Indexation of ‘sin taxes’ to serve as ‘litmus test’ for government — Neri

The indexation of the excise tax on tobacco and alcohol products will serve as a "litmus test" on the government’s resolve to push legislative measures that will improve its fiscal position, Socioeconomic Planning Secretary Romulo L. Neri said.

"This will determine if the Philippine Congress has the political will to pass the necessary tax measures despite the strong lobby of certain groups," Neri told a recent briefing organized by the Senate Economic Planning Office.

Neri, concurrently the director-general of the National Economic and Development Authority (NEDA), said the indexation of sin taxes is very important for the government because such move is being closely monitored by both foreign creditors and credit rating agencies whose reports are used by investors as an indication of the likelihood of recovering their investments.

He recalled that Moody’s Investor Service, a top credit rating firm, downgraded the country’s rating last year due to fiscal problems, which resulted in bigger problems for the country.

"Now we are paying 4.5 percentage points or 450 basis points (bps) over US treasury notes. Since one percentage point (100 bps) is roughly equivalent to P20 billion, we are suffering a very severe penalty in terms of higher interest cost," he stressed.

In contrast, Indonesia, which is a "weaker country in terms of economic growth," is only paying 3.5 percentage points or 350 bps over US Treasury notes while Thailand and Malaysia are paying one percentage point or 100 bps.

Neri is confident that once the bill on indexation of sin taxes is passed, the country will get at least a 50-point or 100-point reduction, or a better outlook for the country.

"That can translate to savings of between P10 and P20 billion for us in terms of reduction in interest payments, including the additional revenues it will bring. If we include the side effects of domestic interest payments, maybe we can save up to P30 billion in terms of lower interest cost," explained Neri.

The business community has also favored taxes on sin products as well as short message system (SMS) or text messages. Higher taxes on petroleum products, the shift to gross income taxation over net, and a two-tranche upward scheme for the value-added tax (VAT) remain unpopular.

Yet another segment of the business sector tends to reject new tax measures preferring to have government strengthen the revenue collecting agencies like the Bureau of Internal Revenue (BIR), they said, should result in better collections of existing tax laws and forms.

Meanwhile, the NEDA chief expects the indexation of sin taxes to recover the foregone revenue resulting from the erosion of the tax base on specific taxes under the current system. The proposed indexation involves the automatic adjustment of taxes to prevent the value of sin taxes from being eroded by inflation, which peaked to 6.3 percent in August this year.

Neri said that aside from the indexation of sin taxes, he considers the rationalization of fiscal incentives and general tax amnesty as the more doable revenue measures in the short run.