IMF warns Philippines against suspending excise tax on gasoline

The International Monetary Fund (IMF) said the Philippine government’s move to suspend the excise tax on kerosene and liquefied petroleum gas (LPG) is appropriate but warned against extending the tax relief to gasoline despite mounting calls to do so.

IMF Mission Chief for the Philippines Andrea Pescatori noted that suspending or cutting the excise tax on gasoline would not be “progressive” for the government’s fiscal consolidation efforts.

In a briefing following their Article IV Consultation in the Philippines on Friday, Mr. Pescatori said suspending excise taxes on kerosene and LPG is more appropriate as it would primarily benefit low-income households.

“Well, it seems that those are used mostly by the low-income segment of the population, and also (in) rural areas. It’s important in agriculture. So, that’s why we think that this is actually an appropriate measure,” he added.

Last week, President Ferdinand R. Marcos, Jr. signed Executive Order No. 125, temporarily suspending the excise tax on kerosene and LPG. This was the second time since the Middle East war erupted in late February that the government imposed the policy.

The suspension, however, does not apply to LPG used as raw material for petrochemical production or motive power and kerosene used as aviation fuel.

The Department of Energy earlier this month certified that the 30-day average price of Dubai crude oil breached the $80-per-barrel threshold that could trigger a fuel excise tax freeze or cut.

Pump prices spiked anew following the reescalation of the Middle East war in early September, prompting calls to freeze the excise tax on gasoline and diesel.

Fuel retailers last week raised pump prices for a third straight week, driving the price of gasoline to as much as P111.60 per liter, diesel to P121 per liter, and kerosene to P147 per liter.

However, motorists are expecting rollbacks this week after global prices eased, with diesel prices to be lowered by up to P8 per liter, gasoline by up to P1 per liter, kerosene by up to P6 per liter.

Mr. Pescatori said the IMF commends the Marcos Jr. administration for executing targeted and time-bound measures.

“So far, the government has compensated, has offset the loss from the excise taxes on oil — kerosene and LPG — with higher VAT (value added tax) receipts because of higher gasoline prices,” he said. So, this has been sort of a budget neutral.”

The VAT on petroleum products mirrors the rise of fuel prices as the 12% levy is computed as a percentage of the fuel’s overall cost.

Leaving the VAT on gasoline unchanged, according to Mr. Pescatori, will help the government generate more revenue while the suspension on kerosene and LPG is in place.

However, the IMF official added that cutting or suspending the excise tax on gasoline would do more harm than good to the country’s fiscal position.

“We do not recommend muting the signal for gasoline, because in fact, as you know, it’s not net progressive, and in high-income households, they can afford to pay higher gasoline prices,” Mr. Pescatori noted.

Finance Secretary Frederick D. Go has said that suspending the excise tax on gasoline and diesel would cost the government about P12 billion in foregone revenue.

Mr. Pescatori likewise noted that the IMF avoids recommending blanket subsidy or tax breaks on fuels at the global level, noting that such policies could lose their incentive effect if adopted by all countries.

“If every country introduces or cuts taxes, introduces subsidies to all fuels, then there is no incentive to cut fuel consumption globally, and this could even be subjective, because the means of price increase is more,” he said. “If a small country does it, that would still be fine.” — Katherine K. Chan