Manila's new tax law sparks inflation fears

Manila's new tax law sparks inflation fears

MANILA (Reuter): Inflation is expected to rear its ugly head
in the Philippines following the introduction of a 10 percent
expanded value added tax (E-VAT) and a rise in domestic oil
product prices, analysts and economists said yesterday.

"The consumers have been hit with a double whammy," Senator
Gloria Macapagal-Arroyo, an economist, said in a statement.

"There's the E-VAT (whose) effect or ill-effect we still have
to fully appreciate. And now we are dealt with another blow in
the form of an oil price increase."

The Energy Regulatory Board (ERB), a state price-setting
agency, announced late on Tuesday an average rise of three
centavos (about one-tenth of a U.S. cent) in prices of domestic
petroleum products effective immediately to cover the additional
costs of oil firms, haulers and dealers under the E-VAT.

The rise came a day after the government introduced the new
tax measure, which replaced more than 80 indirect percentage
taxes on a wide range of goods and services.

Consumer groups, fearing a domino effect, have threatened to
wage protests nationwide to force the government to suspend the
controversial tax law.

Arroyo, who has been asking for a deferment of the E-VAT, said
the tax and oil price hike would put additional pressure on
inflation.

"Coming as we are from the rice crisis which until now has
remained unresolved and with a double digit inflation of 11
percent (in November), the government will now have a difficult
time stabilizing the economy given additional pressures on it,"
she said.

Joven Babaan, analyst at SBC Warburg Manila, said the E-VAT
will cause temporary price instabilities because of
"misinterpretation and misconception" about the measure.

He said the government has so far failed to explain in detail
how the new tax will be applied or how it will be collected.

"But over the long term, price imbalances should start to
normalize and everyone should start to realize the long-term
positive effect of the E-VAT on the fiscal well-being of the
government," he said.

The E-VAT is expected to generate between nine billion and 15
billion pesos (US$$343 million and $572 million).

But other economists said Manila should further refine the E-
VAT.

University of the Philippines economist Benjamin Diokno said
the expansion of the original VAT system, introduced during the
time of former president Corazon Aquino in 1988, has many flaws.

"The E-VAT contained many features that should not be there,
like additional tax that will be imposed on banks and financial
intermediaries," he said.

Diokno said the expansion of the original tax measure was
"giving the VAT system a bad name".

In the meantime, businesspeople have asked the government to
intensify its information campaign to counter the confusion.

Industrialist Raul Concepcion said consumers should be made
aware of items that already have been covered or exempted from
VAT since 1988 or those with percentage taxes now replaced by
VAT.