When taxes become taxing

LAST September 14, intrigued with all the developments coming from the Department of Finance (DOF) and their Comprehensive Tax Reform Program (Package 1) or Tax Reform for Inclusion and Acceleration (TRAIN), I attended the Senate Committee on Ways and Means’ 19th public hearing held at the Sen. Ambrosio Padilla Hall Room, Senate of the Philippines, chaired by Senator Sonny Angara.

That day, I was able to witness the complex workings that must go into the Senate Tax Study and Research Office’s (STSRO) consultations regarding how TRAIN deals with the personal income tax amendment, Value-Added Tax (VAT) base expansion, increase in the excise taxes of oil and automobiles, the imposition of the sugar sweetened beverage tax, and some tax administration measures all aimed at increasing and improving the government’s tax collection and efficiency.

The day I was in attendance, the public hearing was all about the current tax treatment of coal in the country and the possibility of amending it. This topic was especially close to my heart, as any decision on coal will have a major effect on consumers, just like any increase in petroleum products. These recent moves to increase taxes on coal, petroleum, and even automobiles have me, and I’m sure, my fellow everyday consumers, worried.

And so should we all, as these excise taxes are becoming quite the hot topic nowadays.

This past year, the impending excise tax on automobiles, among other things, has been the one that has everybody worried, causing many to panic-buy this year before the price of cars becomes too high next year. But it is not just the excise tax on automobiles that we should be on the watch-out for.

Three months ago, the House of Representatives approved on third and final reading House Bill No. 5636, which seeks to broaden the VAT base and adjust excise tax rates, including those imposed on all petroleum products. This may be bad news for the everyday consumer in more ways than one.

Using one scenario as an example, higher excise tax on diesel and bunker fuel oil used in power generation will increase the cost of electricity generation right after New Year by around 10.75/kWh and unfortunately, this will lead to a higher cost of electricity for consumer.

From that case study alone, you can see that the impact of higher excise taxes on the power industry will have many dire consequences. Higher excise taxes will also affect the universal charge for missionary electrification since diesel is a major fuel source for off-grid electrification.

Also, there may be an increase in the subsidy provided by electricity consumers in the main grid since the disparity between electricity costs in the main grid and off-grid will increase.

Plus, think about this: If you are not connected to the grid, you may find yourself in even a worse position, as electricity price in off-grid or NPC SPUG areas may also increase as these areas source power from generator sets that also use diesel or bunker fuel.

At least a third of these areas operate their generator sets for 24 hours. Imagine the tremendous cost this increase in taxes will mean for the ones operating.

And it is not only Metro Manila that will be carrying this burden. An example would be consumers of Mindanao Electric Cooperatives (ECs) that participated in the Mindanao Modular Generator Sets Program, as they may also experience price increases. As of January, 2015, 11 ECs were enrolled in the program with an estimated 241 MW of additional capacity from modular generator sets that use diesel or bunker fuel.

It is not hard to see the overall impact that increasing the excise tax rates on diesel will have on our fellow Filipinos and our economy.

But the story does not end there. As mentioned earlier, I recently attended a public hearing by the Senate Committee on Ways and Means, chaired by Senator Angara discussing the current tax treatment of coal in the country and the possibility of amending it.

Yes, the Senate is contemplating on increasing the excise tax on coal, our country’s biggest, most reliable, most stable, and cheapest power source. While the current Senate Bill 1408 does not cover Excise Tax on Minerals, the intent is to include it together with Petroleum and Automobiles.

Thus, there was a hearing Sep. 14, 2017, on the Tax Reform for Inclusion and Acceleration (TRAIN), to discuss the current tax treatment of coal in the country and the possibility of amending it. Bad news: This will increase again electricity prices.

What people have to understand is that based on DOE’s 2015 statistics on coal consumption by sector, around 80% is used for power generation, but certain industries, like cement, also rely on coal for production. Coal is clearly a major factor in our economy, infrastructure, and national development.

If we increase the taxes on coal, it is like biting, and even demonizing, the hand that feeds us. In fact, with the government’s target to sustain our country’s economic growth to 7-8% over the term of the current administration, and the “BUILD, BUILD, BUILD” agenda we have embarked on, it is all the more important to leave coal alone and let market forces work. We need reliable power supply at the least cost possible.

Let me paint the picture for you, as I learned during the public hearing I recently attended:

In 2016, coal-fired power plants in the Philippines supplied 48% of the electricity used by the entire country. Coal-fired power plants in Luzon supplied 50% of the island’s power needs. In Visayas, despite the presence of geothermal, coal still provided 41% of electricity. In Mindanao, even with their large hydro dams, coal pumped in 43% of their power.

Obviously, coal is the backbone of our power supply in all grids, and for some reason, our country’s leaders want to tax coal even more? Where is the logic in that? Do they want to further reduce our competitiveness vis-à-vis neighboring countries that already have very low power rates because of government subsidies?

As I mentioned earlier, the impact of higher tax on coal on the generation charge will be huge on businesses and households nationwide, as they will carry the burden of higher prices.

Why is there a need to increase tax when Philippines already ranks number 1 in environmental sustainability among 125 countries, based on the World Energy Council (WEC) Energy Trilemma Index tool, which ranks countries on their ability to provide sustainable energy.

Our rates must be kept at the least cost possible for the consumer’s sake, and taxing coal more would only burden the consumer more.

From the public hearing I attended, there was a proposal from climate groups to increase the existing tax on coal from 110 per metric ton to a 11,300 per metric ton. Are they out of their mind? Do they have a lot of money that they don’t seem to be concerned about high power rates?

A 13,000% increase in the existing tax will easily drive high electricity prices nationwide by around P0.30/ kWh. Let’s not forget that VAT is applied on the tax on coal. A tax on tax! Heavens!.

It would be most unwise to increase the excise tax on coal as this will be an unnecessary and unfair burden to all consumers and will impact the economy of the country.

I believe that further study should be done into the proper taxing of coal, as we cannot risk our consumers’ welfare and the development of our country just because we made a misinformed decision to tax what is powering our progress in the first place.