Government mulls shift to gross income tax

The Arroyo administration is reviving the controversial proposal to shift from net income taxation to gross income taxation (GIT).

In a teleconference with reporters, Finance Secretary Jose Isidro Camacho said yesterday that the Arroyo administration is supportive of the move in Congress to revive the proposal to return to gross income taxation.

After being shelved for some time, the bill was filed recently by Negros Occidental Rep. Jules Ledesma, incumbent head of the House ways and means committee.

The scheme has been harshly criticized for its cascading or multiple taxation effect on prices, equity and general resource allocation. Since pure gross income taxation means zero deduction, even the government decided earlier that it was a deterioration into a kind of sales tax of the turnover variety.

According to Camacho, the main objective of the government was "merely to simplify" the present tax system which he said had grown in complexity with the myriad of deductions that the law allows.

"I'm keeping an open mind but we are supporting moves to bring us as close as possible to pure gross income taxation," Camacho said. "It really depends on coming up with the right formula that would address the specific concerns of various sectors."

The revival of the GIT scheme is expected to spark a conflict between government economic planners and the private sector which had repeatedly attacked the gross income taxation scheme as regressive.

Conflict is also expected within the different agencies of the government itself, especially between Malacañang which initiated the process and line agencies which branded the scheme as inequitable.

Under the GIT scheme, corporate tax would be lowered from 32 percent to 15 percent but the only allowable deductions would be limited to the direct cost of goods sold or direct costs incurred in the production of goods and services.

The proposal would also restructure the tax rate schedule on fixed income earners by proposing a tax rate structure of zero percent on taxable income of P75,000 and below while taxable incomes above P75,000 and below P650,000 would be taxed up to 32 percent.

The Private Sector Advisory Group headed by former finance secretary Roberto de Ocampo said in a position paper that the scheme moved away from the goal of evolving a progressive scheme of income taxation.

PSAG said that under the current tax system, individuals are taxed on the aggregate of his incomes using a progressive schedule. The proposal to tax business income earners with a flat rate, the group said, would put the heavier burden of taxation on salaried taxpayers.

"It does nothing to redistribute the tax burden towards the self-employed," PSAG said. "It is also distortionary and creates a bias against fixed income earners…We have found no reason to support the proposed gross income taxation."

According to PSAG, the scheme would also erode revenues by as much as P46 billion on corporate income tax which was estimated to have raised P87.2 billion in 2000, at 32-percent tax rate. With the 17-point reduction, the group said revenues would go down and there was no assurance that the tax base would sufficiently broaden the tax base to forestall the expected revenue loss.

The government's own policy studies also showed that GIT was downright inequitable and would discourage investments since businesses would not be able to claim a credit on the income tax that has been paid to the Philippine government.

Government studies also indicated that there is no known country in the world that implements a pure GIT for business precisely because of its dis-incentive effect.