Consumers brace for higher prices

Despite government assurances that the impact of the higher excise tax that took effect today, New Year 2018, will be short term, consumers, particularly the marginalized and those in the “laylayan” (fringes) will have to bear the brunt of taxation.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said the package 1 of the governments’ comprehensive tax reform program (CTRP) under the Tax Reform Acceleration and Inclusion (TRAIN) Act will add to inflation pressure particularly on fuel prices however the impact – based on their assessments – is short term in nature.

“We are indeed expecting some inflation pressure from TRAIN especially coming from the higher excise tax on fuel,” said Guinigundo. “That means the build up could be coming from the supply side. This argues for the BSP’s continued vigilance against potential second round effects from higher fuel taxes namely demand for higher transport fares and higher wages.”

Guinigundo said the central bank is prepared to adjust monetary policy “when these demand-driven secondary effects are triggered by higher taxes impinging on the supply side.”

INFLATION As such, the BSP sees an adjustment of one percentage point (or up to 1.2 percentage point) to inflation rate next year and less than a half percentage point in 2019 with the new tax rules.

However, Guinigundo said the 35-percent tariff on rice and thereby scrapping the quantitative restriction (QR) on the staple commodity, will match any impact of the tax reform program over the long term. The removal of the QR will lower rice prices and in turn lower inflation rate by one percentage point.

“As I said and I say it again, a sure game changer is the proposed bill on tarrification of rice imports and elimination of quantitative restrictions on rice imports,” he remarked. “If this bill is approved into law, we should be seeing significant reduction on rice prices and on general average of consumer prices given that rice accounts for nearly nine percent of the total consumer basket.”

Guinigundo added that potential inflation risk from tax measures “can be matched by almost the same amount of consumer price reduction as a result of the rice tarrification bill.”

On the recommendation of the BSP, the inter-agency Development Budget Coordination Committee (DBCC) will keep the current inflation target band of two percent to four percent until 2020.

Guinigundo said they are confident that growth alongside tax reforms would lead to a demand-side inflation which remains manageable based on their assessment.

“We need to go beyond these one-off, short-term impact of TRAIN on both inflation and growth,” he stressed. “Taxes are being raised to fund infrastructure and other social projects including better health and education. In short, we are all investing in order to increase the country’s productive capacity. We should be seeing further expansion of our potential output which should mitigate the collateral effect on inflation over the long run.”

With the National Government investing heavily on infrastructure development, the BSP expects the economy’s productive capacity “would help temper inflation pressures.”

The BSP is sure the current manageable inflation environment could be sustained over the medium term.

OIL PRICES All-time high oil price hikes of R2.50 to R3.00 per liter plus value-added tax (VAT) will whack consumers in the head at the strike of the New Year, due to the enforced excise tax increases under the TRAIN Act of the Duterte Administration.

As advised by the oil companies, gasoline prices will be up by R2.65 per liter plus 12 percent VAT so that runs up to R2.968 per liter hike; and diesel will increase by R2.50 per liter and with 12 percent VAT that will be R2.80 per liter jump in prices.

For kerosene which is a sociallysensitive commodity being used even in households of rural areas, the anticipated increase is R3.00 per liter plus 12 percent VAT, so that will sum up to R3.36 per liter; while for liquefied petroleum gas (LPG), it will be an increase of R1.00 per kilogram or R11 for the standard 11-kilogram cylinder with additional VAT of R1.32/tank.

The TRAIN-induced increases will be on top of the estimated adjustments in prices this week as based on cost movements in the world market, according to the oil companies.

“As per TRAIN, the increases are due January 1, so it will be a paradoxical and agonizing ‘Happy New Year’ greeting to the consumers,” one oil firm has asserted.

The price hike increases under TRAIN will be roughly four-fold compared to when VAT was jacked up to 12percent in 2006, with upward adjustments at the petroleum pumps then just at R0.55 to R0.70 per liter.

Historically, according to the oil industry players, the TRAIN price hikes would be “the most punishing one that will slap consumers in the face, which is ironically coming as they celebrate the New Year.”

For diesel, the increase will not just be felt directly by motorists, but will also impact eventually in electricity rates as this is the fuel that generally runs the peaking facilities in the country’s power system and also the technology deployment in many off-grid areas, according to the Department of Energy.

“Consumers then will be hit on three fronts: one, is with fuels filled up at gas pumps, two, in the generation rate component of the electric bills; and three, the subsidy component of power rates for the SPUG (Small Power Utilities Group) areas,” the energy department added. Cost impacts on power rates are still being calculated.

As culled from the DOF’s primer on fuel excise tax increases, it was stated that “based on the family income and expenditure survey in 2015, the top 10percent richest households consume 51 percent of total fuel consumption.”

The department thus justified that “this is a tax that will affect the rich far more than the poor, given their greater oil consumption than the poor.”

‘LAYLAYAN’

Edgardo Lacson, chairman of the Employers Confederation of the Philippines, said the organized labor will not be hit hard by the new TRAIN, but the poorest of the poor.

“It is the marginalized and people in the ‘laylayan’ of society who will be hit harder, not the organized labor,” said Lacson.

Thus, he said, the government is trying to mitigate the TRAIN’s impact by increasing and retargeting Conditional Cash Transfer (CCT) and other social public expenditure like free tuition, universal health coverage, etc.

However, the organized labor is already asking for another round of wage increase ahead of TRAIN. If granted, Lacson said, it will inflict more sufferings on this sector as it will further increase the cost of living. The demand for wage hike comes amid their benefit from the personal

income tax exemption granted to the first R250,000 annual earnings.

“TRAIN reduces income tax for wage earners with little upward impact on some consumer items, but organized labor is citing TRAIN as a supervening event to file petitions for wage increase after getting their annual wage increase recently,” he said.

“TRAIN’s objective is to establish a progressive tax system where the high income group shoulders a higher tax burden. Labor should give TRAIN a chance to succeed and avoid inciting fear among its members,” he said.

ECOP Governor President Sergio Ortiz-Luis Jr. noted there are 43 million Filipinos in the labor market of which only 16 percent is regularly employed while the informal sector (underemployed and non-taxpayers) accounts for a huge 84 percent.

“The informal sector is the most affected because they are not entitled to any personal tax exemption,” he said.

EXPORTS Ortiz, who is also president of the Philippine Exporters Confederation (PhilExport), downplayed the impact excise tax on exports products, but said inputs like sugar for food exporters will cost higher.

“Sugar and beverage will have higher prices but somehow the market will find a way to make products competitive,” he said.

Sugar-sweetened beverages will become more expensive affecting the poor and that means government intervention.

The foreign exchange rate is not likely to be affected although uptick could be triggered by inflation and credit flow but this will be addressed by the central bank, he said.

GOODS Trade and Industry Secretary Ramon M. Lopez admitted that the higher excise tax will increase prices of goods and commodities, but adjustments will be minimal stressing the effect on inflation is very minimal.

“Not really big because it is just a small percentage increase on fuel and fuel accounts for small percentage in costing except for heavy industries,” he stressed.

George Barcelon, president of the Philippine Chamber of Commerce and Industry, said the effect on prices would be minimal or practically no increase.

“But next year, transportation and public commuting and trucking may go up slightly,” he said.

AUTO TAX The auto tax is one interesting feature in the first package of the government’s CTRP. While the government seeks to collect more revenues from this sector, majority of the taxes may come from the entry level models, but the mid to upper mid-range priced cars are spared from higher excise taxes, even lower than the current.

An excise tax simulation based on net manufacturer’s price (NMP) would show that cars with prices starting from R1.8 million to R4.2 million will enjoy even lower excise tax than what they are currently paying (see table).

“This is because the current tax is slope while the new tax is step-type. It’s now wide and shallow, meaning the lower-priced models will be hardest hit. So, for vehicles with net manufacturer’s price of R1.8 million and above will have no increase in excise tax, in fact they will have lower tax rate than current,” explained Joseph Bautista, vice-president for marketing of Isuzu Philippines Corp.

These vehicles include mostly sports utility vehicles MUX, Montero, Fortuner, among all other mid-range to upper SUV models. With lower excise tax, this segment is expected to effect lower prices by next year. In contrast, the entry level model will have higher prices.

Estimates show that cars with prices of R1.0 million and below account for 50 percent of total volume of taxable vehicles while the R1.0 million to R1.8 million account for 40 percent, and the luxury segment of above R1.8 million account for 10 percent.

Aside from changes in excise tax, motor vehicle firms will have to factor in cost up due to excise tax and weakening peso. But on the positive side, there’s the reduction in Personal Income Tax which will benefit the sales of vehicles 1.0M and below.

STOCK TAX Meantime, the Philippine Stock Exchange has raised the alarm over the 20 percent increase in stock transaction tax under the new tax reform package, but reactions from small investors are mixed.

“Under a good market, this probably won’t have a dramatic impact on equity investors’ line of sight. The additional R100 per R100,000 transaction can easily be offset by rising positive volatility,” said Philstocks Financials Head of Research Justino Calaycay Jr.

He noted that, which “sensitivities are heightened” with the tax hike, it will have to be a “part of the reality for investor’s trade considerations.”

Under TRAIN, the Stock Transaction Tax has been raised from 0.005 to 0.006 (0.5 percent to 0.6 percent). The PSE said this will make the local stock market even less competitive in the region where other bourses either impose lower taxes or none at all for stock trading.

“While the incremental change of 0.001 (10 basis points) may not be seen to make a dent in terms of raising hurdle rates for investments, the move to impose this obligation to the investor may not be an encouraging signal,” noted Calaycay.

However, he stressed that, “For as long as the market continues to do well, this change may never leave coffee-shop conversations and become an issue for serious debate. Alternatively, differences like this are magnified in the global stage, where every basis point counts.”

A local stock broker who handles both retail and institutional clients noted that, “for short-term traders, the higher tax will be felt right away. The half percent was already thought burdensome, the latest change increases the burden.”

He explained that, with the 0.5 percent stock transaction tax and other trading costs, a stock trader will have to see his investment value rise by 1.08 percent to break even. With the 0.6 percent tax, this cost of transaction has gone up to 1.18 percent just to break even.

“This is a big hurdle rate for day traders. Day trading could become trickier. On the other hand, one institutional client confirmed that the higher tax will definitely hurt,” the broker said.

To give perspective, he explained that, institutional money is dominant in the Philippine stock market “but the ranks of day traders is legion. They have swelled together with the trend towards online trading.”

A facebook group composed of mostly small investors and day traders is Traders’ Apprentice Pilipinas which, as of last count, has 97,766 members.

One of the founders and administrators of TAP is veteran stockbroker Kevin Khoe who noted that the higher stock transaction tax is “a necessary evil to share the burden in helping with the tax revenues.”

“But it will not add much to the overall pie since daily transaction is still small. I guess a better way to increase revenues is to broaden the capital markets and encourage more companies to do initial public offerings,” he added.

However, Khoe said “there might be a slight impact for day traders since you need to hurdle additional tax. But rest assured investors will continue to bet for as long as there is opportunity to make money. They think like bettors.”

BENEFITS Finance Secretary Carlos G. Dominguez III issued an assurance that 99 percent of the country’s population stands to benefit from the TRAIN despite the expected increase in consumer prices, which he said would be very minimal or less than one percentage point rise in inflation.

Package 1 of TRAIN is projected to generate R90 billion on the first year of implementation after President Duterte vetoed 5 line items. Without the veto, the tax measure was expected to generate a lower R82 billion.

Dominguez said that 30 percent of the incremental revenues from the TRAIN will be earmarked for social protection programs and the bulk of 70 percent will help fund the government’s “Build, Build, Build” program.

The social protection program under TRAIN is the biggest, in terms of beneficiaries, to be undertaken by the Philippines government. The targetted CCT will benefit the poorest 10 million households in the country.

Cash transfer beneficiaries will get R200 a month during the first year of the program, which will increase to R300 a month in the next two years, and a social welfare card that they can use to receive discounts on medicine, transportation, rice, and vocational training.

Besides the benefits for compensation earners, the TRAIN also provides the same PIT rate for self-employed individuals and professionals within and below the value-added tax (VAT) threshold of R3 million.

While those above the threshold can opt to either pay an 8 percent flat tax on gross receipts or gross sales or the PIT rate.

Salaried employees and self-employed individuals earning a taxable income of R250,000 per year, or around R21,000 a month, are exempted from paying the personal income tax (PIT).

Other taxpayers in higher income brackets will also get to enjoy significant PIT cuts, except the ultra-rich or those earning R8 million a year and above.

Also, 13th month pay and other bonuses amounting to R90,000 a month are non-taxable.

To help make idle land and properties productive, the TRAIN also imposed a flat six percent flat tax on the net estate of the deceased with a R5 million standard deduction and a tax exemption for family homes valued at R10 million and below.

The donor’s tax was also set at a flat six percent for donations above R250,000 under the TRAIN.

Among the TRAIN’s revenue enhancing measures are the expansion of the value-added tax base while keeping exemptions for, among others, seniors and persons with disabilities.

VAT exempt status for cooperatives, low-cost housing of R2 million and below, and leases of R15,000 a month and below were also maintained under the signedTRAIN law. (Lee C. Chipongian, Myrna M. Velasco, Bernie Cahiles-Magkilat, James A. Loyola, Chino S. Leyco)