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Philippines Senate Looks To Reduce 'Sin Tax' Revenue Increase

by Mary Swire,, Hong Kong

11 October 2012

After an initial committee stage, the Philippines Senate appears intent on reducing the additional revenue that the Philippines government can expect from one of its urgent priorities, its ‘sin’ tax reforms.

A bill already passed by the House of Representatives would rationalize the taxes on tobacco and alcohol by establishing a tiered system linking tax rates to product prices, rather than, as currently, the year the cigarettes were first introduced and the raw material from which the alcohol is distilled.

For distilled spirits, a three-tier progressive tax rate based on net retail prices per bottle has been approved, while a two-tier tax structure would be introduced for cigarettes. Both would have an 8% indexation mechanism, every two years from January 1, 2015 until January, 2025.

During his third State of the Nation Address in July this year, President Benigno S. Aquino called for the passage through the Philippines parliament, as soon as possible, of the sin tax reform. He pointed out that the reform would produce more funds for universal health care, to counteract the annual economic cost to the nation’s health of smoking that has been estimated at around PHP177bn (USD4.26bn).

Finance Secretary Cesar Purisima also recently urged the Senate to pass the House version of the bill, which the Bureau of Internal Revenue has estimated could yield PHP31.35bn in 2013, PHP39bn in 2014, and PHP42.7bn in 2015.

The government has maintained its insistence that the main reason for reform is to allow for an expansion of universal health care, rather than for revenue reasons, and that assistance will be given to tobacco farmers who have to shift to alternative crops.

However, it now looks more and more likely that the Senate will modify significantly the House bill, particularly by reducing the increased tax take from cigarette sales, while leaving the proposed changes to alcohol taxes intact.

The version of the bill that has been put together by the Senate Ways and Means Committee is reported to contribute total revenue from both tobacco and alcohol taxes of only PHP15bn to PHP20bn in 2013, much less than the projected PHP31.35bn from the House version, which the Senate committee has called “unrealistic”.

In particular, the Senate bill, while also maintaining a three-tier price structure for an initial period, would reduce the hike in taxes on cheaper cigarettes from 200% in the House bill to only 121%; and would, overall, yield only PHP10bn-PHP15bn in tobacco taxes in the first year.

Predictably, the government has expressed disappointment at the reduced revenue it could expect from the Senate version of the measure. Nevertheless, it is hoping that, even if the Senate version is passed in its current form, the subsequent bicameral conference to merge the two bills could move the final enacted version closer to its targets.

TAGS: individuals | tax | business | public health | law | Philippines | excise duty | ministry of finance | tax authority | health care | legislation | tax rates | tax reform | retail

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