It’s corruption, not the system

At least, the President gets an A for effort for her resolve to overhaul the tax system in this country. Her past posturing has never been remiss in reminding us that the current tax system, one wherein the government revenue is equivalent to 14.4 percent of the domestic production, begs drastic measures to resuscitate it.

Recently, the Asian Development Bank reported that the Philippines has one of the lowest tax takes in the region. The multilateral institution even projected that the ratio could slip further to 14.1 percent this year as the government borrows more to finance its budget deficit.

Therefore, to arrest this deficit, the current administration is championing a shift from the existing net income tax system to a gross income tax model. This is intended as a first measure in a long list of tax reforms to be implemented soonest.

How this is to be achieved is not yet clear. But judging from the president’s statement, it would appear that this administration would revive the bill filed by Rep. Jules Ledesma in 2002 which is lifted from a recommendation made by the finance department as early as 2001.

Squeezing More From Business

The proposed bill has two versions for corporate taxpayers. One is the pure gross that proposes a 15-percent tax on the gross income of corporations, single proprietorships, and even professionals.

The less radical version is the modified gross method (also known as the modified net tax system) that would allow certain deductions but impose a higher rate ranging from 26 to 28 percent. The tax rates on both proposals are lower from the current net income tax rate of 32 percent for businesses.

The tax shift as proposed in the 2002 bill would squeeze more from earnings from businesses but ease the burden on individual taxpayers who are salaried earners.

The idea then was to increase the individual taxpayer exemption ceiling such that those earning P75,000 or below annually could go tax free. At the same time, it would expand the tax brackets so that only those earning P650,000 or more yearly would be subjected to the maximum rate of 32 percent. At present, individuals earning P70,000 and below yearly pay taxes from five to 15 percent, while only those earning more than P500,000 pay 32 percent.

When the proposed bill was presented two years ago, there were suspicions that Congress would push through with the tax cut for the salaried earners who happen to comprise the voting block, and at the same time sit on the revenue-earning gross tax system for the corporate. Such a scenario would have meant losses of about P15 billion annually in government revenues.

Now that elections are over, such fear and suspicions are gone in the face of stark reality of a debilitating deficit.

Does Gross Mean More?

Gross income taxation seems to have its merits. Proponents say it is simpler, could ease tax administration, improve tax compliance and encourage more from the informal sector to finally come to the surface and pay their taxes.

But opponents including some economists think otherwise. They believe that the proposed system is inequitable and could prove to be more disadvantageous not only to corporate taxpayers but for the government itself.

Even Hong Kong, which had been cited by Mrs. Arroyo as an example, is not exactly practicing gross income taxation. What the Crown Colony imposes is actually a simple net income tax that allows deduction for legitimate expenses.

The finance department estimated in 2001 that a shift to gross modified tax system could bring in as much as P60 billion in additional revenues yearly for the government. But those who are against however, believe that such a shift could even erode government revenues by more than P40 billion yearly. They say that instead of encouraging the shadow economy to come forward, the new tax system could only spawn new forms of tax cheating.

Considering that the Bureau of Internal Revenue is still perceived as allegedly teeming with unscrupulous tax agents, companies that are anyway presently cheating with their tax declarations could always find a way to circumvent whatever system is put in place.

There is also the issue of inequity. Business feels that if the government imposes a flat, unitary 15-percent rate on all businesses without taking into account the differences in industries‚ behavior, mode of operation and current profitability situation, some industries could be taxed to death while others would get away with murder.

Simple System And Firm, Corruption-Free Enforcement

Income tax brings more than half of the annual tax take and a change in the current tax model could be in order. But in revising the tax system, the bias should be towards simplification.

What we need is a simple tax system. But the monitoring must be strengthened and made more effective. And, most of all, the enforcement of tax law provisions has to be firm and consistent regardless of the stature of the taxpayer involved. Finally, the circuitous judicial process must be cleared so as not to hamper the prosecution of tax cheaters and evaders.

Underpinning all of the above is the removal of the main problem in revenue-generation which is corruption. Shifting to a new tax model then is not the immediate and best solution to the problem because what must be addressed first and foremost is corruption.

This entails an overhaul not of the tax system but of the BIR and Customs, which are still the country’s two most corrupt agencies based on the latest survey.

A simple tax system is important but not as paramount as ridding the system of corruption, which – if left unchecked – is like a disease that would fester and contaminate even the most foolproof tax system in the world.

An Update Of GSIS Issues On TV

‘Isyung Kalakalan at Iba Pa’ on IBC News (5 p.m., Monday to Friday) starts today with a discussion of issues affecting the Government Service Insurance System. Aside from cleaning up its delinquent accounts, GSIS is also advocating an increase in government employees’ share in the Employees Compensation Fund. Like the Social Security Services, its counterpart for the private sector, benefit payments have been outpacing membership contributions. Watch how the GSIS plans to restore its financial equilibrium.

‘Breaking Barriers’ With Dr. Augusto D. Litonjua

‘Breaking Barriers’ on IBC (11 p.m. every Wednesday) will feature Dr. Augusto D. Litonjua, well-known endocrinologist, on Wednesday, 4th August 2004. Join us break barriers with him and gain a better understanding of diabetes, the disease now dreaded by a growing number of Filipinos who unfortunately do not have the resources to afford the expensive medication and treatment. Watch it.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. If you wish to view the previous columns, you may visit my website at http://bizlinks.linkedge.biz.