Which is advisable? Graduated Income Tax or 8% Special Income Tax

Income tax filing can be a difficult process but with the right strategy you can minimize tax legally "Tax Avoidance" is the term. 

An individual taxpayer whose earnings are from self-employment or practice of profession have two options to pay taxes either graduated tax rate under RR 8-2018 or 8% tax on gross sales/receipts.

Here is the latest tax table for the graduated tax system:

Effective for the year (2018-2022)

The 8% special tax rate was created during the implementation of TRAIN Law ( Tax Reform Acceleration and Inclusion Act). Under this law, only the following can avail with restrictions:

  1. Individuals Earning from Pure Business or Professional Income Earners (Freelancers, Consultants, Practitioners)
  2. Mixed-Income Earners (Individuals Earning Income from Compensation and Self-employment)
  3. Provided that Gross Sales/Receipts, as well as non-operating income, shall not exceed the VAT threshold amounting (3,000,000) for the taxable year. In case a taxpayer exceeded 3,000,000 during the taxable year even though he initially files for the 8% income tax rate, the taxpayer will be automatically be subjected to the graduated tax rates for the remaining quarters and annual income tax return. Income tax payments under an 8% income tax rate shall be allowed as a tax credit.
  4. The taxpayer must signify his/her intention to file under an 8% tax option for the year applicable before the filing of the 1st Quarter ITR. If not, he will be considered as having availed of the graduated income tax rates.

What is the best option?

It depends on taxpayers Income and Expenses to have the best option. The taxpayer should be able to project the transaction for the year, since of the 1st quarter filing of 1701Q, the taxpayer will have to decide either to avail or not to avail the 8% Special tax. The important factor is taxable Income, you have to project your taxable income for the year and make a scenario computation on which is higher between the two options. It is best to seek advice from your bookkeeper or accountants. 

In the example above, you will see the different scenarios that rates will apply.

CBOS Accounting & taxation is an expert in this field. You may book a meeting with us or just chat us for any questions and queries.