Tuesday's measure, approved by Congress earlier this month, increases corporate income tax to 35% from 32% and gives Arroyo the authority to raise the value added tax (VAT) by two points to 12% next year, under certain conditions.
The law also ends VAT exemptions enjoyed by some industries, such as power, electricity, air and sea transport.
"The signing of the amended (expanded VAT) bill into law caps the first phase of the Arroyo administration's economic reform agenda," said Finance Secretary Cesar Purisima after the signing.
"It is a milestone piece of legislation that will significantly broaden our tax base this year and the next," he said.
Officials said the law could raise revenues by as much as $1.94 billion by next year, and help the government plug a chronic fiscal deficit and pay off debts.
The finance department has said that 70% of the proceeds from the new tax measure will be used to address the deficit while 30% will go to budgetary support.
The bill was approved despite criticism that it would deeply hurt private business while failing to raise the revenues that the government desperately needs.
But members of the political opposition as well as consumer welfare groups claim that the measure could help trigger higher prices of basic commodities.
On Tuesday, a group of protesters burned pictures of Arroyo and hoisted banners denouncing the new tax law as a burden to the poor.
The Philippines incurred a budget deficit of 63.5 billion pesos
($1.17 billion) in the first three months of the year, well
within the target of 77.8 billion pesos ($1.44 billion) for