MANILA – Businesses’ compliance with higher taxes on cigarettes – and not the impact of tax reform – is the main factor behind the big jump of the Philippines’ inflation rate in January 2018 to 4 percent from 3.3 percent in December 2017.
This was the assessment of Finance Undersecretary Karl Chua, who cited the 17.4 percent inflation of tobacco in the first month this year compared to the expected 8 percent.
The amended Sin Tax Law, approved in 2012, requires that tax on a pack of cigarettes will be at 4 percent starting 2018 from PHP12 in 2013, PHP15 in 2014, PHP18 in 2015, PHP21 in 2016 and PHP30 in 2017.
Chua said concern that food prices registered an uptick due to the implementation starting January 1 this year of the first package of the Tax Reform for Acceleration and Inclusion (TRAIN) law “is not supported,” noting that overall food inflation is at 4.52 percent, with rice inflation only at 1.4 percent.
He said food inflation rate last January, albeit at the high end, “could suggest some profiteering as oil prices have not even increased due to TRAIN.”
He said fish inflation posted a faster rate of 12 percent, but not because of TRAIN but the impact of the closed season for fishing, normally during November to February, and the recent typhoon in the Visayas.
In his analysis, the Finance official said that another factor for the faster rate of price increases last January could be traced to the correct payment of taxes by Mighty Corporation, which has been bought by JTI Philippines, after erring in the past years.
Citing Bureau of Internal Revenue (BIR) data, Chua said revenues from cigarette taxes rose by about PHP1.5-PHP2 billion last January.
“In fact, if Mighty continued to evade tax and therefore cigarette prices remain low, overall inflation would have gone down to around 3.75 percent,” he said.
While the inflation rate last January is already at the upper end of the government’s 2 to 4 percent target band for 2017-19, the Department of Finance’s (DOF) analysis on the January 2018 inflation said that level “is considered moderate.”
“As the inflation target is set by the BSP (Bangko Sentral ng Pilipinas) for the whole year, one month of higher inflation is not a concern,” Chua added, citing also the base effect since the January 2017 figure is only at 2.7 percent.
The first package of TRAIN, which cut personal income tax rates and gives workers’ first PHP250,000 annual income a tax-free rate, took effect January 1 this year.
While it reduced workers’ income tax rates, it hiked excise taxes on fuel and sugar-sweetened beverages, among others.
The DOF analysis showed that despite the tax reform’s implementation since the start of the year, inflation of sugar-sweetened beverages at 2.8 percent “is expected and indicates that most retailers are still selling old stock.”
Inflation of alcoholic products, in turn, at 4.8 percent is also expected due to the Sin Tax Law implementation.
Inflation of oil at 7.2 percent was attributed to the 1.5 percent depreciation of the Philippine peso and the 19.6 percent uptick in crude oil prices, the DOF assessment said, pointing out that month-on-month oil inflation “was actually slightly negative” at -0.8 percent.
DOF estimates that TRAIN will result in a 0.5-0.7 percentage-point increase in inflation rate this year, which is considered “very minimal” and “manageable.”
Because of higher oil prices, food inflation is seen to rise by 0.3 percentage points and transportation by 0.1 percentage points.
“History supports this analysis. Between January 2016 and January 2017, diesel increased by almost 14 pesos, which is equivalent to an increase of 76 percent. However, inflation remained stable (2.7 percent), and food, transportation, and electricity, gas, housing, and water did not increase significantly,” it said.
“In fact, during the same period, rice, together with other essentials such as pork, sardines, fish, and noodles, did not significantly increase despite the huge increases in diesel,” it added.