In understanding the distinctions among Gross Income, Net Income, and Taxable Income under the National Internal Revenue Code of 1997 (NIRC), as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (R.A. No. 10963) and further revised by the Ease of Paying Taxes Act (R.A. No. 11976), one must meticulously examine their statutory definitions, implications, and applications in the Philippine taxation landscape.
1. Gross Income
Definition
Gross Income is defined under Section 32 of the NIRC, which delineates it as all income derived from any source, including (but not limited to):
- Compensation for services, including fees, salaries, wages, commissions, and similar items.
- Gross income derived from business or from the practice of a profession.
- Gains derived from dealings in property.
- Interests, rents, royalties, dividends, annuities.
- Prizes, winnings, pensions, and partner’s distributive share from the net income of a general professional partnership.
Scope
The scope of Gross Income under Philippine tax law includes income from both within and outside the Philippines for resident citizens and domestic corporations, but only from sources within the Philippines for non-resident aliens and foreign corporations.
Treatment Under the TRAIN Law
The TRAIN Law did not significantly alter the definition of Gross Income, but it made notable adjustments in income tax rates and exemptions, which indirectly affect the computation of gross income in relation to taxable income. Key changes involve income brackets and new tax rates.
2. Net Income
Definition
Net Income, although not explicitly defined in the NIRC, is generally understood as the remaining income after deducting certain allowable expenses and deductions from Gross Income. These deductions often include:
- Business expenses necessary for earning income, such as wages, rentals, and utilities.
- Depreciation and depletion.
- Interest payments, provided they adhere to limitations prescribed by law.
- Contributions to pension or retirement plans.
- Bad debts that are written off.
- Certain losses and casualty losses.
Allowable Deductions and Computation
Deductions for individuals and corporations vary slightly in computation. For instance, individual taxpayers may deduct personal exemptions (e.g., additional exemptions for dependents), while corporations are allowed specific business-related deductions.
Net Income vs. Taxable Income
Although similar to taxable income, net income differs as it may include items that, after further adjustments, will not necessarily be taxed. For instance, losses or certain special deductions may reduce net income without affecting taxable income directly.
3. Taxable Income
Definition
Taxable Income is the basis upon which income tax liability is computed. As defined in Section 31 of the NIRC, taxable income is gross income less deductions allowed by law.
Deductions and Exemptions
The NIRC, as amended by the TRAIN Law and the Ease of Paying Taxes Act, outlines specific deductions for different taxpayers, such as:
- For Individual Taxpayers: Personal and additional exemptions were removed under the TRAIN Law, effectively simplifying computation. However, individual taxpayers may still claim other itemized deductions or opt for the Optional Standard Deduction (OSD), which is 40% of Gross Sales/Receipts for self-employed individuals and professionals.
- For Corporations: Corporations may deduct business expenses, interest, bad debts, depreciation, etc., to arrive at taxable income. The TRAIN Law introduced adjustments to allowable deductions that impact taxable income for corporations, particularly in terms of documentary requirements and deductibility limitations.
Specific Rules under the TRAIN Law and the Ease of Paying Taxes Act
The TRAIN Law introduced substantial changes affecting taxable income computation:
- Lowered tax rates on income, especially for low to middle-income earners.
- Revised income brackets, particularly benefiting those earning PHP 250,000 and below, who are exempted from income tax.
- The Ease of Paying Taxes Act aims to streamline tax compliance, which, while not directly altering taxable income definitions, indirectly simplifies the tax reporting and payment process.
4. Comparing Gross Income, Net Income, and Taxable Income
| Criteria | Gross Income | Net Income | Taxable Income |
|---|---|---|---|
| Definition | Total income from all sources | Gross Income minus allowable deductions | Income on which tax is levied |
| Deductions Allowed | None | Business and allowable deductions | Limited to certain statutory deductions |
| Basis for Tax | Preliminary figure for computing deductions | Represents profit or gain from a business/activity | Final figure after deductions for tax calculation |
| TRAIN Law Impact | Broadened sources and income categories | Adjusted deductibility rules | Lower tax rates and exemptions for certain brackets |
5. Special Considerations Under the TRAIN Law and Ease of Paying Taxes Act
- Exemptions: Under the TRAIN Law, individuals earning PHP 250,000 or less annually are exempt from income tax, which redefines how taxable income is viewed for lower-income earners.
- Withholding and Final Tax on Certain Income: For certain types of passive income like interest on Philippine bank deposits and royalties, the TRAIN Law imposes a final tax, removing these from gross income, net income, and taxable income calculations for ordinary income tax purposes.
- Corporate Income Tax Rate: Amended by the CREATE Act, corporate income tax rates have also been adjusted, affecting how taxable income is reported and calculated for corporations.
- Simplicity and Compliance: The Ease of Paying Taxes Act introduces mechanisms to simplify tax compliance, thus impacting the computation and reporting process, although not directly altering definitions.
6. Conclusion
The distinctions among Gross Income, Net Income, and Taxable Income form the foundation of income tax computation under Philippine law. Understanding these differences is crucial for accurate tax liability assessment. The TRAIN Law and the Ease of Paying Taxes Act reflect ongoing reforms aimed at simplifying the tax system, incentivizing compliance, and providing relief to low-income taxpayers.