THE INTERNATIONAL MONETARY FUND has urged the government to enact pending tax reform bills, warning that the recent move to exempt minimum wage earners from income tax and the cut in corporate income tax next year could erode revenue collections.

The government has made progress in terms of meeting tax collection targets in the first half, the IMF acknowledged. However, it said this would be unsustainable if no measures would be adopted to offset the impact of lower income tax collection.

In the first half, taxes collected by the Bureau of Internal Revenue rose 16 percent to P390 billion from the P335 billion in the same period last year.

The IMF said Congress should pass bills seeking to lift unnecessary tax- and duty-free privileges granted to businesses and increasing excise taxes on cigarettes to maintain, if not accelerate, the growth in tax collection.

Without these measures, the IMF said the tax relief granted to individual and corporate taxpayers could easily slash half a percentage point from the country’s tax effort.

The tax effort, which hit 14.6 percent in the first half, is the ratio of total tax collections to gross domestic product. It measures a government’s ability to translate higher economic growth to improved revenue collection.

Proposals to limit fiscal incentives and impose uniform but higher taxes on cigarettes have been pending in Congress for quite some time, the IMF noted. The need to recover foregone taxes resulting from the income tax exemption of minimum wage earners and the upcoming cut in the corporate income tax rate has necessitated the speedy passage of these bills, the IMF said.

“Prioritize legislative measures to rationalize fiscal incentives and reform excise (taxes),” the IMF said in a paper by Reza Baqir titled “Philippines: High Food and Fuel Prices and the Fiscal program.” Baqir is the IMF’s resident representative to the Philippines.

The bill seeking to rationalize fiscal incentives, if passed, will limit tax- and duty-free perks to cover only exporters, businesses located in the country’s poorest provinces and large-scale investments that will help boost employment in the country.

This legislative proposal is aimed at solving huge foregone revenue year after year arising from generous fiscal incentives granted by various laws.

The excise tax reform bill, meanwhile, basically imposes a uniform tax rate on all cigarettes at P14 a pack. Currently, the excise tax structure for cigarettes are composed of several tiers.

Unifying the excise tax rates would remove tax preferential treatments enjoyed by certain manufacturers. As a result, the government could rake in billions of pesos in additional tax collection.

Last month, the law reforming the income tax system for individuals took effect. One of its provisions is the exemption of minimum wage earners from the income tax, which was estimated to result in nearly P1 billion in foregone taxes a year.

Another provision of the law allows professionals and self-employed individuals to automatically deduct 40 percent from their gross revenue to determine taxable income.

The scheduled cut in the corporate income tax rate to 30 percent from 35 percent starting January 2009 is also seen to drag down tax collection. Government estimates showed that such a move would lead to P15 billion in lost potential revenues a year.

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