Impact of excise taxes on Philippine energy cost

The Tax Reform for Acceleration and Inclusion (TRAIN) is a Comprehensive Tax Reform Program (CTRP) which seeks to correct several deficiencies in the taxation system in the Philippines. In addition, TRAIN is to make the Philippines’ tax system more efficient and fairer. Furthermore, TRAIN also addresses weaknesses in the current tax system by lowering income tax, expanding Value-Added Tax (VAT), adjusting automobile excise tax and oil, and introducing excise tax on coal amongst others.

In line with this, TRAIN focuses on the following;

1. Personal Income Tax
2. Simplifying the donor and estate tax
3. Adjusting financial taxes
4. Improving the VAT system
5. Adjusting fuel excise
6. Simplifying automobile excise tax
7. Sweetened beverages excites tax
8. Introducing and updating taxed on cosmetic procedures, coal excise, mining and tobacco.

Moreover, with the approval of TRAIN, specifically, what is the impact of excise tax on energy cost?

According to the latest data provided by the Department of Energy (DoE), coal accounts for 47.7% of the Philippines’ power generation sources, more than 20 fired coal plants serves as a base load power source which generate continuous energy coast to the grid. Coal accounts for 35.3% in Luzon, 32.1% in the Visayas, and 33.8% in Mindanao in terms of installed generating capacity.

Starting January 1, 2018, the approved coal excise tax is at 50 Php/metric ton which is imposed to both imported and domestic coal. In the following years, as stated in RA 10963, it will increase by 50 Php/metric ton until it reaches 150 Php/metric ton In 2020 which then shows about a 3000% increase. Compared to the original proposal of the Senate which is 100 Php/metric ton in 2018, 200 Php/metric ton in 2019, and 300 Php/Metric Ton in 2020.

With the increase on excise tax on coal this then would result to higher generation charge and would gravely impact the system of billing of distribution utilities based on how much they are sourcing energy from coal. Power rates have gone up to 8 cents/kWh starting February 2018 for customers of Manila Electric Co. (MERALCO) which is evidently the most visible impact of the excise tax on coal and the removal of the exemption of VAT of the National Grid Corp. of the Philippines (NGCP). Needless to say, once NGCP incorporates VAT in their billing to MERALCO in turn consumers can expect higher transmission charges.

In a recent interview with the Vice President of MERALCO, Lawrence S. Fernandez, he mentioned that with the recently enacted TRAIN law it has reconstructed the VAT on wheeling charges. Wheeling charges, which covers services for the transmission of electricity to distribution utilities from power plants, is a factor that the NGCP collects from distribution utilities. In his statement he mentioned that with the re-imposition of VAT on wheeling charges this in turn will translate to 7 cents/kWh and with the combined effect of the excise tax on coal and petroleum products this then would be an additional one (1) cents/kWh to the Philippine consumers, with a total impact of 8 cents/kWh for MERLACO customers just for this year.

In addition, according to DoE the said impact of coal excise tax on energy cost will be greatly felt and reflected on consumers’ electric bill during the summer season.


Excise tax on fuel

In recent studies conducted by BMI Research, within the next 10 years the growth in the Philippine power infrastructure will be driven by investments in coal-fired generating capacity companies as well as the rise of new power plants to support the rapid growth of electricity demand in the Philippines. In addition, BMI research states that 80% of the upcoming capacity and almost 90% of the combined value of upcoming projects for the following years comes from coal-fired generation projects. With these projects, it will result to a rapid increase in investment and construction in the power infrastructure segment with an annual 10.6% growth from 2017-2021.

In line with this, BMI emphasizes that it is important for DoE to meet its projection that the Philippines will be needing 12,300 MW more in generating capacity by 2030 although with this projection it is said to have implications to the energy and utilities sector. One of which is sustained growth in fuel imports which feeds the ever growing number of coal-fired power plants in the Philippines, from 73% this 2017 up to 77% in the next 7-9 years. In relation to this, it is mandatory for the Philippines to increase imports of fuel to feed the newly built coal-fired power plants. In addition, with the minimal access to resource of coal, the existing power plants in the Philippines imports about 70% of coal from neighboring countries like Indonesia.

It was only after January 15, 2018 where the excise tax on fuel is reflected, The Department of Energy (DoE) required companies in the industry to submit a notarized inventory of their fuel products as of December 31, 2018. After doing so, such companies were not allowed to implement the said excise tax until the report they have submitted have been used up within 15 days.

Moreover, expanding the VAT and adjusting the excise tax would then increase prices on consumer goods and other products and services of consumers, the Department of Finance (DOF) estimates that only around 0.73% point increase in inflation during the first year of the TRAIN implementation, wherein food prices may increase by up to 0.73% while transportation would increase by up to 2.8% and electricity would increase up to 0.7%.

In conclusion, having in mind that the Philippines’ power generation source comes from coal power plants, and with the majority of the Philippines’ coal reserve heavily dependent on its import form other countries, and with the implementation of excise tax on fuel, although minimal, its evident that prices on other commodities and power will increase.


Where does the Philippines gets its coal from?

Every year the Philippines imports 15 million tons of coal which is roughly about 80% of the country’s coal requirement. Having Indonesia as the biggest contributing factor of import of coal and other nations like Australia, South Africa, and Russia. In 2016 alone, the Philippines imported more than US$ 1 billion which is about Php 50 billion of coal.

Sources

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