Who doesn’t want to pay fair and equitable taxes? If you are a minimum wage earner, Medical Specialist III, Clerk IV and a call center agent, you would be interested on the impact of the tax reform on your personal income.
“The tax reform agenda proposed by the Department of Finance (DOF) is designated to shift the tax burden from the lower 99 percent of the community to the wealthiest 1 percent,” Finance Secretary Carlos G. Dominguez III said in his speech at a tax forum titled “1 with the 99.” DOF presented the “Tax Reform for Acceleration and Inclusion- Revised package 1”. According to the DOF, doing “tax reform need not be burdensome because we can do it in the most simple, fair and efficient manner so that we end up with a tax system where the rich will contribute more and the poor will benefit from more and better services.”
It’s important to note that the tax reform will fund the President’s ten-point socioeconomic agenda. Although the president promised to lower personal income taxes, he also promised nine other items which needs to be funded. Congress has already passed House Bill 5636 or the Tax Reform for Acceleration and Inclusion Act but the Senate will need to pass the counterpart legislation and reconcile it with the House bill before President Duterte can sign it into law.
Some key points of the Tax Reform for Acceleration and Inclusion Act
1. Effective January 1, 2018 to 2020, those earning no more that P250,000 annually are exempted from income tax with the tax schedule as follows:
P250,000 to P400,000– 20 percent of the excess over P250,000; P400,000 to P800,000– P30,000 plus 25 percent of the excess over P400,000;
P800,000 to P2,000,000— P130,000 plus 30 percent of the excess of P800,000;
P2,000,000 to P5,000,000—P490,000 plus 32 percent of the excess of P2,000,000;
Over P5,000,000—P1,450,000 plus 35 percent of the excess over P5,000,000.
2. The tax rates will be lowered further from January 1, 2021 as follows,
P250,000 to P400,000—15 percent of the excess over P250,000;
P400,000 to P800,000—P22,500 plus 20 percent of the excess over P400,000;
P800,000 to P2,000,000— P102,500 plus 25 percent of the excess of P800,000;
P2,000,000 to P5,000,000—P402,500 plus 30 percent of the excess of P2,000,000;
Over 5,000,000—P1,302,050 plus 35 percent of the excess over P5,000,000.
After 2022, the taxable income levels and base shall be adjusted once every 3 years by the DOF based on inflation.
3. After 2022, the taxable income levels and base shall be adjusted once every 3 years by the DOF based on inflation.
4. Self-employed and professionals within the VAT threshold of P3 million: the substitute bill requires them to pay an 8 percent tax on gross sales or receipts in lieu of the income and percentage taxes. The tax for those above this VAT threshold will be based on the 30 percent corporate income tax rate with minimum tax.
5. Taxable income is defined as gross income minus the authorized deductions like SSS or GSIS, PhilHealth, Pag-IBIG fund and other allowed exemptions like the exemption for the 13th month pay and other bonuses.
6. The exemption for the 13th month pay and other bonuses has been raised to P100,000.
7. Fringe benefits will be considered part of gross income by 2022.
What is the impact on Taxpayer’s Personal Income?
According to Bayan Muna Rep. Carlos Zarate ,”despite income tax exemptions, fringe benefits will be taxed, and consumers will have to shoulder taxes on fuel, sugary beverages, and property.” The objections raised by the Makabayan lawmakers on the tax reform such as the excise taxes on fuel will be discussed in another post.
Let’s take a look at some examples presented by the DOF on the impact on the personal income of taxpayers.
A minimum wage earner, will not be affected by the proposed tax reform. They will continue to be exempted from income taxes because their income is below 250,000 pesos.
Based on year 1 schedule and assuming two dependents, a clerk in the government or an entry level worker with income of around 15,000 pesos a month, pays around 7,282 pesos in taxes in the current system. Under the proposal, clerks will be exempted.
A call center agent with two dependents currently pays 21,867 pesos in tax. With the tax reform, he will also be exempted. (Based on schedule 1 and assumes two dependents.)
A government doctor with two dependents earning 56,610 pesos monthly currently pays 137,981 pesos in tax per year. With the tax reform, he will bring home additional 47,840 pesos more annually. For many people this corresponds to significant increase in take home pay that the president has promised. (Based on schedule 1 and assumes two dependents.)
Overall Impact of “Tax Reform for Acceleration and Inclusion- Revised package 1”
DOF received feedback that “what we give from the left hand, we take it all back from the right hand. ” They say it is not true. DOF explains that the increase in take home pay from the personal income tax deduction is more than enough to compensate for the increase in prices. This is an example provided by DOF on a call center agent who supports two children. With a monthly income of 21,000 a month, his personal income tax is 1,822 pesos. Even with VAT, oil excise tax, and inflationary effect, Evan will still be able to bring home 1,727 pesos.
The example provided by the DOT is Jerry and Eva. Jerry works as a call center agent while Eva works as a clerk. Both work hard for their three children. The combined income of Jerry and Eva will result to a personal income tax of 3,145 pesos. With the additional VAT, oil excise tax, automobile excise tax, and inflationary effect the couple still has additional monthly take home pay of 2,370 pesos.
Tax reform when seen as a package provides benefits to 99% of Filipinos. DOF stresses that more important than the tax is ,how we spend the money to benefit poor Filipinos. The tax reform is an investment in our future. No investment is easy. There are short term challenges but everyone benefits in the long term.
Watch Doy Santos talk about what the reforms seek to achieve, and whether the policy tools used to achieve them are the right ones, from efficiency, equity and ease of administration perspectives.