Manila court freezes new tax in blow to Arroyo

MANILA: The Philippine Supreme Court on Friday froze an expanded sales tax at the heart of President Gloria Macapagal Arroyo’s reform agenda as she faces pressure to step down from election cheating and graft allegations.

“At this point we don’t think it is going to jeopardise the implementation of the VAT package,” Brian Coulton, senior director of Fitch Ratings’ sovereign group, told Reuters.

The government said it would seek to have the freeze lifted but some analysts saw the ruling as a blow to Arroyo and her efforts to raise revenues and cut chronic budget deficits.

Philippine sovereign debt yields surged higher on the news, with bonds due in 2025 giving a bid yield of 9.412 percent versus Thursday’s close at 9.29 percent.

Opposition congressmen and petrol station owners separately asked the Supreme Court to block implementation of the broader value-added tax (VAT), which came into effect on Friday for about 18 hours until the court’s decision. The justices, voting 13-2, set July 26 as the start of hearings on the petition.

The government said it expected the expanded VAT to bring in an extra 28 billion pesos ($502 million) this year.

It said additional revenues would rise to about 145 billion pesos in 2006, after the president exercises her power to boost the VAT rate to 12 percent from 10 percent. “Further delays threaten the fiscal position of the country,” said Astro del Castillo, managing director of First Grade Holdings in Manila.

Revenue boost: On Wednesday, before the court ruling, Finance Secretary Cesar Purisima had said he expected the budget deficit to fall to 160 billion pesos or lower this year from 187 billion pesos last year as tax reforms boosted revenues. He projected a budget deficit of 100 billion pesos or lower for next year.

The Philippines, Asia’s most active issuer of sovereign debt after Japan, has run budget deficits in 11 of the last 15 years, including 2005. In a 42-page petition to the Supreme Court, the opposition law-makers had asked the tax law to be declared unconstitutional because it allowed the president to raise the rate. “The power to tax is legislative in character, and thus a legislative prerogative,” the petition said. reuters

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