The Department of Finance (DOF) expects to raise from its proposed Tax Reform and Inclusion Act a net gain of P174.2 billion, of which a substantial portion would be spent on targeted transfer programs that will benefit the country’s most vulnerable sectors–if and when Congress passes this DOF initiative in its original form.

The first of a series of tax reform packages submitted by the DOF to the Congress last September seeks to lower personal income tax (PIT) rates while expanding the base for the value-added tax (VAT) to plug massive leakages, adjust the excise tax on petroleum products and index these to inflation, and restructure the excise tax on automobiles via a progressive ad valorem system.

Finance Undersecretary Karl Kendrick Chua told a tax forum on Tuesday that the proposed tax reform and inclusion law, which the DOF submitted to the Congress last September, would result in revenue losses of P127.4 billion in 2018, the first year of its proposed implementation.

But such foregone revenues would be offset by gains totalling P301.6 billion from the additional revenues from the proposed broadening of the Value Added Tax (VAT) and adjusting the excise tax on fuel and automobiles, for a net gain of P174.2 billion.

In its original form, Chua said that Package One of the tax reform program is projected to raise an additional P111.2 billion from the removal of certain VAT exemptions, except for basic essentials, another P45 billion from automobile taxes, and P145.4 billion more from the fuel tax adjustment.

Speaking at a tax forum sponsored by the Stratbase ADR Institute, Inc. (ADRi) at the Ortigas Business Center in Pasig City, Chua said up to 40 percent of the incremental revenues collected from the first DOF-proposed tax reform package “will be used for targeted transfers to low-income and vulnerable sectors.”

“We recognize that the tax reform will affect a number of vulnerable people. We are very much committed to protecting the poor, vulnerable, and low income sectors. The poorer the household is, the more social protection subsidies it will get especially, during the first year of the Tax Reform Package One implementation,” Chua said at the Ortigas forum.

These targeted transfers, Chua said, include time-bound unconditional cash transfers for the bottom 50 percent of the population; pantawid pasada programs for public utility vehicles to cushion the impact of fuel excises on commuters; higher socialized pensions or higher conditional cash transfer amounts, plus rice subsidies for indigent senior citizens; and higher Philippine health insurance (PhilHealth) coverage and other benefits to help them defray the ever spiralling costs of healthcare for persons with disabilities.

To benefit most ordinary consumers, the DOF plans to increase the VAT threshold for goods and services from P1.9 million to P3 million for micro and small enterprises, effectively exempting them from the VAT.

This means that sari-sari stores and small groceries, where most Filipinos buy their every day essentials, will be exempted from the VAT and will only pay the percentage tax, he said.

Chua made it clear that in expanding the VAT base, exemptions would be retained for raw food, education, health care and other key essentials, but would lifted for other items such as travel, restaurants and amusement so that the tax savings from this effort would be used to fund the targeted transfer programs for the poor.

He also stressed that senior citizens would continue enjoying their 20 percent discount, regardless of their income status.

“The rich will not need exemptions and subsidies anymore as they are already well-off compared to the rest of the population. To achieve a more equitable society, we are going to spend more equitably even in terms of highly targeted transfer programs for vulnerable sectors,” Chua said.

“As a general principle, the money we generate from the rich, who do not need exemptions and subsidies, will be transferred back to the poor and used to fund more and better services,” Chua said.

With the tax reform and targeted transfers taken altogether, Chua said “we will see higher incomes for 99% of the Filipino people even with the increase in excise taxes. Only those in the top 1% will see incomes reduce, as the rich tend to spend more, and so will have to pay their fair share by way of higher total excise payments,” Chua noted.

“The result is that with transfers, there will be less inequality in our society compared to the present day scenario. However, income inequality will significantly increase if only the revenue-eroding measures–the reduction in personal income tax rates–are passed,” Chua said.

Chua said the targeted transfer programs to help low-income households are not only meant to cushion the impact of higher fuel excise taxes on them, but are also long-term investments in human capital development to help the poorest of the poor become healthier, more educated and better-trained to take on quality jobs or set up their own means of livelihood.

Moreover, studies show that the income multiplier of social protection programs are overly positive, such that for every $1 spent on cash transfers, the return on the economy could go as high as $2.52, Chua noted.

According to Chua, entry- to mid-level workers earning more than the daily minimum wage would effectively enjoy significant increases in their take-home pay because they will pay lower taxes under Package One of the tax reform program.

For instance, a call center agent with an annual basic salary of P252,000 or about P21,000 a month with three declared dependents would see an increase in their take-home pay by P10,300 per year, because he would only have to pay P1.567 in taxes under the DOF-proposed tax reform package, as opposed to the current system where he pays P11,867 in income taxes.

Under Package One, some 3 million taxpayers earning above the minimum wage but with a net taxable income of P250,000 per year and below would automatically increase their take home pay by paying less taxes.

The country’s 1.7 million minimum wage earners are already exempted from paying income taxes.

Another 450,000 taxpayers with a net taxable income of between P250,000 and P400,000 will pay taxes equivalent to only 20% of their incomes in excess of P250,000 by 2018, the first year of implementation of the DOF-proposed tax plan.

From 2019 and onwards, they would have to pay a personal income tax of only 15 percent of the amount in excess of P250,000.

Taxpayers with a net taxable income of P400,000 to 800,00 will pay P30,000 in tax plus 25 percent of their annual gross income in excess of P400,000. The tax would be adjusted in 2019 and onwards so that those belonging to this bracket would pay a lower rate of P22,500 plus 20 percent in excess of P400,000.

Those with a net taxable income of P800,000 to P2 million per year would pay a tax of P130,000 plus 30 percent in excess of P800,000. In 2019 and onwards, the rate would be reduced to P102,500 plus 25 percent in excess of P800,000.

Some 28,000 individuals with a net taxable income of P2 million to P5 million or 1 percent of the tax base would be taxed P490,000 plus 32 percent of their annual gross income in excess of P2 million. They would benefit from a lower tax rate of P402,500 plus 30 percent in excess of P2 million from 2019 and onwards.

The last bracket of ultra-rich taxpayers comprising less than 6,000 individuals with a net taxable income of over P5 million would have to pay a tax of P1.45 million plus 35 percent in excess of P5 million. From 2019 and onwards, the tax rate would be dropped to P1,302,500 plus 35 percent in excess of P5 million.

“When we do the math, for as long as you earn less than P13 million annually, you will still pay lower taxes, because the 35% marginal rate is in excess of P5 million in net taxable income, as opposed to the previous 32% in excess over P500,000 in net taxable income,” Chua said.