Sweetheart deal

After insisting on incremental revenues of P60 billion that should be collected from the excise tax rate increases  on cigarettes and liquor, officials of the executive branch appear to have sobered up and are now saying that they are amenable to a P40 billion additional tax yield from these so-called “sin products.”

Finance officials,  it seems,  have finally realized that their P60 billion target is an unrealistic, if not an, imaginary, figure.  President Aquino said P40 billion was already a compromise, and that he would be “very disappointed” if Congress approves an excise tax bill that would bring in lower than this amount for the government.

But the President appears to have quickly forgotten Finance Secretary Cesar Purisima had given the go-signal last May for a tax proposal that projects additional revenues from sin taxes at a much lower P30 billion. In fact, the tax measure presented by the Department of Finance before the House Ways and Means Committee was the very same one approved by the congressmen in coming up with their version of the bill.

The DOF was able to cut by half the original revenue target of P60 billion from sin products by assigning the bulk of the tax burden to tobacco and making alcohol account for only 15 percent of the tax load.  This is a far cry from the original DOF proposal of targeting P30 billion in additional revenues by collecting P15 billion each from alcohol and tobacco industries.

What happened along the way?

Officials of the DOF and Bureau of Internal Revenue are insisting that they have consistently been pitching for a P60 billion tax yield from sin products, but their actions last May, when the proposal was still under consideration by the House, prove otherwise.

Finance and revenue officials want the public to believe that the House was responsible for lowering the tax take from P60 billion to P30 billion, but the truth is that  the DOF itself was the one which introduced the proposal of reducing the revenue target by half.  They have used this P60 billion line in denouncing the committee report of Sen. Ralph Recto who proposed additional tax collections of only P15 billion to P20 billion from sin products. Recto resigned his post as chairman of the Senate Ways and Means Committee following the sharp criticisms he received from officials of the executive branch who peddled the  P60 billion myth before the public, only to say later that P40 billion was actually all right with them.

The transcripts of the hearings conducted by the House committee reveal that it was DOF undersecretary Jeremias Paul who presented the proposal  of lowering the tax take to P30 billion last May 9 before members of the panel.

The proposal already contained the sweetheart deal for the alcohol industry, which would bear only 15 percent of the tax load or only P4.48 billion out of the projected P30 billion target. The tobacco industry would have to cough up the rest of the 85 percent, or around P26.8 billion.

Why did the DOF suddenly decide in favoring alcohol, when historically, the tax burden was, more or less, equally shared by tobacco and alcohol?

Further reinforcing the fact that it was the DOF which handed alcohol a sweetheart deal was Rep. Joseph Emilio Abaya, the principal  author of House Bill 5727,  the sin tax measure providing for the high tax take of P60 billion.  Abaya, who is now the DOTC secretary,  had said earlier that he was not privy to the details of Paul’s compromise  P30 billion revenue proposal because he “was not part of the negotiating team when the task was given to the DOF,” referring to the  talks done by finance officials with alcohol industry stakeholders regarding the measure.

During the May 9 hearing conducted by the House Ways and Means Committee, Paul said  at the close of his powerpoint presentation on the DOF’s proposed sin tax hikes for the alcohol industry that “this is acceptable. He said the DOF’s compromise proposal was “something that we can live with and something I think the industry can live with also.”

In the case of fermented liquor or beer, Paul said during his May 9 presentation: “We were willing to adjust also the tax rates,  so for the first year it’s P13.75 (for low to mid-priced beer), and (for high-priced beer) or (with a net retail price of) more thanP50 to P60, it’s P18.88.”

The current tax on high priced beer is P20.57, which means that it would even get a tax cut, as it would be charged only P18.88 in the first year. Mid-priced beer brands are currently taxed at P15.49 per bottle. Under the DOF proposal, it would also get a tax cut because it would only pay P13.75 in the first year. In both cases, mid- and high-priced brands will enjoy these tax cuts until 2015.

Low-priced beer or those costing less than P14.50 each are currently taxed P10.41, which means the tax hike to P13.75 represents only a 32 percent increase in contrast to low-priced cigarettes which would get a 708 percent tax hike under the DOF proposal.

The transcripts of the May 9 hearing show Abaya had readily agreed to the DOF’s compromise measure presented by Paul. He said then that “as principal author of the bill, incidentally using my name, I am completely amenable to adopt the amendments proposed by the Department of Finance.”

From a 50-50 revenue sharing, the tax load on tobacco was hiked to 85 percent, and alcohol slashed to 15 percent.

Now that Malacanang is saying that it is amenable to a P40 billion revenue target, the tax burden for tobacco was further increased to 87.5 percent, with alcohol accounting for only 12.5 percent because Purisima had said P35 billion should come from cigarettes and only P5 billion from liquor.

Insisting on a higher tax burden on tobacco products compared to alcohol is grossly inequitable considering that the liquor industry is much bigger than the cigarette industry and its current tax burden as a ratio of its total sales is much smaller at 29.80% compared to the 44.35% tax burden of tobacco products.

Tobacco is currently shouldering the highest tax burden compared to other industries. The banking and finance sector’s total tax payments as a ratio to its total sales is only 13.92 percent. For the telecoms industry, which earns thrice than the tobacco industry, the ratio is only 10.76 percent.  For 2010, the tobacco industry paid a total of P39.92 billion in taxes out of its profits of  P90 billion. The telecoms sector generated a total of P237.7 billion in earnings but paid only P25.58 billion in taxes.

These figures give us a broad hint as to why the government cannot reconcile its health and revenue goals in crafting a realistic sin tax bill.  If it is really concerned about protecting public health, then it should  ban cigarettes altogether instead of using taxation to impose a de facto prohibition on the consumption of these products. But this is impossible because the government relies heavily on the tobacco industry as a steady, predictable source of revenues.

For comments, email at [email protected]