Why go for 8% gross income tax rate?
By Aileen P. Melchor
LIFE presents us with numerous choices. Most of the time, we become indecisive. Don't worry about it. I am here to guide you as to why choosing the 8-percent gross income tax (GIT) could be the right decision.
The first quarter of the year is very crucial for taxpayers. They need to make choices regarding the filing of their returns. Most of us, particularly small business owners and professionals, wonder whether to choose graduated income tax or 8-percent GIT.
Before making a choice, let us revisit the criteria if you are eligible to avail of the 8-percent GIT. Under the BIR Revenue Memorandum Order 23-2018, the taxpayer must meet all four criteria:
– Individuals (single proprietor, or professional or mixed income earner) earning from self-employment and/or practice of profession;
– Taxpayers, whose gross sales/receipts and other nonoperating income, did not exceed the P3,000,000 VAT threshold during the taxable year;
– Taxpayers registered and subject only to percentage tax under Section 116 of the National Internal Revenue Code, as amended; or taxpayers exempt from VAT or other percentage taxes; and
– They should have signified their intention to select the 8-percent income tax rate through any of the provisions under Section II (7) of this order.
However, the 8-percent income tax rate option does not apply to the following individual taxpayers and shall be taxed based on the graduated income tax rates:
– Purely compensation income earners;
– VAT-registered taxpayers, regardless of the gross sales or receipts and other nonoperating income;
– Taxpayers exempt from VAT or other percentage taxes whose gross sales/receipts and other nonoperating income exceeded the P3,000,000 VAT threshold during the taxable year;
– Taxpayers, who are subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except those subject under Section 116 of the same title;
– Partners of a General Professional Partnership;
– Individuals enjoying income tax exemption.
Are you qualified for 8-percent GIT? If yes, the next question is why opt for 8-percent GIT? Allow me to provide you with some insights.
– Lower tax rate. Eight percent tax on gross sales/receipts and other nonoperating income after deductions for returns and cash discounts is lower compared to the graduated income tax rate which ranges from 0 percent to 35 percent of the taxable income. However, depending on the flow of income and expense of the taxpayer, you can save using the graduated income tax process rather than the 8-percent GIT.
– No more percentage tax. Avoid the quarterly burden of 3-percent percentage tax, streamline your tax obligations and reduce paperwork. Once you meet the eligibility criteria and choose the 8-percent gross income tax rate, you are no longer required to pay the 3-percent percentage tax. It also leads to fewer BIR forms to file since you are no longer required to submit BIR Form 2551Q every quarter.
– Reduced compliance burden. For income tax purposes, tax due for choosing 8 percent is based on the gross income and eliminates the need to substantiate expenses. With no need to verify expenses, your chances of being subjected to a BIR audit are minimized.
– P250,000 deduction. Individuals, whose incomes come purely from business/profession are entitled for P250,000 deduction per year from their gross income.
– Tax computation saves cost, time and effort. Tax computation is very simple and easy if you avail of the 8-percent gross income tax rate. You can do it on your own, thus saving you the cost of hiring an accountant or bookkeeper. You can use the following formula as a guide:
Gross receipts/revenue — xxx,xxx
Less: Allowed deductions — 250,000
Gross income — xxx,xxx
Rate — 8 percent
Income tax — xxx,xxx
– Financial statements are not required. Skip the hassle of preparing financial statements. It is no longer required as an attachment in the Annual Income Tax Return.
Consider these factors carefully in deciding on what to choose this coming first-quarter ITR filing. Whether you're seeking to streamline your tax obligations or reduce compliance burdens, opting for the 8-percent GIT could be the right move for you. Understanding its eligibility criteria and weighing its benefits can help you make a well-informed choice that aligns with your business goals and financial objectives.
Aileen P. Melchor, CTT, MBA is the accounting manager of Paguio, Dumayas & Associates, CPAs (PrimeGlobal Philippines), an institutional member of the Association of CPAs in Public Practice (Acpapp). The opinion of the writer does not reflect in any way the opinion of these institutions.
Source: The role of automation in transforming audit