Tax law on alcohol and tobacco products in Philippines

MANILA, - Philippine lawmakers are examining proposals to amend an excise tax law on alcohol and tobacco products to generate at least 20 billion pesos ($420 million) more per year and ease pressure on the budget deficit.

President Gloria Macapagal Arroyo last month asked allies in the lower house of Congress to raise excise taxes to cut the deficit, expected to hit a record 250 billion pesos this year.
But lawmakers and analysts doubt any tax measures will be passed as politicians gear up for next May’s general election.

Here are some questions and answers on the proposal to amend the excise tax on alcohol and tobacco in the Philippines.

WHY AMEND THE CURRENT EXCISE TAX?

Alcohol and tobacco are now placed in four categories with varying tax rates, subject to adjustment every two years from 2005 until 2011. Finance officials complain the law has deficiencies and is open to abuse, like underreporting of sales.

The law also lacks an automatic tax rate adjustment mechanism for inflation, which can erode potential revenues. The government wants a uniform tax rate for all alcohol and tobacco products.

CAN IT BE DONE?

Exequiel Javier, head of the ways and means panel at the lower house of Congress, said lawmakers have made a commitment to Arroyo to pass a new excise tax law before December 2009.

But analysts and some parliamentarians say the prospect of an election and a strong tobacco industry lobby may block passage.

Earl Parreno of the Institute for Political and Electoral Reforms said big campaign contributions from businessmen in the alcohol and tobacco industries could deter Congress from acting.

Danilo Suarez, a close ally of Arroyo and a sponsor of one of eight proposed reform measures said: ‘It needs a very serious push by members of both houses.’

Jose Mario Cuyegkeng, an economist at ING ( ING - news - people ) Bank in Manila, said the measure had to be approved ahead of the elections.

Presidential and senatorial Candidates must file candidacies by November and start campaigning in February. Candidates for local elections start campaigning in March.

WHAT IS THE ALCOHOL AND TOBACCO INDUSTRY SAYING?

Philippine conglomerate San Miguel Corp, which has a 90 percent share of the beer market, supports raising and aligning the tax rate with those in other Southeast Asian states.

The two largest tobacco firms - the local unit of Philip Morris and Fortune Tobacco of tycoon Lucio Tan - say it is up to the next government to review rates. The firms control around 90 percent of the 85 billion cigarettes per year business.

Chris Nelson, managing director of Philip Morris Philippines Manufacturing Inc., says policy vacillations may deter investors.

‘When people change their position, that tells you or indicates a lack of consistency and to some extent undermines credibility,’ he said.

WHAT WILL HAPPEN TO THE DEFICIT?

The Finance department hopes amendments will generate 20 billion pesos of new revenue in the first year and twice that in each succeeding year. Finance Secretary Margarito Teves says that would help fund spending on infrastructure and social services and reduce reliance on debt to fund its deficit,

Hit by slowing growth and the need to stimulate the economy, a deficit of 3.2 percent of GDP is expected this year. Plans call for 2.5-2.8 percent next year and a balanced budget by 2013.

Both goals look difficult if no new excise tax law is passed.


Copyright Thomson Reuters 2009. All rights reserved.

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