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.

Increasing the Fuel Excise Tax

TRAIN increases the excise of petroleum products, which has not been adjusted since 1997. The non-indexation of fuel excise tax to inflation has eroded the revenues collected by P140 billion per year in 2016 prices.

Fuel excise is wrongly perceived to be anti-poor. Based on the Family Income and Expenditure Survey (FIES) 2015, the top 10% richest households consume 51% of total fuel consumption. The top 1% richest households consume 13%, which is equivalent to the aggregate consumption of the bottom 50% of households. Clearly, this is a tax that will affect the rich far more than the poor, given their greater oil consumption than the poor.

The Duterte administration is also doing this to address environmental and health concerns. By taxing dirty fuel correctly, we are also investing in a more sustainable future for our country.

One consequence of exempting diesel from excise is the shift from gasoline to diesel automobiles. For instance, prior to exempting diesel in 2005, there was slightly more gasoline sport utility vehicles than diesel SUVs. Over time, with cheaper diesel prices, consumers shifted to diesel SUVs. As of 2013, some 72% of newly registered SUVs are diesel powered compared to 28% of gasoline. This is basically giving tax breaks to rich people who can afford to buy SUVs.

Expanding the VAT base and adjusting excise taxes would raise prices of some commodities faced by consumers, but this will be minimal or moderate and only temporary. DOF estimates around 0.73 percentage point increase in inflation during the first year of implementation with the impact tapering off over time. Food prices may increase by up to 0.73 percentage point, transportation up to 2.8 percentage point, and electricity up to 0.7 percentage point.

In 2016, despite a P14 increase in diesel oil prices from P18.25 to P32.10, inflation still remained low and stable. Prices of food, transportation, electricity, gas, housing, and water increased only by 2% to 3%. Basic commodities did not increase in prices despite the 75% increase in diesel price. Unlike in the 1970s and 1980s, our economy today is much stronger, diversified, and resilient.

In the recent past, the Philippines had two major economic shocks—one is the VAT reform of 2005 and the other is the global oil price hike in 2011. Both events significantly raised fuel prices. Despite concerns then that higher taxes or higher prices would lead to devastating economic growth and skyrocketing inflation, history shows that the economy has weathered quite well even when the economy then was not in the best of shape.

In the aftermath of the VAT reform in 2005, GDP growth slowed as consumption slowed down and inflation temporarily increased, but the economy did not collapse and inflation was manageable. On the contrary, the VAT reform significantly improved the fiscal position of the government and buoyed the economy, and partly credited for the stronger and more resilient economy we enjoy today.

The global oil price shock in 2011 is similar. Though oil prices increased from $61 per barrel to up to $130 per barrel at its peak, inflation was managed well by the central bank and kept at below 5%, and the economy continued to grow.

Today, with a smaller increase in fuel cost due to the excise reform, the administration is certain that the economy can, like before, manage growth and inflation well and even do better.