The Department of Finance (DOF) is proposing to defer the implementation of the reduced personal income tax (PIT) rate as well as the removal of certain value-added tax (VAT) exemptions as part of its fiscal consolidation program to address the country’s ballooning pandemic-induced debts.
These two proposals, which the DOF projects would raise around P240.2 billion, form part of outgoing Finance Secretary Carlos G. Dominguez III’s fiscal consolidation and resource mobilization program that he hopes the next administration would adopt.
Dominguez said the implementation of the plan is “imperative,” saying it will ensure that the government can continue to effectively manage its increased budget deficit while spending on key investments.
"We are optimistic that the incoming administration and our next set of legislators will recognize the importance and urgency of these measures and implement them at the soonest time possible," Dominguez said.
“Pursuing the fiscal consolidation and resource mobilization program as proposed will help us continue to spend on socioeconomic programs, maintain our credit ratings, and grow out of our debt,” he added. “Taking action now is our responsibility to future generations.”
Finance Officer-in-Charge Undersecretary Valery Joy Brion, who heads the DOF Domestic Finance Group, said the proposed measures are grouped into three packages. However, bulk of the projected revenues will come from the first package.
Brion said reforms under Package 1 are set to be implemented in 2023 and already have existing bills, or have already been sufficiently discussed in Congress.
First on the DOF list is the deferment of the second tranche reduction in PIT scheduled in 2023 as mandated under the tax reform for acceleration and inclusion (TRAIN) law.
“We propose deferring the implementation of this reduction to 2026. This will save around P97.7 billion per year for three years. To clarify, we will still reduce personal income taxes in 2026 when fiscal conditions are hopefully more permissive to the reduction,” Brion said.
Second, the DOF proposed the expansion of the VAT base by removing certain exemptions such as senior citizen and persons with disabilities. As a sweeter, the department is amenable to a possible reduction of the current 12 percent consumption tax levy.
“We seek to limit VAT zero-rating to direct exports, and to repeal VAT exemptions except for education, agricultural products, health, financial sector, and raw food,” Brion said.
VAT reform is estimated by the DOF to generate an average of P142.5 billion in additional revenues every year.
“We need to expand the VAT base first before we consider the possibility of lowering the VAT rate,” Brion, however, noted.
“We are also considering repealing the immediate expending of input VAT on capital goods under TRAIN Law, and reimposing the 60-month limit to credit input VAT on capital goods,” the DOF official added.
The third proposal is the imposition of VAT on digital service providers, which will cover online advertisement services, digital services, and supply of other electronic and online services.
Brion said digital service providers would deliver an annual revenue of P13.2 billion.
Other proposals under Package 1 are reform on the Motor Vehicle Users’ Charge; rationalization of the mining fiscal regime; imposition of taxes and charges on gaming; Passive Income and Financial Intermediary Taxation Act; and Real Property Valuation and Assessment Reform Act.
The DOF also included the strengthening of tax administration for income tax on social media influencers under Package 1.
Overall, Package 1 is estimated to an average of P247.8 billion per year.
Meanwhile, Package 2 is set to be implemented in 2024.
“Measures under this package require further study or still have scheduled increases in 2023 under existing laws,” Brion said.
“We deferred carbon taxation to Package 3, set for implementation in 2025, as the proper carbon tax structure is still under study,” she concluded.