Senior citizen’s discount

Q. "I operate one of those botika ng barangay, offering generic and generally low-priced drugs and medicines. A significant portion of my sales come from purchases made by senior citizens that are tagged 20% lower than the regular price. I understand that the "Senior Citizens Act" has recently been amended. Is there a change on how the 20% discount given them is treated?"

A.The law was recently amended and one of the significant changes made is the treatment of the sales discounts given to qualified senior citizens. While it is true that the discount rate granted to qualified senior citizens on purchase of medicine (among others) in all establishments for their exlcusive use or enjoyment remains at 20%, it appears that the treatment of the said discount in the hands of the establishment plus the basis of the 20% discount are now different, not to mention the amount of savings our senior citizens will be enjoying.

Under the old law, the senior citizen discount granted by establishments such as yours may be claimed as a tax credit against the establishment’s income tax liability. This simply means that the 20% discount could be used to offset payment of your business’ income tax liability. However, under the amended law, the establishments granting the discounts are now to claim the discounts as a deduction from their gross income. How in the world is this different? Well, the difference is that the discount granted is now deducted from your gross income before the applicable income tax is imposed, as compared to the previous treatment where the discount is directly deducted from your income tax liability.

Let me make this clear by giving you a simple example.

Suppose, you are to sell medicine to a qualified senior citizen worth P1,000. Under the old law, the 20% discount or P200 is calculated based on the P1,000 selling price. In computing for your income tax liability, in this particular instance, your sales/income of P1,000 (of course, in the real world, other costs and expenses for doing the business have to be deducted to arrive at your net taxable income where the 32% income tax is applied to determine your income tax liability) will have an income tax due of P320 (32% of P1,000). However, since you granted the 20% discount or P200, you can use this amount to offset in part your total income tax due of P320. At the end of the day, your income tax liability is only P120 (P320 minus P200).

In the amended law, your 20% discount of P200 (although the 20% discount now is to be computed on the net cost of acquiring the medicines sold, which means that, in this particular example, the discount should have been less than P200) is now deducted from your gross sales of P1,000. The remaining P800 is then subjected to the applicable income tax rate of 32%, which will result in an income tax due of P256.

It does not need a rocket scientist to spot the difference. With that, I leave the critique of this amendment to you.

(Raymund S. Gallardo is tax partner of Laya Mananghaya & Co./KPMG. Questions and comments are welcome. Messages to the author can be sent by e-mail at [email protected]).