2

the applicability to home-based businesses of studies of regulatory burdens on small

businesses like in paying tax.
Taxation is very important for any country's government to function well. Taxes are
the sources of government revenue, which is used for government services. This is even more
important in the case of underdeveloped countries like the Philippines, whose government
also happens to be suffering from a huge budget deficit and a huge government debt. All
citizens of a country are morally and legally bound to pay their fair share of tax. A large
percentage of people who pay tax think as if government is trying to steal their hard earned
money but money is collected from taxes to help a country to become stronger and help
government provide a variety of services to its citizens.
This study is all about home-based business owners of small sari-sari (variety)
stores, and other marginal income earners (MIEs) that is argued to still liable to pay tax. In
one of its latest circulars, the BIR reminded concerned individuals that while MIEs have been
enjoying certain privileges under the law, they must still comply with several tax and taxrelated requirements. This study pursues to know the perception of those marginal income
earners specifically home-based business owners in Poblacion II, Sto. Tomas, Batangas, on
their awareness and compliance to the privileges and requirements in Memorandum Circular
No. 7-2014.

Background of the Study

The 1987 Philippine Constitution sets limitations on the exercise of the power to tax
and accordingly the rule of taxation shall be uniform and equitable. All money collected on

any tax levied for a special purpose shall be treated as a special fund and paid out for such
purpose only. The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restriction as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts within the framework
of the national development program of the Government (Article VI, Section 28, paragraph ).
The laws governing taxation in the Philippines are contained within the National
Internal Revenue Code. This code underwent substantial revision with passage of the Tax
Reform Act of 1997. This law took effect on January 1, 1998. Taxation is administered
through the Bureau of Internal Revenue which comes under the Department of Finance.
Tax law in the Philippines covers national and local taxes. National taxes refer to
national internal revenue taxes imposed and collected by the national government through the
Bureau of Internal Revenue (BIR) and local taxes refer to those imposed and collected by the
local government.
In Uganda, according to Bird (1974), tax administration refers to the identification of
the taxpayer, assessment of tax payable, collection of taxes and enforcement of tax liability.
According to Olman (1967), tax administration refers to a structure/procedure of
identification of potential taxpayer, collection and laws governing taxation.
RoyBahl (1988) says that much attention should be paid to critical aspects of tax
administration, training, procedures, staffing, collection and use of information. The
weaknesses in tax administration are mainly caused by lack of relevant information about the
taxpayer, continued criticism of the tax and its structure. The tax structure should be simple
in order to avoid tax evasion. Income tax is affected by the complexity of the rules and

procedures to be followed in in the calculation of tax bands. This hinders tax administration
in the economy and consequently the performance of the business sector,
On the assessment of tax payer, Income Tax Act (1997) section 3 (a), defines
assessment as the ascertainment of the chargeable income and the amount of tax payable on it
by the tax payer for a year of income. Assessment of tax is a process of ascertaining the
amount of tax to be levied on a person/business according to his/its income. According to the
income tax Act (1997) section 96 (1) the commissioner is required to make an assessment of
the chargeable income based on his returns and on any other information available within
seven days from the date the return was furnished. However, small-scale businesses are not
required to submit in any return to the commissioner.
For Small-scale business, according to the Income Tax Act (1997), small-scale
businesses are those with growth turn-over of less than 50 million shillings per annum. In
Uganda, it is not only income tax Act that has tried to define small-scale businesses; there are
also institutions, which have tried to define small-scale business (SSB) such as; Ministry of
Finance Planning and Economic Development (MFPED), the Uganda Small Scale Industries
Association (USSIA). The MFPED defines SSB as a unit with a capital investment not
exceeding US$ 300,000. The USSIA defines SSB as those with employees between 1-25
people and assets and capital exceeding US$ 1,000,000.
In the Philippines the tax department, popularly known as Bureau of Internal Revenue
(BIR), is under the aegis of the Department of Finance. The tax department has enormous
and wide ranging administrative and legislative powers when it comes to assessment,
enforcing taxes and collection. The tax department in the Philippines does not collect VAT
(value added tax) and excise tax as these are collected by the Bureau of Customs. The BIR is

considered to be the main revenue "earning" agency for the government of Philippines.
Annual the bureau collects practically 80 percent of the total generated revenue. The BIR has
monthly and annual targets for collection and this is determined by the Development Budget
and Coordinating Council, which is an inter-agency council headed by the Department of
Budget and Management. History of taxation in the Philippines is not that old. Selfassessment system for individuals and corporations was introduced as early as 1934 when the
first Philippine Tax Code was enacted by the parliament. This code was immediately applied
to income tax, corporation income tax, and inheritance tax. Later on the area of application
was expanded and other national internal revenue taxes were encompassed. The Withholding
Tax System was introduced and implemented in 1951. Even today, this system is the main
method of collecting income. Today tax payers can directly pay taxes either to the BIR using
conduits like RDOs or authorized banks. In the Philippines, individual tax returns have to be
filed by April 15 of the following year for the previous calendar year. There is the option of
paying and filing taxes electronically using the Internet banking through Electronic Filing
and Payment System (EFPS). This system was introduced in 2001.
And recently, the Bureau of Internal Revenue stated that owners of small sari-sari
(variety) stores, farmers, fishermen, single-unit tricycle operators and other marginal income
earners (MIEs) are still liable to pay tax. BIR reminded concerned individuals specifically
MIEs which have been enjoying certain privileges under the law that they must still comply
with several tax and tax-related requirements.

Theoretical Framework
Governments at all levels (national, regional and local) need to raise revenue from a
variety of sources to finance public expenditure. Public expenditure concerns the optimal
provision of public goods. In public-finance literature, there are two theories: the ability
theory (presented by Arthur Cecil Pigou and the benefit theory (developed by Erik Lindahl.
The benefit theory has a modern version, known as the "voluntary exchange" theory.Most
governments collect funds from various sources to provide public services or to finance
transfer payments. Taxation is the most common source of revenue in mixed economies.
Under the benefit theory, tax levels are automatically determined, because taxpayers
pay proportionately for the government benefits they receive. In other words, the individuals
who benefit the most from public services pay the most taxes.In analyzing the benefit
approach, two models have been discussed: the Lindahl model and the Bowen model.
A Lindahl tax is a form of taxation in which individuals pay for the provision of a
public good according to their marginal benefits. So each individual pays according to his/her
marginal benefit derived from the public good. e.g. If AZ loves scenic beauty and likes to be
close to nature he might be ready to pay 5 dollars per day for sitting in a park, whereas a
college student who does not visit the park very often will not be ready to pay so much, but
might agree to pay 1 dollar. So a person who values the good more pays more.
A Lindahl equilibrium is a state of economic equilibrium under such a tax.
Individuals in a society have different preferences based on their nature, personal choice etc.
So an individual's willingness to pay for a public good is a function of many factors, like
income, preference etc. So a student will want to pay just 1 dollar for entering a museum but

a business man will be ready to pay 10 dollars for the same museum. So in such cases the
problem of supply of the public good, at optimal levels arises. Lindahl taxation is a solution
for this problem.
In his 1919 contribution entitled "Just TaxationA Positive Solution" (a part of his
book Die Gerechtigkeit der Besteuerung), Lindahl treats the problem of tax-share
determination as one of bilateral exchange in an "isolated" community with two categories of
taxpayers, one "well-to-do" and the other "relatively poor". The problem of the distribution
of the tax shares is then considered to be one settled by free argument, or "a kind of
economic exchange." (Lindahl of course recognized that this process was filtered through
protagonists in a political process and that resultant tax-share distributions assigned would be
influenced by their relative power, but he assumed initially that such political "blocs" did not
influence the model under free exchange.).
Bowens model has more operational significance, since it demonstrates that when
social goods are produced under conditions of increasing costs, the opportunity cost of
private goods is foregone. The ability-to-pay approach treats government revenue and
expenditures separately. Taxes are based on taxpayers ability to pay; there is no quid pro
quo. Taxes paid are seen as a sacrifice by taxpayers, which raises the issues of what the
sacrifice of each taxpayer should be and how it should be measured: (1) Equal sacrifice: The
total loss of utility as a result of taxation should be equal for all taxpayers (the rich will be
taxed more heavily than the poor); (2)Equal proportional sacrifice: The proportional loss of
utility as a result of taxation should be equal for all taxpayers; (3)Equal marginal sacrifice:
The instantaneous loss of utility (as measured by the derivative of the utility function) as a

result of taxation should be equal for all taxpayers. This will entail the least aggregate
sacrifice (the total sacrifice will be the least).
Ability to pay, the dominant theory of taxation, is usually interpreted in terms of
sacrifice. It is held to justify progressive taxation under any one of three possible
interpretations of sacrifice: the equal, equal-proportional, and least-sacrifice theories. These
theories rest in turn on three assumptions: the declining marginal utility of money with an
increase in its supply, the existence of sacrifice. Analysis discloses each of these supports to
be defective and thereby breaks down the theory of ability to pay. Progressive taxation may,
however, be justified on other grounds. These grounds should be founded on the broad
realities of the economic system. Taxes have economic effects, and these effects entail social
consequences. The choice of the taxes to be laid and rates at which they are to be applied
expresses a preference for one set of economic effects, and hence of social consequences, to
another. The theory of taxation, progressive or other, should correspond to these facts. The
thin nebula of hedonism in reverse is no longer adequate.
Helmholtz (1821-1894) is considered one of the founders of perceptual research. He
argued that between sensations and our conscious perception of the real world there must be
intermediate processes. Such processes would be, for example, 'inferential thinking' - which
allows us to go beyond the evidence of the senses (these inferences are at an unconscious
level). Thus Helmholtz was an early Constructivist who believed perception is more than
direct registration of sensations, but that other events intervene between stimulation and
experience. Top-down and bottom-up are both strategies of information processing and
knowledge ordering, used in a variety of fields including software, humanistic and scientific

theories and management and organization. In practice, they can be seen as a style of
thinking and teaching.

The Conceptual Framework

In this study, the relationship between the dependent and the independent variables
will be investigated. These variables are as illustrated by this figure.
INPUTS

Marginal Income
Earners
a. Farmer
b. Fishermen
c. Small sarisari store
owner
d. Driver /
operator
e. Small
carenderia
turoturo
f. Computer
shop owner

PROCESS

a. Survey
questionnair
e
b. Analysis
and
interpretatio
n
c. Statistical
tools
Frequency
of
percentage
Sample
mean

OUTPUTS

Memorandum
Circular No. 72014

FEEDBACK

As derived from the taxation process models, the Marginal Income Earners: farmer,
fishermen, small sari-sari store owner, driver / operator, small carinderia turo- turo and
computer shop owner as dependent variable. Consequently, the Memorandum Circular No 72014 is determined on how home-based business owners perceived about taxation. It relates

10

the knowledge of home-based business owners to taxes imposed to them, to their level of
awareness to the privileges and requirement of the tax system.

Statement Of The Problem

This study was undertaken to find out the different perceptions in Revenue
Memorandum Circular No. 7-2014 of homed-based venture owners in Barangay Poblacion II
Sto. Tomas, Batangas.
Specifically, this study sought answers to the following research questions:
1. What is the demographic profile of the respondents?
2. To which category of MIE do respondents belong?
A)
Farmers
B)
Fishermen
C)
Small sari-sari store
D)
Small carinderias turo-turo
E)
Drivers/operators of single unit tricycle
3. What is the respondents level of awareness of the following privileges and
requirements of MC No. 7-2014?
a. Registration with the Bureau using BIR Form 1901 with the following minimal
documentary requirements:
b.

i. Sworn Statement of Income for the year (Annex" A"), and

ii. NSO Certified or Local Civil Registry Birth Certificate;

b. Exemption from the payment of Annual Registration Fee (ARF);

11

c. Registration of Books of Accounts (e.g. two-column journal or other simplified

books for daily expenses and revenues);
d. Issuance of registered principal receipts/sales invoices as prescribed under RMO
12-2013;
e. Filing and Payment of Annual Income Tax Return using BIR Form 1701 similar to
any other self-employed individuals; and
f. Exemption from payment of business taxes (i.e. VAT or any Percentage Tax).
4. What is the respondents level of compliance with the MC No. 7-2014?
5. What are the problems the respondents encounter in compliance with MC No. 72014?
Hypothesis
Respondents are mostly marginal income earners, categorized as small sari-sari store
owners, small carinderias or turo-turo owners and computer shop owners.They are highly
aware in MC No. 7-2014, extremely agree to those privileges and requirements and always
comply with the level of compliance with the MC No.7-2014.
Scope and Limitation
The study focuses on the perceptions in paying taxes of marginal income earner in
Poblacion 2, Sto. Tomas, Batangas only. The chosen respondents are mainly home-based
business owners specifically small sari-sari store, small carinderias or turo-turo and
computer shop owners. In addition the study gives emphasis with the demographic profile of
our respondents which serves as one of the factors in identifying ones perceptions,
respondents awareness and compliance with the privileges and requirements about
Memorandum Circular No. 7-2014.

12

Significance of the Study

Every business are required to pay taxes as required by law but not all of it are
required to pay income taxes. The implementation of Revenue Memorandum Circular No.72014 which obliged small scale business specifically home based ventures to pay income
tax compliance with the memorandum, have a lot of impacts and effects to the business
owners and business itself that are needed to consider. The researchers tend to consider
business owners perception with regards of the said memorandum to be able to help,
contribute broaden individuals knowledge and awareness within the researchers study for the
society.
Definition of Terms
Bureau of Internal Revenue is an attached agency of Department of Finance. BIR
collects more than one-half of the total revenues of the government.
Capital is a wealth in the form of money or other assets owned by a person or
organization or available or contributed for a particular purpose such as starting a company
or investing
Determinant is a factor that decisively affects the nature or outcome of something.
Government regulation is a law that controls the way that a business can operate, or
all of these laws considered together:
Income tax is a tax levied by a government directly on income, especially an annual
tax on personal income
Home business (or "home-based business" or "HBB") is a small business that
operates from the business owner's home office.

13

Methodology is the systematic, theoretical analysis of the methods applied to a field

of study. It comprises the theoretical analysis of the body of methods and principles
associated with a branch of knowledge.
Regulatory burden is any aspect of Federal legislation, regulation, or policy, or
Federal/research institution practices that could be made more efficient without diminishing
the intended level of protections.
Privileges is a special right, advantage, or immunity granted or available only to a
particular person or group of people.
Professional certification, trade certification, or professional designation, often
called simply certification or qualification, is a designation earned by a person to assure
qualification to perform a job or task
Small businesses are normally privately owned corporations, partnerships, or sole
proprietorships.
Small Enterprise is an enterprise that has fewer than 50 employees and has either an
annual turnover and/or an annual Balance Sheet total not exceeding 10m.
Subsistence is the action or fact of maintaining or supporting oneself at a minimum
level. Tax is a compulsory contribution to state revenue, levied by the government on
workers' income and business profits or added to the cost of some goods, services, and
transactions.
Tax avoidance is the arrangement of one's financial affairs to minimize tax liability
within the law
Value-added tax is a tax on the amount by which the value of an article has been
increased at each stage of its production or distribution.

14

Withholding tax is the amount of an employee's pay withheld by the employer and
sent directly to the government as partial payment of income tax.