BDB Law’s “Tax Law for Business” appears in the opinion section of Business Mirror every

Thursday.

Taxing the hard-to-tax

How do you tax the hard-to-tax sector of society? After announcing it will run after big-
time tax evaders, the Bureau of Internal Revenue (BIR) suddenly shifted its focus and
announced it will pounce on the small, marginal income earner, non-compliant market
and sidewalk vendors, and the tricycle and jeepney drivers – the core of the hard-to-tax
group.

If such a strategy was meant merely to deliver a message that nobody is spared from
the BIR’s watchful eye rather than to increase revenue collection, it is understandable.
But how do you really tax this sector, or should you tax them at all?

In the past, upon realizing that the conventional ways of safeguarding the payment of
taxes (e.g., invoicing and bookkeeping) are inapplicable to small income earners, the
BIR issued a regulation exempting those with annual income of P 100,000 and below
from the payment of VAT. The BIR coined the word “marginal income earners” and
justified their exemption on the ground that they are not engaged in business but are
only earning for a living. Subsequent to this, the BIR also exempted them from the
requirement of keeping of books of accounts and from the submission of financial
statements. In short, the BIR allowed them to operate outside the tax net to earn a
descent living untaxed.

I think that was a very smart move the BIR did, and my reasons are as follows:

First, going after them requires a lot of resources, both human and capital, yet the
potential for increase in collection is small or none at all. Considering that this is a big
group composed mostly of uneducated or elementary and high-school graduates, it may
be more costly to educate, train and assist them to comply. Likewise, it may be more
difficult to monitor their activities because they are scattered in the most remote places.
The BIR is wanting in resources and it may not be wise to spend a big chunk of its
resources to something that does not produce significant increase in collection.
Second, considering that this group transact business mostly within their own group
(Class E to Class E, small business to consumer), there may be no audit trail, such as
invoices or receipts or books of accounts, to monitor their compliance thereby making
enforcement almost impossible.

Third, the high cost of complying with the BIR requirements may force them to close
shop and, thereafter, become burdens to society.

Notwithstanding, I still think there must be a way to let them contribute their fair share to
the society – one that does not impose too much burden of compliance. I am thinking of
a Fixed Tax - a fixed amount of tax based on certain determinants that would somehow
capture their capacity to pay and the size of their business. For example, tricycle and
pedicab owners will pay a fixed amount, say P500, for each pedicab or tricycle owned or
used. Or, in the case of market and street vendors, a fixed fee of P500 for every stall or
size of stall owned. Or, in the case of balut vendors, a fixed amount for every basket
used, etc. The payment of this fixed fee will give the taxpayer the privilege to enter into
that kind of business, similar to a privilege tax.

This tax system, while it may not generate the taxes that may have been collected had
the current system been used, will encourage the small income earners to register and
join the tax net. This will then enable the BIR to put them within its monitoring radar and
watch them grow until they are ready to join the mainstream of regular taxpayers. For
example, an individual declaring 50 units of pedicab shall now be transitioned to a
regular taxpayer where regular rules apply. By this time, this taxpayer is ready to meet
its tax obligations.

Going after the small businesses is not an easy task. It is a segment of the population
where normal tax rules are inapplicable. Clearly, putting them in jail for tax evasion or
non-payment of taxes may not be an option as it would pose a bigger problem for the
government subsidizing them with free food and lodging instead of collecting from them.
Likewise, they are earning for survival, not to enrich themselves, and the “fear factor”
may not work.

But having said all that, there must be a way to make them part of society. Let them
contribute their share – a fair share – with due empathy to their situation, their level of
education, and their desire to earn a descent living.

The author is the Managing Partner of Du-Baladad and Associates Law Offices (BDB
Law). If you have any comments or questions concerning the article, you can e-mail the
author at benedicta.du-baladad@bdblaw.com.ph or call 403-2001 local 300.