Indigent senior citizens and persons with disabilities (PWDs), along with low-income electricity consumers and small entrepreneurs, will be protected through direct and indirect social protection measures under the tax reform program submitted last month by the Department of Finance (DOF) to the Congress.
Finance Undersecretary Karl Kendrick Chua said the DOF is now looking at lifeline subsidies for low-income electricity consumers to protect them from the impact of the proposed increase in the excise tax on petroleum products.
He said the social protection measures that the DOF is now fine-tuning with other government agencies extends to small and micro enterprises, as the value-added tax (VAT) threshold on their goods and services would be increased from the current P1.9 million to P3 million under the DOF-proposed tax plan–dubbed the Tax Reform for Acceleration and Inclusion Act.
“The protection really comes from the increase in their VAT threshold to 3 million so that the micro and small enterprises with gross sales of at most P3 million will not be affected by the broadening of the (VAT) base. They will of course still pay their percentage tax,” said Chua, who is the DOF’s concurrent chief economist.
Chua said changing the form of benefits provided for the country’s vulnerable sectors from outright exemptions which favors both rich and poor to targeted social protection measures would help plug the massive leakages in the VAT system.
“We very much respect and would like to help the poor and vulnerable people who would be affected, but we think that a better system to do it is through the expenditures side, not the tax side,” Chua said.
“This is so that we can avoid the leakages and in fact transfer the leakages that we [plug] to provide better services,” he said. “To use the tax system to protect the poor and low-income earners risks massive leakages as is currently happening.”
Chua said indigent senior citizens will also be protected by providing them with higher social pensions, while PWDs will get expanded health insurance coverage and other benefits under the social protection package of the DOF-proposed tax plan.
“We propose to do a highly-targeted subsidy reform program wherein … the poorest 50 percent of households will be fully protected through a highly-targeted unconditional cash transfer in the initial year, and that means around P200 to P500 per month or up to P6,000 a year per household, and this is calibrated based on the possible increase in inflation and the impact of the higher oil (tax increase) on their lives,” said Chua at a recent tax reform forum.
“Less leakage means more money for benefits for poor senior citizens,” he said.
Chua said the poorest 50 percent of households earning P5,000 or less a month apiece will each get unconditional cash transfers of up to P6,000 over a year in the initial phase of the DOF’s tax reform program.
These are just some of the expanded benefits that the DOF is now fine-tuning with other government agencies to cushion on the country’s vulnerable sectors the impact of the proposed fuel excise tax adjustments and removal of certain VAT exemptions, which form part of Package One of DOF-proposed tax reform program.
Such measures, along with improvements in tax administration, will help offset the revenue loss from the reductions in the personal income tax rate that the DOF is proposing under Package One, which it submitted to the Congress last Sept. 26.
Chua said minimum-wage earners and other members of the working class identified as those earning more than P5,000 but not over P12,000 a month would be protected from the effects of the excise tax adjustments on petroleum products by providing drivers and operators of public utility vehicles with cash cards similar to the Pantawid Pasada Program to ensure that their pass-through costs would only be around 50 centavos.
“Also, if we address the other problems of traffic, of improving their engines to make these more efficient; if we address the corruption on the streets, which we hear some authorities collect bribes from jeepney drivers, [then we probably do not need to see any increase],” Chua said.
Chua said even the middle class would still be protected because they can use the savings they get from paying lower personal income taxes to offset out the effect of the fuel excise tax adjustment.
According to Chua, entry-level workers earning more than the daily minimum wage would effectively enjoy significant increases in their take-home pay because they will pay lower taxes under the DOF-proposed tax reform program.
For instance, “entry-level employees with a monthly salary of P13,378 and no declared dependents would see an increase in their take-home pay by P12,673 per year,” he said.
There are about 3 million of these entry-level workers paid above the minimum wage, like those in the Clerk III category, who will be exempted from paying income taxes because they each get a monthly income of P13,378 or an annual gross income of P231,292–comprising a basic salary of P160,536 plus 13th month pay and other benefits totalling P36,765, and minus mandatory contributions of P34,000.
They are supposed to each pay a personal income tax of P12,673 under the current system. This amount would be reduced to zero under the DOF tax reform plan.
The country’s 1.7 million minimum-wage earners (MWEs) are already exempted from paying income taxes.
With the current daily minimum wage at P491 in the National Capital Region (NCR), the MWEs earn P12,488 a month or a total gross income of P218,832 per annum–comprising a basic salary of P149,856 plus 13th month and other benefits totalling P34,976 and minus P34,000 in mandatory contributions like those for the Social Security System (SSS) and Pag-IBIG.
This means that a total of 4.7 million taxpayers, which make up 83 percent of the tax base for individuals, would be exempted from paying taxes under the DOF-proposed tax reform plan, Chua said.
Another half-million plus taxpayers earning between P250,000 and P400,000 will pay taxes equivalent to only 20% of their incomes in excess of P250,000 in 2018, the first year of implementation of the DOF-proposed tax plan.
From 2019 and onwards, they would only pay a personal income tax equivalent to a lower 15 percent of their incomes in excess of P250,000.
Taxpayers earning P400,000 to 800,00 will pay P30,000 in tax plus 25 percent of their annual gross income in excess of P400,000. The tax would be adjusted in 2019 and onwards so that those belonging to this bracket would pay a lower rate of P22,500 plus 20 percent in excess of P400,000.
Those earning P800,000 to P2 million per year would pay a tax of P130,000 plus 30 percent in excess of P800,000. In 2019 and onwards, the rate would be reduced to P102,500 plus 25 percent in excess of P800,000.
Some 28,000 individuals earning P2 million to P5 million or 1 percent of the tax base would be taxed P490,000 plus 32 percent of their annual gross income in excess of P2 million. They would benefit from a lower tax rate of P402,500 plus 30 percent in excess of P2 million from 2019 and onwards.
The last bracket of ultra-rich taxpayers comprising less than 6,000 individuals earning over P5 million would have to pay a tax of P1.45 million plus 35 percent in excess of P5 million. From 2019 and onwards, the tax rate would be dropped to P1,302,500 plus 35 percent in excess of P5 million.
