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As a Certified Public Accountant, I occasionally indulged myself into the art of preparing income tax returns for individual taxpayers, whether they are an employee, businessman or one engaged in the practice of his profession. More often than not, based on my experience, salaried individuals are less tax conscious than self-employed/professionals. Other than the amount of tax deducted and withheld from their salaries by their employers, these individuals would typically care less on such other information like what is the graduated rates of tax applied on their taxable income and how is it compared to the tax rates applied to self-employed /professionals. My discussion will be focused on this point of comparison, with substantial reference to the leading case of Sison vs. Ancheta. My objective is to resolve the question of whether or not there is a practical consideration on the thought that salaried taxpayers are placed in an unfair level than self-employed /professionals.

For purposes of the discussion, let us divide individual taxpayers into two groups: salaried individuals and self-employed/professionals. A salaried individual, as defined under Revenue Regulation No. 2-98, is an individual performing services under an employer-employee relationship. The term covers all employees, including officers and employees, whether elected or appointed, of the Government of the Philippines, or any political subdivision thereof or any agency or instrumentality.¹ On the other hand, as defined under Republic Act No. 7496, otherwise known as the simplified net income taxation scheme, "self-employed" means persons engaged in business and who derive their personal income from such business. This includes single proprietorships, i.e., manufacturers, traders, market vendors, owners of eateries, farmers and service shops; and "Professionals" means persons who derive their income from the practice of their profession. This includes lawyers and other persons who are registered with the Professional Regulation Commission such as doctors, dentists, certified public accountants and others similarly situated. The term "professional" also refers to one who pursues an art and makes his living therefrom such as artists, athletes and others similarly situated.

In the leading case of Sison vs. Ancheta 2 , Petitioner Antero Sison questioned the constitutionality of B.P. 135. The assailed provision amends section 21 of the National Internal Revenue Code, which provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable net income, x x x.³ Under this law, salaried individuals are subject to a graduated tax rates from 1% to 35% whereas a much higher graduated tax rates of 5% to 60% are applied to self-employed/Professionals. Petitioner⁴ as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-à-vis those which are imposed upon fixed income or salaried individual taxpayer." For him, there is a transgression of both the equal protection and due process clauses of the constitution as well as of the rule requiring uniformity in taxation.

The issue is centered on the question of whether the imposition of a higher tax rate on taxable net income derived from business or profession than on compensation is constitutionally infirm. The Supreme Court ruled in the negative. In summary, both the due process and equal protection clauses were not violated. On the concept of uniformity, it was held that indeed, there is a substantial distinction between the two groups that set them apart as a class. In addition, the Supreme Court held that what misled petitioner is his failure to take into consideration the distinction between a tax rate and a tax base. This is true considering that the tax on salaried individuals is computed based on gross compensation income (after deducting the allowable and additional exemptions) whereas professionals/self-employed are taxed on the basis of their net income. To give you a clearer understanding of this two different tax base, let me illustrate a skeletal frame of a simplified income statement:

Sales (or Salaries, if an employee) x x x

Less: Cost of Sales (or personal and add'l exemptions, if an employee) x x x

Gross Income (or gross compensation income, if an employee) x x x

Less: Deductions (employees are not allowed deductions) x x x

Net Income x x x

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As illustrated above, the tax base for a salaried individual is broader as it is based on gross income, hence, the rationale for giving them a lower graduated tax of rates. On the other hand, the tax base for self-employed/professionals is smaller as it is based on net income, therefore, they are subject to higher rates.

But then how come they have different set of tax base? According to the Supreme Court, taxpayers who are recipients of compensation income have practically no overhead expense and therefore they are not entitled to make deductions for income tax purposes as they are in the same situation more or less. On the other hand, in the case of professionals/self-employed, there is no uniformity in the deductions necessary to produce their net income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. This is the justification for adopting the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

It is well-settled then that there is indeed a substantial distinction between these two sets of individual taxpayers, in compliance with the requirement that taxation shall be uniform and equitable. Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation.5 As clarified by Justice Tuason, where the differentiation complained of conforms to the practical dictates of justice and equity, it is not discriminatory and is therefore uniform⁶. There is quite a similarity then to the standard of equal protection for all that is required is that the tax applies equally to all persons, firms and corporations placed in similar situation⁷.

In this instance, what was enunciated is that self-employed/professionals are not prejudiced by B.P. 135. Evidently, this does not support my premise that salaried individuals are the ones somewhat discriminated. In fact, such ruling states that no one is being favored. But this is not where the story ends. After B.P. 135, R.A. 7496 took effect in 1992 adopting the Simplified Net Income Taxation Scheme for the self-employed and professionals engaged in the practice of their profession, amending sections 21 and 29 of the NIRC. Professionals/self-employed were subjected to a new graduated rates of tax from 3% to 30%. The disparity between the rates of tax applied to the two sets of individual taxpayers is essentially eliminated. Seemingly, this puts the classification between salaried individuals and self-employed/professionals purposeless considering that they are given virtually the same rates of tax.

Then comes Republic Act No. 8424, otherwise known as the Comprehensive Tax Reform Act of 1997. Under this new tax code, the provision on the simplified net income tax for the professionals/self-employed has been deleted. In other words, both salaried individuals and professionals/self-employed are now subject to the new graduated rate of tax of 5% to 34% (1999-33%; 2000-32%).

If there is really a substantial distinction that makes up the real difference between this two group of taxpayers, then how come both of them are now subject to the same tax rates? How can we reconcile the fact that both taxpayers are subject to the same rates of tax and yet they are applied to different tax base? Do such uniformity conforms to the dictates of justice and equity? It would logically be unfair to salaried taxpayers to be taxed at the same rates as those applied to self-employed/professionals as they may not avail of all sorts of deductions unlike the latter to produce the base from which their taxes are computed. As what Justice Abad Santos wrote in his dissenting opinion in the case of Sison vs. Ancheta, "While the tax rates for compensation income are lower than those for net income, such circumstance does not necessarily result in lower tax payments for those receiving compensation income. In fact, the reverse will most likely be the case: those who file returns on the basis of net income will pay less taxes because they claim all sorts of deduction."

If there is really a substantial distinction that makes up the real difference between this two group of taxpayers, then how come both of them are now subject to the same tax rates? How can we reconcile the fact that both taxpayers are subject to the same rates of tax and yet they are applied to different tax base? Do such uniformity conforms to the dictates of justice and equity? It would logically be unfair to salaried taxpayers to be taxed at the same rates as those applied to self-employed/professionals as they may not avail of all sorts of deductions unlike the latter to produce the base from which their taxes are computed. As what Justice Abad Santos wrote in his dissenting opinion in the case of Sison vs. Ancheta, "While the tax rates for compensation income are lower than those for net income, such circumstance does not necessarily result in lower tax payments for those receiving compensation income. In fact, the reverse will most likely be the case: those who file returns on the basis of net income will pay less taxes because they claim all sorts of deduction."

^*BS Accountancy, San Beda College; Third Year, UB College of Law
1Revenue Regulation No. 2-98, section 2.78.3, 1st paragraph.
²G.R. No. 59431, 25 July 1984.
³Batas Pambansa Blg. 135, section 21 (1981).
⁴The respondents are Ruben B. Ancheta, Acting Commissioner, Bureau of Internal Revenue; Romulo Villa, Deputy Commissioner, Bureau of Internal Revenue; Tomas Toledo, Deputy Commissioner, Bureau of Internal Revenue; Manuel Alba, Minister of Budget; Francisco Tantuico, Chairman, Commissioner on Audit; and Cesar E. A. Virata, Minister of Finance.
⁵Eastern Theatrical Co. v. Alfonso, 83 Phil. 852, 862 (1949).
⁶Manila Race Horse Trainers Asso. v. De la Fuente, 88 Phil. 60,65 (1951).
⁷Uy Matias v. City of Cebu, 93 Phil. 300 (1953).