SENATE BILL

SEP
16
2015

SBN-2953: Increasing the Allowable Personal Exemption of Individual Taxpayers

An Act Increasing the Allowable Personal Exemption of Individual Taxpayers, Amending for the Purpose Section 35 (A) of the National Internal Revenue Code of 1997, As Amended, And for Other Purposes

EXPLANATORY NOTE

It is provided under Section 1, Article XV of the 1987 Philippine Constitution that the State recognizes the Filipino family as the foundation of the nation and accordingly, it shall strengthen its solidarity and actively promote its total development. In addition, the same Article ordains that the State shall defend the right of the family to a family living wage and income.

In recognition of the above Constitutional precepts, Congress, in enacting Republic Act No. 8424, otherwise known as the National Internal Revenue Code of 1997 (Tax Code), allowed individuals to claim for personal exemptions under Section 35 thereof. In a decided case, the Supreme Court said:

“XXX Personal exemptions are the theoretical personal, living, and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amount in the sense that the amounts have been predetermined by our lawmakers as provided under Section 35 (A) and (B). Unless and until our new lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress. ”

Prior to its amendment in 2008, the Tax Code provides for different amounts of personal exemptions depending on the personal status of the taxpayer. A single individual was allowed a basic personal exemption of P20,000, for head of family, P25,000 and for each married individual, P32,000. With the enactment of Republic Act No. 9504 in 2008, the allowable personal exemption for each taxpayer has been increased to a uniform amount of Fifty thousand pesos (P50,000) regardless of the personal status of the taxpayer.

The amount of personal exemption has not been increased by Congress since 2008 even as during this time, the amount can be considered as insufficient to approximate the prevailing annual poverty threshold for a family of five (5) based on the data released by the then National Statistics Office in 2006. For the said year, or two years prior to the adjustment of the allowable personal exemption by virtue of RA 9504, the average annual poverty threshold amount for a family of five was P66,785. For 2012, the amount increased to P94,675.

The Constitution explicitly provides that the rule of taxation shall be uniform and equitable and that Congress shall evolve a progressive system of taxation. Equity in taxation involves the “ability to pay” principle. The concept of equity in taxation requires that such apportionment be more or less just in the light of the taxpayer’s ability to shoulder the tax burden (usually measured in terms of the size of wealth or property or income) and if warranted, on the basis of the benefits he receives from the government. Applying this Constitutional fiat to the case of purely compensation income earners, those who are placed in the lower income brackets must be taxed at a lower rate thereby allowing them the opportunity to pay lesser taxes and enjoy a higher take home pay for their families.

From 2008 to present, the daily minimum wage rate in Metro Manila increased from P382 to P481. A paltry increase amidst the rising cost of living and losses in human productivity due to the traffic congestion plaguing the country’s major cities.

To counter the steady increase of prices of consumer goods and services and to help our hardworking middle class in meeting the demands of daily living, this bill seeks to adjust the allowable personal exemption for each individual taxpayers from P50,000 to P150,000.

In the case of married individuals, the gainfully employed spouse may claim an exemption for the other spouse even though the latter did not earn any gross income for the taxable year and did not file a return for as long as the said spouse is living exclusively with the gainfully employed spouse. This, however, does not classify the said spouse as a dependent, but merely recognizes the latter’s efforts in the care and maintenance of the family and of the household which is akin to the recognition accorded by the Family Code in cases contemplated under Article 147 thereof. In short, all married individuals may claim a maximum amount of allowable personal exemption of up to P300,000 regardless of whether the other spouse is employed or not.

Aside from providing a uniform and adjusted individual personal exemption, RA 9504 also exempted minimum wage earners from the payment of income tax. Tax experts, however, noted that RA 9504 also gave rise to another form of wage distortion. To illustrate, compare a married couple who are both earning the statutory minimum wage and a couple wherein only one is earning a salary which is slightly higher than the statutory minimum wage. Applying the provisions of RA 9504 in the said situation, the taxpayer earning a salary slightly above the statutory minimum wage stands to lose out to minimum wage earners in terms of take home pay although both are facing the same high cost of daily living. Taking this into consideration and to somehow provide a level playing field, the bill aims to approximate the tax privilege accorded to couples both earning the statutory minimum wage and to grant the same to married couples wherein only one is gainfully employed but merely earning slightly above the minimum wage. Thus, as mentioned in the immediately preceding paragraph, all married couples shall have a maximum aggregate allowable personal exemption amounting to P300,000.

Lastly, the bill provides that the amount of allowable personal exemption be adjusted by the President six (6) years after the effectivity of the Act and every six years thereafter to its present value using the Consumer Price Index (CPI) as published by the Philippine Statistics Authority.

In view of the foregoing, the passage of this bill is earnestly sought.

RALPH G. RECTO

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