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TRAIN Law: A Pop or Flop?
By Gilbert A. Galope

The Tax Reform for Acceleration and Inclusion (TRAIN) Law is aligned with the vision for the Philippines by year 2022 to reduce the poverty rate from 21.6% to 14%, (or an estimated number of six million Filipinos will be uplifted from poverty and be able to achieve a high middle-income status), and where the per capita gross national income (GNI) will increase from US$3,500 to at least US$4,100 in today’s money.

The passage of Republic Act No. 10693, or simply known as TRAIN Law, aims to provide the needed additional revenues that would fund the country’s investment needs, promoting better lives for the Filipinos and with a strong foundation for the “Build, Build, Build” Program of the Duterte Administration.

As explicitly enshrined in the 1987 Constitution, under Section 28 (1) of Article VI, “The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.” The last major revision of the Tax Code was in 1997, which has been a two decade until the TRAIN was signed into law. So, let’s take a look on some of the major revisions and inclusions of the new tax law. Is it a pop or flop?

1. Personal Income Tax

Annual income below Php250,000.00 are now exempt from tax. This time, this would mean an increase in the take home pays of employees. However, under the new law, there would be no more personal exemption and additional exemption. More so, the Php82,000.00 tax exemption for 13th month pay and other bonuses have been raised to Php90,000.00. This actually corrects the long overdue inequity of the tax system, reducing the income taxes of 99% of the income taxpayers.

Special treatment on fringe benefit also changes from a final tax of 32% to 35% of the grossed-up monetary value of the fringe benefit granted to the employees. Effective January 1, 2018, the grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by 65%.

2. Self-Employed Professionals

TRAIN gives a new income tax rate for self-employed professionals with 8-percent flat tax rate on gross sales or receipts instead of income tax and percentage tax to be filed once a year.

I believed this is for the simplification of compliance, yet giving an efficient result in collection. It was observed in the past that self-employed professionals, who are earning more compared to compensation-based employees, are paying lesser taxes. With this provision, the goal of the government is to impose equity among taxpayers—the more income you received, the more taxes you should pay.

3. Taxes on Certain Goods and Services

To fill in the gap between the losses of revenue due to lower income tax, the law imposes higher taxes on certain goods, like excise tax on cars, tobacco, cosmetic surgery (vanity tax) and some sweetened beverages.

Diesel, which was previously exempt from tax, is now being taxed at Php2.50 per liter. Consequently, the costs of transportation and the commodities that are being transferred from place of production to markets will surely increase. The same will shoot up in 2019 at Php4.50 and Php6.00 in 2020. Likewise, tax on LPG is now at Php1.00 per kilogram, which will increase to Php2.00 in 2019 and Php3.00 in 2020. Gasoline products, which were previously taxed at Php4.35 per liter, went up as well at Php7.00 per liter this 2018.

Excise tax is also levied for automobiles at tier rates of 4% for prices up to Php600,000.00, 10% for over Php600,000.00 up to Php1 million, 20% for over Php1 million up to Php4 million and 50% for over Php4 million (hybrid and luxury cars). Pick-up trucks and electric vehicles are exempted from this provision. Of course, this is based again on equity among taxpayers—well-to-do individuals who can afford to buy luxury cars should pay more taxes.

Others that are exempted in this new provision are products used for feedstock, replacement fuel and raw material (petrochemical) purposes.

One of the most controversial items in the new law was the inclusion of the excise tax imposed on sweetened beverages. The tax, which is at Php6.00 per liter, is imposed on drinks that use artificial sugars or sweeteners. It also includes beverages using high fructose corn syrups, which are taxed at Php12 per liter. After long debates on other beverages, like milk, 3-in-1 coffee and other forms of natural juices, the same have been approved to be tax-exempt.

Tobacco products become more expensive as well. Sin tax on such products will increase gradually—from Php30.00 to Php32.50 for January-June 2018, to Php35.00 for July 2018-December 2019, to Php37.50 for years 2020-2021, to Php40.00 for years 2022-2023 and, ultimately, to a 4-percent annual increase for years thereafter. Moreover, coal will be taxed at Php50.00, Php100.00 and Php150.00 for 2018, 2019 and 2020, respectively, with the intention to lessen the use of coal and shift to renewable energy sources.

TRAIN also introduced a new tax (the vanity tax), which is at 5%, to be levied on cosmetic surgery that is intended for aesthetic purposes.

4. Value Added Tax (VAT)

Value added tax likewise increased, from a threshold of Php1.9 million to Php3.0 million. It means that micro and small businesses with annual sales of up to Php3.0 million are now exempt from paying VAT. This is aligned with the initiative to encourage business growth and job generation.
Aside from such businesses, the following are also exempted from VAT: raw foods, agricultural products, health and education, senior citizens, PWDs, cooperatives, renewable energy, tourism enterprises, BPOs in special economic zones, socialized housing (Php450,000.00 and below), low-cost housing (for the next three years) amounting to Php3 million, leases below Php15,000.00 per month, and condominium association dues.

5. Estate and Donor’s Tax

Also under the new law, an estate tax of 6-percent flat rate is imposed in excess of the net value of the estate of Php5.0 million. Under the old law, estates worth Php200,000.00 and above were being taxed from 5% up to 20%. Moreover, family homes that have worth of up to Php10 million are exempted from estate tax, much higher compared to the old law cap of Php1 million.

Likewise, donor’s tax was simplified into a flat tax rate of 6% for gifts exceeding Php250,000.00.

6. Passive Income and Other Taxes

Documentary stamp tax (DST) and final tax on foreign currency deposit unit (FCDU) have new rates as well under the TRAIN Law. Under the DST, increases of Php1.50 to Php3.00 for documents, instruments, loan agreements, loan arrangements and papers, such as bank checks, and 50% for debt instruments will be imposed. And for final tax on FCDU, a tax rate of 15% (from its previous level of 7.5%) shall be imposed. In addition, the stocks that are not traded in the stock exchange market will be levied with capital gains tax of 10%-15% from that of old law’s 5%.

With the impact of TRAIN on higher prices of goods and services, especially on the poor people, the government provides a subsidy through its cash transfer program.

Under the new law, an estimated 10 million of the poorest households will receive cash transfer of Php200.00 per month in 2018, and Php300.00 per month for the years 2019 and 2020. However, is an estimated increase of Php6.66-Php10.00 average per day for each poor family enough to sustain a living?

The advent of the new law somehow provides a simpler and a more-effective system for the collection of taxes. A more-simple way of taxing the public will lead to the collection of more money for the government. TRAIN is part of the master plan of the government of inclusive growth and eradication of poverty among Filipinos.

The objectives of the new law are somehow promising. The revenues to be generated from TRAIN will fund the infrastructure projects, under the “Build, Build, Build” Program, and provide infrastructure programs to address congestion through mass transport and new road networks, military infrastructure, sports facilities for public schools and potable drinking water supply in all public places. More so, TRAIN will endeavor to enhance the self-reliance of sugar farmers in a way that will increase their productivity, provide livelihood opportunities, develop alternative farming systems and ultimately augment their income.

Social mitigating measures, such as investments in education, health, nutrition and anti-hunger programs (for mothers, infants and young children), social protection, employment and housing, will be prioritized to directly benefit the poor and near-poor households.

Qualified beneficiaries under the social welfare and benefits program will be provided with a social benefit card, so as to avail of these benefits: (i) unconditional cash transfer to households in the first to seventh income deciles of the National Household Targeting System for Poverty Reduction, Pantawid Pamilyang Pilipino Program; and (ii) fuel vouchers to qualified franchise holders of public utility jeepneys. For minimum wage earners, unemployed and the poorest 50% of the population, their benefits include: (i) 10% fare discount from all public utility vehicles; (ii) discounted purchase of the National Food Authority (NFA) rice from accredited retail store, equivalent to 10% of the net retail price but only up to 20 kilos per month; and (iii) free skills training under TESDA Program.

The biggest question that every taxpayer should be seeking an answer for is that: “Will the pop provisions compensate the flop provisions?” At the end of the day, however, we need to ride with the TRAIN, as tax is the lifeblood of the government. In closing, I am hoping that our TRAIN will not be derailed, so as to lead us all faster to a more-developed nation.






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