G.R. No. L-28896 February 17, 1988; CRUZ, J.

: practically everything, from the formation of the

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
ALGUE, INC., and THE COURT OF TAX
APPEALS, respondents.
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.
FACTS: Philippine Sugar Estate Development Company
appointed Algue as its agent, authorizing it to sell its land,
factories and oil manufacturing process. Pursuant to such
authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel
Guevara, Edith, O'Farell, and Pablo Sanchez, worked for
the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in
it.14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation
purchased the PSEDC properties.15 For this sale, Algue
received as agent a commission of P126,000.00, and it
was from this commission that the P75,000.00
promotional fees were paid to the aforenamed
individuals.16 The CIR, however, contends that the
claimed deduction of P75,000.00 was properly
disallowed because it was not an ordinary reasonable or
necessary business expense. It claims that these
payments are fictitious because most of the payees are
members of the same family in control of Algue and
suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
Nonetheless, the CTA agreed with Algue and held that
the said amount had been legitimately paid by Algue for
actual services rendered in the form of promotional fees.
These were collected by the Payees for their work in the
creation of the Vegetable Oil Investment Corporation of
the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development
Company. Further, the payees duly reported their
respective shares of the fees in their income tax returns
and paid the corresponding taxes thereon.17 The Court of
Tax Appeals also found, after examining the evidence,
that no distribution of dividends was involved.18
Vegetable Oil Investment Corporation to the actual
purchase by it of the Sugar Estate properties. It is also
worth noting at this point that most of the payees were
not in the regular employ of Algue nor were they its
controlling stockholders. 23
The burden is on the taxpayer to prove the validity of the
claimed deduction. In the present case, Algue proved that
the payment of the fees was necessary and reasonable
in the light of the efforts exerted by the payees in inducing
investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean
feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization
society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to
surrender part of one's hard earned income to the taxing
authorities, every person who is able to must contribute
his share in the running of the government. The
government for its part, is expected to respond in the form
of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and
material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those
in the seat of power.
But even as we concede the inevitability and
indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and
in accordance with the prescribed procedure. If it is not,
then the taxpayer has a right to complain and the courts
will then come to his succor. For all the awesome power
of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate, as it has here, that the law
has not been observed.

MAIN ISSUE: whether or not the CIR was correct in

disallowing the P75,000.00 deduction claimed by private
respondent Algue as legitimate business expenses in its
income tax returns.

HELD: The Supreme Court ruled in the NEGATIVE

ratiocinating that the amount of the promotional fees was
not excessive. The total commission paid by the
Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21After deducting the said
fees, Algue still had a balance of P50,000.00 as clear
profit from the transaction. The amount of P75,000.00
was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did
G.R. No. L-28896 February 17, 1988; CRUZ, J.:
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

FACTS: Algue INC. is a domestic corporation engaged in engineering, construction and other allied activities. On
January 14, 1965, it received a letter from the CIR assessing it a P83,183.85 delinquency income taxes for the years
1958 and 1959.1 Days after, Algue filed a letter of protest, which letter bore a received stamp by the CIR.
However, come March 12, 1965, a warrant of distraint and levy was presented to Algue, through its counsel, Atty.
Guevara, who refused to receive it on the ground of the pending protest. A search of the protest in the dockets of the
case proved fruitless. Atty. Guevara produced his file copy and gave a machine copy thereof to BIR agent Ramon
Reyes, who deferred service of the warrant. 4

Nonetheless, a month after Atty. Guevara was informed that the BIR was not taking any action on the protest and it
was only then that he accepted the warrant of distraint and levy earlier sought to be served. Consequently, Algue filed
a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals.6

ISSUE 2: whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue
was made on time and in accordance with law.

HELD:The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal
may be made within thirty days after receipt of the decision or ruling challenged.7 It is true that as a rule the warrant
of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But
there is a special circumstance in the case at bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its
letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed,
such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of
the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was
premature and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was
based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the
reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period
started running again only on April 7, 1965, when the private respondent was definitely informed of the implied
rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,
1965, only 20 days of the reglementary period had been consumed.
G.R. No. 122480 April 12, 2000
BPI-FAMILY SAVINGS BANK, Inc., petitioner, vs.
COURT OF APPEALS, COURT OF TAX APPEALS
and the COMMISSIONER OF INTERNAL
REVENUE, respondent; PANGANIBAN, J.:
“If the State expects its taxpayers to observe fairness and honesty in paying
their taxes, so must it apply the same standard against itself in refunding
excess payments. When it is undisputed that a taxpayer is entitled to a
refund, the State should not invoke technicalities to keep money not
belonging to it. No one, not even the State, should enrich oneself at the
expense of another.”
FACTS: BPI Family filed a claim for tax refund in the
amount of P112,491.00 representing petitioner's tax
withheld for the year 1989. In its Corporate Annual ITR
it appears BPI Family had a total refundable amount of
P297,492 inclusive of the P112,491.00 being claimed as
tax refund in the present case. However, petitioner
declared in the same 1989 ITR that the said total
refundable amount of P297,492.00 will be applied
as tax credit to the succeeding taxable year.
A year after, BPI Family filed a written claim for refund
in the amount of P112,491.00 with the CIR alleging that
it did not apply the 1989 refundable amount of
P297,492.00 (including P112,491.00) to its 1990 Annual
Income Tax Return or other tax liabilities due to the
alleged business losses it incurred for the same year.
Without waiting for respondent Commissioner of
Internal Revenue to act on the claim for refund,
petitioner filed a petition for review with respondent
Court of Tax Appeals, seeking the refund of the
amount of P112,491.00.
Court of Tax Appeals dismissed petitioner's petition
on the ground that petitioner failed to present as
evidence its corporate Annual Income Tax Return for
1990 to establish the fact that petitioner had not yet
credited the amount of P297,492.00 (inclusive of the
amount P112,491.00 which is the subject of the present
controversy) to its 1990 income tax liability. Petitioner
filed a motion for reconsideration, but the same was
denied. the CA affirmed the CTA. Hence, BPI Family
filed a Petition for Review with the SC assailing the
Decision of CA, which affirmed the Decision2 of the
CTA, denying the tax refund and dismissing the case
for lack of merit.
ISSUE: whether or not petitioner is entitled to the
refund of P112,491.90, representing excess creditable
withholding tax paid for the taxable year 1989.9
HELD: The Supreme Court ruled in the affirmative
and held that as a rule, the factual findings on the
appellate court are binding on the SC. This rule,
however, does not apply where, inter alia, the
judgment is premised on a misapprehension of facts or
when the appellate court failed to notice certain
relevant facts which if considered would justify a
different conclusion. This case is one such exception.
The Return attached to the Motion for Reconsideration
clearly showed that BPI Family suffered a net loss in
1990; accordingly, it incurred no tax liability to which
the tax credit could be applied. In failing to consider
the said Return, as well as the other documentary
evidence presented during the trial, the appellate court
committed a reversible error. There is no reason for the
BIR and this Court to withhold the tax refund which
rightfully belongs to the petitioner.
Strict procedural rules generally frown upon the
submission of the return the trial. R.A. 1125, the law
creating the CTA, however, specifically provides the
proceedings before it “shall not be governed strictly by
the technical rules of evidence”. The paramount
considerations remains the ascertainment of truth.
Verily, the quest for orderly presentation of issues is
not absolute. It should not bar courts from considering
undisputed facts to arrive at a just determination of a
controversy.
While tax refunds are in the nature of tax exemptions
and are to be construed strictissimi juris against the
claimant. Substantial justice, equity and fair play are
on the side of petitioner. Technicalities and legalisms,
however exalted, should not be misused by the
government to keep money not belonging to it and
thereby enrich itself at the expense of its law-abiding
citizens. If the State expects its taxpayers to observe
fairness and honesty in paying their taxes, so must it
apply the same standard against itself in refunding
excess payments of such taxes. Indeed, the State must
lead by its own example of honor, dignity and
uprightness.
G.R. No. L-7859 December 22, 1955 determine within reasonable bounds what is necessary for its
WALTER LUTZ, as Judicial Administrator of the Intestate protection and expedient for its promotion. Here, the
Estate of the deceased Antonio Jayme Ledesma,plaintiff- legislative discretion must be allowed fully play, subject only
appellant, vs. J. ANTONIO ARANETA, as the Collector of to the test of reasonableness; and it is not contended that the
Internal Revenue, defendant-appellee; REYES, J.B L., J.: means provided in section 6 of the law (above quoted) bear
no relation to the objective pursued or are oppressive in
FACTS: Plaintiff, Walter Lutz, in his capacity as Judicial character. If objective and methods are alike constitutionally
Administrator of the Intestate Estate of Antonio Jayme valid, no reason is seen why the state may not levy taxes to
Ledesma, seeks to recover from the CIR the sum of raise funds for their prosecution and attainment. Taxation
P14,666.40 paid by the estate as taxes, Commonwealth Act may be made the implement of the state's police power.
No. 567, also known as the Sugar Adjustment Act, for the
crop years 1948-1949 and 1949-1950. Section 2,
Commonwealth Act 567 provides for an increase of the
existing tax on the manufacture of sugar, on a graduated basis,
on each picul of sugar manufactured; while section 3 levies on
owners or persons in control of lands devoted to the
cultivation of sugar cane and ceded to others for a
consideration, on lease or otherwise —

a tax equivalent to the difference between the money

value of the rental or consideration collected and the
amount representing 12 per centum of the assessed
value of such land.

This case was then initiated in the CFI of Negros Occidental

to test the legality of the taxes imposed by the Sugar
Adjustment Act. It was alleged that said taxes were
unconstitutional and void, being levied for the aid and support
of the sugar industry exclusively, which is not a public
purpose. The CFI however dismissed the case and plaintiffs
appealed to the Supreme Court.

ISSUE: Whether the Sugar Adjustment Act is

unconstitutional.

HELD: The Court ruled in the negative holding that the tax
provided for in Commonwealth Act No. 567 is not a pure
exercise of the taxing power. Section 6, will show that the tax
is levied with a regulatory purpose, to provide means for the
rehabilitation and stabilization of the threatened sugar
industry. In other words, the act is primarily an exercise of the
police power.

The Court took judicial notice of the fact that sugar

production is one of the great industries of our nation…, its
promotion, protection and advancement, therefore redounds
greatly to the general welfare. Hence it was competent for the
legislature to find that the general welfare demanded that the
sugar industry should be stabilized in turn; and in the wide
field of its police power, the lawmaking body could provide
that the distribution of benefits therefrom be readjusted
among its components to enable it to resist the added strain
of the increase in taxes that it had to sustain.

The protection and promotion of the sugar industry is a

matter of public concern, it follows that the Legislature may
G.R. No. 99886 March 31, 1993 capacity as Secretary of Finance; WENCESLAO DELA PAZ, in
JOHN H. OSMEÑA, petitioner, vs. OSCAR ORBOS, in his his capacity as Head of the Office of Energy Affairs; REX V.
capacity as Executive Secretary; JESUS ESTANISLAO, in his
TANTIONGCO, and the ENERGY REGULATORY
BOARD, respondents; NARVASA, C.J.:
FACTS: Former Pres. Marcos issued PD 1956 creating a Special
Account in the General Fund, designated as the Oil Price
Stabilization Fund (OPSF), which was designed to reimburse oil
companies for cost increases in crude oil and imported petroleum
products resulting from exchange rate adjustments and from
increases in the world market prices of crude oil.
By virtue of EO 1024, OPSF was reclassified into a "trust liability
account," and ordered released from the National Treasury to the
Ministry of Energy. The same EO also authorized the investment
of the fund in government securities, with the earnings from such
placements accruing to the fund.
Thereafter, Former Pres. Cory amended P.D. 1956. Executive
Order No. 137 was promulgated expanding the grounds for
reimbursement to oil companies for possible cost under
recovery incurred as a result of the reduction of domestic prices of
petroleum products, the amount of the under recovery being left
for determination by the Ministry of Finance.
The petitioner alleged that the status of the OPSF as of March 31,
1991 showed a "Terminal Fund Balance deficit" of some P12.877
8
billion; that to abate the worsening deficit, "the Energy Regulatory
Board . . issued an Order approving the increase in pump prices
of petroleum products…".
The petitioner thus assails the constitutionality of paragraph 1c of
PD 1956, as amended by EO 137, empowering the Energy
Regulatory Board (ERB) to approve the increase of fuel prices or
impose additional amounts on petroleum products which proceeds
shall accrue to the OPSF (established for the reimbursement to
ailing oil companies in the event of sudden price increases). He
avers that the collection on oil products establishments is an undue
and invalid delegation to the ERB of the legislative power to tax (and
thus, it appears that the challenge posed by the petitioner is
premised primarily on the view that the powers granted to the ERB
under P.D. 1956, as amended, partake of the nature of the taxation
power of the State) which violates § 28 (2) Article VI of the
Constitution, viz.:
(2) The Congress may, by law, authorize the President to fix, within
specified limits, and subject to such limitations and restrictions 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; and,
inasmuch as the delegation relates to the exercise of the power of
taxation, "the limits, limitations and restrictions must be quantitative,
that is, the law must not only specify how to tax, who (shall) be taxed
(and) what the tax is for, but also impose a specific limit on how
much to tax."
ISSUE: Whether or not there was undue delegation of legislative
power to tax.
HELD: NONE. The provision conferring the authority upon the
ERB to impose additional amounts on petroleum products
G.R. No. 168056 September 1, 2005
provides a sufficient standard by which the authority must be
exercised. In addition to the general policy of the law to protect the
local consumer by stabilizing and subsidizing domestic pump rates,
§ 8(c) of P.D. 1956 expressly authorizes the ERB to impose
18
additional amounts to augment the resources of the Fund.
What is here involved is not so much the power of taxation as police
power. Although the provision authorizing the ERB to impose
additional amounts could be construed to refer to the power of
taxation, it cannot be overlooked that the overriding consideration
is to enable the delegate to act with expediency in carrying out the
objectives of the law which are embraced by the police power of the
State.
The interplay and constant fluctuation of the various factors
involved in the determination of the price of oil and petroleum
products, and the frequently shifting need to either augment or
exhaust the Fund, do not conveniently permit the setting of fixed or
rigid parameters in the law as proposed by the petitioner. To do so
would render the ERB unable to respond effectively so as to
mitigate or avoid the undesirable consequences of such fluidity. As
such, the standard as it is expressed, suffices to guide the delegate
in the exercise of the delegated power, taking account of the
circumstances under which it is to be exercised.
For a valid delegation of power, it is essential that the law delegating
the power must be (1) complete in itself, that is it must set forth the
policy to be executed by the delegate and (2) it must fix a standard
— limits of which
are sufficiently determinate or determinable — to which the delegate
must conform. 20
The standard, as the Court has already stated, may even be implied.
In that light, there can be no ground upon which to sustain the
petition, inasmuch as the challenged law sets forth a determinable
standard which guides the exercise of the power granted to the
ERB. By the same token, the proper exercise of the delegated
power may be tested with ease. It seems obvious that what the law
intended was to permit the additional imposts for as long as there
exists a need to protect the general public and the petroleum
industry from the adverse consequences of pump rate fluctuations.
"Where the standards set up for the guidance of an administrative
officer and the action taken are in fact recorded in the orders of
such officer, so that Congress, the courts and the public are assured
that the orders in the judgment of such officer conform to the
legislative standard, there is no failure in the performance of the
legislative functions."
22
This Court thus finds no serious impediment to sustaining the
validity of the legislation; the express purpose for which the imposts
are permitted and the general objectives and purposes of the fund
are readily discernible, and they constitute a sufficient standard
upon which the delegation of power may be justified.
WHEREFORE, the petition is GRANTED insofar as it prays for
the nullification of the reimbursement of financing charges, paid
pursuant to E.O. 137, and DISMISSED in all other respects.
SO ORDERED
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S.
ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR., Respondent.

x-------------------------x

G.R. No. 168207

AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON,

ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEÑA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE,
GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Respondent.

x-------------------------x

G.R. No. 168461

ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO;
PETRON DEALERS’ ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF CALTEX
DEALERS’ OF THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA; ROSARIO ANTONIO
doing business under the name and style of "ANB NORTH SHELL SERVICE STATION"; LOURDES MARTINEZ
doing business under the name and style of "SHELL GATE – N. DOMINGO"; BETHZAIDA TAN doing business
under the name and style of "ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing business under the
name and style of "NEW LAMUAN SHELL SERVICE STATION"; EFREN SOTTO doing business under the name
and style of "RED FIELD SHELL SERVICE STATION"; DONICA CORPORATION represented by its President,
DESI TOMACRUZ; RUTH E. MARBIBI doing business under the name and style of "R&R PETRON STATION";
PETER M. UNGSON doing business under the name and style of "CLASSIC STAR GASOLINE SERVICE
STATION"; MARIAN SHEILA A. LEE doing business under the name and style of "NTE GASOLINE & SERVICE
STATION"; JULIAN CESAR P. POSADAS doing business under the name and style of "STARCARGA
ENTERPRISES"; ADORACION MAÑEBO doing business under the name and style of "CMA MOTORISTS
CENTER"; SUSAN M. ENTRATA doing business under the name and style of "LEONA’S GASOLINE STATION and
SERVICE CENTER"; CARMELITA BALDONADO doing business under the name and style of "FIRST CHOICE
SERVICE CENTER"; MERCEDITAS A. GARCIA doing business under the name and style of "LORPED SERVICE
CENTER"; RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT GAS STATION"; MA.
ISABEL VIOLAGO doing business under the name and style of "VIOLAGO-PTT SERVICE CENTER"; MOTORISTS’
HEART CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA;
MOTORISTS’ HARVARD CORPORATION represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS’ HERITAGE CORPORATION represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL doing business under the name and style of
"ROMMAN GASOLINE STATION"; ANTHONY ALBERT CRUZ III doing business under the name and style of
"TRUE SERVICE STATION", Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, Respondent.

x-------------------------x

G.R. No. 168463

FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA, RODOLFO G.

PLAZA, DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN
EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO
B. MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS C. LOPEZ, RODOLFO Q.
AGBAYANI and TEODORO A. CASIÑO, Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his capacity
as Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as Executive
Secretary,Respondent.

x-------------------------x

G.R. No. 168730

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,

vs.
HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his
capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of the
Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC Commissioner of the
Bureau of Customs, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest of all, should be borne by everyone, and the more
man enjoys the advantages of society, the more he ought to hold himself honored in contributing to those expenses.

-Anne Robert Jacques Turgot (1727-1781)

French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments for
health workers, and wider coverage for full value-added tax benefits … these are the reasons why Republic Act No.
9337 (R.A. No. 9337)1 was enacted. Reasons, the wisdom of which, the Court even with its extensive constitutional
power of review, cannot probe. The petitioners in these cases, however, question not only the wisdom of the law,
but also perceived constitutional infirmities in its passage.

Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners failed
to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate Bill
No. 1950.

House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on Ways and
Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson
introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate enactment. On
January 27, 2005, the House of Representatives approved the bill on second and third reading.

House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F. Baterina,
and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No. 3555. The House
Committee on Ways and Means approved the bill on February 2, 2005. The President also certified it as urgent on
February 8, 2005. The House of Representatives approved the bill on second and third reading on February 28,
2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March 7, 2005, "in
substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and 3705."
Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both
sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill on
March 11, 2005, and was approved by the Senate on second and third reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a
committee conference on the disagreeing provisions of the proposed bills.

Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No. 3705,
and Senate Bill No. 1950, "after having met and discussed in full free and conference," recommended the approval
of its report, which the Senate did on May 10, 2005, and with the House of Representatives agreeing thereto the
next day, May 11, 2005.

On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the President,
who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.

July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court issued a temporary restraining
order, effective immediately and continuing until further orders, enjoining respondents from enforcing and
implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr. Justice
Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining order on July 1, 2005, to
wit:

J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little background.
You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5 o’clock in the afternoon. But
before that, there was a lot of complaints aired on television and on radio. Some people in a gas station were
complaining that the gas prices went up by 10%. Some people were complaining that their electric bill will go up by
10%. Other times people riding in domestic air carrier were complaining that the prices that they’ll have to pay would
have to go up by 10%. While all that was being aired, per your presentation and per our own understanding of the
law, that’s not true. It’s not true that the e-vat law necessarily increased prices by 10% uniformly isn’t it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : It’s not, because, Your Honor, there is an Executive Order that granted the Petroleum
companies some subsidy . . . interrupted

J. PANGANIBAN : That’s correct . . .

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise Tax
and the import duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased prices by
10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-Vat
tax. If you consider the excise tax and the import duties, the Net Tax would probably be in the neighborhood of 7%?
We are not going into exact figures I am just trying to deliver a point that different industries, different products,
different services are hit differently. So it’s not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : You’re right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a Sales
Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a mitigating measure. So, therefore,
there is no justification to increase the fares by 10% at best 7%, correct?

ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that the people were complaining on that first day, were being
increased arbitrarily by 10%. And that’s one reason among many others this Court had to issue TRO because of the
confusion in the implementation. That’s why we added as an issue in this case, even if it’s tangentially taken up by
the pleadings of the parties, the confusion in the implementation of the E-vat. Our people were subjected to the
mercy of that confusion of an across the board increase of 10%, which you yourself now admit and I think even the
Government will admit is incorrect. In some cases, it should be 3% only, in some cases it should be 6% depending
on these mitigating measures and the location and situation of each product, of each service, of each company, isn’t
it?

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So that’s one reason why we had to issue a TRO pending the clarification of all these and
we wish the government will take time to clarify all these by means of a more detailed implementing rules, in case
the law is upheld by this Court. . . .6

The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition on
May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,
107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of
goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT
on sale of services and use or lease of properties. These questioned provisions contain a
uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate
to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1
½%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive
authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on the
ground that it amounts to an undue delegation of legislative power, petitioners also contend that the increase in the
VAT rate to 12% contingent on any of the two conditions being satisfied violates the due process clause embodied
in Article III, Section 1 of the Constitution, as it imposes an unfair and additional tax burden on the people, in that:
(1) the 12% increase is ambiguous because it does not state if the rate would be returned to the original 10% if the
conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of the applicable
VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to be an incentive to the
President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should only be based on fiscal
adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral
Conference Committee is a violation of the "no-amendment rule" upon last reading of a bill laid down in Article VI,
Section 26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers, Inc., et
al., assailing the following provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall be
amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million Pesos
(₱1, 000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be credited
against the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross payments of goods
and services, which are subject to 10% VAT under Sections 106 (sale of goods and properties) and 108 (sale of
services and use or lease of properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and
confiscatory.

Petitioners’ argument is premised on the constitutional right of non-deprivation of life, liberty or property without due
process of law under Article III, Section 1 of the Constitution. According to petitioners, the contested sections
impose limitations on the amount of input tax that may be claimed. Petitioners also argue that the input tax partakes
the nature of a property that may not be confiscated, appropriated, or limited without due process of law. Petitioners
further contend that like any other property or property right, the input tax credit may be transferred or disposed of,
and that by limiting the same, the government gets to tax a profit or value-added even if there is no profit or value-
added.

Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law under
Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a high ratio of
input tax; or (2) invests in capital equipment; or (3) has several transactions with the government, is not based on
real and substantial differences to meet a valid classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of the
Constitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer the
consequences thereof for it wipes out whatever meager margins the petitioners make.

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition
for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of Article VI,
Section 28(2) of the Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions present in
Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125,7 148, 151,
236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the Constitution,
which provides that all appropriation, revenue or tariff bills shall originate exclusively in the House of
Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20, 2005,
alleging unconstitutionality of the law on the ground that the limitation on the creditable input tax in effect allows
VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle that tax
collection and revenue should be solely allocated for public purposes and expenditures. Petitioner Garcia further
claims that allowing these establishments to pass on the tax to the consumers is inequitable, in violation of Article
VI, Section 28(1) of the Constitution.

RESPONDENTS’ COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents
contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt on its
validity.

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral
proceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto, have
already been settled. With regard to the issue of undue delegation of legislative power to the President, respondents
contend that the law is complete and leaves no discretion to the President but to increase the rate to 12% once any
of the two conditions provided therein arise.

Respondents also refute petitioners’ argument that the increase to 12%, as well as the 70% limitation on the
creditable input tax, the 60-month amortization on the purchase or importation of capital goods exceeding
₱1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and confiscatory,
and that it violates the constitutional principle on progressive taxation, among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the government’s fiscal reform agenda. A reform in
the value-added system of taxation is the core revenue measure that will tilt the balance towards a sustainable
macroeconomic environment necessary for economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the
following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of
R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT), as the
confusion and inevitably, litigation, breeds from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or
properties and services.8 Being an indirect tax on expenditure, the seller of goods or services may pass on the
amount of tax paid to the buyer,9 with the seller acting merely as a tax collector.10 The burden of VAT is intended to
fall on the immediate buyers and ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in,
without transferring the burden to someone else.11 Examples are individual and corporate income taxes, transfer
taxes, and residence taxes.12

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode.
Prior to 1978, the system was a single-stage tax computed under the "cost deduction method" and was payable only
by the original sellers. The single-stage system was subsequently modified, and a mixture of the "cost deduction
method" and "tax credit method" was used to determine the value-added tax payable.13 Under the "tax credit
method," an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.14

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system was
rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit method."15

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,16 R.A. No. 8241 or the Improved VAT
Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally, the presently beleaguered R.A. No. 9337, also
referred to by respondents as the VAT Reform Act.

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

I.

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded its
authority by:

1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and

4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to
the value-added tax.

Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.

It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative body for,
as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be utterly impracticable to
transact the business of the nation, either at all, or at least with decency, deliberation, and order."19 Thus,
Article VI, Section 16 (3) of the Constitution provides that "each House may determine the rules of its proceedings."
Pursuant to this inherent constitutional power to promulgate and implement its own rules of procedure, the
respective rules of each house of Congress provided for the creation of a Bicameral Conference Committee.

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:

Sec. 88. Conference Committee. – In the event that the House does not agree with the Senate on the amendment
to any bill or joint resolution, the differences may be settled by the conference committees of both chambers.

In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and support the
House Bill. If the differences with the Senate are so substantial that they materially impair the House Bill, the panel
shall report such fact to the House for the latter’s appropriate action.

Sec. 89. Conference Committee Reports. – . . . Each report shall contain a detailed, sufficiently explicit statement of
the changes in or amendments to the subject measure.

...

The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the voting
thereon. The House shall vote on the Conference Committee Report in the same manner and procedure as it votes
on a bill on third and final reading.

Rule XII, Section 35 of the Rules of the Senate states:

Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any bill
or joint resolution, the differences shall be settled by a conference committee of both Houses which shall meet
within ten (10) days after their composition. The President shall designate the members of the Senate Panel in the
conference committee with the approval of the Senate.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in, or
amendments to the subject measure, and shall be signed by a majority of the members of each House panel, voting
separately.

A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof with the
explanatory statement of the conference committee shall be attached to the report.

...

The creation of such conference committee was apparently in response to a problem, not addressed by any
constitutional provision, where the two houses of Congress find themselves in disagreement over changes or
amendments introduced by the other house in a legislative bill. Given that one of the most basic powers of the
legislative branch is to formulate and implement its own rules of proceedings and to discipline its members, may the
Court then delve into the details of how Congress complies with its internal rules or how it conducts its business of
passing legislation? Note that in the present petitions, the issue is not whether provisions of the rules of both houses
creating the bicameral conference committee are unconstitutional, but whether the bicameral conference
committee has strictly complied with the rules of both houses, thereby remaining within the jurisdiction
conferred upon it by Congress.

In the recent case of Fariñas vs. The Executive Secretary,20 the Court En Banc, unanimously reiterated and
emphasized its adherence to the "enrolled bill doctrine," thus, declining therein petitioners’ plea for the Court to go
behind the enrolled copy of the bill. Assailed in said case was Congress’s creation of two sets of bicameral
conference committees, the lack of records of said committees’ proceedings, the alleged violation of said
committees of the rules of both houses, and the disappearance or deletion of one of the provisions in the
compromise bill submitted by the bicameral conference committee. It was argued that such irregularities in the
passage of the law nullified R.A. No. 9006, or the Fair Election Act.

Striking down such argument, the Court held thus:

Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate President and the
certification of the Secretaries of both Houses of Congress that it was passed are conclusive of its due enactment. A
review of cases reveals the Court’s consistent adherence to the rule. The Court finds no reason to deviate from
the salutary rule in this case where the irregularities alleged by the petitioners mostly involved the internal
rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference Committee by the House. This Court
is not the proper forum for the enforcement of these internal rules of Congress, whether House or Senate.
Parliamentary rules are merely procedural and with their observance the courts have no concern. Whatever
doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in its favor.The Court
reiterates its ruling in Arroyo vs. De Venecia, viz.:

But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power to
inquire into allegations that, in enacting a law, a House of Congress failed to comply with its own rules, in
the absence of showing that there was a violation of a constitutional provision or the rights of private
individuals. In Osmeña v. Pendatun, it was held: "At any rate, courts have declared that ‘the rules adopted by
deliberative bodies are subject to revocation, modification or waiver at the pleasure of the body adopting them.’ And
it has been said that "Parliamentary rules are merely procedural, and with their observance, the courts have
no concern. They may be waived or disregarded by the legislative body." Consequently, "mere failure to
conform to parliamentary usage will not invalidate the action (taken by a deliberative body) when the
requisite number of members have agreed to a particular measure."21 (Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities committed
by the conference committee in introducing changes or deleting provisions in the House and Senate bills. Akin to
the Fariñas case,22 the present petitions also raise an issue regarding the actions taken by the conference
committee on matters regarding Congress’ compliance with its own internal rules. As stated earlier, one of the most
basic and inherent power of the legislature is the power to formulate rules for its proceedings and the discipline of its
members. Congress is the best judge of how it should conduct its own business expeditiously and in the most
orderly manner. It is also the sole

concern of Congress to instill discipline among the members of its conference committee if it believes that said
members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to
questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the internal
proceedings of a co-equal branch of government.

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,23 the
Court already made the pronouncement that "[i]f a change is desired in the practice [of the Bicameral
Conference Committee] it must be sought in Congress since this question is not covered by any
constitutional provision but is only an internal rule of each house." 24 To date, Congress has not seen it fit to
make such changes adverted to by the Court. It seems, therefore, that Congress finds the practices of the bicameral
conference committee to be very useful for purposes of prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral
conference committees, the Court deems it necessary to dwell on the issue. The Court observes that there was a
necessity for a conference committee because a comparison of the provisions of House Bill Nos. 3555 and 3705 on
one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed disagreements. As pointed out in
the petitions, said disagreements were as follows:
 House Bill No. 3555
With regard to "Stand-By Authority" in favor of President
Provides for 12% VAT on every
sale of goods or properties
(amending Sec. 106 of NIRC);
12% VAT on importation of
goods (amending Sec. 107 of
NIRC); and 12% VAT on sale of
services and use or lease of
properties (amending Sec. 108
of NIRC)
With regard to the "no pass-on" provision
No similar provision
House Bill No.3705
Provides for 12% VAT in general on
sales of goods or properties and
reduced rates for sale of certain
locally manufactured goods and
petroleum products and raw materials
to be used in the manufacture thereof
(amending Sec. 106 of NIRC); 12%
VAT on importation of goods and
reduced rates for certain imported
products including petroleum
products (amending Sec. 107 of
NIRC); and 12% VAT on sale of
services and use or lease of
properties and a reduced rate for
certain services including power
generation (amending Sec. 108 of
NIRC)
Provides that the VAT imposed on
power generation and on the sale of
petroleum products shall be absorbed
by generation companies or sellers,
respectively, and shall not be passed
on to consumers
Senate Bill No. 1950
Provides for a single rate of 10%
VAT on sale of goods or
properties (amending Sec. 106 of
NIRC), 10% VAT on sale of
services including sale of
electricity by generation
companies, transmission and
distribution companies, and use or
lease of properties (amending
Sec. 108 of NIRC)
Provides that the VAT imposed on
sales of electricity by generation
companies and services of
transmission companies and
distribution companies, as well as
those of franchise grantees of
electric utilities shall not apply to
residential

end-users. VAT shall be absorbed

Provides that the input tax credit
for capital goods on which a VAT
has been paid shall be equally
distributed over 5 years or the
depreciable life of such capital
goods; the input tax credit for
goods and services other than
capital goods shall not exceed
5% of the total amount of such
goods and services; and for
persons engaged in retail trading
of goods, the allowable input tax
credit shall not exceed 11% of
the total amount of goods
purchased.
With regard to amendments to be made to NIRC provisions regarding income and excise
No similar provision
by generation, transmission, and
distribution companies.
With regard to 70% limit on input tax credit
No similar provision Provides that the input tax credit
for capital goods on which a VAT
has been paid shall be equally
distributed over 5 years or the
depreciable life of such capital
goods; the input tax credit for
goods and services other than
capital goods shall not exceed
90% of the output VAT.
taxes
No similar provision Provided for amendments to
several NIRC provisions
regarding corporate income,
percentage, franchise and
excise taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what rate of
VAT is to be imposed; (2) whether only the VAT imposed on electricity generation, transmission and distribution
companies should not be passed on to consumers, as proposed in the Senate bill, or both the VAT imposed on
electricity generation, transmission and distribution companies and the VAT imposed on sale of petroleum products
should not be passed on to consumers, as proposed in the House bill; (3) in what manner input tax credits should be
limited; (4) and whether the NIRC provisions on corporate income taxes, percentage, franchise and excise taxes
should be amended.

There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the
Bicameral Conference Committee was mandated by the rules of both houses of Congress to act on the same by
settling said differences and/or disagreements. The Bicameral Conference Committee acted on the disagreeing
provisions by making the following changes:

1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference
Committee Report that the Bicameral Conference Committee tried to bridge the gap in the difference between the
10% VAT rate proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed by the
House, by striking a compromise whereby the present 10% VAT rate would be retained until certain conditions
arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of the previous year
exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year exceeds 1½%, when
the President, upon recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective
January 1, 2006.

2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission and
distribution companies should not be passed on to consumers or whether both the VAT imposed on electricity
generation, transmission and distribution companies and the VAT imposed on sale of petroleum products may be
passed on to consumers, the Bicameral Conference Committee chose to settle such disagreement by altogether
deleting from its Report any no pass-on provision.

3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral Conference
Committee decided to adopt the position of the House by putting a limitation on the amount of input tax that may be
credited against the output tax, although it crafted its own language as to the amount of the limitation on input tax
credits and the manner of computing the same by providing thus:

(A) Creditable Input Tax. – . . .

...

Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the
fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component
thereof, exceeds one million Pesos (₱1,000,000.00): PROVIDED, however, that if the estimated useful life of the
capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over
such shorter period: . . .

(B) Excess Output or Input Tax. – If at the end of any taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters: PROVIDED that the input tax inclusive of input VAT carried over
from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output
VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales by a VAT-registered person may
at his option be refunded or credited against other internal revenue taxes, . . .

4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise, percentage
and excise taxes, the conference committee decided to include such amendments and basically adopted the
provisions found in Senate Bill No. 1950, with some changes as to the rate of the tax to be imposed.

Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral
Conference Committee is mandated to settle the differences between the disagreeing provisions in the House bill
and the Senate bill. The term "settle" is synonymous to "reconcile" and "harmonize."25 To reconcile or harmonize
disagreeing provisions, the Bicameral Conference Committee may then (a) adopt the specific provisions of either
the House bill or Senate bill, (b) decide that neither provisions in the House bill or the provisions in the Senate bill
would

be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing provisions.

In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions
were meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent that is
wholly foreign to the subject embraced by the original provisions.

The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate is
retained until such time that certain conditions arise when the 12% VAT wanted by the House shall be imposed,
appears to be a compromise to try to bridge the difference in the rate of VAT proposed by the two houses of
Congress. Nevertheless, such compromise is still totally within the subject of what rate of VAT should be imposed
on taxpayers.

The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral Conference
Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained the reason for
deleting the no pass-on provision in this wise:

. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector should be
a beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an indirect tax. It is a
pass on-tax. And let’s keep it plain and simple. Let’s not confuse the bill and put a no pass-on provision. Two-thirds
of the world have a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no pass-though
provision. So, the thinking of the Senate is basically simple, let’s keep the VAT simple.26 (Emphasis supplied)

Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really enjoyed the support
of either House."27

With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee came
to a compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the change
introduced by the Bicameral Conference Committee was totally within the intent of both houses to put a cap on input
tax that may be

credited against the output tax. From the inception of the subject revenue bill in the House of Representatives, one
of the major objectives was to "plug a glaring loophole in the tax policy and administration by creating vital
restrictions on the claiming of input VAT tax credits . . ." and "[b]y introducing limitations on the claiming of tax credit,
we are capping a major leakage that has placed our collection efforts at an apparent disadvantage."28

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No.
1950, since said provisions were among those referred to it, the conference committee had to act on the same and it
basically adopted the version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to subjects of
the provisions referred

to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack
or excess of jurisdiction committed by the Bicameral Conference Committee. In the earlier cases of Philippine
Judges Association vs. Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized the long-standing
legislative practice of giving said conference committee ample latitude for compromising differences between the
Senate and the House. Thus, in the Tolentino case, it was held that:

. . . it is within the power of a conference committee to include in its report an entirely new provision that is not found
either in the House bill or in the Senate bill. If the committee can propose an amendment consisting of one or two
provisions, there is no reason why it cannot propose several provisions, collectively considered as an "amendment
in the nature of a substitute," so long as such amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the approval of both houses of Congress to become valid as
an act of the legislative department. The charge that in this case the Conference Committee acted as a third
legislative chamber is thus without any basis.31 (Emphasis supplied)

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-Amendment Rule"

Article VI, Sec. 26 (2) of the Constitution, states:

No bill passed by either House shall become a law unless it has passed three readings on separate days, and
printed copies thereof in its final form have been distributed to its Members three days before its passage, except
when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency.
Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken
immediately thereafter, and the yeas and nays entered in the Journal.

Petitioners’ argument that the practice where a bicameral conference committee is allowed to add or delete
provisions in the House bill and the Senate bill after these had passed three readings is in effect a circumvention of
the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate from its
ruling in the Tolentino case that:

Nor is there any reason for requiring that the Committee’s Report in these cases must have undergone three
readings in each of the two houses. If that be the case, there would be no end to negotiation since each house may
seek modification of the compromise bill. . . .

Art. VI. § 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in either
house of Congress, not to the conference committee report.32 (Emphasis supplied)

The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by each
house of Congress with regard to bills initiated in each of said respective houses, before said bill is
transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in a way as
to proscribe any further changes to a bill after one house has voted on it would lead to absurdity as this would mean
that the other house of Congress would be deprived of its constitutional power to amend or introduce changes to
said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral
Conference Committee of amendments and modifications to disagreeing provisions in bills that have been acted
upon by both houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of Revenue
Bills

Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate income
taxes and percentage, excise taxes. Petitioners refer to the following provisions, to wit:

Section 27 Rates of Income Tax on Domestic Corporation

28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House. They
aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114 of the
NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the
NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments were not found in the
House bills are not intended to be amended by the House of Representatives. Hence, they argue that since the
proposed amendments did not originate from the House, such amendments are a violation of Article VI, Section 24
of the Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application,
and private bills shall originate exclusively in the House of Representatives but the Senate may propose or concur
with amendments.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move for
amending provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House bills to
the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC provisions on
the value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is the introduction by the
Senate of provisions not dealing directly with the value- added tax, which is the only kind of tax being amended in
the House bills, still within the purview of the constitutional provision authorizing the Senate to propose or concur
with amendments to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:

. . . To begin with, it is not the law – but the revenue bill – which is required by the Constitution to "originate
exclusively" in the House of Representatives. It is important to emphasize this, because a bill originating in the
House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At
this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist
that a revenue statute – and not only the bill which initiated the legislative process culminating in the
enactment of the law – must substantially be the same as the House bill would be to deny the Senate’s
power not only to "concur with amendments" but also to "propose amendments." It would be to violate the
coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.

…Given, then, the power of the Senate to propose amendments, the Senate can propose its own version
even with respect to bills which are required by the Constitution to originate in the House.

...

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing
an increase of the public debt, private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the districts, the members of the House can be
expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are
elected at large, are expected to approach the same problems from the national perspective. Both views are
thereby made to bear on the enactment of such laws.33 (Emphasis supplied)

Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate
was acting within its

constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950
amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the
Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced
by the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the
House bills are still in furtherance of the intent of the House in initiating the subject revenue bills. The Explanatory
Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later substituted by House
Bill No. 3555, stated:

One of the challenges faced by the present administration is the urgent and daunting task of solving the country’s
serious financial problems. To do this, government expenditures must be strictly monitored and controlled and
revenues must be significantly increased. This may be easier said than done, but our fiscal authorities are still
optimistic the government will be operating on a balanced budget by the year 2009. In fact, several measures that
will result to significant expenditure savings have been identified by the administration. It is supported with a
credible package of revenue measures that include measures to improve tax administration and control the
leakages in revenues from income taxes and the value-added tax (VAT). (Emphasis supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:

In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of our
agenda must be the restoration of the health of our fiscal system.

In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget by the
year 2009, we need to seize windows of opportunities which might seem poignant in the beginning, but in
the long run prove effective and beneficial to the overall status of our economy. One such opportunity is a
review of existing tax rates, evaluating the relevance given our present conditions.34 (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in sizeable
revenues for the government

to supplement our country’s serious financial problems, and improve tax administration and control of the leakages
in revenues from income taxes and value-added taxes. As these house bills were transmitted to the Senate, the
latter, approaching the measures from the point of national perspective, can introduce amendments within the
purposes of those bills. It can provide for ways that would soften the impact of the VAT measure on the
consumer, i.e., by distributing the burden across all sectors instead of putting it entirely on the shoulders of the
consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation were
included is worth quoting:

All in all, the proposal of the Senate Committee on Ways and Means will raise ₱64.3 billion in additional revenues
annually even while by mitigating prices of power, services and petroleum products.

However, not all of this will be wrung out of VAT. In fact, only ₱48.7 billion amount is from the VAT on twelve goods
and services. The rest of the tab – ₱10.5 billion- will be picked by corporations.

What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should the
latter bear all the pain? Why should the fiscal salvation be only on the burden of the consumer?

The corporate world’s equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up to
2008 only. This will raise ₱10.5 billion a year. After that, the rate will slide back, not to its old rate of 32 percent, but
two notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that will be
in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry date.

For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief. We
would like to assure them that not because there is a light at the end of the tunnel, this government will keep on
making the tunnel long.

The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to share
the burden.35
As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions in the
tax on income of corporations are germane to the purpose of the house bills which is to raise revenues for the
government.

Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to the
VAT system, as these sections would cushion the effects of VAT on consumers. Considering that certain goods and
services which were subject to percentage tax and excise tax would no longer be VAT-exempt, the consumer would
be burdened more as they would be paying the VAT in addition to these taxes. Thus, there is a need to amend
these sections to soften the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:

However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen the
effect of a VAT on this product.

For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.

And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain, we will
however bring down the excise tax on socially sensitive products such as diesel, bunker, fuel and kerosene.

...

What do all these exercises point to? These are not contortions of giving to the left hand what was taken from the
right. Rather, these sprang from our concern of softening the impact of VAT, so that the people can cushion the
blow of higher prices they will have to pay as a result of VAT.36

The other sections amended by the Senate pertained to matters of tax administration which are necessary for the
implementation of the changes in the VAT system.

To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the house
bills, which is to supplement our country’s fiscal deficit, among others. Thus, the Senate acted within its power to
propose those amendments.

SUBSTANTIVE ISSUES

I.

Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the
following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common that
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving the
President the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is met, constitutes
undue delegation of the legislative power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 106. Value-Added Tax on Sale of Goods or Properties. –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or exchange of
goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor: provided, that the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%).

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 107. Value-Added Tax on Importation of Goods. –

(A) In General. – There shall be levied, assessed and collected on every importation of goods a value-added tax
equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and
customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer
prior to the release of such goods from customs custody: Provided, That where the customs duties are determined
on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus
excise taxes, if any: provided, further, that the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any
of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%).

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or exchange of services: provided, that the President, upon
the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%), after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%). (Emphasis supplied)

Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual
abdication by Congress of its exclusive power to tax because such delegation is not within the purview of Section 28
(2), Article VI of the Constitution, which provides:

The Congress may, by law, authorize the President to fix within specified limits, and 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.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the
sale or exchange of services, which cannot be included within the purview of tariffs under the exempted delegation
as the latter refers to customs duties, tolls or tribute payable upon merchandise to the government and usually
imposed on goods or merchandise imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative power
to tax is contrary to republicanism. They insist that accountability, responsibility and transparency should dictate the
actions of Congress and they should not pass to the President the decision to impose taxes. They also argue that
the law also effectively nullified the President’s power of control, which includes the authority to set aside and nullify
the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by the President
upon the recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the conditions
provided by the law to bring about either or both the conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the 12%
rate would be subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the principle of
no taxation without representation. They submit that the Secretary of Finance is not mandated to give a favorable
recommendation and he may not even give his recommendation. Moreover, they allege that no guiding standards
are provided in the law on what basis and as to how he will make his recommendation. They claim, nonetheless,
that any recommendation of the Secretary of Finance can easily be brushed aside by the President since the former
is a mere alter ego of the latter, such that, ultimately, it is the President who decides whether to impose the
increased tax rate or not.

A brief discourse on the principle of non-delegation of powers is instructive.

The principle of separation of powers ordains that each of the three great branches of government has exclusive
cognizance of and is supreme in matters falling within its own constitutionally allocated sphere.37 A logical

corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the
Latin maxim: potestas delegata non delegari potest which means "what has been delegated, cannot be
delegated."38 This doctrine is based on the ethical principle that such as delegated power constitutes not only a right
but a duty to be performed by the delegate through the instrumentality of his own judgment and not through the
intervening mind of another.39

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative power shall
be vested in the Congress of the Philippines which shall consist of a Senate and a House of Representatives." The
powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively,
legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a
complete law – complete as to the time when it shall take effect and as to whom it shall be applicable – and
to determine the expediency of its enactment.40 Thus, the rule is that in order that a court may be justified in
holding a statute unconstitutional as a delegation of legislative power, it must appear that the power involved is
purely legislative in nature – that is, one appertaining exclusively to the legislative department. It is the nature of the
power, and not the liability of its use or the manner of its exercise, which determines the validity of its delegation.

Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized
limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;

(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if
the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the
delegate;41 and (b) fixes a standard — the limits of which are sufficiently determinate and determinable — to which
the delegate must conform in the performance of his functions.42 A sufficient standard is one which defines
legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the
circumstances under which the legislative command is to be effected.43 Both tests are intended to prevent a total
transference of legislative authority to the delegate, who is not allowed to step into the shoes of the legislature and
exercise a power essentially legislative.44

In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent of
delegation of power in this wise:

In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire whether
the statute was complete in all its terms and provisions when it left the hands of the legislature so that nothing was
left to the judgment of any other appointee or delegate of the legislature.

...

‘The true distinction’, says Judge Ranney, ‘is between the delegation of power to make the law, which
necessarily involves a discretion as to what it shall be, and conferring an authority or discretion as to its
execution, to be exercised under and in pursuance of the law. The first cannot be done; to the latter no valid
objection can be made.’

...

It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the
legislature. It is true that laws may be made effective on certain contingencies, as by proclamation of the executive
or the adoption by the people of a particular community. In Wayman vs. Southard, the Supreme Court of the United
States ruled that the legislature may delegate a power not legislative which it may itself rightfully exercise. The
power to ascertain facts is such a power which may be delegated. There is nothing essentially legislative in
ascertaining the existence of facts or conditions as the basis of the taking into effect of a law. That is a
mental process common to all branches of the government. Notwithstanding the apparent tendency, however,
to relax the rule prohibiting delegation of legislative authority on account of the complexity arising from social and
economic forces at work in this modern industrial age, the orthodox pronouncement of Judge Cooley in his work on
Constitutional Limitations finds restatement in Prof. Willoughby's treatise on the Constitution of the United States in
the following language — speaking of declaration of legislative power to administrative agencies: The principle
which permits the legislature to provide that the administrative agent may determine when the
circumstances are such as require the application of a law is defended upon the ground that at the time this
authority is granted, the rule of public policy, which is the essence of the legislative act, is determined by
the legislature. In other words, the legislature, as it is its duty to do, determines that, under given
circumstances, certain executive or administrative action is to be taken, and that, under other
circumstances, different or no action at all is to be taken. What is thus left to the administrative official is
not the legislative determination of what public policy demands, but simply the ascertainment of what the
facts of the case require to be done according to the terms of the law by which he is governed. The
efficiency of an Act as a declaration of legislative will must, of course, come from Congress, but the
ascertainment of the contingency upon which the Act shall take effect may be left to such agencies as it
may designate. The legislature, then, may provide that a law shall take effect upon the happening of future
specified contingencies leaving to some other person or body the power to determine when the specified
contingency has arisen. (Emphasis supplied).46

In Edu vs. Ericta,47 the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them; the test
is the completeness of the statute in all its terms and provisions when it leaves the hands of the legislature. To
determine whether or not there is an undue delegation of legislative power, the inquiry must be directed to the scope
and definiteness of the measure enacted. The legislative does not abdicate its functions when it describes
what job must be done, who is to do it, and what is the scope of his authority. For a complex economy, that
may be the only way in which the legislative process can go forward. A distinction has rightfully been made
between delegation of power to make the laws which necessarily involves a discretion as to what it shall be,
which constitutionally may not be done, and delegation of authority or discretion as to its execution to be
exercised under and in pursuance of the law, to which no valid objection can be made. The Constitution is
thus not to be regarded as denying the legislature the necessary resources of flexibility and practicability. (Emphasis
supplied).48

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or
conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to depend,
but the legislature must prescribe sufficient standards, policies or limitations on their authority.49 While the power to
tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of
such power may be left to them, including the power to determine the existence of facts on which its operation
depends.50

The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is not of
itself a legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information and making
recommendations is the kind of subsidiary activity which the legislature may perform through its members, or which
it may delegate to others to perform. Intelligent legislation on the complicated problems of modern society is
impossible in the absence of accurate information on the part of the legislators, and any reasonable method of
securing such information is proper.51 The Constitution as a continuously operative charter of government does not
require that Congress find for itself

every fact upon which it desires to base legislative action or that it make for itself detailed determinations which it
has declared to be prerequisite to application of legislative policy to particular facts and circumstances impossible
for Congress itself properly to investigate.52

In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6 which
reads as follows:

That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1
½%).

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts
upon which enforcement and administration of the increase rate under the law is contingent. The legislature has
made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It
leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the
executive.

No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the
word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a
statute denotes an imperative obligation and is inconsistent with the idea of discretion.53 Where the law is clear and
unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the
mandate is obeyed.54

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the
conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law
specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a clear
directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the
12% VAT rate is based on the happening of a certain specified contingency, or upon the ascertainment of certain
facts or conditions by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law effectively
nullified the President’s power of control over the Secretary of Finance by mandating the fixing of the tax rate by the
President upon the recommendation of the Secretary of Finance. The Court cannot also subscribe to the position of
petitioners

Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the
recommendation of the Secretary of Finance." Neither does the Court find persuasive the submission of petitioners
Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed aside by the President
since the former is a mere alter ego of the latter.

When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of the
Department of Finance he is the assistant and agent of the Chief Executive. The multifarious executive and
administrative functions of the Chief Executive are performed by and through the executive departments, and the
acts of the secretaries of such departments, such as the Department of Finance, performed and promulgated in the
regular course of business, are, unless disapproved or reprobated by the Chief Executive, presumptively the acts of
the Chief Executive. The Secretary of Finance, as such, occupies a political position and holds office in an advisory
capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom confidence" and, in the
language of Attorney-General Cushing, is "subject to the direction of the President."55

In the present case, in making his recommendation to the President on the existence of either of the two conditions,
the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he
is not subject to the power of control and direction of the President. He is acting as the agent of the legislative
department, to determine and declare the event upon which its expressed will is to take effect.56 The Secretary of
Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he
possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate
them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two
conditions laid out by Congress is present. His personality in such instance is in reality but a projection of that of
Congress. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or
nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the former for that of
the latter.

Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether
by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a percentage of GDP
of the previous year exceeds one and one-half percent (1½%). If either of these two instances has occurred, the
Secretary of Finance, by legislative mandate, must submit such information to the President. Then the 12% VAT
rate must be imposed by the President effective January 1, 2006. There is no undue delegation of legislative
power but only of the discretion as to the execution of a law. This is constitutionally permissible.57 Congress
does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it,
and what is the scope of his authority; in our complex economy that is frequently the only way in which the
legislative process can go forward.58

As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the legislative
power to tax is contrary to the principle of republicanism, the same deserves scant consideration. Congress did not
delegate the power to tax but the mere implementation of the law. The intent and will to increase the VAT rate to
12% came from Congress and the task of the President is to simply execute the legislative policy. That Congress
chose to do so in such a manner is not within the province of the Court to inquire into, its task being to interpret the
law.59

The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the
conditions to bring about either or both the conditions precedent does not deserve any merit as this argument is
highly speculative. The Court does not rule on allegations which are manifestly conjectural, as these may not exist
at all. The Court deals with facts, not fancies; on realities, not appearances. When the Court acts on appearances
instead of realities, justice and law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax burden
on the people. Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set forth in the
contested provisions, is ambiguous because it does not state if the VAT rate would be returned to the original 10% if
the rates are no longer satisfied. Petitioners also argue that such rate is unfair and unreasonable, as the people are
unsure of the applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth therein are
satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It does not provide
for a return to the 10% rate nor does it empower the President to so revert if, after the rate is increased to 12%, the
VAT collection goes below the 24/5 of the GDP of the previous year or that the national government deficit as a
percentage of GDP of the previous year does not exceed 1½%.

Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be introduced
where none is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon.60

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds none,
petitioners’ argument is, at best, purely speculative. There is no basis for petitioners’ fear of a fluctuating VAT rate
because the law itself does not provide that the rate should go back to 10% if the conditions provided in Sections 4,
5 and 6 are no longer present. The rule is that where the provision of the law is clear and unambiguous, so that
there is no occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid of judicial
addition or subtraction.61

Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to raise
the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another
condition, i.e., the national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 ½%).

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, it
means that government has weak or no capability of implementing the VAT or that VAT is not effective in the
function of the tax collection. Therefore, there is no value to increase it to 12% because such action will also be
ineffectual.

2. Nat’l Gov’t Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government has
reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, there is no
need to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio
is more than 1.5%, there is indeed a need to increase the VAT rate.62

That the first condition amounts to an incentive to the President to increase the VAT collection does not render it
unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is mainly to
raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in
his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as
possible over and above what it brings into the public treasury of the state.63

It simply means that sources of revenues must be adequate to meet government expenditures and their variations.64
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the Bicameral
Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the country’s gloomy state of
economic affairs, thus:

First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90 percent of
our revenue is used for debt service. So, for every peso of revenue that we currently raise, 90 goes to debt service.
That’s interest plus amortization of our debt. So clearly, this is not a sustainable situation. That’s the first fact.

The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow money
from that international financial markets. Our debt to GDP is approximately equal to our GDP. Again, that shows you
that this is not a sustainable situation.

The third thing that I’d like to point out is the environment that we are presently operating in is not as benign as what
it used to be the past five years.

What do I mean by that?

In the past five years, we’ve been lucky because we were operating in a period of basically global growth and low
interest rates. The past few months, we have seen an inching up, in fact, a rapid increase in the interest rates in the
leading economies of the world. And, therefore, our ability to borrow at reasonable prices is going to be challenged.
In fact, ultimately, the question is our ability to access the financial markets.

When the President made her speech in July last year, the environment was not as bad as it is now, at least based
on the forecast of most financial institutions. So, we were assuming that raising 80 billion would put us in a position
where we can then convince them to improve our ability to borrow at lower rates. But conditions have changed on
us because the interest rates have gone up. In fact, just within this room, we tried to access the market for a billion
dollars because for this year alone, the Philippines will have to borrow 4 billion dollars. Of that amount, we have
borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We were trying to access last week
and the market was not as favorable and up to now we have not accessed and we might pull back because the
conditions are not very good.

So given this situation, we at the Department of Finance believe that we really need to front-end our deficit
reduction. Because it is deficit that is causing the increase of the debt and we are in what we call a debt spiral. The
more debt you have, the more deficit you have because interest and debt service eats and eats more of your
revenue. We need to get out of this debt spiral. And the only way, I think, we can get out of this debt spiral is really
have a front-end adjustment in our revenue base.65

The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe. Whether
the law is indeed sufficient to answer the state’s economic dilemma is not for the Court to judge. In the Fariñas case,
the Court refused to consider the various arguments raised therein that dwelt on the wisdom of Section 14 of R.A.
No. 9006 (The Fair Election Act), pronouncing that:

. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the
political branches of the government. It is not for this Court to look into the wisdom or propriety of legislative
determination. Indeed, whether an enactment is wise or unwise, whether it is based on sound economic theory,
whether it is the best means to achieve the desired results, whether, in short, the legislative discretion within its
prescribed limits should be exercised in a particular manner are matters for the judgment of the legislature, and the
serious conflict of opinions does not suffice to bring them within the range of judicial cognizance.66

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy, given
that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of legislation."67

II.

Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A.
No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending
Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are arbitrary,
oppressive, excessive and confiscatory. Their argument is premised on the constitutional right against deprivation of
life, liberty of property without due process of law, as embodied in Article III, Section 1 of the Constitution.

Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law.

The doctrine is that where the due process and equal protection clauses are invoked, considering that they are not
fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such
a conclusion. Absent such a showing, the presumption of validity must prevail.68

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax
that may be credited against the output tax. It states, in part: "[P]rovided, that the input tax inclusive of the input VAT
carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%)
of the output VAT: …"

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a
VAT-registered person on the importation of goods or local purchase of good and services, including lease or use of
property, in the course of trade or business, from a VAT-registered person, and Output Tax is the value-added
tax due on the sale or lease of taxable goods or properties or services by any person registered or required to
register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In
effect, a portion of the input tax that has already been paid cannot now be credited against the output tax.

Petitioners’ argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and therefore, the
input tax in excess of 70% remains uncredited. However, to the extent that the input tax is less than 70% of the
output tax, then 100% of such input tax is still creditable.

More importantly, the excess input tax, if any, is retained in a business’s books of accounts and remains creditable
in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that "if the input tax exceeds
the output tax, the excess shall be carried over to the succeeding quarter or quarters." In addition, Section 112(B)
allows a VAT-registered person to apply for the issuance of a tax credit certificate or refund for any unused input
taxes, to the extent that such input taxes have not been applied against the output taxes. Such unused input tax
may be used in payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly
contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided. It ends at the net effect that
there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over provision of
Section 110(B) or that it may later on be refunded through a tax credit certificate under Section 112(B).

Therefore, petitioners’ argument must be rejected.

On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation on the
input tax. According to petitioner, the limitation on the creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they collect, which violates the principle that tax collection and
revenue should be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods.
Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three
possible scenarios may arise:

First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid
and passed on by the suppliers, then no payment is required;

Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be
paid to the Bureau of Internal Revenue (BIR);69 and

Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the
output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the
taxpayer’s option.70

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input
tax only up to the extent of 70% of the output tax. In layman’s term, the value-added taxes that a person/taxpayer
paid and passed on to him by a seller can only be credited up to 70% of the value-added taxes that is due to him on
a taxable transaction. There is no retention of any tax collection because the person/taxpayer has already previously
paid the input tax to a seller, and the seller will subsequently remit such input tax to the BIR. The party directly liable
for the payment of the tax is the seller.71 What only needs to be done is for the person/taxpayer to apply or credit
these input taxes, as evidenced by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a
property that may not be confiscated, appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-
registered person’s entitlement to the creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested
rights in statutory privileges. The state may change or take away rights, which were created by the law of the state,
although it may not take away property, which was vested by virtue of such rights.72

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable from
the taxes payable, although it becomes part of the cost, which is deductible from the gross revenue. When Pres.
Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of the input
tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was
introduced.73 This was adopted by the Expanded VAT Law (R.A. No. 7716),74 and The Tax Reform Act of 1997 (R.A.
No. 8424).75 The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that
also the law can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending
Section 110(A) of the NIRC, which provides:

SEC. 110. Tax Credits. –

(A) Creditable Input Tax. – …

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for
which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition
and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT
component thereof, exceeds One million pesos (₱1,000,000.00): Provided, however, That if the estimated useful life
of the capital goods is less than five (5) years, as used for depreciation purposes, then the input VAT shall be
spread over such a shorter period: Provided, finally, That in the case of purchase of services, lease or use of
properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of the compensation,
rental, royalty or fee.
The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or
importation of capital goods with acquisition cost of ₱1 Million pesos, exclusive of the VAT component. Such spread
out only poses a delay in the crediting of the input tax. Petitioners’ argument is without basis because the taxpayer
is not permanently deprived of his privilege to credit the input tax.

It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts to
a 4-year interest-free loan to the government.76 In the same breath, Congress also justified its move by saying that
the provision was designed to raise an annual revenue of 22.6 billion.77 The legislature also dispelled the fear that
the provision will fend off foreign investments, saying that foreign investors have other tax incentives provided by
law, and citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments were not
deterred.78 Again, for whatever is the purpose of the 60-month amortization, this involves executive economic policy
and legislative wisdom in which the Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable
transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Value-added Tax. – The Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross
payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident owners
shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor
or person in control of the payment shall be considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made.

Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT
withholding system. The government in this case is constituted as a withholding agent with respect to their
payments for goods and services.

Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3% on
gross payments for purchases of goods; 6% on gross payments for services supplied by contractors other than by
public works contractors; 8.5% on gross payments for services supplied by public work contractors; or 10% on
payment for the lease or use of properties or property rights to nonresident owners. Under the present Section
114(C), these different rates, except for the 10% on lease or property rights payment to nonresidents, were deleted,
and a uniform rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to creditable,
means full. Thus, it is provided in Section 114(C): "final value-added tax at the rate of five percent (5%)."

In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of final
withholding tax on income was explained, to wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. – Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as full and final payment of the income tax due from the payee on the said
income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his
failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the
payor/withholding agent. …

(B) Creditable Withholding Tax. – Under the creditable withholding tax system, taxes withheld on certain income
payments are intended to equal or at least approximate the tax due of the payee on said income. … Taxes withheld
on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and
compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in nature.

As applied to value-added tax, this means that taxable transactions with the government are subject to a 5% rate,
which constitutes as full payment of the tax payable on the transaction. This represents the net VAT payable of the
seller. The other 5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of the actual input
VAT directly or attributable to the taxable transaction.79

The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat differently
taxable transactions with the government.80 This is supported by the fact that under the old provision, the 5% tax
withheld by the government remains creditable against the tax liability of the seller or contractor, to wit:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Creditable Value-added Tax. – The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making
payment on account of each purchase of goods from sellers and services rendered by contractors which are subject
to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due
at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross
receipts for services rendered by contractors on every sale or installment payment which shall be creditable
against the value-added tax liability of the seller or contractor: Provided, however, That in the case of
government public works contractors, the withholding rate shall be eight and one-half percent (8.5%): Provided,
further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to
ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the
payment shall be considered as the withholding agent.

The valued-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made. (Emphasis supplied)

As amended, the use of the word final and the deletion of the word creditable exhibits Congress’s intention to treat
transactions with the government differently. Since it has not been shown that the class subject to the 5% final
withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as
petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to all those who deal
with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No. 14-
2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the actual
input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should the actual input tax
be less than 5%, the difference is treated as income.81

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a profit or
value-added even if there is no profit or value-added.

Petitioners’ stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a legal
joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the Court on this
point will only be, as Shakespeare describes life in Macbeth,82 "full of sound and fury, signifying nothing."

What’s more, petitioners’ contention assumes the proposition that there is no profit or value-added. It need not take
an astute businessman to know that it is a matter of exception that a business will sell goods or services without
profit or value-added. It cannot be overstressed that a business is created precisely for profit.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of
the same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances."83

The power of the State to make reasonable and natural classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts
to be raised, the methods of assessment, valuation and collection, the State’s power is entitled to presumption of
validity. As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness,
discrimination, or arbitrariness.84

Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or invests
in capital equipment, or has several transactions with the government, is not based on real and substantial
differences to meet a valid classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of
taxation, the kind of property, the rates to be levied or the amounts to be raised, the methods of assessment,
valuation and collection. Petitioners’ alleged distinctions are based on variables that bear different consequences.
While the implementation of the law may yield varying end results depending on one’s profit margin and value-
added, the Court cannot go beyond what the legislature has laid down and interfere with the affairs of business.

The equal protection clause does not require the universal application of the laws on all persons or things without
distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality among
equals as determined according to a valid classification. By classification is meant the grouping of persons or things
similar to each other in certain particulars and different from all others in these same particulars.85

Petitioners brought to the Court’s attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmeña III and
Ma. Ana Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The
proposed legislation seeks to amend the 70% limitation by increasing the same to 90%. This, according to
petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to say
that these are still proposed legislations. Until Congress amends the law, and absent any unequivocal basis for its
unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the
same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class
everywhere with all people at all times.86

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services.
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a
rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use or lease of
properties. These same sections also provide for a 0% rate on certain sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the
creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding
tax by the government. It must be stressed that the rule of uniform taxation does not deprive Congress of the power
to classify subjects of taxation, and only demands uniformity within the particular class.87

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%)
does not apply to sales of goods or services with gross annual sales or receipts not exceeding
₱1,500,000.00.88Also, basic marine and agricultural food products in their original state are still not subject to the
tax,89 thus ensuring that prices at the grassroots level will remain accessible. As was stated in Kapatiran ng mga
Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in
business with an aggregate gross annual sales exceeding ₱200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, so
that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are expected to
be relatively lower and within the reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those with
high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law entails, the law,
under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions
with gross annual sales and/or receipts not exceeding ₱1.5 Million. This acts as a equalizer because in effect,
bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those
previously exempt. Excise taxes on petroleum products91 and natural gas92 were reduced. Percentage tax on
domestic carriers was removed.93 Power producers are now exempt from paying franchise tax.94

Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden of
taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate, from a
previous 32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to 15% final
withholding tax but the tax credit allowed on the corporation’s domicile was increased to 20%.96 The Philippine
Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore.97 Even the sale by an
artist of his works or services performed for the production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest largely
on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller
business with higher input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was also lifted from Adam
Smith’s Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in
proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the
protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected.98

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive
taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every
goods bought or services enjoyed is the same regardless of income. In

other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income
earned by a person or profit margin marked by a business, such that the higher the income or profit margin, the
smaller the portion of the income or profit that is eaten by VAT. A converso, the lower the income or profit margin,
the bigger the part that the VAT eats away. At the end of the day, it is really the lower income group or businesses
with low-profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply
provides is that Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino case,
thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it
simply provides is that Congress shall ‘evolve a progressive system of taxation.’ The constitutional provision has
been interpreted to mean simply that ‘direct taxes are . . . to be preferred [and] as much as possible, indirect taxes
should be minimized.’ (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977))
Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales
taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art.
VIII, §17 (1) of the 1973 Constitution from which the present Art. VI, §28 (1) was taken. Sales taxes are also
regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid
them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes
the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, §3,
amending §102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, §4 amending
§103 of the NIRC)99

CONCLUSION

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid measure
to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight of the
masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other cases, the Court
cannot strike down a law as unconstitutional simply because of its yokes.

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should
stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for instance, those
involving political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all political or
social ills; We should not forget that the Constitution has judiciously allocated the powers of government to three
distinct and separate compartments; and that judicial interpretation has tended to the preservation of the
independence of the three, and a zealous regard of the prerogatives of each, knowing full well that one is not the
guardian of the others and that, for official wrong-doing, each may be brought to account, either by impeachment,
trial or by the ballot box.100

The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered, there is
no raison d'être for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207,
168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the
temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.

SO ORDERED.

ABAKADA GURO PARTY LIST VS EXECUTIVE SECRETARY

G.R. No. 168056 September 1, 2005
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S. ALBANO,
Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE DEPARTMENT OF
FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR.,
Respondent.

Facts:
Petitioners ABAKADA GURO Party List challenged the constitutionality of R.A. No. 9337 particularly Sections 4, 5 and 6,
amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). These questioned
provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to
raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive authority to
fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution. They further argue that VAT is a
tax levied on the sale or exchange of goods and services and cannot be included within the purview of tariffs under the
exemption delegation since this refers to customs duties, tolls or tribute payable upon merchandise to the government
and usually imposed on imported/exported goods. They also said that the President has powers to cause, influence or
create the conditions provided by law to bring about the conditions precedent. Moreover, they allege that no guiding
standards are made by law as to how the Secretary of Finance will make the recommendation. They claim, nonetheless,
that any recommendation of the Secretary of Finance can easily be brushed aside by the President since the former is a
mere alter ego of the latter, such that, ultimately, it is the President who decides whether to impose the increased tax
rate or not.

Issues:

1. Whether or not R.A. No. 9337 has violated the provisions in Article VI, Section 24, and Article VI, Section 26 (2) of
the Constitution.
2. Whether or not there was an undue delegation of legislative power in violation of Article VI Sec 28 Par 1 and 2 of the
Constitution.
3. Whether or not there was a violation of the due process and equal protection under Article III Sec. 1 of the
Constitution.

Discussions:

1. Basing from the ruling of Tolentino case, it is not the law, but the revenue bill which is required by the Constitution
to “originate exclusively” in the House of Representatives, but Senate has the power not only to propose
amendments, but also to propose its own version even with respect to bills which are required by the Constitution
to originate in the House. the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the districts, the members of the House can be expected
to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are
expected to approach the same problems from the national perspective. Both views are thereby made to bear on the
enactment of such laws.
2. In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire
whether the statute was complete in all its terms and provisions when it left the hands of the legislature so that
nothing was left to the judgment of any other appointee or delegate of the legislature.
3. The equal protection clause under the Constitution means that “no person or class of persons shall be deprived of
the same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances.”

Rulings:
1. R.A. No. 9337 has not violated the provisions. The revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its constitutional power to introduce amendments to the House bill
when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and
franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the
extent of the amendments that may be introduced by the Senate to the House revenue bill.
2. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is
constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes
what job must be done, who must do it, and what is the scope of his authority; in our complex economy that is
frequently the only way in which the legislative process can go forward.
3. Supreme Court held no decision on this matter. The power of the State to make reasonable and natural
classifications for the purposes of taxation has long been established. Whether it relates to the subject of taxation,
the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment, valuation and
collection, the State’s power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such
power absent a clear showing of unreasonableness, discrimination, or arbitrariness.
G.R. Nos. L-49839-46 April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,

vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROÑO, in their capacities as appointed and Acting
Members of the CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M.
DEL ROSARIO, RAUL C. FLORES, in their capacities as appointed and Acting Members of the BOARD OF
ASSESSMENT APPEALS of Manila; and NICOLAS CATIIL in his capacity as City Assessor of
Manila,respondents.

Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

PARAS, J.:

This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central Board of Assessment
Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v. Board of Assessment Appeals
of Manila and City Assessor of Manila" which affirmed the March 29, 1976 decision of the Board of Tax Assessment
Appeals2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and
"Edmundo Reyes and Milagros Reyes v. City Assessor of Manila" upholding the classification and assessments
made by the City Assessor of Manila.

The facts of the case are as follows:

Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in Tondo and Sta.
Cruz Districts, City of Manila, which are leased and entirely occupied as dwelling sites by tenants. Said tenants were
paying monthly rentals not exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971, the National
Legislature enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in monthly rentals
of dwelling units or of lands on which another's dwelling is located, where such rentals do not exceed three hundred
pesos (P300.00) a month but allowing an increase in rent by not more than 10% thereafter. The said Act also
suspended paragraph (1) of Article 1673 of the Civil Code for two years from its effectivity thereby disallowing the
ejectment of lessees upon the expiration of the usual legal period of lease. On October 12, 1972, Presidential
Decree No. 20 amended R.A. No. 6359 by making absolute the prohibition to increase monthly rentals below
P300.00 and by indefinitely suspending the aforementioned provision of the Civil Code, excepting leases with a
definite period. Consequently, the Reyeses, petitioners herein, were precluded from raising the rentals and from
ejecting the tenants. In 1973, respondent City Assessor of Manila re-classified and reassessed the value of the
subject properties based on the schedule of market values duly reviewed by the Secretary of Finance. The revision,
as expected, entailed an increase in the corresponding tax rates prompting petitioners to file a Memorandum of
Disagreement with the Board of Tax Assessment Appeals. They averred that the reassessments made were
"excessive, unwarranted, inequitable, confiscatory and unconstitutional" considering that the taxes imposed upon
them greatly exceeded the annual income derived from their properties. They argued that the income approach
should have been used in determining the land values instead of the comparable sales approach which the City
Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals, however, considered the
assessments valid, holding thus:

WHEREFORE, and considering that the appellants have failed to submit concrete evidence which could
overcome the presumptive regularity of the classification and assessments appear to be in accordance with
the base schedule of market values and of the base schedule of building unit values, as approved by the
Secretary of Finance, the cases should be, as they are hereby, upheld.

SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).

The Reyeses appealed to the Central Board of Assessment Appeals. They submitted, among others, the summary
1âwphi 1

of the yearly rentals to show the income derived from the properties. Respondent City Assessor, on the other hand,
submitted three (3) deeds of sale showing the different market values of the real property situated in the same
vicinity where the subject properties of petitioners are located. To better appreciate the locational and physical
features of the land, the Board of Hearing Commissioners conducted an ocular inspection with the presence of two
representatives of the City Assessor prior to the healing of the case. Neither the owners nor their authorized
representatives were present during the said ocular inspection despite proper notices served them. It was found that
certain parcels of land were below street level and were affected by the tides (Rollo, pp. 24-25).

On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the dispositive portion of which
reads:

WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots covered by Tax
Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is affirmed.

For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-266, the appealed
Decision is modified by allowing a 20% reduction in their respective market values and applying therein the
assessment level of 30% to arrive at the corresponding assessed value.

SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)

Petitioner's subsequent motion for reconsideration was denied, hence, this petition.

The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES APPROACH" METHOD
IN FIXING THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.

The petition is impressed with merit.

The crux of the controversy is in the method used in tax assessment of the properties in question. Petitioners
maintain that the "Income Approach" method would have been more realistic for in disregarding the effect of the
restrictions imposed by P.D. 20 on the market value of the properties affected, respondent Assessor of the City of
Manila unlawfully and unjustifiably set increased new assessed values at levels so high and successive that the
resulting annual real estate taxes would admittedly exceed the sum total of the yearly rentals paid or payable by the
dweller tenants under P.D. 20. Hence, petitioners protested against the levels of the values assigned to their
properties as revised and increased on the ground that they were arbitrarily excessive, unwarranted, inequitable,
confiscatory and unconstitutional (Rollo, p. 10-A).

On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that the income
approach is used in determining land values in some vicinities, it maintains that when income is affected by some
sort of price control, the same is rejected in the consideration and study of land values as in the case of properties
affected by the Rent Control Law for they do not project the true market value in the open market (Rollo, p. 21).
Thus, respondents opted instead for the "Comparable Sales Approach" on the ground that the value estimate of the
properties predicated upon prices paid in actual, market transactions would be a uniform and a more credible
standards to use especially in case of mass appraisal of properties (Ibid.). Otherwise stated, public respondents
would have this Court completely ignore the effects of the restrictions of P.D. No. 20 on the market value of
properties within its coverage. In any event, it is unquestionable that both the "Comparable Sales Approach" and the
"Income Approach" are generally acceptable methods of appraisal for taxation purposes (The Law on Transfer and
Business Taxation by Hector S. De Leon, 1988 Edition). However, it is conceded that the propriety of one as against
the other would of course depend on several factors. Hence, as early as 1923 in the case of Army & Navy Club,
Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that the assessors, in finding the
value of the property, have to consider all the circumstances and elements of value and must exercise a prudent
discretion in reaching conclusions.

Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not only be uniform, but
must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of property of the same class shall
be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).

Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects of taxation required
in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221, Second Edition). Thus, the need to
examine closely and determine the specific mandate of the Constitution.

Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is progressive when its
rate goes up depending on the resources of the person affected (Ibid.).

The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of government. But for all
its plenitude the power to tax is not unconfined as there are restrictions. Adversely effecting as it does property
rights, both the due process and equal protection clauses of the Constitution may properly be invoked to invalidate
in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief
Justice Marshall that "the power to tax involves the power to destroy." The web or unreality spun from Marshall's
famous dictum was brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the power
to destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr.
v. Commissioner of Internal Revenue, 139 SCRA 439 [1985]).

In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it finds no
support in the Constitution. An obvious example is where it can be shown to amount to confiscation of property. That
would be a clear abuse of power (Sison v. Ancheta, supra).

The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but the
government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support
in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or
that all persons must be treated in the same manner, the conditions not being different both in the privileges
conferred and the liabilities imposed (Ibid., p. 662).

Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first Fundamental Principle
to guide the appraisal and assessment of real property for taxation purposes is that the property must be "appraised
at its current and fair market value."

By no strength of the imagination can the market value of properties covered by P.D. No. 20 be equated with the
market value of properties not so covered. The former has naturally a much lesser market value in view of the rental
restrictions.

Ironically, in the case at bar, not even the factors determinant of the assessed value of subject properties under the
"comparable sales approach" were presented by the public respondents, namely: (1) that the sale must represent
a bonafide arm's length transaction between a willing seller and a willing buyer and (2) the property must be
comparable property (Rollo, p. 27). Nothing can justify or support their view as it is of judicial notice that for
properties covered by P.D. 20 especially during the time in question, there were hardly any willing buyers. As a
general rule, there were no takers so that there can be no reasonable basis for the conclusion that these properties
were comparable with other residential properties not burdened by P.D. 20. Neither can the given circumstances be
nonchalantly dismissed by public respondents as imposed under distressed conditions clearly implying that the
same were merely temporary in character. At this point in time, the falsity of such premises cannot be more
convincingly demonstrated by the fact that the law has existed for around twenty (20) years with no end to it in sight.

Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance.
However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxations, which is the promotion of the common good, may be achieved
(Commissioner of Internal Revenue v. Algue Inc., et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that
petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20)
under the principle of social justice should not now be penalized by the same government by the imposition of
excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties.
By the public respondents' own computation the assessment by income approach would amount to only P10.00 per
sq. meter at the time in question.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public respondents are
REVERSED and SET ASIDE; and (e) the respondent Board of Assessment Appeals of Manila and the City
Assessor of Manila are ordered to make a new assessment by the income approach method to guarantee a fairer
and more realistic basis of computation (Rollo, p. 71).

SO ORDERED.
TITLE:
J.B.L. Reyes, Edmundo Reyes, et al, petitioner, v. Board of Assessment Appeals of Manila and City Assessor of
Manila, respondents
CITATION:
G.R. Nos. L-49839-46, 196 SCRA 322
DATE:
April 26, 1991
FACTS:
J.B.L Reyes, et al., petitioners, owners of parcels of land in Tondo and Sta. Cruz Districts, City of Manila which
are leased by tenants for a monthly rentals not exceeding three hundred pesos (P300.00) in July 1971. Around
that time, a law was passed prohibiting the increase of rentals of properties leased for rentals not exceeding
P300.00 monthly and ejecting lessees after the expiration of the usual legal period of lease. In 1973,
respondent City Assessor of Manila re-classified and reassessed the value of the subject properties based on
the schedule of market values which entailed an increase in the acorresponding tax rates
prompting petitioners to file a Memorandum of Disagreement with the Board of Tax Assessment
Appeals. They averred that the reassessments made were "excessive, unwarranted, inequitable, confiscatory
and unconstitutional" considering that the taxes imposed upon them greatly exceeded the annual income
derived from their properties. They argued that the income approach should have been used in determining
the land values instead of the comparable sales approach which the City Assessor adopted
ISSUE:
Is the approach adopted by the City Assessor appropriate in assessing the property?
HELD:
No. The taxing power is an attribute of sovereignty. However, the power to tax is not unconfined as there are
restrictions. The due process and equal protection clauses of the Constitution limit this power. The laws
should operate equally and uniformly on all persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different both in the privileges conferred and the
liabilities imposed. The market value of properties covered by P.D. No. 20 cannot be equated with the market
value of properties not covered. The former has naturally a much lesser market value in view of the rental
restrictions. Consequently, the use of the Comparable Sales Approach in the assessment of the properties on
the ground of uniformity is unreasonable.
G.R. No. 115455 August 25, 1994

ARTURO M. TOLENTINO, petitioner,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115525 August 25, 1994

JUAN T. DAVID, petitioner,

vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance;
LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR
REPRESENTATIVES, respondents.

G.R. No. 115543 August 25, 1994

RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,

vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE BUREAU OF
INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.

G.R. No. 115544 August 25, 1994

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; PUBLISHING CORPORATION;
PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON. TEOFISTO T.
GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his
capacity as Secretary of Finance, respondents.

G.R. No. 115754 August 25, 1994

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. 115781 August 25, 1994

KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR.,
JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L.
GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL,
MOVEMENT OF ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"),
FREEDOM FROM DEBT COALITION, INC., PHILIPPINE BIBLE SOCIETY, INC., and WIGBERTO
TAÑADA, petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL
REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.

G.R. No. 115852 August 25, 1994

PHILIPPINE AIRLINES, INC., petitioner,

vs.
THE SECRETARY OF FINANCE, and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115873 August 25, 1994

COOPERATIVE UNION OF THE PHILIPPINES, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T.
GUINGONA, JR., in his capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his
capacity as Secretary of Finance, respondents.

G.R. No. 115931 August 25, 1994

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC., and ASSOCIATION OF PHILIPPINE BOOK-

SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the
Commissioner of Internal Revenue and HON. GUILLERMO PARAYNO, JR., in his capacity as the
Commissioner of Customs, respondents.

MENDOZA, J.:

The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on the sale
or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods or
properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. Republic Act
No. 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the
National Internal Revenue Code.

These are various suits for certiorari and prohibition, challenging the constitutionality of Republic Act No. 7716 on
various grounds summarized in the resolution of July 6, 1994 of this Court, as follows:

I. Procedural Issues:

A. Does Republic Act No. 7716 violate Art. VI, § 24 of the Constitution?

B. Does it violate Art. VI, § 26(2) of the Constitution?

C. What is the extent of the power of the Bicameral Conference Committee?

II. Substantive Issues:

A. Does the law violate the following provisions in the Bill of Rights (Art. III)?

1. §1

2. § 4

3. § 5

4. § 10

B. Does the law violate the following other provisions of the Constitution?

1. Art. VI, § 28(1)

2. Art. VI, § 28(3)

These questions will be dealt in the order they are stated above. As will presently be explained not all of these
questions are judicially cognizable, because not all provisions of the Constitution are self executing and, therefore,
judicially enforceable. The other departments of the government are equally charged with the enforcement of the
Constitution, especially the provisions relating to them.
 I. PROCEDURAL ISSUES

The contention of petitioners is that in enacting Republic Act No. 7716, or the Expanded Value-Added Tax Law,
Congress violated the Constitution because, although H. No. 11197 had originated in the House of Representatives,
it was not passed by the Senate but was simply consolidated with the Senate version (S. No. 1630) in the
Conference Committee to produce the bill which the President signed into law. The following provisions of the
Constitution are cited in support of the proposition that because Republic Act No. 7716 was passed in this manner, it
did not originate in the House of Representatives and it has not thereby become a law:

Art. VI, § 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills
of local application, and private bills shall originate exclusively in the House of Representatives, but
the Senate may propose or concur with amendments.

Id., § 26(2): No bill passed by either House shall become a law unless it has passed three readings
on separate days, and printed copies thereof in its final form have been distributed to its Members
three days before its passage, except when the President certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment
thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.

It appears that on various dates between July 22, 1992 and August 31, 1993, several bills 1 were introduced in the
House of Representatives seeking to amend certain provisions of the National Internal Revenue Code relative to the
value-added tax or VAT. These bills were referred to the House Ways and Means Committee which recommended
for approval a substitute measure, H. No. 11197, entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE
AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99,
100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF TITLE IV, 112, 115 AND 116 OF TITLE V, AND
236, 237 AND 238 OF TITLE IX, AND REPEALING SECTIONS 113 AND 114 OF TITLE V, ALL OF
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED

The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and, on November 17, 1993,
it was approved by the House of Representatives after third and final reading.

It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee on Ways and
Means.

On February 7, 1994, the Senate Committee submitted its report recommending approval of S. No. 1630, entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE
AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99,
100, 102, 103, 104, 105, 107, 108, AND 110 OF TITLE IV, 112 OF TITLE V, AND 236, 237, AND
238 OF TITLE IX, AND REPEALING SECTIONS 113, 114 and 116 OF TITLE V, ALL OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES

It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into consideration P.S.
Res. No. 734 and H.B. No. 11197."

On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished debates on the bill and
approved it on second reading on March 24, 1994. On the same day, it approved the bill on third reading by the
affirmative votes of 13 of its members, with one abstention.

H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee which, after
meeting four times (April 13, 19, 21 and 25, 1994), recommended that "House Bill No. 11197, in consolidation with
Senate Bill No. 1630, be approved in accordance with the attached copy of the bill as reconciled and approved by
the conferees."
The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,
WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR THESE PURPOSES AMENDING
AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, AND FOR OTHER PURPOSES," was thereafter approved by the House of Representatives on April
27, 1994 and by the Senate on May 2, 1994. The enrolled bill was then presented to the President of the Philippines
who, on May 5, 1994, signed it. It became Republic Act No. 7716. On May 12, 1994, Republic Act No. 7716 was
published in two newspapers of general circulation and, on May 28, 1994, it took effect, although its implementation
was suspended until June 30, 1994 to allow time for the registration of business entities. It would have been
enforced on July 1, 1994 but its enforcement was stopped because the Court, by the vote of 11 to 4 of its members,
granted a temporary restraining order on June 30, 1994.

First. Petitioners' contention is that Republic Act No. 7716 did not "originate exclusively" in the House of
Representatives as required by Art. VI, §24 of the Constitution, because it is in fact the result of the consolidation of
two distinct bills, H. No. 11197 and S. No. 1630. In this connection, petitioners point out that although Art. VI, SS 24
was adopted from the American Federal Constitution, 2 it is notable in two respects: the verb "shall originate" is
qualified in the Philippine Constitution by the word "exclusively" and the phrase "as on other bills" in the American
version is omitted. This means, according to them, that to be considered as having originated in the House,
Republic Act No. 7716 must retain the essence of H. No. 11197.

This argument will not bear analysis. To begin with, it is not the law — but the revenue bill — which is required by
the Constitution to "originate exclusively" in the House of Representatives. It is important to emphasize this,
because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a
rewriting of the whole. The possibility of a third version by the conference committee will be discussed later. At this
point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that
a revenue statute — and not only the bill which initiated the legislative process culminating in the enactment of the
law — must substantially be the same as the House bill would be to deny the Senate's power not only to "concur
with amendments" but also to "propose amendments." It would be to violate the coequality of legislative power of the
two houses of Congress and in fact make the House superior to the Senate.

The contention that the constitutional design is to limit the Senate's power in respect of revenue bills in order to
compensate for the grant to the Senate of the treaty-ratifying power 3 and thereby equalize its powers and those of
the House overlooks the fact that the powers being compared are different. We are dealing here with the legislative
power which under the Constitution is vested not in any particular chamber but in the Congress of the Philippines,
consisting of "a Senate and a House of Representatives." 4 The exercise of the treaty-ratifying power is not the
exercise of legislative power. It is the exercise of a check on the executive power. There is, therefore, no justification
for comparing the legislative powers of the House and of the Senate on the basis of the possession of such
nonlegislative power by the Senate. The possession of a similar power by the U.S. Senate 5 has never been thought
of as giving it more legislative powers than the House of Representatives.

In the United States, the validity of a provision (§ 37) imposing an ad valorem tax based on the weight of vessels,
which the U.S. Senate had inserted in the Tariff Act of 1909, was upheld against the claim that the provision was a
revenue bill which originated in the Senate in contravention of Art. I, § 7 of the U.S. Constitution. 6 Nor is the power
to amend limited to adding a provision or two in a revenue bill emanating from the House. The U.S. Senate has
gone so far as changing the whole of bills following the enacting clause and substituting its own versions. In 1883,
for example, it struck out everything after the enacting clause of a tariff bill and wrote in its place its own measure,
and the House subsequently accepted the amendment. The U.S. Senate likewise added 847 amendments to what
later became the Payne-Aldrich Tariff Act of 1909; it dictated the schedules of the Tariff Act of 1921; it rewrote an
extensive tax revision bill in the same year and recast most of the tariff bill of 1922. 7 Given, then, the power of the
Senate to propose amendments, the Senate can propose its own version even with respect to bills which are
required by the Constitution to originate in the House.

It is insisted, however, that S. No. 1630 was passed not in substitution of H. No. 11197 but of another Senate bill (S.
No. 1129) earlier filed and that what the Senate did was merely to "take [H. No. 11197] into consideration" in
enacting S. No. 1630. There is really no difference between the Senate preserving H. No. 11197 up to the enacting
clause and then writing its own version following the enacting clause (which, it would seem, petitioners admit is an
amendment by substitution), and, on the other hand, separately presenting a bill of its own on the same subject
matter. In either case the result are two bills on the same subject.
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills, bills authorizing
an increase of the public debt, private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the districts, the members of the House can be
expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at
large, are expected to approach the same problems from the national perspective. Both views are thereby made to
bear on the enactment of such laws.

Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill
from the House, so long as action by the Senate as a body is withheld pending receipt of the House bill. The Court
cannot, therefore, understand the alarm expressed over the fact that on March 1, 1993, eight months before the
House passed H. No. 11197, S. No. 1129 had been filed in the Senate. After all it does not appear that the Senate
ever considered it. It was only after the Senate had received H. No. 11197 on November 23, 1993 that the process
of legislation in respect of it began with the referral to the Senate Committee on Ways and Means of H. No. 11197
and the submission by the Committee on February 7, 1994 of S. No. 1630. For that matter, if the question were
simply the priority in the time of filing of bills, the fact is that it was in the House that a bill (H. No. 253) to amend the
VAT law was first filed on July 22, 1992. Several other bills had been filed in the House before S. No. 1129 was filed
in the Senate, and H. No. 11197 was only a substitute of those earlier bills.

Second. Enough has been said to show that it was within the power of the Senate to propose S. No. 1630. We now
pass to the next argument of petitioners that S. No. 1630 did not pass three readings on separate days as required
by the Constitution 8 because the second and third readings were done on the same day, March 24, 1994. But this
was because on February 24, 1994 9 and again on March 22, 1994, 10 the President had certified S. No. 1630 as
urgent. The presidential certification dispensed with the requirement not only of printing but also that of reading the
bill on separate days. The phrase "except when the President certifies to the necessity of its immediate enactment,
etc." in Art. VI, § 26(2) qualifies the two stated conditions before a bill can become a law: (i) the bill has passed three
readings on separate days and (ii) it has been printed in its final form and distributed three days before it is finally
approved.

In other words, the "unless" clause must be read in relation to the "except" clause, because the two are really
coordinate clauses of the same sentence. To construe the "except" clause as simply dispensing with the second
requirement in the "unless" clause (i.e., printing and distribution three days before final approval) would not only
violate the rules of grammar. It would also negate the very premise of the "except" clause: the necessity of securing
the immediate enactment of a bill which is certified in order to meet a public calamity or emergency. For if it is only
the printing that is dispensed with by presidential certification, the time saved would be so negligible as to be of any
use in insuring immediate enactment. It may well be doubted whether doing away with the necessity of printing and
distributing copies of the bill three days before the third reading would insure speedy enactment of a law in the face
of an emergency requiring the calling of a special election for President and Vice-President. Under the Constitution
such a law is required to be made within seven days of the convening of Congress in emergency session. 11

That upon the certification of a bill by the President the requirement of three readings on separate days and of
printing and distribution can be dispensed with is supported by the weight of legislative practice. For example, the
bill defining the certiorari jurisdiction of this Court which, in consolidation with the Senate version, became Republic
Act No. 5440, was passed on second and third readings in the House of Representatives on the same day (May 14,
1968) after the bill had been certified by the President as urgent. 12

There is, therefore, no merit in the contention that presidential certification dispenses only with the requirement for
the printing of the bill and its distribution three days before its passage but not with the requirement of three readings
on separate days, also.

It is nonetheless urged that the certification of the bill in this case was invalid because there was no emergency, the
condition stated in the certification of a "growing budget deficit" not being an unusual condition in this country.

It is noteworthy that no member of the Senate saw fit to controvert the reality of the factual basis of the certification.
To the contrary, by passing S. No. 1630 on second and third readings on March 24, 1994, the Senate accepted the
President's certification. Should such certification be now reviewed by this Court, especially when no evidence has
been shown that, because S. No. 1630 was taken up on second and third readings on the same day, the members
of the Senate were deprived of the time needed for the study of a vital piece of legislation?
The sufficiency of the factual basis of the suspension of the writ of habeas corpus or declaration of martial law under
Art. VII, § 18, or the existence of a national emergency justifying the delegation of extraordinary powers to the
President under Art. VI, § 23(2), is subject to judicial review because basic rights of individuals may be at hazard.
But the factual basis of presidential certification of bills, which involves doing away with procedural requirements
designed to insure that bills are duly considered by members of Congress, certainly should elicit a different standard
of review.

Petitioners also invite attention to the fact that the President certified S. No. 1630 and not H. No. 11197. That is
because S. No. 1630 was what the Senate was considering. When the matter was before the House, the President
likewise certified H. No. 9210 the pending in the House.

Third. Finally it is contended that the bill which became Republic Act No. 7716 is the bill which the Conference
Committee prepared by consolidating H. No. 11197 and S. No. 1630. It is claimed that the Conference Committee
report included provisions not found in either the House bill or the Senate bill and that these provisions were
"surreptitiously" inserted by the Conference Committee. Much is made of the fact that in the last two days of its
session on April 21 and 25, 1994 the Committee met behind closed doors. We are not told, however, whether the
provisions were not the result of the give and take that often mark the proceedings of conference committees.

Nor is there anything unusual or extraordinary about the fact that the Conference Committee met in executive
sessions. Often the only way to reach agreement on conflicting provisions is to meet behind closed doors, with only
the conferees present. Otherwise, no compromise is likely to be made. The Court is not about to take the suggestion
of a cabal or sinister motive attributed to the conferees on the basis solely of their "secret meetings" on April 21 and
25, 1994, nor read anything into the incomplete remarks of the members, marked in the transcript of stenographic
notes by ellipses. The incomplete sentences are probably due to the stenographer's own limitations or to the
incoherence that sometimes characterize conversations. William Safire noted some such lapses in recorded talks
even by recent past Presidents of the United States.

In any event, in the United States conference committees had been customarily held in executive sessions with only
the conferees and their staffs in attendance. 13 Only in November 1975 was a new rule adopted requiring open
sessions. Even then a majority of either chamber's conferees may vote in public to close the meetings. 14

As to the possibility of an entirely new bill emerging out of a Conference Committee, it has been explained:

Under congressional rules of procedure, conference committees are not expected to make any
material change in the measure at issue, either by deleting provisions to which both houses have
already agreed or by inserting new provisions. But this is a difficult provision to enforce. Note the
problem when one house amends a proposal originating in either house by striking out everything
following the enacting clause and substituting provisions which make it an entirely new bill. The
versions are now altogether different, permitting a conference committee to draft essentially a new
bill. . . . 15

The result is a third version, which is considered an "amendment in the nature of a substitute," the only requirement
for which being that the third version be germane to the subject of the House and Senate bills. 16

Indeed, this Court recently held that it is within the power of a conference committee to include in its report an
entirely new provision that is not found either in the House bill or in the Senate bill. 17 If the committee can propose
an amendment consisting of one or two provisions, there is no reason why it cannot propose several provisions,
collectively considered as an "amendment in the nature of a substitute," so long as such amendment is germane to
the subject of the bills before the committee. After all, its report was not final but needed the approval of both houses
of Congress to become valid as an act of the legislative department. The charge that in this case the Conference
Committee acted as a third legislative chamber is thus without any basis. 18

Nonetheless, it is argued that under the respective Rules of the Senate and the House of Representatives a
conference committee can only act on the differing provisions of a Senate bill and a House bill, and that contrary to
these Rules the Conference Committee inserted provisions not found in the bills submitted to it. The following
provisions are cited in support of this contention:

Rules of the Senate

 Rule XII:

§ 26. In the event that the Senate does not agree with the House of Representatives on the
provision of any bill or joint resolution, the differences shall be settled by a conference committee of
both Houses which shall meet within ten days after their composition.

The President shall designate the members of the conference committee in accordance with
subparagraph (c), Section 3 of Rule III.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the
changes in or amendments to the subject measure, and shall be signed by the conferees.

The consideration of such report shall not be in order unless the report has been filed with the
Secretary of the Senate and copies thereof have been distributed to the Members.

(Emphasis added)

Rules of the House of Representatives

Rule XIV:

§ 85. Conference Committee Reports. — In the event that the House does not agree with the Senate
on the amendments to any bill or joint resolution, the differences may be settled by conference
committees of both Chambers.

The consideration of conference committee reports shall always be in order, except when the journal
is being read, while the roll is being called or the House is dividing on any question. Each of the
pages of such reports shall be signed by the conferees. Each report shall contain a detailed,
sufficiently explicit statement of the changes in or amendments to the subject measure.

The consideration of such report shall not be in order unless copies thereof are distributed to the
Members: Provided, That in the last fifteen days of each session period it shall be deemed sufficient
that three copies of the report, signed as above provided, are deposited in the office of the Secretary
General.

(Emphasis added)

To be sure, nothing in the Rules limits a conference committee to a consideration of conflicting provisions. But Rule
XLIV, § 112 of the Rules of the Senate is cited to the effect that "If there is no Rule applicable to a specific case the
precedents of the Legislative Department of the Philippines shall be resorted to, and as a supplement of these, the
Rules contained in Jefferson's Manual." The following is then quoted from the Jefferson's Manual:

The managers of a conference must confine themselves to the differences committed to them. . .
and may not include subjects not within disagreements, even though germane to a question in issue.

Note that, according to Rule XLIX, § 112, in case there is no specific rule applicable, resort must be to the legislative
practice. The Jefferson's Manual is resorted to only as supplement. It is common place in Congress that conference
committee reports include new matters which, though germane, have not been committed to the committee. This
practice was admitted by Senator Raul S. Roco, petitioner in G.R. No. 115543, during the oral argument in these
cases. Whatever, then, may be provided in the Jefferson's Manual must be considered to have been modified by the
legislative practice. If a change is desired in the practice it must be sought in Congress since this question is not
covered by any constitutional provision but is only an internal rule of each house. Thus, Art. VI, § 16(3) of the
Constitution provides that "Each House may determine the rules of its proceedings. . . ."

This observation applies to the other contention that the Rules of the two chambers were likewise disregarded in the
preparation of the Conference Committee Report because the Report did not contain a "detailed and sufficiently
explicit statement of changes in, or amendments to, the subject measure." The Report used brackets and capital
letters to indicate the changes. This is a standard practice in bill-drafting. We cannot say that in using these marks
and symbols the Committee violated the Rules of the Senate and the House. Moreover, this Court is not the proper
forum for the enforcement of these internal Rules. To the contrary, as we have already ruled, "parliamentary rules
are merely procedural and with their observance the courts have no concern." 19 Our concern is with the procedural
requirements of the Constitution for the enactment of laws. As far as these requirements are concerned, we are
satisfied that they have been faithfully observed in these cases.

Nor is there any reason for requiring that the Committee's Report in these cases must have undergone three
readings in each of the two houses. If that be the case, there would be no end to negotiation since each house may
seek modifications of the compromise bill. The nature of the bill, therefore, requires that it be acted upon by each
house on a "take it or leave it" basis, with the only alternative that if it is not approved by both houses, another
conference committee must be appointed. But then again the result would still be a compromise measure that may
not be wholly satisfying to both houses.

Art. VI, § 26(2) must, therefore, be construed as referring only to bills introduced for the first time in either house of
Congress, not to the conference committee report. For if the purpose of requiring three readings is to give members
of Congress time to study bills, it cannot be gainsaid that H. No. 11197 was passed in the House after three
readings; that in the Senate it was considered on first reading and then referred to a committee of that body; that
although the Senate committee did not report out the House bill, it submitted a version (S. No. 1630) which it had
prepared by "taking into consideration" the House bill; that for its part the Conference Committee consolidated the
two bills and prepared a compromise version; that the Conference Committee Report was thereafter approved by
the House and the Senate, presumably after appropriate study by their members. We cannot say that, as a matter of
fact, the members of Congress were not fully informed of the provisions of the bill. The allegation that the
Conference Committee usurped the legislative power of Congress is, in our view, without warrant in fact and in law.

Fourth. Whatever doubts there may be as to the formal validity of Republic Act No. 7716 must be resolved in its
favor. Our cases 20 manifest firm adherence to the rule that an enrolled copy of a bill is conclusive not only of its
provisions but also of its due enactment. Not even claims that a proposed constitutional amendment was invalid
because the requisite votes for its approval had not been obtained 21 or that certain provisions of a statute had been
"smuggled" in the printing of the bill 22 have moved or persuaded us to look behind the proceedings of a coequal
branch of the government. There is no reason now to depart from this rule.

No claim is here made that the "enrolled bill" rule is absolute. In fact in one case 23 we "went behind" an enrolled bill
and consulted the Journal to determine whether certain provisions of a statute had been approved by the Senate in
view of the fact that the President of the Senate himself, who had signed the enrolled bill, admitted a mistake and
withdrew his signature, so that in effect there was no longer an enrolled bill to consider.

But where allegations that the constitutional procedures for the passage of bills have not been observed have no
more basis than another allegation that the Conference Committee "surreptitiously" inserted provisions into a bill
which it had prepared, we should decline the invitation to go behind the enrolled copy of the bill. To disregard the
"enrolled bill" rule in such cases would be to disregard the respect due the other two departments of our
government.

Fifth. An additional attack on the formal validity of Republic Act No. 7716 is made by the Philippine Airlines, Inc.,
petitioner in G.R. No. 11582, namely, that it violates Art. VI, § 26(1) which provides that "Every bill passed by
Congress shall embrace only one subject which shall be expressed in the title thereof." It is contended that neither
H. No. 11197 nor S. No. 1630 provided for removal of exemption of PAL transactions from the payment of the VAT
and that this was made only in the Conference Committee bill which became Republic Act No. 7716 without
reflecting this fact in its title.

The title of Republic Act No. 7716 is:

AN ACT RESTRUCTURING THE VALUE- ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX
BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED, AND FOR OTHER PURPOSES.

Among the provisions of the NIRC amended is § 103, which originally read:
 § 103. Exempt transactions. — The following shall be exempt from the value-added tax:

....

(q) Transactions which are exempt under special laws or international agreements to which the
Philippines is a signatory. Among the transactions exempted from the VAT were those of PAL
because it was exempted under its franchise (P.D. No. 1590) from the payment of all "other taxes . .
. now or in the near future," in consideration of the payment by it either of the corporate income tax
or a franchise tax of 2%.

As a result of its amendment by Republic Act No. 7716, § 103 of the NIRC now provides:

§ 103. Exempt transactions. — The following shall be exempt from the value-added tax:

....

(q) Transactions which are exempt under special laws, except those granted under Presidential
Decree Nos. 66, 529, 972, 1491, 1590. . . .

The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is concerned.

The question is whether this amendment of § 103 of the NIRC is fairly embraced in the title of Republic Act No.
7716, although no mention is made therein of P.D. No. 1590 as among those which the statute amends. We think it
is, since the title states that the purpose of the statute is to expand the VAT system, and one way of doing this is to
widen its base by withdrawing some of the exemptions granted before. To insist that P.D. No. 1590 be mentioned in
the title of the law, in addition to § 103 of the NIRC, in which it is specifically referred to, would be to insist that the
title of a bill should be a complete index of its content.

The constitutional requirement that every bill passed by Congress shall embrace only one subject which shall be
expressed in its title is intended to prevent surprise upon the members of Congress and to inform the people of
pending legislation so that, if they wish to, they can be heard regarding it. If, in the case at bar, petitioner did not
know before that its exemption had been withdrawn, it is not because of any defect in the title but perhaps for the
same reason other statutes, although published, pass unnoticed until some event somehow calls attention to their
existence. Indeed, the title of Republic Act No. 7716 is not any more general than the title of PAL's own franchise
under P.D. No. 1590, and yet no mention is made of its tax exemption. The title of P.D. No. 1590 is:

AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE AIRLINES, INC. TO ESTABLISH,

OPERATE, AND MAINTAIN AIR-TRANSPORT SERVICES IN THE PHILIPPINES AND BETWEEN
THE PHILIPPINES AND OTHER COUNTRIES.

The trend in our cases is to construe the constitutional requirement in such a manner that courts do not unduly
interfere with the enactment of necessary legislation and to consider it sufficient if the title expresses the general
subject of the statute and all its provisions are germane to the general subject thus expressed. 24

It is further contended that amendment of petitioner's franchise may only be made by special law, in view of § 24 of
P.D. No. 1590 which provides:

This franchise, as amended, or any section or provision hereof may only be modified, amended, or
repealed expressly by a special law or decree that shall specifically modify, amend, or repeal this
franchise or any section or provision thereof.

This provision is evidently intended to prevent the amendment of the franchise by mere implication resulting from
the enactment of a later inconsistent statute, in consideration of the fact that a franchise is a contract which can be
altered only by consent of the parties. Thus in Manila Railroad Co. v.
Rafferty, 25 it was held that an Act of the U.S. Congress, which provided for the payment of tax on certain goods and
articles imported into the Philippines, did not amend the franchise of plaintiff, which exempted it from all taxes
except those mentioned in its franchise. It was held that a special law cannot be amended by a general law.
In contrast, in the case at bar, Republic Act No. 7716 expressly amends PAL's franchise (P.D. No. 1590) by
specifically excepting from the grant of exemptions from the VAT PAL's exemption under P.D. No. 1590. This is
within the power of Congress to do under Art. XII, § 11 of the Constitution, which provides that the grant of a
franchise for the operation of a public utility is subject to amendment, alteration or repeal by Congress when the
common good so requires.

II. SUBSTANTIVE ISSUES

A. Claims of Press Freedom, Freedom of Thought and Religious

Freedom

The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit organization of newspaper
publishers established for the improvement of journalism in the Philippines. On the other hand, petitioner in G.R. No.
115781, the Philippine Bible Society (PBS), is a nonprofit organization engaged in the printing and distribution of
bibles and other religious articles. Both petitioners claim violations of their rights under § § 4 and 5 of the Bill of
Rights as a result of the enactment of the VAT Law.

The PPI questions the law insofar as it has withdrawn the exemption previously granted to the press under § 103 (f)
of the NIRC. Although the exemption was subsequently restored by administrative regulation with respect to the
circulation income of newspapers, the PPI presses its claim because of the possibility that the exemption may still
be removed by mere revocation of the regulation of the Secretary of Finance. On the other hand, the PBS goes so
far as to question the Secretary's power to grant exemption for two reasons: (1) The Secretary of Finance has no
power to grant tax exemption because this is vested in Congress and requires for its exercise the vote of a majority
of all its members 26 and (2) the Secretary's duty is to execute the law.

§ 103 of the NIRC contains a list of transactions exempted from VAT. Among the transactions previously granted
exemption were:

(f) Printing, publication, importation or sale of books and any newspaper, magazine, review, or
bulletin which appears at regular intervals with fixed prices for subscription and sale and which is
devoted principally to the publication of advertisements.

Republic Act No. 7716 amended § 103 by deleting ¶ (f) with the result that print media became subject to the VAT
with respect to all aspects of their operations. Later, however, based on a memorandum of the Secretary of Justice,
respondent Secretary of Finance issued Revenue Regulations No. 11-94, dated June 27, 1994, exempting the
"circulation income of print media pursuant to § 4 Article III of the 1987 Philippine Constitution guaranteeing against
abridgment of freedom of the press, among others." The exemption of "circulation income" has left income from
advertisements still subject to the VAT.

It is unnecessary to pass upon the contention that the exemption granted is beyond the authority of the Secretary of
Finance to give, in view of PPI's contention that even with the exemption of the circulation revenue of print media
there is still an unconstitutional abridgment of press freedom because of the imposition of the VAT on the gross
receipts of newspapers from advertisements and on their acquisition of paper, ink and services for publication. Even
on the assumption that no exemption has effectively been granted to print media transactions, we find no violation of
press freedom in these cases.

To be sure, we are not dealing here with a statute that on its face operates in the area of press freedom. The PPI's
claim is simply that, as applied to newspapers, the law abridges press freedom. Even with due recognition of its high
estate and its importance in a democratic society, however, the press is not immune from general regulation by the
State. It has been held:

The publisher of a newspaper has no immunity from the application of general laws. He has no
special privilege to invade the rights and liberties of others. He must answer for libel. He may be
punished for contempt of court. . . . Like others, he must pay equitable and nondiscriminatory taxes
on his business. . . . 27

The PPI does not dispute this point, either.

What it contends is that by withdrawing the exemption previously granted to print media transactions involving
printing, publication, importation or sale of newspapers, Republic Act No. 7716 has singled out the press for
discriminatory treatment and that within the class of mass media the law discriminates against print media by giving
broadcast media favored treatment. We have carefully examined this argument, but we are unable to find a
differential treatment of the press by the law, much less any censorial motivation for its enactment. If the press is
now required to pay a value-added tax on its transactions, it is not because it is being singled out, much less
targeted, for special treatment but only because of the removal of the exemption previously granted to it by law. The
withdrawal of exemption is all that is involved in these cases. Other transactions, likewise previously granted
exemption, have been delisted as part of the scheme to expand the base and the scope of the VAT system. The law
would perhaps be open to the charge of discriminatory treatment if the only privilege withdrawn had been that
granted to the press. But that is not the case.

The situation in the case at bar is indeed a far cry from those cited by the PPI in support of its claim that Republic
Act No. 7716 subjects the press to discriminatory taxation. In the cases cited, the discriminatory purpose was clear
either from the background of the law or from its operation. For example, in Grosjean v. American Press Co., 28 the
law imposed a license tax equivalent to 2% of the gross receipts derived from advertisements only on newspapers
which had a circulation of more than 20,000 copies per week. Because the tax was not based on the volume of
advertisement alone but was measured by the extent of its circulation as well, the law applied only to the thirteen
large newspapers in Louisiana, leaving untaxed four papers with circulation of only slightly less than 20,000 copies a
week and 120 weekly newspapers which were in serious competition with the thirteen newspapers in question. It
was well known that the thirteen newspapers had been critical of Senator Huey Long, and the Long-dominated
legislature of Louisiana respondent by taxing what Long described as the "lying newspapers" by imposing on them
"a tax on lying." The effect of the tax was to curtail both their revenue and their circulation. As the U.S. Supreme
Court noted, the tax was "a deliberate and calculated device in the guise of a tax to limit the circulation of
information to which the public is entitled in virtue of the constitutional guaranties." 29 The case is a classic illustration
of the warning that the power to tax is the power to destroy.

In the other case 30 invoked by the PPI, the press was also found to have been singled out because everything was
exempt from the "use tax" on ink and paper, except the press. Minnesota imposed a tax on the sales of goods in
that state. To protect the sales tax, it enacted a complementary tax on the privilege of "using, storing or consuming
in that state tangible personal property" by eliminating the residents' incentive to get goods from outside states
where the sales tax might be lower. The Minnesota Star Tribune was exempted from both taxes from 1967 to 1971.
In 1971, however, the state legislature amended the tax scheme by imposing the "use tax" on the cost of paper and
ink used for publication. The law was held to have singled out the press because (1) there was no reason for
imposing the "use tax" since the press was exempt from the sales tax and (2) the "use tax" was laid on an
"intermediate transaction rather than the ultimate retail sale." Minnesota had a heavy burden of justifying the
differential treatment and it failed to do so. In addition, the U.S. Supreme Court found the law to be discriminatory
because the legislature, by again amending the law so as to exempt the first $100,000 of paper and ink used, further
narrowed the coverage of the tax so that "only a handful of publishers pay any tax at all and even fewer pay any
significant amount of tax." 31 The discriminatory purpose was thus very clear.

More recently, in Arkansas Writers' Project, Inc. v. Ragland, 32 it was held that a law which taxed general interest
magazines but not newspapers and religious, professional, trade and sports journals was discriminatory because
while the tax did not single out the press as a whole, it targeted a small group within the press. What is more, by
differentiating on the basis of contents (i.e., between general interest and special interests such as religion or sports)
the law became "entirely incompatible with the First Amendment's guarantee of freedom of the press."

These cases come down to this: that unless justified, the differential treatment of the press creates risks of
suppression of expression. In contrast, in the cases at bar, the statute applies to a wide range of goods and
services. The argument that, by imposing the VAT only on print media whose gross sales exceeds P480,000 but not
more than P750,000, the law discriminates 33 is without merit since it has not been shown that as a result the class
subject to tax has been unreasonably narrowed. The fact is that this limitation does not apply to the press along but
to all sales. Nor is impermissible motive shown by the fact that print media and broadcast media are treated
differently. The press is taxed on its transactions involving printing and publication, which are different from the
transactions of broadcast media. There is thus a reasonable basis for the classification.

The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers are immune from
any forms of ordinary taxation." The license tax in the Grosjean case was declared invalid because it was "one
single in kind, with a long history of hostile misuse against the freedom of the
press." 34 On the other hand, Minneapolis Star acknowledged that "The First Amendment does not prohibit all
regulation of the press [and that] the States and the Federal Government can subject newspapers to generally
applicable economic regulations without creating constitutional problems." 35

What has been said above also disposes of the allegations of the PBS that the removal of the exemption of printing,
publication or importation of books and religious articles, as well as their printing and publication, likewise violates
freedom of thought and of conscience. For as the U.S. Supreme Court unanimously held in Jimmy Swaggart
Ministries v. Board of Equalization, 36 the Free Exercise of Religion Clause does not prohibit imposing a generally
applicable sales and use tax on the sale of religious materials by a religious organization.

This brings us to the question whether the registration provision of the law, 37 although of general applicability,
nonetheless is invalid when applied to the press because it lays a prior restraint on its essential freedom. The case
of American Bible Society v. City of Manila 38 is cited by both the PBS and the PPI in support of their contention that
the law imposes censorship. There, this Court held that an ordinance of the City of Manila, which imposed a license
fee on those engaged in the business of general merchandise, could not be applied to the appellant's sale of bibles
and other religious literature. This Court relied on Murdock v. Pennsylvania, 39 in which it was held that, as a license
fee is fixed in amount and unrelated to the receipts of the taxpayer, the license fee, when applied to a religious sect,
was actually being imposed as a condition for the exercise of the sect's right under the Constitution. For that reason,
it was held, the license fee "restrains in advance those constitutional liberties of press and religion and inevitably
tends to suppress their exercise." 40

But, in this case, the fee in § 107, although a fixed amount (P1,000), is not imposed for the exercise of a privilege
but only for the purpose of defraying part of the cost of registration. The registration requirement is a central feature
of the VAT system. It is designed to provide a record of tax credits because any person who is subject to the
payment of the VAT pays an input tax, even as he collects an output tax on sales made or services rendered. The
registration fee is thus a mere administrative fee, one not imposed on the exercise of a privilege, much less a
constitutional right.

For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that it offends the free
speech, press and freedom of religion guarantees of the Constitution to be without merit. For the same reasons, we
find the claim of the Philippine Educational Publishers Association (PEPA) in G.R. No. 115931 that the increase in
the price of books and other educational materials as a result of the VAT would violate the constitutional mandate to
the government to give priority to education, science and technology (Art. II, § 17) to be untenable.

B. Claims of Regressivity, Denial of Due Process, Equal Protection,

and Impairment
of Contracts

There is basis for passing upon claims that on its face the statute violates the guarantees of freedom of speech,
press and religion. The possible "chilling effect" which it may have on the essential freedom of the mind and
conscience and the need to assure that the channels of communication are open and operating importunately
demand the exercise of this Court's power of review.

There is, however, no justification for passing upon the claims that the law also violates the rule that taxation must
be progressive and that it denies petitioners' right to due process and that equal protection of the laws. The reason
for this different treatment has been cogently stated by an eminent authority on constitutional law thus: "[W]hen
freedom of the mind is imperiled by law, it is freedom that commands a momentum of respect; when property is
imperiled it is the lawmakers' judgment that commands respect. This dual standard may not precisely reverse the
presumption of constitutionality in civil liberties cases, but obviously it does set up a hierarchy of values within the
due process clause." 41

Indeed, the absence of threat of immediate harm makes the need for judicial intervention less evident and
underscores the essential nature of petitioners' attack on the law on the grounds of regressivity, denial of due
process and equal protection and impairment of contracts as a mere academic discussion of the merits of the law.
For the fact is that there have even been no notices of assessments issued to petitioners and no determinations at
the administrative levels of their claims so as to illuminate the actual operation of the law and enable us to reach
sound judgment regarding so fundamental questions as those raised in these suits.

Thus, the broad argument against the VAT is that it is regressive and that it violates the requirement that "The rule
of taxation shall be uniform and equitable [and] Congress shall evolve a progressive system of
taxation." 42 Petitioners in G.R. No. 115781 quote from a paper, entitled "VAT Policy Issues: Structure, Regressivity,
Inflation and Exports" by Alan A. Tait of the International Monetary Fund, that "VAT payment by low-income
households will be a higher proportion of their incomes (and expenditures) than payments by higher-income
households. That is, the VAT will be regressive." Petitioners contend that as a result of the uniform 10% VAT, the
tax on consumption goods of those who are in the higher-income bracket, which before were taxed at a rate higher
than 10%, has been reduced, while basic commodities, which before were taxed at rates ranging from 3% to 5%,
are now taxed at a higher rate.

Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by respondents that in
fact it distributes the tax burden to as many goods and services as possible particularly to those which are within the
reach of higher-income groups, even as the law exempts basic goods and services. It is thus equitable. The goods
and properties subject to the VAT are those used or consumed by higher-income groups. These include real
properties held primarily for sale to customers or held for lease in the ordinary course of business, the right or
privilege to use industrial, commercial or scientific equipment, hotels, restaurants and similar places, tourist buses,
and the like. On the other hand, small business establishments, with annual gross sales of less than P500,000, are
exempted. This, according to respondents, removes from the coverage of the law some 30,000 business
establishments. On the other hand, an occasional paper 43 of the Center for Research and Communication cities a
NEDA study that the VAT has minimal impact on inflation and income distribution and that while additional
expenditure for the lowest income class is only P301 or 1.49% a year, that for a family earning P500,000 a year or
more is P8,340 or 2.2%.

Lacking empirical data on which to base any conclusion regarding these arguments, any discussion whether the
VAT is regressive in the sense that it will hit the "poor" and middle-income group in society harder than it will the
"rich," as the Cooperative Union of the Philippines (CUP) claims in G.R. No. 115873, is largely an academic
exercise. On the other hand, the CUP's contention that Congress' withdrawal of exemption of producers
cooperatives, marketing cooperatives, and service cooperatives, while maintaining that granted to electric
cooperatives, not only goes against the constitutional policy to promote cooperatives as instruments of social justice
(Art. XII, § 15) but also denies such cooperatives the equal protection of the law is actually a policy argument. The
legislature is not required to adhere to a policy of "all or none" in choosing the subject of taxation. 44

Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA), petitioner in G.R. 115754,
that the VAT will reduce the mark up of its members by as much as 85% to 90% any more concrete. It is a mere
allegation. On the other hand, the claim of the Philippine Press Institute, petitioner in G.R. No. 115544, that the VAT
will drive some of its members out of circulation because their profits from advertisements will not be enough to pay
for their tax liability, while purporting to be based on the financial statements of the newspapers in question, still falls
short of the establishment of facts by evidence so necessary for adjudicating the question whether the tax is
oppressive and confiscatory.

Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution
to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to
give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic
and political inequalities (Art. XIII, § 1), or for the promotion of the right to "quality education" (Art. XIV, § 1). These
provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights.

At all events, our 1988 decision in Kapatiran 45 should have laid to rest the questions now raised against the VAT.
There similar arguments made against the original VAT Law (Executive Order No. 273) were held to be
hypothetical, with no more basis than newspaper articles which this Court found to be "hearsay and [without]
evidentiary value." As Republic Act No. 7716 merely expands the base of the VAT system and its coverage as
provided in the original VAT Law, further debate on the desirability and wisdom of the law should have shifted to
Congress.

Only slightly less abstract but nonetheless hypothetical is the contention of CREBA that the imposition of the VAT on
the sales and leases of real estate by virtue of contracts entered into prior to the effectivity of the law would violate
the constitutional provision that "No law impairing the obligation of contracts shall be passed." It is enough to say
that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing
power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties,
but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the
legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government
which retains adequate authority to secure the peace and good order of society. 46

In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation
save only where a tax exemption has been granted for a valid consideration. 47 Such is not the case of PAL in G.R.
No. 115852, and we do not understand it to make this claim. Rather, its position, as discussed above, is that the
removal of its tax exemption cannot be made by a general, but only by a specific, law.

The substantive issues raised in some of the cases are presented in abstract, hypothetical form because of the lack
of a concrete record. We accept that this Court does not only adjudicate private cases; that public actions by "non-
Hohfeldian" 48 or ideological plaintiffs are now cognizable provided they meet the standing requirement of the
Constitution; that under Art. VIII, § 1, ¶ 2 the Court has a "special function" of vindicating constitutional rights.
Nonetheless the feeling cannot be escaped that we do not have before us in these cases a fully developed factual
record that alone can impart to our adjudication the impact of actuality 49 to insure that decision-making is informed
and well grounded. Needless to say, we do not have power to render advisory opinions or even jurisdiction over
petitions for declaratory judgment. In effect we are being asked to do what the Conference Committee is precisely
accused of having done in these cases — to sit as a third legislative chamber to review legislation.

We are told, however, that the power of judicial review is not so much power as it is duty imposed on this Court by
the Constitution and that we would be remiss in the performance of that duty if we decline to look behind the barriers
set by the principle of separation of powers. Art. VIII, § 1, ¶ 2 is cited in support of this view:

Judicial power includes the duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government.

To view the judicial power of review as a duty is nothing new. Chief Justice Marshall said so in 1803, to justify the
assertion of this power in Marbury v. Madison:

It is emphatically the province and duty of the judicial department to say what the law is. Those who
apply the rule to particular cases must of necessity expound and interpret that rule. If two laws
conflict with each other, the courts must decide on the operation of each. 50

Justice Laurel echoed this justification in 1936 in Angara v. Electoral Commission:

And when the judiciary mediates to allocate constitutional boundaries, it does not assert any
superiority over the other departments; it does not in reality nullify or invalidate an act of the
legislature, but only asserts the solemn and sacred obligation assigned to it by the Constitution to
determine conflicting claims of authority under the Constitution and to establish for the parties in an
actual controversy the rights which that instrument secures and guarantees to them. 51

This conception of the judicial power has been affirmed in several

cases 52 of this Court following Angara.

It does not add anything, therefore, to invoke this "duty" to justify this Court's intervention in what is essentially a
case that at best is not ripe for adjudication. That duty must still be performed in the context of a concrete case or
controversy, as Art. VIII, § 5(2) clearly defines our jurisdiction in terms of "cases," and nothing but "cases." That the
other departments of the government may have committed a grave abuse of discretion is not an independent
ground for exercising our power. Disregard of the essential limits imposed by the case and controversy requirement
can in the long run only result in undermining our authority as a court of law. For, as judges, what we are called
upon to render is judgment according to law, not according to what may appear to be the opinion of the day.
 _______________________________

In the preceeding pages we have endeavored to discuss, within limits, the validity of Republic Act No. 7716 in its
formal and substantive aspects as this has been raised in the various cases before us. To sum up, we hold:

(1) That the procedural requirements of the Constitution have been complied with by Congress in the enactment of
the statute;

(2) That judicial inquiry whether the formal requirements for the enactment of statutes — beyond those prescribed
by the Constitution — have been observed is precluded by the principle of separation of powers;

(3) That the law does not abridge freedom of speech, expression or the press, nor interfere with the free exercise of
religion, nor deny to any of the parties the right to an education; and

(4) That, in view of the absence of a factual foundation of record, claims that the law is regressive, oppressive and
confiscatory and that it violates vested rights protected under the Contract Clause are prematurely raised and do not
justify the grant of prospective relief by writ of prohibition.

WHEREFORE, the petitions in these cases are DISMISSED.

Arturo Tolentino v. Secretary of Finance and Commissioner of Internal Revenue
G.R. No. 115455; October 30, 1995
Mendoza, J.:

FACTS:
The present case involves motions seeking reconsideration of the Court’s decision dismissing the petitions for
the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax
Law. The motions, of which there are 10 in all, have been filed by the several petitioners.
The Philippine Press Institute, Inc. (PPI) contends that by removing the exemption of the press from the VAT
while maintaining those granted to others, the law discriminates against the press. At any rate, it is averred,
“even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional”, citing in
support of the case of Murdock v. Pennsylvania.

Chamber of Real Estate and Builders Associations, Invc., (CREBA), on the other hand, asserts that R.A. No. 7716
(1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt without reasonable
basis and (3) violates the rule that taxes should be uniform and equitable and that Congress shall “evolve a
progressive system of taxation”.

Further, the Cooperative Union of the Philippines (CUP), argues that legislature was to adopt a definite policy
of granting tax exemption to cooperatives that the present Constitution embodies provisions on cooperatives.
To subject cooperatives to the VAT would, therefore, be to infringe a constitutional policy.

ISSUE:
Whether or not, based on the aforementioned grounds of the petitioners, the Expanded Value-Added Tax Law
should be declared unconstitutional.

RULING:
No. With respect to the first contention, it would suffice to say that since the law granted the press a privilege,
the law could take back the privilege anytime without offense to the Constitution. The reason is simple: by
granting exemptions, the State does not forever waive the exercise of its sovereign prerogative. Indeed, in
withdrawing the exemption, the law merely subjects the press to the same tax burden to which other
businesses have long ago been subject. The PPI asserts that it does not really matter that the law does not
discriminate against the press because “even nondiscriminatory taxation on constitutionally guaranteed
freedom is unconstitutional.” The Court was speaking in that case (Murdock v. Pennsylvania) of a license tax,
which, unlike an ordinary tax, is mainly for regulation. Its imposition on the press is unconstitutional because it
lays a prior restraint on the exercise of its right. The VAT is, however, different. It is not a license tax. It is not a
tax on the exercise of a privilege, much less a constitutional right. It is imposed on the sale, barter, lease or
exchange of goods or properties or the sale or exchange of services and the lease of properties purely for
revenue purposes. To subject the press to its payment is not to burden the exercise of its right any more than
to make the press pay income tax or subject it to general regulation is not to violate its freedom under the
Constitution.
Anent the first contention of CREBA, it has been held in an early case that even though such taxation may
affect particular contracts, as it may increase the debt of one person and lessen the security of another, or
may impose additional burdens upon one class and release the burdens of another, still the tax must be paid
unless prohibited by the Constitution, nor can it be said that it impairs the obligation of any existing contract in
its true legal sense. It is next pointed out that while Section 4 of R.A. No. 7716 exempts such transactions as
the sale of agricultural products, food items, petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The sale of food items, petroleum, medical
and veterinary services, etc., which are essential goods and services was already exempt under Section 103,
pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A.
No. 7716 granted exemption to these transactions while subjecting those of petitioner to the payment of the
VAT. Finally, it is contended that R.A. No. 7716 also violates Art. VI, Section 28(1) which provides that “The rule
of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation”.
Nevertheless, equality and uniformity of taxation mean that all taxable articles or kinds of property of the
same class be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance
applies equally to all persons, firms, and corporations placed in similar situation. Furthermore, the
Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What
it simply provides is that Congress shall “evolve a progressive system of taxation.” The constitutional provision
has been interpreted to mean simply that “direct taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized.” The mandate to Congress is not to prescribe, but to evolve, a progressive
tax system.

As regards the contention of CUP, it is worth noting that its theory amounts to saying that under the
Constitution cooperatives are exempt from taxation. Such theory is contrary to the Constitution under which
only the following are exempt from taxation: charitable institutions, churches, and parsonages, by reason of
Art. VI, §28 (3), and non-stock, non-profit educational institutions by reason of Art. XIV, §4 (3).
With all the foregoing ratiocinations, it is clear that the subject law bears no constitutional infirmities and is
thus upheld.
 BULL v. UNITED STATES(1935)

No. 649

Argued: April 9, 1935Decided: April 29, 1935

[295 U.S. 247, 248] Messrs. Loring M. Black, Jr., and David A. Buckley, Jr., both of Washington, D.C., for petitioner.

[295 U.S. 247, 250] The Attorney General and Mr. James W. Morris, of Washington, D.C., for the United
States. [295 U.S. 247, 251]

Mr. Justice ROBERTS delivered the opinion of the Court.

Archibald H. Bull died February 13, 1920. He had been a member of a partnership engaged in the business of
ship-brokers. The agreement of association provided that in the event a partner died the survivors should
continue the business for one year subsequent to his death, and his estate should 'receive the same interests,
or participate in the losses to the same extent,' as the deceased partner would, if living, 'based on the usual
method of ascertaining what the said profits or losses would be . ... Or the estate of the deceased partner shall
have the option of withdrawing his interest from the firm within thirty days after the probate of will ... and all
adjustments of profits or losses shall be made as of the date of such withdrawal.' The estate's representative
did not exercise the option to withdraw in thirty days, and the business was conducted until December 31, 1920,
as contemplated by the agreement.

The enterprise required no capital and none was ever invested by the partners. Bull's share of profits from
January 1, 1920, to the date of his death, February 13, 1920, was $24,124.20; he had no other accumulated
profits [295 U.S. 247, 252] and no interest in any tangible property belonging to the firm. Profits accruing to the
estate for the period from the decedent's death to the end of 1920 were $212,718.79; $200,117.90 being paid
during the year, and $12, 601.70 during the first two months of 1921

The Court of Claims found:

'When filing an estate tax return, the executor included the decedent's interest in the partnership at a
value of $24,124.20, which represented the decedent's share of the earnings accrued to the date of
death, whereas the Commissioner, in 1921, valued such interest at $235,202. 99, and subjected such
increased value to the payment of an estate tax, which was paid in June and August, 1921. The
lastmentioned amount was made up of the amount of $24,124.20 plus the amount of $212,718.79,
hereinbefore mentioned. The estate tax on this increased amount was $41, 517.45.1
'April 14, 1921, plaintiff filed an income tax return for the period February 13, 1920, to December 31,
1920, for the estate of the decedent, which return did not include, as income, the amount of $200,117.09
received as the share of the profits earned by the partnership during the period for which the return was
filed. The estate employed the cash receipts and disbursement method of accounting.
'Thereafter, in July, 1925, the Commissioner determined that the sum of $200,117.09 received in 1920
should have been returned by the executor as income to the estate for the period February 13 to
December 31, 1920, and notified plaintiff of a deficiency in income tax due from the estate for that
period of $261,212.65, which was due in part to the inclusion of that amount as taxable income and in
part to adjustments not here in contro- [295 U.S. 247, 253] versy. No deduction was allowed by the
Commissioner from the amount of $ 200,117.09 on account of the value of the decedent's interest in
the partnership at his death.' 6 F.Supp. 141, 142.
September 5, 1925, the executor appealed to the Board of Tax Appeals from the deficiency of income tax so
determined. The Board sustained the Commissioner's action in including the item of $200,117.99 without any
reduction on account of the value of the decedent's interest in the partnership at the date of death,2 and
determined a deficiency of $55,166. 49, which, with interest of $7,510.95, was paid April 14, 1928.

July 11, 1928, the executor filed a claim for refund of this amount, setting forth that the $200,117.99, by reason
of which the additional tax was assessed and paid, was corpus; that it was so originally determined by the
Commissioner and the estate tax assessed thereon was paid by the executor; and that the subsequent
assessment of an income tax against the estate for the receipt of the same sum was erroneous. The claim was
rejected May 8, 1929. September 16, 1930, the executor brought suit in the Court of Claims, and in his petition,
after setting forth the facts as he alleged them to be, prayed judgment in the alternative: (1) For the principal
sum of $62,677.44, the amount paid April 14, 1928, as a deficiency of income tax unlawfully assessed and
collected; or (2) for the sum of $47,643.44 on the theory that if the sum of $200,117.99 was income for the year
1920 and taxable as such, the United States should have credited against the income tax attributable to the
receipt of this sum the overpayment of estate tax resulting from including the amount in the taxable estate-
$34,035,3 with interest thereon. [295 U.S. 247, 254] The Court of Claims held that the item was income and
properly so taxed. With respect to the alternative relief sought, it said: 'We cannot consider whether the
Commissioner correctly included the total amount received from the business in the net estate of the decedent
subject to estate tax for the reason that the suit was not timely instituted.' Judgment went for the United
States. 4 Because of the novelty and importance of the question presented we granted certiorari. 5

1. We concur in the view of the Court of Claims that the amount received from the partnership as profits earned
prior to Bull's death was income earned by him in his lifetime and taxable to him as such; and that it was also
corpus of his estate and as such to be included in his gross estate for computation of estate tax. We also agree
that the sums paid his estate as profits earned after his death were not corpus but income received by his
executor, and to be reckoned in computing income tax for the years 1920 and 1921. Where the effect of the
contract is that the deceased partner's estate shall leave his interest in the business and the surviving partners
shall acquire it by payments to the estate, the transaction is a sale, and payments made to the estate are for
the account of the survivors. It results that the surviving partners are taxable upon firm profits and the estate is
not. 6 Here, however, the survivors have purchased nothing belonging to the decedent, who had made no
investment in the business and owned no tangible property connected with it. The portion of the profits paid
his estate was therefore income and not corpus; and this is so whether we consider the executor a member of
the old firm for the remainder [295 U.S. 247, 255] of the year, or hold that the estate became a partner in a new
association formed upon the decedent's demise.

2. A serious and difficult issue is raised by the claim that the same receipt has been made the basis of both
income and estate tax, although the item cannot in the circumstances be both income and corpus; and that the
alternative prayer of the petition required the court to render a judgment which would redress the illegality and
injustice resulting from the erroneous inclusion of the sum in the gross estate for estate tax. The respondent
presents two arguments in opposition, one addressed to the merits and the other to the bar of the statute of
limitations.

On the merits it is insisted that the government was entitled to both estate tax and income tax in virtue of the
right conferred on the estate by the partnership agreement and the fruits of it. The position is that, as the
contract gave Bull a valuable right which passed to his estate at his death, the Commissioner correctly included
it for estate tax. And the propriety of treating the share of profits paid to the estate as income is said to be
equally clear. The same sum of money in different aspects may be the basis of both forms of tax. An example
is found in this estate. The decedent's share of profits accrued to the date of his death was $24,124. 20. This
was income to him in his lifetime and his executor was bound to return it as such. But the sum was paid to the
executor by the surviving partners, and thus became an asset of the estate; accordingly, the petitioner returned
that amount as part of the gross estate for computation of estate tax and the Commissioner properly treated
it as such.

We are told that, since the right to profits is distinct from the profits actually collected, we cannot now say more
than that perhaps the Commissioner put too high a value on the contract right when he valued it as equal to
the amount [295 U.S. 247, 256] of profits received-$212,718.99. This error, if error it was, the government says is
now beyond correction.

While, as we have said, the same sum may in different aspects be used for the computation of both an income
and an estate tax, this fact will not here serve to justify the Commissioner's rulings. They were inconsistent.
The identical money-not a right to receive the amount, on the one hand, and actual receipt resulting from that
right on the other- was the basis of two assessments. The double taxation involved in this inconsistent
treatment of that sum of money is made clear by the lower court's finding we have quoted. The Commissioner
assessed estate tax on the total obtained by adding $24,124.20, the decedent's share of profits earned prior to
his death, and $212,718.79, the estate's share of profits earned thereafter. He treated the two items as of like
quality, considered them both as capital or corpus; and viewed neither as the measure of value of a right passing
from the decedent at death. No other conclusion may be drawn from the finding of the Court of Claims.

In the light of the facts it would not have been permissible to place a value of $212,718.99 or any other value on
the mere right of continuance of the partnership relation inuring to Bull's estate. Had he lived, his share of
profits would have been income. By the terms of the agreement his estate was to sustain precisely the same
status quoad the firm as he had, in respect of profits and losses. Since the partners contributed no capital and
owned no tangible property connected with the business, there is no justification for characterizing the right
of a living partner to his share of earnings as part of his capital; and if the right was not capital to him, it could
not be such to his estate. Let us suppose Bull had, while living, assigned his interest in the firm, with his partners'
consent, to a third person for a valuable consideration, and in making return of income had valued or capitalized
the right to profits which [295 U.S. 247, 257] he had thus sold, had deducted such valuation from the consideration
received, and returned the difference only as gain. We think the Commissioner would rightly have insisted that
the entire amount received was income.

Since the firm was a personal service concern and no tangible property was involved in its transactions, if it had
not been for the terms of the agreement, no accounting would have ever been made upon Bull's death for
anything other than his share of profits accrued to the date of his death-$24,124.20-and this would have been
the only amount to be included in his estate in connection with his membership in the firm. As respects the
status after death, the form of the stipulation is significant. The declaration is that the surviving partners 'are
to be at liberty' to continue the business for a year, in the same relation with the deceased partner's estate as
if it were in fact the decedent himself still alive and a member of the firm. His personal representative is given
a veto which will prevent the continuance of the firm's business. The purpose may well have been to protect
the good will of the enterprise in the interest of the survivors and to afford them a reasonable time in which to
arrange for their future activities. But no sale of the decedent's interest or share in the good will can be spelled
out. Indeed the government strenuously asserted, in supporting the treatment of the payments to the estate
as income, that the estate sold nothing to the surviving partners; and we agree. An analogous situation would
be presented if Bull had not died, but the partnership had terminated by limitation on February 13, 1920, and
the agreement had provided that, if Bull's partners so desired, the relation should continue for another year. It
could not successfully be contended that, in such case, Bull's share of profit for the additional year was capital.

We think there was no estate tax due in respect of the $212,718.79 paid to the executor as profits for the period
subsequent to the decedent's death. [295 U.S. 247, 258] The government's second point is that if the use of profits
accruing to the estate in computing estate tax was wrong, the statute of limitations bars correction of the error
in the present action. So the Court of Claims thought. We hold otherwise.

The petitioner included in his estate tax return, as the value of Bull's interest in the partnership, only $24,124.20,
the profit accrued prior to his death. The Commissioner added $212,718.79, the sum received as profits after
Bull's death, and determined the total represented the value of the interest. The petitioner acquiesced and paid
the tax assessed in full in August, 1921. He had no reason to assume the Commissioner would adjudge the
$212,718.79 income and taxable as such. Nor was this done until July, 1925. The petitioner thereupon asserted,
as we think correctly, that the item could not be both corpus and income of the estate. The Commissioner
apparently held a contrary view. The petitioner appealed to the Board of Tax Appeals from the proposed
deficiency of income tax. His appeal was dismissed April 9, 1928. It was then too late to file a claim for refund
of overpayment of estate tax due to the error of inclusion in the estate of its share of firm profits. 7 Inability to
obtain a refund or credit, or to sue the United States, did not, however, alter the fact that if the government
should insist on payment of the full deficiency of income tax, it would be in possession of some $41,000 in
excess of the sum to which it was justly entitled. Payment was demanded. The petitioner paid April 14, 1928,
and on June 11, 1928, presented a claim for refund, in which he still insisted the amount in question was corpus,
had been so determined and estate tax paid on that basis, and should not be classified for taxation as income.
The claim was rejected May 8, 1929, and the present action instituted September 16, 1930. [295 U.S. 247,
259] The fact that the petitioner relied on the Commissioner's assessment for estate tax, and believed the
inconsistent claim of deficiency of income tax was of no force, cannot avail to toll the statute of limitations,
which forbade the bringing of any action in 1930 for refund of the estate tax payments made in 1921. As the
income tax was properly collected, suit for the recovery of any part of the amount paid on that account was
futile. Upon what theory, then, may the petitioner obtain redress in the present action for the unlawful
retention of the money of the estate? Before an answer can be given the system of enforcing the government's
claims for taxes must be considered in its relation to the problem.

A tax is an exaction by the sovereign, and necessarily the sovereign has an enforceable claim against every one
within the taxable class for the amount lawfully due from him. The statute prescribes the rule of taxation. Some
machinery must be provided for applying the rule to the facts in each taxpayer's case, in order to ascertain the
amount due. The chosen instrumentality for the purpose is an administrative agency whose action is called an
assessment. The assessment may be a valuation of property subject to taxation, which valuation is to be
multiplied by the statutory rate to ascertain the amount of tax. Or it may include the calculation and fix the
amount of tax payable, and assessments of federal estate and income taxes are of this type. Once the tax is
assessed, the taxpayer will owe the sovereign the amount when the date fixed by law for payment arrives.
Default in meeting the obligation calls for some procedure whereby payment can be enforced. The statute
might remit the government to an action at law wherein the taxpayer could offer such defense as he had. A
judgment against him might be collected by the levy of an execution. But taxes are the lifeblood of
government, and their prompt and certain availability an imperious need. Time out of mind, therefore, the
sovereign has resorted to more drastic [295 U.S. 247, 260] means of collection. The assessment is given the force
of a judgment, and if the amount assessed is not paid when due, administrative officials may seize the debtor's
property to satisfy the debt.

In recognition of the fact that erroneous determinations and assessments will inevitably occur, the statutes, in
a spirit of fairness, invariably afford the taxpayer an opportunity at some stage to have mistakes rectified. Often
an administrative hearing is afforded before the assessment becomes final; or administrative machinery is
provided whereby an erroneous collection may be refunded; in some instances both administrative relief and
redress by an action against the sovereign in one of its courts are permitted methods of restitution of excessive
or illegal exaction. Thus, the usual procedure for the recovery of debts is reversed in the field of taxation.
Payment precedes defense, and the burden of proof, normally on the claimant, is shifted to the taxpayer. The
assessment supersedes the pleading, proof, and judgment necessary in an action at law, and has the force of
such a judgment. The ordinary defendant stands in judgment only after a hearing. The taxpayer often is
afforded his hearing after judgment and after payment, and his only redress for unjust administrative action is
the right to claim restitution. But these reversals of the normal process of collecting a claim cannot obscure the
fact that after all what is being accomplished is the recovery of a just debt owed the sovereign. If that which
the sovereign retains was unjustly taken in violation of its own statute, the withholding is wrongful. Restitution
is owed the taxpayer. Nevertheless he may be without a remedy. But we think this is not true here.

In a proceeding for the collection of estate tax, the United States through a palpable mistake took more than
it was entitled to. Retention of the money was against morality and conscience. But claim for refund or
credit [295 U.S. 247, 261] was not presented or action instituted for restitution within the period fixed by the
statute of limitations. If nothing further had occurred, congressional action would have been the sole avenue
of redress.

In July, 1925, the government brought a new proceeding arising out of the same transaction involved in the
earlier proceeding. This time however, its claim was for income tax. The taxpayer opposed payment in full, by
demanding recoupment of the amount mistakenly collected as estate tax and wrongfully retained. Had the
government instituted an action at law, the defense would have been good. The United States, we have held,
cannot, as against the claim of an innocent party, hold his money which has gone into its treasury by means of
the fraud of their agent. United States v. State Bank, 96 U.S. 30 . While here the money was taken through
mistake without any element of fraud, the unjust retention is immoral and amounts in law to a fraud on the
taxpayer's rights. What was said in the State Bank Case applies with equal force to this situation. 'An action will
lie whenever the defendant has received money which is the property of the plaintiff, and which the defendant
is obliged by natural justice and equity to refund. The form of the indebtedness or the mode in which it was
incurred is immaterial. ... In these cases (cited in the opinion), and many others that might be cited, the rules of
law applicable to individuals were applied to the United States' 96 U.S. (pages 35, 36).8 A claim for recovery of
money so held may not only be the subject of a suit in the Court of Claims, as shown by the authority referred
to, but may be used by way of recoupment and credit in an action by the United States arising out of the same
transaction. United States v. Macdaniel, 7 Pet. 1, 16, 17; United States v. Ringgold, 8 Pet. 150, 163, 164. In
the [295 U.S. 247, 262] latter case this language was used: 'No direct suit can be maintained against the United
States; but when an action is brought by the United States, to recover money in the hands of a party, who has
a legal claim against them, it would be a very rigid principle, to deny to him the right of setting up such claim in
a court of justice, and turn him round to an application to congress. If the right of the party is fixed by the
existing law, there can be no necessity for an application to congress, except for the purpose of remedy. And
no such necessity can exist, when this right can properly be set up by way of defence, to a suit by the United
States.' 9 If the claim for income tax deficiency had been the subject of a suit, any counter demand for
recoupment of the overpayment of estate tax could have been asserted by way of defense and credit obtained,
notwithstanding the statute of limitations had barred an independent suit against the government therefor.
This is because recoupment is in the nature of a defense arising out of some feature of the transaction upon
which the plaintiff's action is grounded. Such a defense is never barred by the statute of limitations so long as
the main action itself is timely. 10

The circumstance that both claims, the one for estate tax and the other for income tax, were prosecuted to
judgment and execution in summary form does not obscure the fact that in substance the proceedings were
actions to collect debts alleged to be due the United States. It is [295 U.S. 247, 263] immaterial that in the second
case, owing to the summary nature of the remedy, the taxpayer was required to pay the tax and afterwards
seek refundment. This procedural requirement does not obliterate his substantial right to rely on his cross-
demand for credit of the amount which, if the United States had sued him for income tax, he could have
recouped against his liability on that score.
To the objection that the sovereign is not liable to respond to the petitioner the answer is that it has given him
a right of credit or refund, which, though he could not assert it in an action brought by him in 1930, had accrued
and was available to him, since it was actionable and not barred in 1925 when the government proceeded
against him for the collection of income tax.

The pleading was sufficient to put in issue the right to recoupment. The Court of Claims is not bound by any
special rules of pleading;11 all that is required is that the petition shall contain a plain and concise statement of
the facts relied on and give the United States reasonable notice of the matters it is called upon to meet. 12 And
a prayer for alternative relief, based upon the facts set out in the petition, may be the basis of the judgment
rendered. 13

We are of opinion that the petitioner was entitled to have credited against the deficiency of income tax the
amount of his overpayment of estate tax with interest, and that he should have been given judgment
accordingly. The judgment must be reversed, and the cause remanded for further proceedings in conformity
with this opinion.

So ordered.