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INTRODUCTION

 LESSON 2.1

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MODULE INCOME TAXATION – BASIC
2
LESSON 1 PRINCIPLES
Introduction
Most people receive their initial exposure to the Philippine income tax system
when first faced with the responsibility of filing their own tax returns. As a
result, tax work is sometimes viewed as a robotized process of filing out
government forms —not a very challenging activity.
Actually, the perception of tax work as a routine clerical process is a grossly
distorted view of the tax profession. Historically, most professional-level work
has concerned conceptual issues. In today's society, that emphasis is greater
than ever with computer systems handling an ever-increasing share of the
mechanical chores of tax practice. This allows tax professionals and business
managers to devote an even greater share of their time to substantive
matters.
Content Focus
WHAT IS TAXATION?
Definition, Nature and Basis of
Taxation
Taxation is the process or means
by which the sovereign, through its
lawmaking body, raises income to
defray the necessary expenses of
the government. Taxation, as a
power of the State, is inherent in
sovereignty.
Taxes are the lifeblood of the government and their prompt and certain
availability are an imperious need (Commissioner vs. Pineda, 21 SCRA 105).
A government cannot continue to exist and operate without financial means.
This inherent power gives the government the right to tax citizens and
properties within its jurisdiction.
Taxation is indispensable and inevitable price for civilized society; without
taxes, the government would be paralyzed (Commissioner vs. Algue, Inc., L-
28896, Feb. 17, 1988, 158 SCRA 9).
Indeed, the collection of taxes remains one of the primary undertakings of
any government in order to provide sufficient funds with which a nation's
economy may be sustained and developed. In this light, it has become the
enduring goal of every tax authority, be it one that serves a developed or a
developing nation, to seek and implement strategies and technologies that
shall support the continuing improvement of their collection systems. In the
Philippines, the premier tax agency is the Bureau of Internal Revenue (BIR).
OBJECTIVES OF TAXATION
Taxation is much more than just a means of raising revenue for the
government. It is also one of the major means by which the national

government attempts to achieve various economic and social objectives.

These objectives include shifting wealth from the rich to the poor,
maintaining price stability, stimulating economic growth, and encouraging
full employment.
WHAT IS THE PRIMARY PURPOSE OF TAXATION?
The primary purpose of taxation is to provide funds or property with which to
promote the general welfare and protection of the country’s citizens and to
support the government in financing its multifarious activities.
BASIC PRINCIPLES OF A SOUND TAX SYSTEM
1. Fiscal adequacy. Sources of revenue are sufficient to meet government
expenditures;
2. Equality or theoretical justice. The tax imposed must be proportionate to
taxpayer's ability to pay; and
3. Administrative feasibility. The law must be capable of convenient, just and
effective administration.
WHAT ARE TAXES?
Taxes are enforced proportional contribution from persons and property
levied by the lawmaking body of the State by virtue of its sovereignty for the
support of the government and all public needs.
WHAT ARE THE ESSENTIAL ELEMENTS OF TAX?
There are seven essential elements of tax, namely:
1. It is an enforced contribution;
2. It is levied by the lawmaking body;
3. It is proportionate in character;
4. It is generally payable in money;
5. It is imposed for the purpose of raising revenues; and
6. It is to be used for public purpose
INCOME AND INCOME TAXES
Income Defined and Distinguished from Capital
Income, in its broad sense, means all wealth, which flows into the taxpayer
other than a mere return of capital. It is the return in money from one's
business, labor, or capital invested, e.g., gains, profits, salary and wages.
The words 'income from any source whatever' disclose a legislative policy to
include all income not expressly exempted from the class of taxable income
under our laws (Commissioner vs. BOAC, L-65773, Apr. 30, 1987, citing
Madrigal vs. Rafferty, 38 Phil. 14).
Income is also defined as the amount of money coming to a person or
corporation within a specified time, whether as payment for services, interest
or profit from investment. Unless otherwise specified, it means cash or its
equivalent. Income may also be thought of as a flow of the fruits of one's
labor.

Capital is a fund or property existing at one distinct point of time. Income, on

the other hand, denotes a flow of wealth during a definite period of time.
While capital is wealth, income is the service of wealth. In the Madrigal case,
the Supreme Court made an essential distinction between capital and
income: " ...capital is a fund, while income is a flow; capital is wealth, while
income is the service of wealth; capital is a "tree" and income is the "fruit"."
Income Tax Defined, Base and Nature
Income tax is a tax on all yearly profits arising from property, profession,
trade or business, or is a tax on a person's income, emoluments, profits and
the like.
Income tax is generally regarded as an excise (privilege) tax. It is not levied
upon persons, property, funds, or profits as such but upon the right of a
person to receive income or profits. Income tax is based on income, either
gross or net, realized in one taxable year.

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