YEARENDER : Major change in fiscal system as TRAIN starts rolling in 2018

by Mary Grace Padin (The Philippine Star) – Jan 5, 2019

MANILA, Philippines — The year 2018 signified major changes for the country’s fiscal system as the government started the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law.

Some sectors praised the measure, noting the much-needed change it brought to the country’s tax system while generating more revenues for the government. But others were also loud in their criticism, blaming the law for the additional burden on the pockets of millions of poor Filipinos.

As the first package under the Comprehensive Tax Reform Program (CTRP), the objective of Republic Act 10963 or the TRAIN law was to start the process toward a simpler, fairer and more efficient tax system.

It also seeks to help generate more revenues to enable the government to fund its priority programs, including infrastructure development and social protection programs.

Finance Assistant Secretary and spokesperson Antonio Lambino believes TRAIN was able to achieve these objectives last year.

“We said we wanted a fair and equitable, a more transparent way of financing the investments that we need to make. TRAIN was the first big step towards that direction,” Lambino said in an interview with The STAR.

However, the DOF official admitted that while some provisions of the law were rolled out smoothly, some components of TRAIN still have yet to be implemented successfully.

“In terms of the specific objective, some have been met completely, some have been met partially, and some still have to be met,” Lambino said.

He said among the provisions immediately enforced upon TRAIN’s effectivity on Jan. 1, 2018, was the reduction in the personal income taxes (PIT), which benefitted about 99 percent of Filipino individual taxpayers in the country. It also provided relief to some six million taxpayers by exempting the first P250,000 of the annual taxable income.

“I think the most important provision of TRAIN that most people do not pay attention to is on the personal income taxes. There was an injustice, an unfairness, and lack of transparency in the way the taxes were being computed and collected. So that was adjusted,” Lambino said.

As a result of the reduction, Lambino said the government has foregone revenues of about P12 billion a month, which now instead remains on the pockets of Filipino taxpayers.

Upon TRAIN’s effectivity also came the increase in excise taxes imposed on some products.

The most controversial was the increase in the excise taxes of oil products, including diesel, LPG and gasoline, which was implemented on a staggered basis spanning three years.

Tax on diesel, in particular, was increased by P2.50 per liter in January last year, and will further increase by P2 per liter in 2019 and P1.50 in 2020.

TRAIN also imposed excise taxes on sugar-sweetened beverages, in the amount of P6 per liter for beverages using caloric and non-caloric sweeteners, and P12 per liter for beverages using high-fructose corn syrup. This is to discourage Filipinos from constantly drinking sugary drinks, which are deemed not good for health.

Another health-related measure under the law is the increase in excise taxes on cigarette products. From the previous rate of P30 per pack, the tax was increased to P32.50 per pack in January, and then to P35 per pack later in July.

TRAIN also raised taxes on automobiles, coal, mineral products and cosmetic procedures. It also expanded the value-added tax base by removing some exemptions enjoyed by some sectors.

While these adjustments were immediately executed, some components of the law faced difficulties and delays in terms of implementation.

These include provisions on the fuel marking system, which seeks to plug P40 billion in foregone revenues due to oil smuggling, and the electronic receipts system.

“Fuel marking is in its last stage of testing for rollout in early 2019. They are approving the marker. E-receipts, that one I think will follow fuel marking later in 2019,” Lambino said.

Due to the delay in the implementation of these programs, Finance Undersecretary Karl Kendrick Chua said the government had to slash the expected revenue from TRAIN by P26.6 billion, amounting only to P63.3 billion instead of the original target of P89.9 billion.

As a result, economic managers cut the government’s revenue program for 2018 to P2.82 trillion from the previous goal of P2.846 trillion.

TRAIN revenues and proceeds Citing the latest verified data from the Department of Finance (DOF), Lambino said the enforcement of TRAIN in the first half resulted in a net revenue gain of P33.7 billion.

This is higher than the P30.1 billion target for the first six months, and represents 53 percent of the full-year target of P63.3 billion.

Under the law, 30 percent of TRAIN-generated revenue should be earmarked for the government’s social programs and investments, including programs to mitigate the impact of excise tax increases on poor Filipino households.

One of these is the Unconditional Cash Transfer (UCT) program, which provides cash assistance to the poorest 10 million Filipino families in the country.

According to Lambino, the Department of Social Welfare and Development has so far verified 9.4 million beneficiaries for the program. Of this, 8.1 million has been given the P200 monthly UCT benefits for 2018.

“Why is it more difficult to get to the last two million? Because these are the hardest to reach beneficiaries. In many cases, we’re going to need to use conduits, local financial institutions, in order to serve the beneficiaries in the farthest flung areas,” the DOF spokesperson said.

“There is also the part of the list that is in need of validation, so there are about half a million on the list that DSWD is validating to make sure the money is going to the right recipients,” he said.

On the other hand, the Pantawid Pasada program, which aims to provide fuel vouchers to franchise holders of public utility jeepneys, is facing a slower pace of implementation.

Lambino said some 68,200 out of the 179,000 beneficiaries have already received their vouchers in the form of cards from the Land Bank of the Philippines.

“On Pantawid Pasada, the rules were changed recently. Before, only the franchise holder could receive the cash grant for fuel purchases. But the situation is that a lot of franchise holders, the ones who hold the paper, are not the name who’s on the franchise. So there has been a lot of passing on of the franchise,” he explained.

“So what the Land Transportation Franchising and Regulatory Board and LandBank did was they adjusted and made space for that reality. So now representatives are already allowed to claim the cards,” he said.

Meanwhile, the remaining 70 percent of TRAIN’s revenues was allocated for the government’s ambitious infrastructure development program.

Train on inflation, economic growth
Amidst all the reforms initiated under TRAIN, the law faced the ire of many groups and sectors, and was often blamed for the uptick in inflation in 2018.

However, Lambino said TRAIN only contributed 0.4 percent to 0.7 percentage points to inflation.

Inflation peaked at 6.7 percent in September before slowing down to six percent in November, bringing the average inflation to 5.2 percent in the first eleven months.

In addition, ING Bank Manila senior economist Nicholas Mapa said while TRAIN did contribute to inflation, it was not the only culprit in the increase in prices of goods.

“The bump in 2018 inflation can be traced in part, but not solely on TRAIN with price pressures emanating more from food inflation related to supply shortages and storm damage than from the excise tax on select products,” Mapa said.

Furthermore, he said the rise in pump prices could be traced more to the global oil price spike in the third quarter, rather than the excise tax slapped by TRAIN.

“Unfortunately, (TRAIN) fell into a context that made it very difficult to talk about its benefits. It became vulnerable to profiteering, it became vulnerable to anti-TRAIN advocacy, mainly because of inflation,” Lambino said.

Despite facing bottlenecks, the DOF official maintained that TRAIN was able to help boost investor confidence, and made economic growth more inclusive.

“The TRAIN law signalled to all stakeholders that we are serious about our desire to increase our fiscal space. It also showed with confidence to our taxpayers that we’re serious about managing our finances responsibly,” he said.

Michael Ricafort, head of the Economics and Industry Research Division of the Rizal Commercial Banking Corp., meanwhile, said TRAIN was able to boost much needed revenue to sustain the government’s fiscal performance, especially in maintaning its deficit-to-gross domestic product ratio within the three percent ceiling.

He said it also supported infrastructure spending, which surged by 50 percent from January to October this year, which further propelled economic growth.

“From the point of view of international credit rating agencies and international investors, additional recurring sources of government revenue also structurally provides greater fiscal space/flexibility to increase government spending on infrastructure and various social services, thereby making government spending a major growth driver of the economy in recent quarters,” he said.

Going forward, the DOF is now just awaiting for the second round of tax adjustments under TRAIN.

An additional P2 per liter increase in fuel excise tax is scheduled this January, while medicines prescribed for diabetes, high cholesterol and hypertension will become VAT-free starting 2019.

The DOF is also hoping for the swift passage of the remaining packages under the CTRP.

These include Package 1B on the tax amnesty program, Package 2 on the lowering of corporate income taxes and rationalization of fiscal incentives, Package 2 Plus on the increases for tobacco, alcohol and mining taxes, Package 3 on property valuation, and Package 4 on financial taxes.