A PLAN by the Marcos administration to remove the excise tax exemption on pickup trucks has caused an existential crisis for the nation's automotive sector, which has not yet fully recovered from the economic downturn of the Covid-19 pandemic. While the proposal may be a bitter pill to swallow and pose some challenges to the industry, it is both a reasonable and necessary step to bolster government revenues.
The excise tax exemption for pickup trucks was granted by Republic Act 10963, or the "Tax Reform for Acceleration and Inclusion (Train) Act," the first package of the Duterte-era tax reform program. In that tax reform measure, excise taxes on motor vehicles were increased significantly, but some exemptions were granted for vehicles used for business, public transportation, emergency services and other special purposes. Pickup trucks, due to their carrying capacity and versatility, were exempted because of their usefulness for commercial activities.
Prior to leaving office, however, former Finance secretary Carlos Dominguez 3rd revisited the exemption on pickup trucks in a fiscal consolidation plan prepared for his successor, Benjamin Diokno. Dominguez's recommendation was that the exemption be removed, reasoning that actual use for pickup trucks in the Philippine market is more as passenger or sports utility vehicles.
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Current Finance chief Diokno has agreed with Dominguez' suggestion. "Pick-up trucks were granted the special tax treatment for their utility as workhorses for small business owners and professionals in their livelihood," he said in a recent letter to the House ways and means committee, which is currently debating the Passive Income and Financial Intermediary Taxation Act (Pifta), the fourth of five tax reform packages launched during the Duterte administration.
"The Department of Trade and Industry has observed that manufacturers modify pick-up trucks to serve as passenger, leisure, or sports utility vehicles. This scheme allows manufacturers to circumvent the provision of the law and purpose of the exemption," Diokno explained.
From our perspective, that certainly does seem to be the case, at least anecdotally. Marketing for these types of vehicles invariably highlights their appeal to customers who fancy an active or sporty lifestyle, and rarely, if ever, presents their features and benefits as working vehicles.
Diokno has suggested that a provision to remove the tax exemption on pickup trucks could be added to the Pifta bill being deliberated in Congress.
The government continues to face constraints on its ability to spend on programs due to the rapid increase in debt during the pandemic crisis. While it needs to be aggressive in plugging revenue leaks and finding new sources of revenue, it has to balance its efforts against creating additional hardships for the Filipino people. As the price for a new pickup truck in the Philippines ranges from just over P800,000 to more than P8.5 million for high-end models, removing the largely misapplied excise tax exemption from them affects a segment of the population that can certainly withstand the impact of that particular economic shock.
No one will be happy about it, of course, and that is understandable, but it is far less harmful than other measures that could be implemented. And the benefit to the government in terms of revenue could be substantial. Secretary Diokno estimated the change would bring in P52.6 billion in tax revenue from 2022 to 2026, although that may be a bit optimistic, as the contention of the auto industry that increased taxes would reduce sales is probably valid.
We do believe, however, that one important modification to the proposal should be made.
While many pickup trucks are indeed sold for use as stylish passenger cars, not all of them are, and those customers who buy a pickup truck to serve as a work or business vehicle should not be penalized. The automotive sector and concerned government agencies should work together to create a system by which legitimate business customers can be identified so that the excise tax exemption can be selectively continued, and applied for their benefit. This is something that could be achieved through matching business registrations to vehicle registrations, for example.
Doing this would be only fair, and likely would not reduce the government's revenue forecasts by a substantial amount.