TRAIN Law: How’s it Working Out for SMEs?

“Big winners” is how banks and financial consulting groups described small and medium-sized businesses under the Tax Reform for Acceleration and Inclusion (TRAIN). This assessment came in a week or so in January after the current administration’s reform program was enacted into law.

Several months after its enactment, how has the TRAIN Law worked out for SMEs?

Prospects and Growth

At the tail end of this year’s first quarter, the manufacturing industry reported slow growth. According to a global research firm, the sector’s Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) score dipped to 50.8 in February from 51.7 in January. It is the industry’s weakest quarter to date, analysts report.

Business confidence also took a tumble in the same quarter, from 43.3 percent toward the end of 2017 to 39.5 percent. The Business Expectations Survey (BES) from the Bangko Sentral ng Pilipinas (BSP) reveals that companies were not only less encouraged by the country’s economy but that they are also cautious.

The businesses that were surveyed did take into account the cycle in which consumer spending tends to ease up as part of their expectations. But the respondents also cited the multiple changes brought about by the TRAIN Law as a critical factor in the BES result.

Tax Reform for Businesses

The government designed the TRAIN Law to simplify taxes and encourage SMEs, including the micro enterprises, to file taxes. It is, a Chinabank Securities report notes, favorable to entrepreneurs.

Here are two key aspects of the tax reform program for your business:

  • The VAT threshold for exemption is now P3 million from P1.5 million; if your business’s gross sales fall below the threshold, you can pay the flat tax rate of 8 percent on gross receipts and non-operating income rather than the regular income tax.
  • Income tax return paperwork for businesses has gone from 12 pages to four pages, making it more manageable for your company to meet its obligation to the government.

According to the Department of Finance, the lowering of the VAT threshold, as well as the simplified tax application, has allowed SMEs to enjoy tax breaks amounting to P44.15 billion. While VAT collections fell by over 13 percent, percentage tax collections climbed to 49.4 percent.

The tax reform program can help your business as it seeks to reduce the taxes you pay and eases the process. You can keep more money in your pocket, and you don’t have to hire a professional to look through your books.

But a business doesn’t run solely on reduced taxes and simplified paperwork; other factors are at play.

Inflation and the Peso

TRAIN Law has cut taxes for some people, but it’s also raised excise taxes on:

  • Oil
  • Sugary beverages
  • Cigarettes
  • Vehicles

The increasing cost of commodities is just the tip of this fiscal iceberg.

Inflation is hitting record highs as it went up to 5.7 percent in July from 5.2 percent in June. The government’s target is 2 to 4 percent. The BSP sees the increase as an effect of rising consumer prices. Higher import costs are also affecting the peso’s weaker value.

The cost increases in commodities along with the weakening purchasing power of the Filipino is pushing companies to cut costs. For most businesses, this means scaling back the workforce. And that comes with a whole slew of other challenges.

The tax reform program is in its first phase. The government is preparing to release the second salvo of the TRAIN Law, which analysts warn could turn off foreign investors. TRAIN 2 seeks to repeal 30 laws that grant incentives to investors. The Philippine Association of Multinational Companies Regional Headquarters Inc. (PAMURI) states that this could displace the Regional Operating Headquarters sector (i.e., foreign business entities serving affiliates or subsidiaries in the country).

As it turns out “big winners” may have been a hasty projection. But the year has yet to finish out so it may be too soon to assume that SMEs are the “big losers” in the tax reform program as it continues to create changes — good and bad.

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