Small businesses are big winners in tax reform

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Micro, small and medium enterprises (MSME) with gross sales below the threshold can opt to pay a flat tax of just 8% instead of paying the regular income tax. (FILE PHOTO)

Metro Manila (CNN Philippines, January 8) — Micro, small and medium enterprises (MSME) are the biggest winners in the government's tax reform program, according to new research by several firms.

Experts said the most important change was the raising of the tax threshold from ₱1.5 million to ₱3 million. MSMEs with gross sales below the threshold can opt to pay a flat tax of just 8% instead of paying the regular income tax.

This change makes the tax system "simpler and more favorable" to entrepreneurs, a report by Chinabank Securities read.

According to its simulation, entrepreneurs earning up to ₱1.5 million annually will see their disposable incomes increase by as much as 12.7% this year.

The change is even more significant for those earning between P1.5 million and ₱3 million a year — the newly tax-exempt. Their disposable incomes are expected to jump by 27-28.2%.

Even though consumer prices are expected to go up because of higher taxes on fuel and coal, Chinabank Securities said inflation will still be outpaced by the rise in entrepreneurs' income.

For those earning up to ₱1.5 million annually, inflation will not erode their income gains until 2021. For those earning between ₱1.5 million and ₱3 million, they have until 2025, the bank said.

Cutting tax in half

Tax consultancy Abrea Consulting Group, meanwhile, said that even if MSMEs don't avail of the 8% flat tax, they will still benefit from the overall lowering of income tax rates.

Under the Tax Reform for Acceleration and Inclusion (TRAIN) law, all income ₱250,000 and below will be exempt from tax. Tax rates were also lowered for most taxpayers, except those earning ₱2 million and above.

In a sample case, Abrea Consulting Group showed that a typical sari-sari store (mom and pop shop) making P500,000 in gross sales a year would have to pay ₱52,500 in taxes under the old rules. With the new rules, the store's tax bill will go down to ₱25,000 using the lower income tax or ₱20,000 using the flat tax.

"They'll be saving at least half of what they're paying right now," Abrea Consulting Group President Mon Abrea said in an interview on Monday. "So that's really good tax relief for our small businesses."

Simplifying rules

The simplified tax procedures should also benefit MSMEs that often don't have the time or money to hire accountants to go over their books, Abrea said.

The TRAIN law cut down the income tax returns from 12 pages to four. It also extended the deadline for taxpayers to pay the second installment of their tax liabilities from July 15 to October 15.

"I think that's the ultimate objective of the TRAIN law, simplifying the rules to encourage compliance for small businesses," Abrea said.

"I don't think the government should run after the few taxes of the small businesses. We just want them to comply so they be part of the formal economy."