A reader reacts

In our recent 17th anniversary issue, this writer quoted another Philippine STAR columnist, specifically political analyst Alex Magno, as having said, "Our readers are articulate and they are not shy to give feedback." The eloquent mister Magno could not have said it more succinctly. Apparently, one of the regular readers of The Philippine STAR is Senator Ralph G. Recto, who heads the Senate’s Committee on Ways and Means. Senate Bill Number 2517, more popularly known as the Automobile Excise Tax Bill, thus falls on the Senator’s scope of responsibilities. In an effort to aid not just this writer and this publication, but moreso our readers, to see SB 2571’s merits from all angles, Senator Recto wrote us a letter detailing the Senate’s efforts to carefully amend the said bill. We are reprinting the said letter in full, in turn devoting this space for the side of this debate which has yet to receive ample coverage.

Dear Mr. Magsajo,

We have prepared a concise yet comprehensive backgrounder on Senate Bill 2571 (AN ACT RATIONALIZING THE EXCISE TAX ON AUTOMOBILES, AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE CODE OF 1997, AND FOR OTHER PURPOSES) as approved on Second Reading.

We hope that this piece will aid you in discussing a tax measure that has generated much debate. It can be seen as too technical a topic that may make for a dull copy. Without deep understanding, the issues can easily be distorted. Worse, unresolved issues can engender ungrounded fears among consumers, car dealers and automotive industry workers.

We present our reexamination of the six most contentious issues on the measure. Thus:

1. Objectives. To raise government revenues; level the playing field where everyone pays taxes; make the excise tax system fair and simple to administer; make excise collection more reflective of the growth in the automotive industry.

2. Shift to purely value-based excise tax scheme. Similarly-priced vehicles — regardless of seating capacity, engine displacement fuel type used — are applied the same tax rate.

It corrects the weaknesses of the current system deemed too narrow (only 25% of vehicle sales are taxed); more complicated (tax rates are too high and based on two factors i.e. engine displacement and fuel type used); and inequitable and unfair (small consumers pay the same tax rate as the well-to-do). It also does away with the current high tax rates in the upper-end categories that encourages smuggling.

3. Incremental excise tax collection debate. Under SB 2571 approved on Second Reading, government expects incremental collection of P600 Million from locally-assembled vehicles. It shifted the burden to the SUV category anticipating that it would generate as much as 45% of projected total excise tax collection of P1.17 Billion.

Under the Second Reading version, the projected total collection would likely be missed since SUV sales accounted for only 5 per cent of total removals last year. Assuming a drop of 50 per cent in SUV sales — also due to higher selling prices, then excise tax collection from this category will drop to P585 Million wiping out the expected P600 Million projected incremental revenue.

In comparison, the original proposal of the Ways and Means committee projects greater minimum incremental revenue of P740 Million from locally-assembled vehicles even with flat sales growth. Likewise, by setting lower excise tax rates on higher priced automobiles it reduces the profit margins of smugglers and unscrupulous Customs officials.

4. Price impact on all brackets. While the proposed tax structure is progressive, it has marginal application. The determination of the tax due always begins with the tax rate set for the lowest taxable bracket; subsequent marginal rates are then applied on the remaining portion of the taxable amount. Contrary to popular fears, the committee’s original proposals carried only a minimal price impact on all brackets, even on AUVs.

5. Consumer protection. We provided for indexation to prevent market distortions in case of exchange rate fluctuations. It protects consumers by ensuring brackets are maintained at lower rates even as car prices increase. Under SB 2517, the Finance Secretary is authorized to revise the bracketing so that low-end vehicles would still be slapped only a 2 per cent excise tax even if all cars eventually cost more than P600,000.

6. Excise-tax excemption for vehicles in Freeports. The current system allows vehicles bought excise-tax free by Freeport operators/locators to continue enjoying excemption as long as the vehicle is used outside the Freeport for only a maximum of 14 days a month. This is the loophole through which much car smuggling passes. This proposed tax measure will plug this loophole. Henceforth, only vehicles used exclusively within the confines of the Freeports will be excise-tax excempt.

This piece is based on official data and comments from the National Tax Research Center, Department of Finance, the automotive industry and transcripts of the public hearings, Technical Working Group meetings and Plenary debates.

We hope our efforts will clarify the issues and be of value to your readers who count on you for the many decisions they make.

Very truly yours,
Ralph G. Recto

Senator Recto, in an accompanying piece with more a detailed breakdown of SB 2517, goes on to say, "We have traveled the long road to rationalize an excise tax system that is fraught with inequities and loopholes. It behooves Congress to pause and ponder on the merits of the proposed measures and hopefully come up with a wise compromise that brings a win-win situation for all. Rarely do we find ourselves in the position where government and the industry players are in agreement on a major tax measure. It took a year before both sides could come up with a sound proposal such as Senate Bill No. 2517 as embodied in Committee Report No. 154."

It has indeed taken time for this new excise tax law to see the light of day. Now that the Third Regular Session of Congress has opened, the Senate is expected to approve the bill on Third Reading and sit down with the House panel to thresh out the differences between the two versions that both houses have approved. It does seem like the compromise is just around the corner. Here’s hoping that this particular step towards standardizing government revenues and widening consumer access to more affordable passenger cars does pave the way for a more stable and more profitable legitimate automotive industry — in which the consumer is ultimately deemed the big winner.