The House Committee on Ways and Means is moving to suspend or reduce excise taxes on selected fuel products as temporary relief for consumers amid skyrocketing prices of oil and petroleum products in the past few months.
On Nov. 11, the House panel approved a bill suspending for six months the imposition of excise taxes on diesel, kerosene, and liquefied petroleum gas (LPG) and reducing taxes on low-octane gasoline, used primarily by tricycle drivers, to P4.35 per liter. Excise taxes on premium gasoline will be retained under the proposed law.
The bill includes a mechanism allowing the government to revert the taxes to current rates when the price of crude oil returns to US$65 per barrel. As of Nov. 11, the selling price of crude oil by the Organization of the Petroleum Exporting Countries (OPEC), an organization of 13 oil-producing countries including Iran and Saudi Arabia, was $83.69 per barrel.
In October, drivers of public transport vehicles, such as jeepneys and taxis, and agricultural groups, complained about the additional expenses they have had to shoulder due to the price hikes.
To soften the impact of high oil prices on food products and services, Energy Secretary Alfonso Cusi, agricultural groups, and some presidential aspirants, such as Manila Mayor Isko Moreno and Vice President Leni Robredo, have proposed the suspension of excise taxes on oil.
Why can’t the government just regulate oil prices? What factors are causing the rapid increase in fuel prices? What is an excise tax and how much does it cost per fuel and petroleum product? Here are five things you need to know:
1. Why can’t the government regulate oil prices?
In February 1998, President Fidel Ramos signed Republic Act (RA) No. 8749, or the Downstream Oil Industry Deregulation Act of 1998, removing the government’s control over the pricing of fuel products and instead allowing the market to determine the prices.
The law was intended to “ensure a truly competitive market” and encourage the entry of new participants in the local downstream oil industry. It mandated a regime of fair oil prices as well as adequate and continuous supply of clean, high-quality petroleum products.
In a February 2000 article published by the Philippine Institute for Development Studies, researcher Ma. Teresa D. Caparas said oil price increases “were not a direct effect of deregulation” because this was happening even before RA 8749 took effect.
Caparas said the oil industry had “little choice” but to adopt the price increases in the international market since the country is a net importer that largely depends on overseas suppliers.
2. What caused the uncontrolled increase of prices in October?
According to the Department of Energy (DOE), the substantial increases in oil prices in October were mainly due to the sudden jump in demand in the global market resulting from the reopening of economies amid the coronavirus disease 2019 (COVID-19) pandemic and the unexpected low supply. In an Oct, 19 briefer, the department mentioned five main factors behind the surge that drove oil prices to shoot up last month.
The DOE said the Philippines consumes 425,000 barrels of crude oil per day, equivalent to 0.4% of the world supply. Global demand for crude oil as of Oct. 16 was at 100.32 million barrels per day. In 2020, the country imported 32.94 million barrels of crude oil, with 15 million barrels coming from Saudi Arabia.
In its Nov. 9 weekly monitoring report based on the Asia Pacific Weekly Recap by S&P Global, the DOE reported that gasoline prices decreased by P1 per liter and kerosene by P0.60 to P0.65 per liter on Nov. 9. The net increase in gasoline prices amounted to P20.95 per liter, P17.50 per liter for diesel, and P15.09 per liter for kerosene from January to Nov. 9, 2021.
The department earlier reported that tight supply could potentially ease in view of a surge of COVID-19 cases in Russia and China, which are among the top 10 oil consumers in the world, and a possible addition of 1.3 million barrels per day as a result of the resumption of nuclear talks between the European Union and Iran.
3. Why are prices of food and other commodities affected by oil price hikes?
Adolfo Jose Montesa, economic researcher and analyst at Action for Economic Reforms, said prices of goods are “dependent on the cost of the inputs used to produce them.” He explained that higher oil prices mean additional cost in the transportation of goods that requires fuel.
“So nearly all consumer goods will be affected by oil prices because goods are usually transported from one place to another, for example from the factory to the warehouse to supermarkets and retail stores,” Montesa said.
Oil is the most consumed source of energy by the transportation and services sectors and the second by agriculture in 2020, according to the latest DOE Key Energy Statistics report.
4. What is an excise tax and what are the excise taxes on oil products?
The Bureau of Internal Revenue (BIR) defines excise tax as “a tax on the production, sale or consumption of a commodity in a country.” The government imposes excise taxes on 19 petroleum products, such as diesel and LPG.
Excise taxes on products such as jet fuel, kerosene and premium gasoline range from P0 to P10 due to adjustments mandated under RA 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN Law).
5. What is the government doing to cushion the impact of oil price hikes?
On Oct. 25, the government announced the allocation of P1 billion to provide fuel subsidies for nearly 178,000 public utility vehicle (PUV) drivers for the remaining months of the year.
The next day, however, Land Transportation and Franchising Board (LTFRB) Chairperson Martin Delgra clarified that only qualified jeepney drivers, not all PUV drivers, would receive the cash grant. LTFRB increased the passenger capacity for land-based PUVs to 70% starting Nov. 4 to help drivers increase their earnings.
Amid the continued rise in prices in October, the DOE proposed to Congress the amendment of RA 8749 to allow the government to “intervene” and address sudden, prolonged oil price spikes.
The department wants to add security in oil supply and mandate companies to submit weekly reports on unbundled oil price adjustments and pump prices. In 2019, it issued Department Circular 05-0008 that requires the unbundling of the cost of petroleum products “to determine their true and passed-on costs,” but oil companies succeeded in getting a court injunction to block this.
The DOE also sought the amendment of RA 10963 to allow the government to suspend excise taxes on oil products. The TRAIN Law allowed the suspension of new excise tax rates when oil prices reach or exceed an average of US$80 per barrel for three months, but this lapsed in 2020.
If the bill approved by the House Ways and Means Committee is adopted by Congress and is signed into law, the government would lose an estimated P45 billion in revenues.
The panel, meanwhile, added a provision for a social impact stabilization fund to provide subsidies for affected sectors such as farmers, fisherfolk, and transport workers when oil prices increase. Funding will come from a P2-per-liter charge on diesel and gasoline when global prices are lower than US$45 per barrel of crude oil.
But the Department of Finance (DOF) has opposed the suspension of the excise taxes, telling the House Committee on Energy in an Oct. 28 hearing that the proposal would be detrimental to the country’s economic recovery and long-term growth. Finance Undersecretary Antonette Tionko estimated that the government would lose at least P131.4 billion in revenues in 2022 if excise taxes on all petroleum products were suspended.
Montesa also objected to the proposed suspension of fuel taxes, saying that the government is better off providing targeted subsidies to drivers of transport services, such as jeepneys and buses, that the poor and middle class workers often use.
He added that the government may also extend “targeted ayuda (cash assistance)” like the Pantawid Pamilyang Pilipino Program to help the poor cope with rising prices; install better road infrastructure such as bike lanes and sidewalks; and, provide “alternative means of travel” for workers.
“[W]e're still in a pandemic, so the government must be wise in how it uses its resources. Fuel excise taxes are a revenue source that can fund these kinds of spending but will also help fund the government's pandemic response,” Montesa said.
VERA FILES FACT SHEET: Understanding oil price hikes and excise taxes
