DOF Hails Sin Tax Law

Without a doubt, year 2012 was one of the most memorable years for the Philippines' fiscal authorities after they successfully passed into law the controversial sin tax measure as well as winning several positive rating actions from the three big credit companies.

The enactment of the sin tax law may also be the last missing ingredient for the Aquino administration's vision of transforming the Philippines into an investment grade nation.

But it was not an easy job for the Department of Finance (DOF), headed by Cesar V. Purisima, to persuade first lawmakers from the Senate and the House of Representatives to vote in favor of the excise tax reform bill after its 16-year failed attempts.

President Aquino signed the bill into law on December 20, 2012.

Because of strong lobby groups in the past, the DOF had, in more than one and a half decades, struggled to remove the annexes attached with the 1996 four-tier tax system as well as the price freeze classification and the insertion of the indexation to inflation provision.

The DOF was against the price classification freeze provision of the old law because it had pegged tobacco products to 1996 prices as the basis for their tax classification, while the annexes favored brands introduced at an earlier date.

Meanwhile, without the indexing the taxes to inflation, prices of sin products will eventually erode as consumer prices, such as food, rise. This will result to affordable cigarettes and alcoholic drinks.

Finance Assistant Secretary Ma. Teresa S. Habitan explained that the sin tax law is an incomplete measure without the indexing tobacco and alcohol taxes to inflation.

On December 10, 2012, the long wait was finally over after the two chambers of Congress ratified the Aquino administration's one priority measure. The excise tax reform bill was just one signature shy of becoming a full-fledged law starting January 1, 2013.

The DOF expects the sin tax law to yield R34 billion in revenue during the initial year of implementation and an ultimate R64.18 billion by 2017.

Purisima said the passage of the excise tax bill marks a historic victory for health and revenue agenda of the government as the measure obtained the three key elements to institute the reforms the Aquino administration wanted.

Now that the Philippines has a new excise tax regime, its enactment into law may be all that is needed to persuade the big three rating agencies to immediately upgrade the country's credit standing to an investment grade.

The projected revenue from the sin tax law will help further boost the confidence in the Philippine government's ability to maintain its good credit standing by reducing its debt burden.

The investment grade rating will, likewise, surge the foreign direct investments into the country.

To date, all big three credit firms-Moody's Investors Service, Fitch Ratings and Standard & Poor's-have rated the Philippines to a notch below investment grade after nine positive ratings actions since July, 2010, ending a decade's worth of decline.

These positive rating actions for the Philippines were due to the country's continueD strong performance in the current global economic climate, achieving a respectable growth rate of 6.5 percent in the first nine-months of the year.

As the economy continues to grow, the government's revenue collection was also expanding on the back of strong and steady performances of the country's two main tax agencies at a rate faster than the nation's nominal gross domestic product (GDP) growth.

The Philippines' foreign exchange reserves also continue to provide a healthy buffer from external shocks in 2012, and are bolstered by sustained growth in dollar remittances and business process outsourcing revenues.

Singaporean-lender DBS has already projected that the Philippines' investment grade rating would come in 2013 as country's ability to repay has improved compared with the past few years.

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