What is TRAIN?
Tax Reform for Acceleration and Inclusion
The goal of the first package of the Comprehensive Tax Reform Program (CTRP) or TRAIN is to create a simpler, fair, and more efficient system, as per the constitution, where the rich will have a bigger contribution and the poor will benefit more from the government’s programs and services.
Expanding the Value-Added Tax (VAT)
The Philippines has one of the highest VAT rates but also the highest number of exemptions in the Southeast Asia region. Consequently, the Philippines collect the same amount of VAT revenues as a percentage of the economy as that of Thailand despite only imposing a 7% VAT rate, while the Philippines is at 12%.
These tax exemptions have been given to many sectors and were supposedly very well meaning. However, these exemptions have also created much confusion, complexity, and discretion in our tax system resulting in leakages and opening doors for negotiation, corruption, and tax evasion.
The truth is, these exemptions are not free and someone pays for them, and it is most often the poor who pays as they are deprived of quality public service necessary to accelerate their graduation out of poverty.
TRAIN aims to clean up the VAT system to make it fairer and simpler and lower the cost of compliance for both the taxpayers and tax administrators. This is achieved by limiting VAT exemptions to necessities such as raw agriculture food, education, and health. This does not mean that the benefits the poor rightly deserve will be removed. The Duterte administration commits to use the budget to provide targeted transfers and programs that are more transparent and accountable. The administration will direct the way to protect the poor and vulnerable compared to the tax exemptions and blind subsidies that are inefficient and largely beneficial to the rich since they have higher purchasing power.
TRAIN repeals 54 out of 61 special laws with non-essential VAT exemptions, thereby making the system fairer. Purchases of senior citizens and persons with disabilities, however, will continue to be exempt from VAT. Housing that cost below P2 million will be exempt from VAT beginning 2021, while medicines for diabetes, high cholesterol, and hypertension will be exempt beginning 2019.
The reform also aims to limit the VAT zero-rating to direct exporters who actually export goods out of the country. This will be implemented together with an enhanced VAT refund system that will provide timely cash refunds to exporters.
The VAT threshold is increased from P1.9 million to P3 million to protect the poor and low-income Filipinos and small and micro businesses and for manageable administration. This effectively exempts the sale of goods and services of marginal establishments from VAT. Under TRAIN, VAT exempt taxpayers will have the following options:
● PIT schedule with 40% OSD on gross receipts or gross sales plus 3% percentage tax
● PIT schedule with itemized deductions plus 3% percentage tax, or
● Flat tax of 8% on gross sales or gross revenues in lieu of percentage tax and personal income tax.