According to reports from the Philippines, the Department of Finance is considering the benefits of pushing forward a proposal to shift the tax system towards that of a modified gross income taxation (MGIT) basis. Apparently the Department has prepared two versions of a document scheduled to be presented before the Congressional budget hearing this week.
One version recommends the MGIT which is expected to raise revenues of P9.5 billion, and to index-link the tax rate on 'sin taxes' on tobacco and alcohol related products so that they will be based on the inflation rate and adjusted each year accordingly. This tax is set to add a further P5 billion to government coffers.
The other version also includes the sin taxes, but also re-introduces an earlier plan to remove the excise tax exemptions on Asian utility vehicles (AUVs) and impose uniform taxation for all vehicles instead. This proposal is forecast to raise at least P10.5 billion.
The International Monetary Fund (IMF) has raised concerns over the possible impact of implementing the MGIT scheme, and has recommended that the Philippines government stick with the current net income taxation system whereby all valid business costs can be deducted from taxable income.
But the government is confident that not only will the shift help simplify taxation but it will also tap into, and raise more taxes from, the 'underground economy'.
According to the Philippine Star online news service, the plan to lift the excise tax exemption on AUVs was raised by former Finance Secretary Alberto Romulo but was shelved in favour of the MGIT when President Arroyo called for its adoption in her state-of-the-nation address before the 12th Congress in July last year.
Currently, motor vehicles in the Philippines are classified and taxed with relation to seating capacity and engine displacement. Five-seaters are categorised as luxury cars and high taxes are imposed on them, but AUVs with nine seats are classified as utility vehicles and awarded preferential tax treatment.
Sources told the Philippine Star that 'redefining AUVs should be easier because no legislation is necessary. The Secretary of Finance only has to issue an administrative order directing the Bureau of Internal Revenue to start collecting the taxes.'
However, it is expected that the plan will be fiercely opposed by the country's motor industry. Ariel de Jesus, spokesman of Toyota motors Philippines said there had been no mention of the plan in recent meetings of the industry. 'Sales are down by 14 percent year-on-year. If they push for the imposition of the excise taxes on AUV to earn more revenues, it won't happen. For one, this will lead to an increase in prices, lower demand and eventually lead to the collapse of the industry,' De Jesus explained.
He said if the plan is implemented, it will spell disaster for the industry: 'Sales from the network of local suppliers could fall and some may be forced to close shop. We're talking of job losses. The taxes will hurt the industry because we don't know when the turnaround will happen. AUVs have the highest local content among locally-manufactured vehicles and have the biggest network of local suppliers.'
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