The Tax Reform Package May Be Good For The Economy, But Is It Good For You Too?

3 min. read By eCompareMo on

The Department of Finance (DOF) submitted a new tax reform proposal to the Congress last week, aiming to update the country’s two-decade old income tax system.

Among the adjustments in the DOF’s comprehensive tax reform bill is exempting low-income earners from income taxes.

The Tax Reform Package May Be Good For The Economy

The comprehensive tax reform bill will exempt low-income earners from income taxes. The forum “Insights on President Duterte’s Tax Reform Agenda” was hosted by the Senate Tax Study and Research Office (STSRO) last Thursday, September 29, where DOF Undersecretary Karl Kendrick Chua discussed the proposed tax reform.

Understanding the new income tax system

If passed into law, over 4.6 million taxpayers earning P250,000 a year, or P20,833 a month and below will be exempted from income tax.

Those with incomes higher than the tax exempt bracket will have reduced income tax, as the bill aims to lower tax rates and increase the base pay of employees, according to Chua.

Other adjustments include the removal of the tax exemption cap of up to P82,000 for the 13th month pay, and personal tax exemptions for working spouses.

Currently, employed spouses are enjoying a personal tax exemption of P50,000, with P25,000 for each dependent for a maximum of four dependents. The other employed spouse is also entitled to another P50,000 personal exemption. All these will be abolished under the new income tax system.

Read: Philippine Economy Posts 7% Growth In Q2 Of 2016

The DOF is also proposing to remove the 20-percent tax exemption on certain goods and services, and the 12-percent value added tax of senior citizens and persons with disability.

The new income tax system will also introduce new taxes on sweetened beverages, fatty foods, jewelry, mining, carbon, gambling, lottery and casinos, as well as higher excise taxes on alcohol, tobacco, and petroleum products.

Corporate income tax rate will be lowered to 25 percent, and property and capital income taxes will be reduced.

Implementation

The current tax system applies 30-percent income tax to individuals who earn P250,000 to P500,000. Under the proposed tax reform bill, the income tax will be 10-percent lower for the same bracket.

The adjusted income tax are as follows:

First year

Annual income Taxable income
Less than P250,000 No income tax
Between P250,000 and P400,000 20-percent tax rate on the excess over P250,000
Between P400,000 and P800,000 P30,000 + 25 percent on the excess over P400,000
Between P800,000 and P2 million P130,000 + 30 percent on the excess over P800,000
Between P2 million and P5 million P490,000 + 32 percent on the excess over P2 million
P5 million and above P1,450,000 + 35 percent on the excess over P5 million

Second year onwards

Annual income Taxable income
Less than P250,000 No income tax
Between P250,000 and P400,000 15-percent tax rate on the excess over P250,000
Between P400,000 and P800,000 P22,500 + 20 percent on the excess over P400,000
Between P800,000 and P2 million P102,500 + 25 percent on the excess over P800,000
Between P2 million and P5 million P402,500 + 30 percent on the excess over P2 million
P5 million and above P1,302,500 + 35 percent on the excess over P5 million

As an example, let’s take a married woman with one child earning a gross monthly income of P40,000.

Proposed income tax system:

P40,000 gross monthly salary
x 13 months
—————————–
= P520,000 gross annual salary

This falls under the P400,000 to P800,000 income bracket.

First year

Gross Basic Salary Government contributions Net income  Personal exemption  Taxable Annual withholding Withholding tax (per cut-off)*
P520,000 P13,425.60 P506,574.40 (removed) P506,574.40 P56,643.60 P2,360.15

Note: The 13th month pay will be released in full (in this case, P40,000). Its tax will be applied in the *monthly withholding tax.

Second year onwards

Gross Basic Salary Government contributions Net Income  Personal exemption  Taxable Annual withholding Withholding tax (per cut-off)*
 P520,000 P13,425.60 P506,574.40 (removed) P506,574.40 P43,814.88 P1,825.62

Read: What Are The Real Implications Of Granting Employees A 14th Month Pay?

Old vs. new

In the current income tax system, the woman has a 30-percent tax rate and P75,000 total in personal exemptions: P50,000 for personal tax, and P25,000 for one dependent.

Comparing the two, the proposed income tax system will result in lower withholding tax even if the 13th month pay is taxed.

What do you think of the proposed tax system? Share your thoughts in the comments.

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