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The Philippine high court on Tuesday upheld the constitutionality of the Philippines's new value-added tax law , the mainstay of president Gloria Macapagal Arroyo’s fiscal reform programmed. It is a move that should boost investor confidence and almost a requirement of the International Monetary Fund and other lenders.

The ruling paves the way for the implementation of a key element of Mrs Macapagal’s attempt to cut budget deficits and curb heavy government borrowing that holders of Philippine sovereign bonds are afraid could lead to an Argentine-style debt disaster . The tax is set to take effect on November 1, 2005 .

The supreme court decision “will help reduce the fiscal deficit and allow more resources for job-creating infrastructure and the delivery of key services,” said Gary Teves, finance secretary .

The tax law, which expands VAT to include petrol and power, raises the tax rate from 10 per cent to 12 per cent from 2006 and boosts the corporate income tax rate from 32 % to %. The tax is estimated to boost government revenue by 80 billion pesos a year. Some of this was on basic commodities, so a serious concern to the masses. Some of these commodities have been exempted in recent ammendments.

Mrs Macapagal desires the budget deficit, which was 187 billion pesos last year and expected to be 180 billion pesos this year, to be eliminated by 2009 or 2010.

The ruling ends a three-and-a-half month freeze that had prevented implementation of the VAT. Although the VAT law came into effect on July 1 its implementation was delayed after Mrs Macapagal’s political opponents raised questions over the constitutionally of the law.

The delay raised worries among international investors over whether the Philippines was committed to fiscal reform and had prompted credit rating agencies to immediately reduce the outlook for the country’s debt ratings from “stable” to “negative”.

Although the supreme court decision is expected to revive investor confidence in Mrs Macapagal’s ability to push through reforms, protests against the new tax may create fresh political turbulence for her. Mrs. Macapagal has survived the opposition's attempts to impeach her but her position remains uncertain because of continuing street demonstrations against her.