An error in the excise tax structure

An amendment to the excise tax structure for alcohol and tobacco products recently passed the third reading in the lower house. It will now be deliberated upon at the Senate and nursed to passage by Senator Sonny Angara who heads the committee of ways and means.

The increase in excise taxes for alcohol and tobacco products is part of government’s second tax reform package called the Corporate Income Tax and Incentives Reform Act, or CITIRA. Among CITIRA’s key features is to cut corporate income taxes by two percentage points per year starting 2021, eventually reducing the rate from 30% today to 20%. The move is meant to make the country’s tax framework more competitive and more attractive to foreign investors.

Finance Undersecretary Karl Kendrick Chua admitted that government stands to incur a revenue loss of about P62 billion once the bill is implemented. Hence, the Department of Finance must find ways to off-set the loss. Levying higher excise taxes on alcohol and tobacco is one of the ways.

To increase excise taxes on “sin products” is the prerogative of government which we all accept. However, as I looked deeper into the tax structure approved by congress, I could not ignore certain inconsistencies and faulty assumptions that could backfire. This is particularly true in the way excise taxes were structured for sparkling wine.

In the first place, the bill makes a stark difference between sparkling wine and carbonated wine. For those unaware, sparkling wines like Champagne, Cava and Prosecco are bubbly wines that develop their carbonation in the bottle through a second fermentation. On the other hand, carbonated wines are still wines infused with carbonation outside the bottle.

The premise is that sparkling wines are a premium products while carbonated wines are not. This is a misnomer. Truth is, both have different grades in quality. A sparkling wine can be inferior to a carbonated wine if the pedigree of the carbonated wine’s grapes and production process conform to a higher standard. The reverse is true. In short, there are various determinants to superiority. It cannot be said that one is automatically superior to the other.

Because the authors of the tax scheme automatically count all sparkling wines to be superior, it levied a whopping P522 excise tax for all 750 ml bottles, regardless of whether its net retail price (or landed cost) is P50 or P3,000.In contrast, carbonated wines are saddled with an excise tax of only P45 per bottle, regardless of its net retail price.

With slight differences between sparkling wines and carbonated wines, the former is levied an excise tax that is nearly 12 times more than the latter. Not only does this give undue advantage to carbonated wines in the marketplace, it also deprives the public from enjoying sparkling wine at a fair price.

Another point to consider is that the new tax scheme levies the same excise tax (P522/ 750 ml bottle) regardless of the value of the sparkling wine. In other words, a low quality sparkling wine whose net retail price is P200 will now be valued at P722, after tax. This brings the tax component to 72% of its value. In contrast, a high quality sparkling wine whose net retail price is P2,000 will now be valued at P2,522, after tax. In which case, its tax component is only 21%.

The tax scheme effectively makes low cost sparkling wines scandalously overpriced while making premium sparkling wines reasonably priced. This works to the disadvantage of middle to lower income Filipinos who can only afford wines with a cheaper net retail price. It works to the advantage of the rich as they get a good deal on their premium wines. It is a case of penalizing the middle class while subsidizing the rich.

As a whole, the manner in which sparkling wines are taxed is a disservice to the Filipino people. Sparkling wines are beverages not taken every day but only during festive occasions. Every Filipino should be given the opportunity to enjoy the product at a sensible price, regardless of their economic standing.

As a middle class consumer, I would like sparkling wines to be taxed at the same level as still wines (wines with no bubbles), which is P28.47 per 750 ml bottle. If this is too much to ask, then levy the same excise tax as carbonated wines which is P45 per 750 ml bottle. I reiterate, to charge P522 is disproportionate and unreasonable.

The latest statistics show that the share of sparkling wine against the total consumption of wines in the Philippines is only 1.36%. Thus, even if government were to reduce the excise tax to match the levels of carbonated wine, its impact on revenues will not be substantial. On the contrary, we can even expect a spike in demand given more reasonable prices. The increase in volume will surely compensate for the forgone revenues from the excise tax roll back. Best of all, it will put the product within reach of middle class Filipinos. It is a win-win situation.

To leave the tax structure as it is, or the way Congress approved it, will lead to a contraction in sparkling wine demand and inevitably, to lower excise tax revenues for government. This, while depriving Filipinos of a festive wine they can enjoy. Everybody loses.

I know Senator Angara to be a reasonable, diligent legislator. I trust he will look into this matter in the spirit of correctness and fairness.

Andrew J. Masigan is an economist.