RP Congress approves crucial tax law

RP Congress approves crucial tax law

Agence France-Presse, Manila

The Philippine Congress on Tuesday passed a crucial government tax measure, raising the corporate income tax rate to 35 percent and giving President Gloria Arroyo power to raise value-added tax (VAT) to 12 percent by next year, officials said.

The Senate and the House of Representatives are set to send the act to Arroyo for signing into law, officials said.

The legislation is among several tax measures being pushed by Arroyo aimed at helping the government raise additional revenues to help settle a chronic budget deficit and ballooning debt.

"I want to assure everyone that this will go a very long way to consolidating our fiscal position," finance secretary Cesar Purisima said in a statement. "The impact of this is a more stable macroecomic environment and hopefully a more stable peso."

After lenghty debate, legislators arrived at a compromise under which VAT will be maintained at 10 percent for this year. Arroyo however is given a "standby authority" to raise it to 12 percent if needed by 2006.

At the same time, VAT exemptions previously enjoyed by certain industries such as oil and electricity, sea and air transport, will be ended.

The measure raised the corporate income tax to 35 percent from 32 percent, including for foreign and state-owned corporations, except charities and pension funds.

Arroyo, at the recommendation of the finance secretary, may be allowed to raise VAT in 2006 to 12 percent if VAT collections exceed 2.4 percent of gross domestic product (GDP) and if the budget deficit as a percentage of GDP exceeds 1.5 percent.

Legislators agreed to delete a provision barring independent power producers from passing on the burden of VAT to consumers, said Senator Joker Arroyo, who had tried to oppose the move.

Purisima said the legislation was expected to raise 28-31 billion pesos in revenues for the government over the balance of this year.

By next year, that should rise to 97-105 billion pesos (US$1.79-1.94 billion).

"I am hopeful that this will be ratified by both chambers this week and signed into law (by President Arroyo) immediately after that," Purisima said in a statement.

"We will be applying all the proceeds of VAT this year to (budget) deficit reduction."

By next year, he said 70 percent of the proceeds will be used to plug the budget deficit, while the balance of 30 percent will be used for budgetary support, particularly for social services and infrastructure.

The Philippines incurred a budget deficit of 63.5 billion pesos in the first three months of the year, well within the target ceiling of 77.8 billion pesos for the period.

The government is aiming to limit the deficit to 177-180 billion pesos for the whole year after a deficit of 187 billion pesos in 2004.

Senate minority leader Aquilino Pimentel said he was disappointed at the compromise, noting that giving Arroyo a standby authority to raise taxes could be unconstitutional.

"It is a bad compromise because it trivializes the constitutional prohibition against legislation by the chief executive," Pimentel said in a statement.

"It will constitute an undue delegation of legislative power to the president in matters of taxation," he added.