to tax-paying consumers — including the poor.
Thus, if higher taxes result in higher consumer prices, which in turn dampens consumer demand and negatively impacts on public consumption of taxable goods and services, then what happens to all the tax projections? Will we still raise sufficient revenues to pay for more public infrastructure and better public services?
Marvin A. Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council.