[G.R. Nos. 167274-75. July 21, 2008.] interpretation.—In Commissioner of Internal Revenue v.

Central Luzon Drug Corporation, 456 SCRA 414 (2005), the tax
authorities gave the term “tax credit” in Sections 2(i) and 4 of
COMMISSIONER OF INTERNAL
Revenue Regulation 2-94 a meaning utterly disparate from
REVENUE, petitioner, vs. FORTUNE TOBACCO
what R.A. No. 7432 provides. Their interpretation muddled up
CORPORATION, respondent.
the intent of Congress to grant a mere discount privilege and
not a sales discount. The Court, striking down the revenue
regulation, held that an administrative agency issuing
Taxation; The power to tax is inherent in the State, such
regulations may not enlarge, alter or restrict the provisions of
power being inherently legislative, based on the principle that
the law it administers, and it cannot engraft additional
taxes are a grant of the people who are taxed, and the grant
requirements not contemplated by the legislature. The Court
must be made by the immediate representatives of the
emphasized that tax administrators are not allowed to expand
people; and where the people have laid the power, there it
or contract the legislative mandate and that the “plain
must remain and be exercised.—The power to tax is inherent
meaning rule” or verba legis in statutory construction should
in the State, such power being inherently legislative, based on
be applied such that where the words of a statute are clear,
the principle that taxes are a grant of the people who are
plain and free from ambiguity, it must be given its literal
taxed, and the grant must be made by the immediate
meaning and applied without attempted interpretation.
representatives of the people; and where the people have laid
the power, there it must remain and be exercised.
Same; Same; Administrative regulations must always be in
harmony with the provisions of the law because any resulting
Statutory Construction; Taxation; The Court held that in case
discrepancy between the two will always be resolved in favor
of discrepancy between the law as amended and the
of the basic law.—As we have previously declared, rule-
implementing regulation based on the old law, the former
making power must be confined to details for regulating the
necessarily prevails.—In Commissioner of Internal Revenue v.
mode or proceedings in order to carry into effect the law as it
Reyes, 480 SCRA 382 (2006), respondent was not informed in
has been enacted, and it cannot be extended to amend or
writing of the law and the facts on which the assessment of
expand the statutory requirements or to embrace matters not
estate taxes was made pursuant to Section 228 of the 1997
covered by the statute. Administrative regulations must
Tax Code, as amended by Republic Act (R.A.) No. 8424. She
always be in harmony with the provisions of the law because
was merely notified of the findings by the Commissioner, who
any resulting discrepancy between the two will always be
had simply relied upon the old provisions of the law and
resolved in favor of the basic law.
Revenue Regulation No. 12-85 which was based on the old
provision of the law. The Court held that in case of
discrepancy between the law as amended and the
Same; Same; The Court nullified the circular, ruling that the
implementing regulation based on the old law, the former
Bureau of Internal Revenue (BIR) did not simply interpret the
necessarily prevails. The law must still be followed, even
law; rather it legislated guidelines contrary to the statute
though the existing tax regulation at that time provided for a
passed by Congress.—In Philippine Bank of Communications
different procedure.
v. Commissioner of Internal Revenue, 302 SCRA 241 (1999),
the then acting Commissioner issued RMC 7-85, changing the
prescriptive period of two years to ten years for claims of
Same; Same; The Court emphasized that tax administrators
excess quarterly income tax payments, thereby creating a
are not allowed to expand or contract the legislative mandate
clear inconsistency with the provision of Section 230 of the
and that the “plain meaning rule” or verba legis in statutory
1977 Tax Code. The Court nullified the circular, ruling that the
construction should be applied such that where the words of
BIR did not simply interpret the law; rather it legislated
a statute are clear, plain and free from ambiguity, it must be
guidelines contrary to the statute passed by Congress. The
given its literal meaning and applied without attempted
Court held: It bears repeating that Revenue memorandum-
circulars are considered administrative rulings (in the sense
of more specific and less general interpretations of tax laws)
which are issued from time to time by the Commissioner of
Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is
to enforce it, is entitled to great respect by the courts.
Nevertheless, such interpretation is not conclusive and will
be ignored if judicially found to be erroneous. Thus, courts
will not countenance administrative issuances that override,
instead of remaining consistent and in harmony with, the law
they seek to apply and implement.
Same; Same; Revenue generation has undoubtedly been a
major consideration in the passage of the Tax Code.—The
foregoing leads us to conclude that Revenue Regulation No.
17-99 is indeed indefensibly flawed. The Commissioner cannot
seek refuge in his claim that the purpose behind the passage
of the Tax Code is to generate additional revenues for the
government. Revenue generation has undoubtedly been a
major consideration in the passage of the Tax Code. However,
as borne by the legislative record, the shift from the ad
valorem system to the specific tax system is likewise meant
to promote fair competition among the players in the
industries concerned, to ensure an equitable distribution of
the tax burden and to simplify tax administration by
classifying cigarettes, among others, into high, medium and
low-priced based on their net retail price and accordingly
graduating tax rates.
Same; Same; There is parity between tax refund and tax
exemption only when the former is based either on a tax
exemption statute or a tax refund statute.—The
Commissioner’s contention that a tax refund partakes the
nature of a tax exemption does not apply to the tax refund to
which Fortune Tobacco is entitled. There is parity between
tax refund and tax exemption only when the former is based
either on a tax exemption statute or a tax refund statute.
Obviously, that is not the situation here. Quite the contrary,
Fortune Tobaccos claim for refund is premised on its
erroneous payment of the tax, or better still the government’s
exaction in the absence of a law.
Same; Same; The rule is that tax exemptions must be strictly
construed such that the exemption will not be held to be
conferred unless the terms under which it is granted clearly
and distinctly show that such was the intention.—Tax
exemption is a result of legislative grace. And he who claims
an exemption from the burden of taxation must justify his
claim by showing that the legislature intended to exempt him
by words too plain to be mistaken. The rule is that tax
exemptions must be strictly construed such that the
exemption will not be held to be conferred unless the terms
under which it is granted clearly and distinctly show that
such was the intention.
Same; Same; Tax Refunds; The dynamic of erroneous payment
of tax fits to a tee the prototypic quasi-contract, solutio
indebiti, which covers not only mistake in fact but also
mistake in law.—A claim for tax refund may be based on
statutes granting tax exemption or tax refund. In such case,
the rule of strict interpretation against the taxpayer is
applicable as the claim for refund partakes of the nature of
an exemption, a legislative grace, which cannot be allowed
unless granted in the most explicit and categorical language.
The taxpayer must show that the legislature intended to
exempt him from the tax by words too plain to be mistaken.
Tax refunds (or tax credits), on the other hand, are not
founded principally on legislative grace but on the legal
principle which underlies all quasi-contracts abhorring a
person’s unjust enrichment at the expense of another. The
dynamic of erroneous payment of tax fits to a tee the
prototypic quasi-contract, solutio indebiti, which covers not
only mistake in fact but also mistake in law.
Same; Same; If the State expects its taxpayers to observe
fairness and honesty in paying their taxes, it must hold itself
against the same standard in refunding excess (or erroneous)
payments of such taxes.—The Government is not exempt from
the application of solutio indebiti. Indeed, the taxpayer
expects fair dealing from the Government, and the latter has
the duty to refund without any unreasonable delay what it has
erroneously collected. If the State expects its taxpayers to
observe fairness and honesty in paying their taxes, it must
hold itself against the same standard in refunding excess (or
erroneous) payments of such taxes. It should not unjustly
enrich itself at the expense of taxpayers. And so, given its The tax refund is being re-claimed by the Commissioner of
essence, a claim for tax refund necessitates only Internal Revenue (Commissioner) in this petition.
preponderance of evidence for its approbation like in any
The following undisputed facts, summarized by the Court
other ordinary civil case.
of Appeals, are quoted in the assailed Decision 1 dated 28
September 2004:
Same; Same; The rule in the interpretation of tax laws is that CA G.R. SP No. 80675
a statute will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously.—What is xxx xxx xxx
controlling in this case is the well-settled doctrine of strict Petitioner 2 is a domestic corporation duly
interpretation in the imposition of taxes, not the similar organized and existing under and by virtue of the
doctrine as applied to tax exemptions. The rule in the laws of the Republic of the Philippines, with
interpretation of tax laws is that a statute will not be principal address at Fortune Avenue, Parang,
construed as imposing a tax unless it does so clearly, Marikina City.
expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose. Petitioner is the manufacturer/producer of,
Accordingly, the general rule of requiring adherence to the among others, the following cigarette brands, with
letter in construing statutes applies with peculiar strictness tax rate classification based on net retail price
to tax laws and the provisions of a taxing act are not to be prescribed by Annex "D" to R.A. No. 4280, to wit:
extended by implication. In answering the question of who is
subject to tax statutes, it is basic that in case of doubt, such
statutes are to be construed most strongly against the Brand Tax Rate
government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed Champion M 100 P1.00
beyond what statutes expressly and clearly import. As Salem M 100 P1.00
burdens, taxes should not be unduly exacted nor assumed Salem M King P1.00
beyond the plain meaning of the tax laws. Commissioner of Camel F King P1.00
Internal Revenue vs. Fortune Tobacco Corporation, 559 SCRA Camel Lights Box 20's P1.00
160, G.R. Nos. 167274-75 July 21, 2008 Camel Filters Box 20's P1.00
Winston F Kings P5.00
Winston Lights P5.00

DECISION
TINGA, J p:
Simple and uncomplicated is the central issue involved,
yet whopping is the amount at stake in this case. TcHDIA
After much wrangling in the Court of Tax Appeals (CTA)
and the Court of Appeals, Fortune Tobacco Corporation (Fortune
Tobacco) was granted a tax refund or tax credit representing
specific taxes erroneously collected from its tobacco products.
Immediately prior to January 1, 1997, the
above-mentioned cigarette brands were subject
to ad valorem tax pursuant to then Section 142 of
the Tax Code of 1977, as amended. However, on
January 1, 1997, R.A. No. 8240 took effect whereby
a shift from the ad valorem tax (AVT) system to the
specific tax system was made and subjecting the
aforesaid cigarette brands to specific tax under
[S]ection 142 thereof, now renumbered as Sec. 145
of the Tax Code of 1997, pertinent provisions of
which are quoted thus: caDTSE
Section 145. Cigars and Cigarettes. —
 (A) Cigars. — There shall be levied,
assessed and collected on cigars a tax of
One peso (P1.00) per cigar.
"(B) Cigarettes packed by hand. —
There shall be levied, assessed and collected
on cigarettes packed by hand a tax of Forty
centavos (P0.40) per pack.
(C) Cigarettes packed by machine. —
There shall be levied, assessed and collected
on cigarettes packed by machine a tax at the
rates prescribed below:
(1) If the net retail price (excluding
the excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax
shall be Twelve (P12.00) per pack;
(2) If the net retail price (excluding
the excise tax and the value added
tax) exceeds Six pesos and Fifty centavos
(P6.50) but does not exceed Ten pesos
(P10.00) per pack, the tax shall be Eight
Pesos (P8.00) per pack.
(3) If the net retail price (excluding
the excise tax and the value-added tax)
is Five pesos (P5.00) but does not exceed Six
Pesos and fifty centavos (P6.50) per pack,
the tax shall be Five pesos (P5.00) per pack;
(4) If the net retail price (excluding
the excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax
shall be One peso (P1.00) per pack;
"Variants of existing brands of
cigarettes which are introduced in the
domestic market after the effectivity of R.A.
No. 8240 shall be taxed under the highest
classification of any variant of that brand.
The excise tax from any brand of
cigarettes within the next three (3) years
from the effectivity of R.A. No. 8240 shall not
be lower than the tax, which is due from each
brand on October 1, 1996. Provided, however,
that in cases were (sic) the excise tax rate
imposed in paragraphs (1), (2), (3) and (4)
hereinabove will result in an increase in
excise tax of more than seventy percent
(70%), for a brand of cigarette, the increase
shall take effect in two tranches: fifty
percent (50%) of the increase shall be
effective in 1997 and one hundred percent
(100%) of the increase shall be effective in
1998.
Duly registered or existing brands of
cigarettes or new brands thereof packed by
machine shall only be packed in twenties.
The rates of excise tax on cigars and
cigarettes under paragraphs (1), (2) (3) and
(4) hereof, shall be increased by twelve
percent (12%) on January 1, 2000. (Emphasis
supplied) HIACac
New brands shall be classified
according to their current net retail price.
For the above purpose, 'net retail
price' shall mean the price at which the
cigarette is sold on retail in twenty (20)
major supermarkets in Metro Manila (for
brands of cigarettes marketed nationally),
excluding the amount intended to cover the
applicable excise tax and value-added tax.
For brands which are marketed only outside
Metro [M]anila, the 'net retail price' shall
mean the price at which the cigarette is sold
in five (5) major supermarkets in the region
excluding the amount intended to cover the
applicable excise tax and the value-added
tax.
The classification of each brand of
cigarettes based on its average retail price
as of October 1, 1996, as set forth in Annex
"D", shall remain in force until revised by
Congress.
Variant of a brand shall refer to a
brand on which a modifier is prefixed and/or
 suffixed to the root name of the brand and/or brand of cigars, cigarettes packed by machine,
a different brand which carries the same logo distilled spirits, wines and fermented liquor shall
or design of the existing brand. not be lower than the excise tax that is actually
being paid prior to January 1, 2000." SHIETa
To implement the provisions for a twelve
percent (12%) increase of excise tax on, among For the period covering January 1-31, 2000,
others, cigars and cigarettes packed by machines petitioner allegedly paid specific taxes on all
by January 1, 2000, the Secretary of Finance, upon brands manufactured and removed in the total
recommendation of the respondent Commissioner amounts of P585,705,250.00.
of Internal Revenue, issued Revenue Regulations On February 7, 2000, petitioner filed with
No. 17-99, dated December 16, 1999, which respondent's Appellate Division a claim for refund
provides the increase on the applicable tax rates or tax credit of its purportedly overpaid excise tax
on cigar and cigarettes as follows: for the month of January 2000 in the amount of
SECTION DESCRIPTION OF PRESENT NEW P35,651,410.00
ARTICLES SPECIFIC TAX SPECIFIC TAX On June 21, 2001, petitioner filed with
RATE PRIOR RATE EFFECTIVE respondent's Legal Service a letter dated June 20,
TO JAN. 1, 2000 JAN. 1, 2000 2001 reiterating all the claims for refund/tax credit
of its overpaid excise taxes filed on various dates,
145 (A) P1.00/cigar P1.12/cigar including the present claim for the month of
(B) Cigarettes January 2000 in the amount of P35,651,410.00.
packed
by machine As there was no action on the part of the
respondent, petitioner filed the instant petition for
(1) Net retail price review with this Court on December 11, 2001, in
(excluding VAT and P12.00/pack P13.44/pack order to comply with the two-year period for filing
excise) exceeds a claim for refund.
P10.00 per pack
In his answer filed on January 16, 2002,
respondent raised the following Special and
(2) Exceeds P10.00 P8.00/pack P8.96/pack
Affirmative Defenses;
per pack
4. Petitioner's alleged claim for refund is
(3) Net retail price subject to administrative routinary
(excluding VAT and P5.00/pack P5.60/pack investigation/examination by the
excise) is P5.00 to Bureau;
P6.50 per pack
5. The amount of P35,651,410 being claimed
by petitioner as alleged overpaid
(4) Net Retail Price
excise tax for the month of January
(excluding VAT and P1.00/pack P1.12/pack
2000 was not properly documented.
excise) is below
P5.00 per pack 6. In an action for tax refund, the burden of
proof is on the taxpayer to establish
Revenue Regulations No. 17-99 likewise its right to refund, and failure to
provides in the last paragraph of Section 1 thereof, sustain the burden is fatal to its claim
"(t)hat the new specific tax rate for any existing for refund/credit.
 7. Petitioner must show that it has complied
with the provisions of Section 204(C)
in relation [to] Section 229 of the Tax
Code on the prescriptive period for
claiming tax refund/credit;
8. Claims for refund are construed strictly
against the claimant for the same
partake of tax exemption from
taxation; and
9. The last paragraph of Section 1 of Revenue
Regulation[s] [No.]17-99 is a valid
implementing regulation which has
the force and effect of law." TAcDHS
CA G.R. SP No. 83165
The petition contains essentially similar
facts, except that the said case questions the
CTA's December 4, 2003 decision in CTA Case No.
6612 granting respondent's 3 claim for refund of
the amount of P355,385,920.00 representing
erroneously or illegally collected specific taxes
covering the period January 1, 2002 to December
31, 2002, as well as its March 17, 2004 Resolution
denying a reconsideration thereof.
xxx xxx xxx
In both CTA Case Nos. 6365 & 6383 and CTA
No. 6612, the Court of Tax Appeals reduced the
issues to be resolved into two as stipulated by the
parties, to wit: (1) Whether or not the last paragraph
of Section 1 of Revenue Regulation[s] [No.] 17-99 is
in accordance with the pertinent provisions of
Republic Act [No.] 8240, now incorporated in Section
145 of the Tax Code of 1997; and (2) Whether or not
petitioner is entitled to a refund of P35,651,410.00
as alleged overpaid excise tax for the month of
January 2000.
xxx xxx xxx
Hence, the respondent CTA in its assailed
October 21, 2002 [twin] Decisions[s] disposed in
CTA Case Nos. 6365 & 6383:
WHEREFORE, in view of the foregoing,
the court finds the instant petition
meritorious and in accordance with law.
Accordingly, respondent is hereby ORDERED
to REFUND to petitioner the amount of
P35,651.410.00 representing erroneously
paid excise taxes for the period January 1 to
January 31, 2000.
SO ORDERED.
Herein petitioner sought reconsideration of
the above-quoted decision. In [twin] resolution[s]
[both] dated July 15, 2003, the Tax Court, in an
apparent change of heart, granted the petitioner's
consolidated motions for reconsideration, thereby
denying the respondent's claim for refund.
However, on consolidated motions for
reconsideration filed by the respondent in CTA
Case Nos. 6363 and 6383, the July 15, 2002
resolution was set aside, and the Tax Court ruled,
this time with a semblance of finality, that the
respondent is entitled to the refund claimed.
Hence, in a resolution dated November 4, 2003, the
tax court reinstated its December 21, 2002
Decision and disposed as follows:
WHEREFORE, our Decisions in CTA
Case Nos. 6365 and 6383 are hereby
REINSTATED. Accordingly, respondent is
hereby ORDERED to REFUND petitioner the
total amount of P680,387,025.00 representing
erroneously paid excise taxes for the period
January 1, 2000 to January 31, 2000 and
February 1, 2000 to December 31,
2001. SEAHcT
SO ORDERED.
Meanwhile, on December 4, 2003, the Court
of Tax Appeals rendered decision in CTA Case No.
6612 granting the prayer for the refund of the
amount of P355,385,920.00 representing overpaid
excise tax for the period covering January 1, 2002
to December 31, 2002. The tax court disposed of
the case as follows:
 IN VIEW OF THE FOREGOING, the
Petition for Review is GRANTED. Accordingly,
respondent is hereby ORDERED to REFUND to
petitioner the amount of P355,385,920.00
representing overpaid excise tax for the
period covering January 1, 2002 to December
31, 2002.
SO ORDERED.
Petitioner sought reconsideration of the
decision, but the same was denied in a Resolution
dated March 17, 2004. 4 (Emphasis supplied)
(Citations omitted)
The Commissioner appealed the aforesaid decisions of
the CTA. The petition questioning the grant of refund in the
amount of P680,387,025.00 was docketed as CA-G.R. SP No.
80675, whereas that assailing the grant of refund in the amount
of P355,385,920.00 was docketed as CA-G.R. SP No. 83165. The
petitions were consolidated and eventually denied by the Court of
Appeals. The appellate court also denied reconsideration in its
Resolution 5 dated 1 March 2005.
In its Memorandum 6 22 dated November 2006, filed on
behalf of the Commissioner, the Office of the Solicitor General
(OSG) seeks to convince the Court that the literal interpretation
given by the CTA and the Court of Appeals of Section 145 of
the Tax Code of 1997 (Tax Code) would lead to a lower tax
imposable on 1 January 2000 than that imposable during the
transition period. Instead of an increase of 12% in the tax rate
effective on 1 January 2000 as allegedly mandated by the Tax
Code, the appellate court's ruling would result in a significant
decrease in the tax rate by as much as 66%.
The OSG argues that Section 145 of the Tax Code admits
of several interpretations, such as:
1. That by January 1, 2000, the excise tax on
cigarettes should be the higher tax imposed
under the specific tax system and the tax
imposed under the ad valorem tax system
plus the 12% increase imposed by par. 5, Sec.
145 of the Tax Code; AIHaCc
2. The increase of 12% starting on January 1, 2000
does not apply to the brands of cigarettes
listed under Annex "D" referred to in par. 8,
Sec. 145 of the Tax Code;
3. The 12% increment shall be computed based on
the net retail price as indicated in par. C, sub-
par. (1)-(4), Sec. 145 of the Tax Code even if
the resulting figure will be lower than the
amount already being paid at the end of the
transition period. This is the interpretation
followed by both the CTA and the Court of
Appeals. 7
This being so, the interpretation which will give life to the
legislative intent to raise revenue should govern, the OSG
stresses.
Finally, the OSG asserts that a tax refund is in the nature
of a tax exemption and must, therefore, be construed strictly
against the taxpayer, such as Fortune Tobacco.
In its Memorandum 8 dated 10 November 2006, Fortune
Tobacco argues that the CTA and the Court of Appeals merely
followed the letter of the law when they ruled that the basis for
the 12% increase in the tax rate should be the net retail price of
the cigarettes in the market as outlined in paragraph C, sub
paragraphs (1)-(4), Section 145 of the Tax Code. The
Commissioner allegedly has gone beyond his delegated rule-
making power when he promulgated, enforced and implemented
Revenue Regulation No. 17-99, which effectively created a
separate classification for cigarettes based on the excise tax
"actually being paid prior to January 1, 2000". 9
It should be mentioned at the outset that there is no
dispute between the fact of payment of the taxes sought to be
refunded and the receipt thereof by the Bureau of Internal
Revenue (BIR). There is also no question about the mathematical
accuracy of Fortune Tobacco's claim since the documentary
evidence in support of the refund has not been controverted by
the revenue agency. Likewise, the claims have been made and
the actions have been filed within the two (2)-year prescriptive
period provided under Section 229 of the Tax Code.
The power to tax is inherent in the State, such power
being inherently legislative, based on the principle that taxes are
a grant of the people who are taxed, and the grant must be made
by the immediate representatives of the people; and where the
people have laid the power, there it must remain and be
exercised. 10
 This entire controversy revolves around the interplay
between Section 145 of the Tax Code and Revenue Regulation 17-
99. The main issue is an inquiry into whether the revenue
regulation has exceeded the allowable limits of legislative
delegation.
For ease of reference, Section 145 of the Tax Code is
again reproduced in full as follows:
Section 145. Cigars and Cigarettes. —
(A) Cigars. — There shall be levied,
assessed and collected on cigars a tax of One
peso (P1.00) per cigar.
(B). Cigarettes packed by hand. — There
shall be levied, assessed and collected on
cigarettes packed by hand a tax of Forty centavos
(P0.40) per pack.
(C) Cigarettes packed by machine. — There
shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates
prescribed below: CScaDH
(1) If the net retail price (excluding the
excise tax and the value-added tax) is above Ten
pesos (P10.00) per pack, the tax shall be Twelve
pesos (P12.00) per pack;
(2) If the net retail price (excluding the
excise tax and the value added tax) exceeds Six
pesos and Fifty centavos (P6.50) but does not
exceed Ten pesos (P10.00) per pack, the tax shall
be Eight Pesos (P8.00) per pack.
(3) If the net retail price (excluding the
excise tax and the value-added tax) is Five pesos
(P5.00) but does not exceed Six Pesos and fifty
centavos (P6.50) per pack, the tax shall be Five
pesos (P5.00) per pack;
(4) If the net retail price (excluding the
excise tax and the value-added tax) is below Five
pesos (P5.00) per pack, the tax shall be One peso
(P1.00) per pack;
Variants of existing brands of cigarettes
which are introduced in the domestic market after
the effectivity of R.A. No. 8240 shall be taxed
under the highest classification of any variant of
that brand.
The excise tax from any brand of cigarettes
within the next three (3) years from the effectivity
of R.A. No. 8240 shall not be lower than the tax,
which is due from each brand on October 1,
1996. Provided, however, That in cases where the
excise tax rates imposed in paragraphs (1), (2), (3)
and (4) hereinabove will result in an increase in
excise tax of more than seventy percent (70%), for
a brand of cigarette, the increase shall take effect
in two tranches: fifty percent (50%) of the increase
shall be effective in 1997 and one hundred percent
(100%) of the increase shall be effective in
1998. HCTEDa
Duly registered or existing brands of
cigarettes or new brands thereof packed by
machine shall only be packed in twenties.
The rates of excise tax on cigars and
cigarettes under paragraphs (1), (2) (3) and (4)
hereof, shall be increased by twelve percent (12%)
on January 1, 2000.
New brands shall be classified according to
their current net retail price.
For the above purpose, 'net retail
price' shall mean the price at which the cigarette
is sold on retail in twenty (20) major supermarkets
in Metro Manila (for brands of cigarettes marketed
nationally), excluding the amount intended to
cover the applicable excise tax and value-added
tax. For brands which are marketed only outside
Metro Manila, the 'net retail price' shall mean the
price at which the cigarette is sold in five (5)
major intended to cover the applicable excise tax
and the value-added tax.
The classification of each brand of
cigarettes based on its average retail price as of
October 1, 1996, as set forth in Annex "D", shall
remain in force until revised by Congress.
Variant of a brand' shall refer to a brand on
which a modifier is prefixed and/or suffixed to the
 root name of the brand and/or a different brand that "[T]he new specific tax rate for any existing brand of cigars,
which carries the same logo or design of the cigarettes packed by machine, distilled spirits, wines and
existing brand. 11 (Emphasis supplied) fermented liquor shall not be lower than the excise tax that is
actually being paid prior to January 1, 2000". 13 aACEID
Revenue Regulation 17-99, which was issued pursuant to
the unquestioned authority of the Secretary of Finance to
promulgate rules and regulations for the effective
Parenthetically, Section 145 states that during the
implementation of the Tax Code, 12 interprets the above-quoted
transition period, i.e., within the next three (3) years from the
provision and reflects the 12% increase in excise taxes in the
effectivity of the Tax Code, the excise tax from any brand of
following manner:
cigarettes shall not be lower than the tax due from each brand on
SECTION DESCRIPTION OF PRESENT NEW 1 October 1996. This qualification, however, is conspicuously
ARTICLES SPECIFIC TAX SPECIFIC TAX absent as regards the 12% increase which is to be applied on
RATES PRIOR RATE Effective cigars and cigarettes packed by machine, among others,
TO JAN. 1, 2000 Jan. 1, 2000 effective on 1 January 2000. Clearly and unmistakably, Section
145 mandates a new rate of excise tax for cigarettes packed by
145 (A) Cigars P1.00/cigar P1.12/cigar machine due to the 12% increase effective on 1 January 2000
(B) Cigarettes without regard to whether the revenue collection starting from
packed this period may turn out to be lower than that collected prior to
by machine this date.
By adding the qualification that the tax due after the 12%
(1) Net Retail Price
increase becomes effective shall not be lower than the tax
(excluding VAT and P12.00/pack P13.44/pack
actually paid prior to 1 January 2000, Revenue Regulation No. 17-
Excise) exceeds
99 effectively imposes a tax which is the higher amount between
P10.00 per pack
the ad valorem tax being paid at the end of the three (3)-year
transition period and the specific tax under paragraph C, sub-
(2) Net Retail Price P8.00/pack P8.96/pack
paragraph (1)-(4), as increased by 12% — a situation not
(excluding VAT and
supported by the plain wording of Section 145 of the Tax Code.
Excise) is P6.51 up
to P10.00 per pack This is not the first time that national revenue officials
had ventured in the area of unauthorized administrative
(3) Net Retail Price legislation.
(excluding VAT and P5.00/pack P5.60/pack
In Commissioner of Internal Revenue v.
excise) is P5.00 to
Reyes, 14 respondent was not informed in writing of the law and
P6.50 per pack
the facts on which the assessment of estate taxes was made
pursuant to Section 228 of the 1997 Tax Code, as amended
(4) Net Retail Price
byRepublic Act (R.A.) No. 8424. She was merely notified of the
(excluding VAT and P1.00/pack P1.12/pack
findings by the Commissioner, who had simply relied upon the old
excise) is below
provisions of the law and Revenue Regulation No. 12-85 which
P5.00 per pack
was based on the old provision of the law. The Court held that in
case of discrepancy between the law as amended and the
This table reflects Section 145 of the Tax Code insofar as implementing regulation based on the old law, the former
it mandates a 12% increase effective on 1 January 2000 based on necessarily prevails. The law must still be followed, even though
the taxes indicated under paragraph C, sub-paragraph (1)-(4). the existing tax regulation at that time provided for a different
However, Revenue Regulation No. 17-99 went further and added procedure. 15
 In Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, 16 the tax authorities gave the term "tax
credit" in Sections 2 (i) and 4 of Revenue Regulation 2-94 a
meaning utterly disparate from what R.A. No. 7432provides. Their
interpretation muddled up the intent of Congress to grant a mere
discount privilege and not a sales discount. The Court, striking
down the revenue regulation, held that an administrative agency
issuing regulations may not enlarge, alter or restrict the
provisions of the law it administers, and it cannot engraft
additional requirements not contemplated by the legislature. The
Court emphasized that tax administrators are not allowed to
expand or contract the legislative mandate and that the "plain
meaning rule" or verba legis in statutory construction should be
applied such that where the words of a statute are clear, plain
and free from ambiguity, it must be given its literal meaning and
applied without attempted interpretation.
As we have previously declared, rule-making power must
be confined to details for regulating the mode or proceedings in
order to carry into effect the law as it has been enacted, and it
cannot be extended to amend or expand the statutory
requirements or to embrace matters not covered by the statute.
Administrative regulations must always be in harmony with the
provisions of the law because any resulting discrepancy between
the two will always be resolved in favor of the basic law. 17
In Commissioner of Internal Revenue v. Michel J. Lhuillier
Pawnshop, Inc., 18 Commissioner Jose Ong issued Revenue
Memorandum Order (RMO) No. 15-91, as well as the clarificatory
Revenue Memorandum Circular (RMC) 43-91, imposing a 5%
lending investor's tax under the 1977 Tax Code, as amended by
Executive Order (E.O.) No. 273, on pawnshops. The Commissioner
anchored the imposition on the definition of lending investors
provided in the 1977 Tax Code which, according to him, was
broad enough to include pawnshop operators. However, the Court
noted that pawnshops and lending investors were subjected to
different tax treatments under the Tax Code prior to its
amendment by the executive order; that Congress never intended
to treat pawnshops in the same way as lending investors; and
that the particularly involved section of the Tax Code explicitly
subjected lending investors and dealers in securities only to
percentage tax. And so the Court affirmed the invalidity of the
challenged circulars, stressing that "administrative issuances
must not override, supplant or modify the law, but must remain
consistent with the law they intend to carry out". 19
In Philippine Bank of Communications v. Commissioner of
Internal Revenue, 20 the then acting Commissioner issued RMC 7-
85, changing the prescriptive period of two years to ten years for
claims of excess quarterly income tax payments, thereby
creating a clear inconsistency with the provision of Section 230
of the 1977 Tax Code. The Court nullified the circular, ruling that
the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress. The Court
held:
It bears repeating that Revenue
memorandum-circulars are considered
administrative rulings (in the sense of more
specific and less general interpretations of tax
laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely
accepted that the interpretation placed upon a
statute by the executive officers, whose duty is to
enforce it, is entitled to great respect by the
courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to
be erroneous. Thus, courts will not countenance
administrative issuances that override, instead of
remaining consistent and in harmony with, the law
they seek to apply and implement. 21 cTCEIS
In Commissioner of Internal Revenue v. CA, et al., 22 the
central issue was the validity of RMO 4-87 which had construed
the amnesty coverage under E.O. No. 41 (1986) to include only
assessments issued by the BIR after the promulgation of the
executive order on 22 August 1986 and not assessments made to
that date. Resolving the issue in the negative, the Court held:
. . . all such issuances must not override,
but must remain consistent and in harmony with,
the law they seek to apply and implement.
Administrative rules and regulations are intended
to carry out, neither to supplant nor to modify, the
law. 23
xxx xxx xxx
If, as the Commissioner argues, Executive
Order No. 41 had not been intended to include
1981-1985 tax liabilities already assessed
(administratively) prior to 22 August 1986, the law
could have simply so provided in its exclusionary
 clauses. It did not. The conclusion is unavoidable,
and it is that the executive order has been
designed to be in the nature of a general grant of
tax amnesty subject only to the cases specifically
excepted by it. 24
In the case at bar, the OSG's argument that by 1 January
2000, the excise tax on cigarettes should be the higher tax
imposed under the specific tax system and the tax imposed
under the ad valorem tax system plus the 12% increase imposed
by paragraph 5, Section 145 of the Tax Code, is an unsuccessful
attempt to justify what is clearly an impermissible incursion into
the limits of administrative legislation. Such an interpretation is
not supported by the clear language of the law and is obviously
only meant to validate the OSG's thesis that Section 145 of
the Tax Code is ambiguous and admits of several interpretations.
The contention that the increase of 12% starting on 1
January 2000 does not apply to the brands of cigarettes listed
under Annex "D" is likewise unmeritorious, absurd even.
Paragraph 8, Section 145 of the Tax Code simply states that,
"[T]he classification of each brand of cigarettes based on its
average net retail price as of October 1, 1996, as set forth in
Annex 'D', shall remain in force until revised by Congress". This
declaration certainly does not lend itself to the interpretation
given to it by the OSG. As plainly worded, the average net retail
prices of the listed brands under Annex "D", which classify
cigarettes according to their net retail price into low, medium or
high, obviously remain the bases for the application of the
increase in excise tax rates effective on 1 January 2000.
The foregoing leads us to conclude that Revenue
Regulation No. 17-99 is indeed indefensibly flawed. The
Commissioner cannot seek refuge in his claim that the purpose
behind the passage of the Tax Code is to generate additional
revenues for the government. Revenue generation has
undoubtedly been a major consideration in the passage of
the Tax Code. However, as borne by the legislative record, 25 the
shift from the ad valorem system to the specific tax system is
likewise meant to promote fair competition among the players in
the industries concerned, to ensure an equitable distribution of
the tax burden and to simplify tax administration by classifying
cigarettes, among others, into high, medium and low-priced
based on their net retail price and accordingly graduating tax
rates.
At any rate, this advertence to the legislative record is
merely gratuitous because, as we have held, the meaning of the
law is clear on its face and free from the ambiguities that the
Commissioner imputes. We simply cannot disregard the letter of
the law on the pretext of pursuing its spirit. 26 TcSaHC
Finally, the Commissioner's contention that a tax refund
partakes the nature of a tax exemption does not apply to the tax
refund to which Fortune Tobacco is entitled. There is parity
between tax refund and tax exemption only when the former is
based either on a tax exemption statute or a tax refund statute.
Obviously, that is not the situation here. Quite the contrary,
Fortune Tobaccos claim for refund is premised on its erroneous
payment of the tax, or better still the government's exaction in
the absence of a law.
Tax exemption is a result of legislative grace. And he who
claims an exemption from the burden of taxation must justify his
claim by showing that the legislature intended to exempt him by
words too plain to be mistaken. 27 The rule is that tax
exemptions must be strictly construed such that the exemption
will not be held to be conferred unless the terms under which it
is granted clearly and distinctly show that such was the
intention. 28
A claim for tax refund may be based on statutes granting
tax exemption or tax refund. In such case, the rule of strict
interpretation against the taxpayer is applicable as the claim for
refund partakes of the nature of an exemption, a legislative
grace, which cannot be allowed unless granted in the most
explicit and categorical language. The taxpayer must show that
the legislature intended to exempt him from the tax by words too
plain to be mistaken. 29
Tax refunds (or tax credits), on the other hand, are not
founded principally on legislative grace but on the legal principle
which underlies all quasi-contracts abhorring a person's unjust
enrichment at the expense of another. 30 The dynamic of
erroneous payment of tax fits to a tee the prototypic quasi-
contract, solutio indebiti, which covers not only mistake in fact
but also mistake in law. 31
The Government is not exempt from the application
of solutio indebiti. 32 Indeed, the taxpayer expects fair dealing
from the Government, and the latter has the duty to refund
without any unreasonable delay what it has erroneously
collected. 33 If the State expects its taxpayers to observe
 fairness and honesty in paying their taxes, it must hold itself
against the same standard in refunding excess (or erroneous)
payments of such taxes. It should not unjustly enrich itself at the
expense of taxpayers. 34 And so, given its essence, a claim for
tax refund necessitates only preponderance of evidence for its
approbation like in any other ordinary civil case.
Under the Tax Code itself, apparently in recognition of the
pervasive quasi-contract principle, a claim for tax refund may be
based on the following: (a) erroneously or illegally assessed or
collected internal revenue taxes; (b) penalties imposed without
authority; and (c) any sum alleged to have been excessive or in
any manner wrongfully collected. 35
What is controlling in this case is the well-settled doctrine
of strict interpretation in the imposition of taxes, not the similar
doctrine as applied to tax exemptions. The rule in the
interpretation of tax laws is that a statute will not be construed
as imposing a tax unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of a taxing
act are not to be extended by implication. In answering the
question of who is subject to tax statutes, it is basic that in case
of doubt, such statutes are to be construed most strongly against
the government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed
beyond what statutes expressly and clearly import. 36 As
burdens, taxes should not be unduly exacted nor assumed beyond
the plain meaning of the tax laws. 37 HAaDTE
WHEREFORE, the petition is DENIED. The Decision of the
Court of Appeals in CA G.R. SP No. 80675, dated 28 September
2004, and its Resolution, dated 1 March 2005, are AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
||| (Commissioner of Internal Revenue v. Fortune Tobacco Corp., G.R.
Nos. 167274-75, [July 21, 2008], 581 PHIL 146-168)

SECOND DIVISION
[G.R. No. 183505. February 26, 2010.]
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. SM PRIME HOLDINGS, INC.
and FIRST ASIA REALTY DEVELOPMENT
CORPORATION, respondents.
Taxation; Value-Added Tax (VAT); Statutory Construction; A
cursory reading of Section 108 of the National Internal
Revenue Code of 1997 clearly shows that the enumeration of
the “sale or exchange of services” subject to Value-Added Tax
(VAT) is not exhaustive—the words, “including,” “similar
services,” and “shall likewise include,” indicate that the
enumeration is by way of example only.—Section 108 of the
NIRC of the 1997 reads: x x x A cursory reading of the
foregoing provision clearly shows that the enumeration of the
“salevor exchange of services” subject to VAT is not
exhaustive. The words, “including,” “similar services,” and
“shall likewise include,” indicate that the enumeration is by
way of example only. Among those included in the
enumeration is the “lease of motion picture films, films, tapes
and discs.” This, however, is not the same as the showing or
exhibition of motion pictures or films. As pointed out by the
CTA En Banc: “Exhibition” in Black’s Law Dictionary is defined
as “To show or display. x x x To produce anything in public so
that it may be taken into possession” (6th ed., p. 573). While
the word “lease” is defined as “a contract by which one
owning such property grants to another the right to possess,
use and enjoy it on specified period of time in exchange for
periodic payment of a stipulated price, referred to as rent
(Black’s Law Dictionary, 6th ed., p. 889). x x x Since the
activity of showing motion pictures, films or movies by
cinema/theater operators or proprietors is not included in the
enumeration, it is incumbent upon the court to the determine
whether such activity falls under the phrase “similar
services.” The intent of the legislature must therefore be
ascertained.
Same; Same; Cinema Houses; Several amendments were
made to expand the coverage of Value Added Tax but none
pertain to cinema/theater operators or proprietors—at
present, only lessors or distributors of cinematographic films
are subject to Value-Added Tax (VAT).—In 1994, RA 7716
restructured the VAT system by widening its tax base and
enhancing its administration. Three years later, RA 7716 was
amended by RA 8241. Shortly thereafter, the NIRC of 1997
was signed into law. Several amendments were made to
expand the coverage of VAT. However, none pertain to
cinema/theater operators or proprietors. At present, only
lessors or distributors of cinematographic films are subject to
VAT. While persons subject to amusement tax under the NIRC
of 1997 are exempt from the coverage of VAT.
Same; Same; Same; Legal Research; Historically, the activity
of showing motion pictures, films or movies by
cinema/theater operators or proprietors has always been
considered as a form of entertainment subject to amusement
tax; Only lessors or distributors of cinematographic films are
included in the coverage of Value-Added Tax (VAT).—Based on
the foregoing, the following facts can be established: (1)
Historically, the activity of showing motion pictures, films or
movies by cinema/theater operators or proprietors has always
been considered as a form of entertainment subject to
amusement tax. (2) Prior to the Local Tax Code, all forms of
amusement tax were imposed by the national government. (3)
When the Local Tax Code was enacted, amusement tax on
admission tickets from theaters, cinematographs, concert
halls, circuses and other places of amusements were
transferred to the local government. (4) Under the NIRC of
1977, the national government imposed amusement tax only
on proprietors, lessees or operators of cabarets, day and
night clubs, Jai-Alai and race tracks. (5) The VAT law was
enacted to replace the tax on original and subsequent sales
tax and percentage tax on certain services. (6) When the VAT
law was implemented, it exempted persons subject to
amusement tax under the NIRC from the coverage of VAT. (7)
When the Local Tax Code was repealed by the LGC of 1991,
the local government continued to impose amusement tax on
admission tickets from theaters, cinematographs, concert
halls, circuses and other places of amusements. (8)
Amendments to the VAT law have been consistent in
exempting persons subject to amusement tax under the NIRC
from the coverage of VAT. (9) Only lessors or distributors of
cinematographic films are included in the coverage of VAT.
These reveal the legislative intent not to impose VAT on
persons already covered by the amusement tax. This holds
true even in the case of cinema/theater operators taxed under
the LGC of 1991 precisely because the VAT law was intended
to replace the percentage tax on certain services. The mere
fact that they are taxed by the local government unit and not
by the national government is immaterial. The Local Tax
Code, in transferring the power to tax gross receipts derived
by cinema/theater operators or proprietor from admission
tickets to the local government, did not intend to treat
cinema/theater houses as a separate class. No distinction
must, therefore, be made between the places of amusement
taxed by the national government and those taxed by the
local government.
Same; Same; Same; The power of taxation is sometimes
called also the power to destroy, therefore, it should be
exercised with caution to minimize injury to the proprietary
rights of a taxpayer—it must be exercised fairly, equally and
uniformly, lest the tax collector kill the “hen that lays the
golden egg.”—To hold otherwise would impose an
unreasonable burden on cinema/theater houses operators or
proprietors, who would be paying an additional 10% VAT on
top of the 30% amusement tax imposed by Section 140 of the
LGC of 1991, or a total of 40% tax. Such imposition would
result in injustice, as persons taxed under the NIRC of 1997
would be in a better position than those taxed under the LGC
of 1991. We need not belabor that a literal application of a law
must be rejected if it will operate unjustly or lead to absurd
results. Thus, we are convinced that the legislature never
intended to include cinema/theater operators or proprietors in
the coverage of VAT. On this point, it is apropos to quote the
case of Roxas v. Court of Tax Appeals, 23 SCRA 276 (168) to
wit: The power of taxation is sometimes called also the power
to destroy. Therefore, it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax
collector kill the “hen that lays the golden egg.” And, in order
to maintain the general public’s trust and confidence in the
Government this power must be used justly and not
treacherously.
Same; Same; Same; Local Government Code; Statutory
Construction; The repeal of the Local Tax Code by the Local
Government Code (LGC) of 1991 is not a legal basis for the
imposition of Value-Added Tax (VAT) on the gross receipts of
cinema/theater operators or proprietors derived from
admission tickets; A law will not be construed as imposing a
tax unless it does so clearly, expressly, and unambiguously;
The power to impose amusement tax on cinema/theater
operators or proprietors remains with the local government.—
The repeal of the Local Tax Code by the LGC of 1991 is not a
legal basis for the imposition of VAT on the gross receipts of
cinema/theater operators or proprietors derived from
admission tickets. The removal of the prohibition under the
Local Tax Code did not grant nor restore to the national
government the power to impose amusement tax on
cinema/theater operators or proprietors. Neither did it expand
the coverage of VAT. Since the imposition of a tax is a burden
on the taxpayer, it cannot be presumed nor can it be extended
by implication. A law will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously. As it
is, the power to impose amusement tax on cinema/theater
operators or proprietors remains with the local government.
Same; Administrative Law; Revenue Memorandum Circulars
(RMCs); Revenue Memorandum Circulars (RMCs) must not
override, supplant, or modify the law, but must remain
consistent and in harmony with, the law they seek to apply
and implement.—Considering that there is no provision of law
imposing VAT on the gross receipts of cinema/theater
operators or proprietors derived from admission tickets, RMC
No. 28-2001 which imposes VAT on the gross receipts from
admission to cinema houses must be struck down. We cannot
overemphasize that RMCs must not override, supplant, or
modify the law, but must remain consistent and in harmony
with, the law they seek to apply and implement.
Same; The rule that tax exemptions should be construed
strictly against the taxpayer presupposes that the taxpayer is
clearly subject to the tax being levied against him—unless a
statute imposes a tax clearly, expressly and unambiguously,
what applies is the equally well-settled rule that the
imposition of a tax cannot be presumed.—Contrary to the
view of petitioner, respondents need not prove their
entitlement to an exemption from the coverage of VAT. The
rule that tax exemptions should be construed strictly against
the taxpayer presupposes that the taxpayer is clearly subject
to the tax being levied against him. The reason is obvious: it
is both illogical and impractical to determine who are
exempted without first determining who are covered by the
provision. Thus, unless a statute imposes a tax clearly,
expressly and unambiguously, what applies is the equally
well-settled rule that the imposition of a tax cannot be
presumed. In fact, in case of doubt, tax laws must be
construed strictly against the government and in favor of the
taxpayer. Commissioner of Internal Revenue vs. SM Prime
Holdings, Inc., 613 SCRA 774, G.R. No. 183505 February 26,
2010
DECISION
DEL CASTILLO, J p:
When the intent of the law is not apparent as worded, or
when the application of the law would lead to absurdity or
injustice, legislative history is all important. In such cases,
courts may take judicial notice of the origin and history of the
law, 1 the deliberations during the enactment, 2 as well as prior
laws on the same subject matter 3 to ascertain the true intent or
spirit of the law.
This Petition for Review on Certiorari under Rule 45 of
the Rules of Court, in relation to Republic Act (RA) No.
9282, 4 seeks to set aside the April 30, 2008 Decision 5 and the
June 24, 2008 Resolution 6 of the Court of Tax Appeals (CTA).
Factual Antecedents
Respondents SM Prime Holdings, Inc. (SM Prime) and First
Asia Realty Development Corporation (First Asia) are domestic
corporations duly organized and existing under the laws of the
Republic of the Philippines. Both are engaged in the business of
operating cinema houses, among others. 7
CTA Case No. 7079
On September 26, 2003, the Bureau of Internal Revenue
(BIR) sent SM Prime a Preliminary Assessment Notice (PAN) for
value added tax (VAT) deficiency on cinema ticket sales in the
amount of P119,276,047.40 for taxable year 2000. 8 In response,
SM Prime filed a letter-protest dated December 15, 2003. 9
On December 12, 2003, the BIR sent SM Prime a Formal
Letter of Demand for the alleged VAT deficiency, which the latter
protested in a letter dated January 14, 2004. 10
On September 6, 2004, the BIR denied the protest filed by
SM Prime and ordered it to pay the VAT deficiency for taxable
year 2000 in the amount of P124,035,874.12. 11 SAcCIH
On October 15, 2004, SM Prime filed a Petition for Review
before the CTA docketed as CTA Case No. 7079. 12
CTA Case No. 7085
On May 15, 2002, the BIR sent First Asia a PAN for VAT
deficiency on cinema ticket sales for taxable year 1999 in the
total amount of P35,823,680.93. 13 First Asia protested the PAN
in a letter dated July 9, 2002. 14
Subsequently, the BIR issued a Formal Letter of Demand
for the alleged VAT deficiency which was protested by First Asia
in a letter dated December 12, 2002. 15
On September 6, 2004, the BIR rendered a Decision
denying the protest and ordering First Asia to pay the amount of
P35,823,680.93 for VAT deficiency for taxable year 1999. 16
Accordingly, on October 20, 2004, First Asia filed a
Petition for Review before the CTA, docketed as CTA Case No.
7085. 17
CTA Case No. 7111
On April 16, 2004, the BIR sent a PAN to First Asia for VAT
deficiency on cinema ticket sales for taxable year 2000 in the
amount of P35,840,895.78. First Asia protested the PAN through a
letter dated April 22, 2004. 18
 Thereafter, the BIR issued a Formal Letter of Demand for
alleged VAT deficiency. 19 First Asia protested the same in a
letter dated July 9, 2004. 20
On October 5, 2004, the BIR denied the protest and
ordered First Asia to pay the VAT deficiency in the amount of
P35,840,895.78 for taxable year 2000. 21
This prompted First Asia to file a Petition for Review
before the CTA on December 16, 2004. The case was docketed as
CTA Case No. 7111. 22
CTA Case No. 7272
Re: Assessment Notice No. 008-02
A PAN for VAT deficiency on cinema ticket sales for the
taxable year 2002 in the total amount of P32,802,912.21 was
issued against First Asia by the BIR. In response, First Asia filed
a protest-letter dated November 11, 2004. The BIR then sent a
Formal Letter of Demand, which was protested by First Asia on
December 14, 2004. 23
Re: Assessment Notice No. 003-03
A PAN for VAT deficiency on cinema ticket sales in the
total amount of P28,196,376.46 for the taxable year 2003 was
issued by the BIR against First Asia. In a letter dated September
23, 2004, First Asia protested the PAN. A Formal Letter of
Demand was thereafter issued by the BIR to First Asia, which the
latter protested through a letter dated November 11,
2004. 24 cECaHA
On May 11, 2005, the BIR rendered a Decision denying the
protests. It ordered First Asia to pay the amounts of
P33,610,202.91 and P28,590,826.50 for VAT deficiency for taxable
years 2002 and 2003, respectively. 25
Thus, on June 22, 2005, First Asia filed a Petition for
Review before the CTA, docketed as CTA Case No. 7272. 26
Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his
Answers to the Petitions filed by SM Prime and First Asia. 27
On July 1, 2005, SM Prime filed a Motion to Consolidate
CTA Case Nos. 7085, 7111 and 7272 with CTA Case No. 7079 on
the grounds that the issues raised therein are identical and that
SM Prime is a majority shareholder of First Asia. The motion was
granted. 28
Upon submission of the parties' respective memoranda,
the consolidated cases were submitted for decision on the sole
issue of whether gross receipts derived from admission tickets
by cinema/theater operators or proprietors are subject to VAT. 29
Ruling of the CTA First Division
On September 22, 2006, the First Division of the CTA
rendered a Decision granting the Petition for Review. Resorting to
the language used and the legislative history of the law, it ruled
that the activity of showing cinematographic films is not a
service covered by VAT under the National Internal Revenue Code
(NIRC) of 1997, as amended, but an activity subject to
amusement tax under RA 7160, otherwise known as the Local
Government Code (LGC) of 1991. Citing House Joint Resolution
No. 13, entitled "Joint Resolution Expressing the True Intent of
Congress with Respect to the Prevailing Tax Regime in the
Theater and Local Film Industry Consistent with the State's
Policy to Have a Viable, Sustainable and Competitive Theater and
Film Industry as One of its Partners in National
Development," 30 the CTA First Division held that the House of
Representatives resolved that there should only be one business
tax applicable to theaters and movie houses, which is the 30%
amusement tax imposed by cities and provinces under the LGC of
1991. Further, it held that consistent with the State's policy to
have a viable, sustainable and competitive theater and film
industry, the national government should be precluded from
imposing its own business tax in addition to that already imposed
and collected by local government units. The CTA First Division
likewise found that Revenue Memorandum Circular (RMC) No. 28-
2001, which imposes VAT on gross receipts from admission to
cinema houses, cannot be given force and effect because it
failed to comply with the procedural due process for tax
issuances under RMC No. 20-86.31 Thus, it disposed of the case
as follows:
IN VIEW OF ALL THE FOREGOING, this Court
hereby GRANTS the Petitions for Review.
Respondent's Decisions denying petitioners'
protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment Notices
Nos. VT-00-000098, VT-99-000057, VT-00-000122, 003-
03 and 008-02 are ORDERED cancelled and set
aside.
SO ORDERED. 32
 Aggrieved, the CIR moved for reconsideration which was
denied by the First Division in its Resolution dated December 14,
2006. 33
Ruling of the CTA En Banc
Thus, the CIR appealed to the CTA En Banc. 34 The case
was docketed as CTA EB No. 244. 35 The CTA En Banc however
denied 36 the Petition for Review and dismissed 37 as well
petitioner's Motion for Reconsideration.
The CTA En Banc held that Section 108
the NIRC actually sets forth an exhaustive enumeration of what
services are intended to be subject to VAT. And since the showing
or exhibition of motion pictures, films or movies by cinema
operators or proprietors is not among the enumerated activities
contemplated in the phrase "sale or exchange of services," then
gross receipts derived by cinema/theater operators or proprietors
from admission tickets in showing motion pictures, film or movie
are not subject to VAT. It reiterated that the exhibition or showing
of motion pictures, films, or movies is instead subject to
amusement tax under the LGC of 1991. As regards the validity
of RMC No. 28-2001, the CTA En Banc agreed with its First
Division that the same cannot be given force and effect for
failure to comply with RMC No. 20-86. TaSEHD
Issue
Hence, the present recourse, where petitioner alleges
that the CTA En Banc seriously erred:
(1) In not finding/holding that the gross receipts
derived by operators/proprietors of cinema
houses from admission tickets [are] subject
to the 10% VAT because:
(a) THE EXHIBITION OF MOVIES BY CINEMA
OPERATORS/PROPRIETORS TO THE
PAYING PUBLIC IS A SALE OF
SERVICE;
(b) UNLESS EXEMPTED BY LAW, ALL SALES
OF SERVICES ARE EXPRESSLY
SUBJECT TO VAT UNDER SECTION
108 OF THE NIRC OF 1997;
(c) SECTION 108 OF THE NIRC OF 1997 IS A
CLEAR PROVISION OF LAW AND THE
APPLICATION OF RULES OF
STATUTORY CONSTRUCTION AND
EXTRINSIC AIDS IS UNWARRANTED;
(d) GRANTING WITHOUT CONCEDING THAT
RULES OF CONSTRUCTION ARE
APPLICABLE HEREIN, STILL THE
HONORABLE COURT ERRONEOUSLY
APPLIED THE SAME AND
PROMULGATED DANGEROUS
PRECEDENTS;
of
(e) THERE IS NO VALID, EXISTING PROVISION
OF LAW EXEMPTING RESPONDENTS'
SERVICES FROM THE VAT IMPOSED
UNDER SECTION 108 OF THE NIRC OF
1997;
(f) QUESTIONS ON THE WISDOM OF THE LAW
ARE NOT PROPER ISSUES TO BE
TRIED BY THE HONORABLE COURT;
and
(g) RESPONDENTS WERE TAXED BASED ON
THE PROVISION OF SECTION 108 OF
THE NIRC.
(2) In ruling that the enumeration in Section 108 of
the NIRC of 1997 is exhaustive in coverage;
(3) In misconstruing the NIRC of 1997 to conclude
that the showing of motion pictures is merely
subject to the amusement tax imposed by
the Local Government Code; and
(4) In invalidating Revenue Memorandum Circular
(RMC) No. 28-2001. 38
Simply put, the issue in this case is whether the gross
receipts derived by operators or proprietors of cinema/theater
houses from admission tickets are subject to VAT. AEIHaS
Petitioner's Arguments
Petitioner argues that the enumeration of services
subject to VAT in Section 108 of the NIRC is not exhaustive
because it covers all sales of services unless exempted by law.
He claims that the CTA erred in applying the rules on statutory
construction and in using extrinsic aids in interpreting Section
108 because the provision is clear and unambiguous. Thus, he
maintains that the exhibition of movies by cinema operators or
proprietors to the paying public, being a sale of service, is
subject to VAT.
Respondents' Arguments
Respondents, on the other hand, argue that a plain
reading of Section 108 of the NIRC of 1997 shows that the gross
receipts of proprietors or operators of cinemas/theaters derived
from public admission are not among the services subject to VAT.
Respondents insist that gross receipts from cinema/theater
admission tickets were never intended to be subject to any tax
imposed by the national government. According to them, the
absence of gross receipts from cinema/theater admission tickets
from the list of services which are subject to the national
amusement tax under Section 125 of the NIRC of 1997 reinforces
this legislative intent. Respondents also highlight the fact
that RMC No. 28-2001 on which the deficiency assessments were
based is an unpublished administrative ruling.
Our Ruling
The petition is bereft of merit.
The enumeration of services subject to VAT under Section 108 of
the NIRC is not exhaustive
Section 108 of the NIRC of the 1997 reads:
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,
including the use or lease of properties.
The phrase "sale or exchange of services"
means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or
consideration, including those performed or
rendered by construction and service contractors;
stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether
personal or real; warehousing services; lessors or
distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or
keepers of hotels, motels, rest houses, pension
houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers; dealers
in securities; lending investors; transportation
contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes
for hire and other domestic common carriers by
land, air and water relative to their transport of
goods or cargoes; services of franchise grantees of
telephone and telegraph, radio and television
broadcasting and all other franchise grantees except
those under Section 119 of this Code; services of
banks, non-bank financial intermediaries and
finance companies; and non-life insurance
companies (except their crop insurances), including
surety, fidelity, indemnity and bonding companies;
and similar services regardless of whether or not
the performance thereof calls for the exercise or use
of the physical or mental faculties. The phrase "sale
or exchange of services" shall likewise
include: ECAaTS
(1) The lease or the use of or the right or
privilege to use any copyright, patent, design or
model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or
right;
xxx xxx xxx
(7) The lease of motion picture films, films,
tapes and discs; and
(8) The lease or the use of or the right to use
radio, television, satellite transmission and cable
television time.
xxx xxx xxx (Emphasis supplied)
A cursory reading of the foregoing provision clearly shows
that the enumeration of the "sale or exchange of services"
subject to VAT is not exhaustive. The words, "including," "similar
services," and "shall likewise include," indicate that the
enumeration is by way of example only. 39
Among those included in the enumeration is the "lease of
motion picture films, films, tapes and discs." This, however, is not
the same as the showing or exhibition of motion pictures or films.
As pointed out by the CTA En Banc:
"Exhibition" in Black's Law Dictionary is
defined as "To show or display. . . . To produce
anything in public so that it may be taken into
possession" (6th ed., p. 573). While the word "lease"
is defined as "a contract by which one owning such
property grants to another the right to possess, use
and enjoy it on specified period of time in exchange
for periodic payment of a stipulated price, referred
to as rent (Black's Law Dictionary, 6th ed., p. 889). . .
. 40
Since the activity of showing motion pictures, films or
movies by cinema/theater operators or proprietors is not included
in the enumeration, it is incumbent upon the court to the
determine whether such activity falls under the phrase "similar
services." The intent of the legislature must therefore be
ascertained.
The legislature never intended operators
or proprietors of cinema/theater houses to be covered by VAT
Under the NIRC of 1939 41 the national government
imposed amusement tax on proprietors, lessees, or operators of
theaters, cinematographs, concert halls, circuses, boxing
exhibitions, and other places of amusement, including cockpits,
race tracks, and cabaret. 42 In the case of theaters or
cinematographs, the taxes were first deducted, withheld, and
paid by the proprietors, lessees, or operators of such theaters or
cinematographs before the gross receipts were divided between
the proprietors, lessees, or operators of the theaters or
cinematographs and the distributors of the cinematographic
films. Section 11 43 of the Local Tax Code, 44 however, amended
this provision by transferring the power to impose amusement
tax 45 on admission from theaters, cinematographs, concert
halls, circuses and other places of amusements exclusively to
the local government. Thus, when the NIRC of 1977 46 was
enacted, the national government imposed amusement tax only
on proprietors, lessees or operators of cabarets, day and night
clubs, Jai-Alai and race tracks. 47 ADTCaI
On January 1, 1988, the VAT Law 48 was promulgated. It
amended certain provisions of the NIRC of 1977 by imposing a
multi-stage VAT to replace the tax on original and subsequent
sales tax and percentage tax on certain services. It imposed VAT
on sales of services under Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of
services. — (a) Rate and base of tax. — There shall
be levied, assessed and collected, a value-added tax
equivalent to 10% percent of gross receipts derived
by any person engaged in the sale of services. The
phrase "sale of services" means the performance of
all kinds of services for others for a fee,
remuneration or consideration, including those
performed or rendered by construction and service
contractors; stock, real estate, commercial, customs
and immigration brokers; lessors of personal
property; lessors or distributors of cinematographic
films; persons engaged in milling, processing,
manufacturing or repacking goods for others; and
similar services regardless of whether or not the
performance thereof calls for the exercise or use of
the physical or mental faculties: Provided That the
following services performed in the Philippines by
VAT-registered persons shall be subject to 0%:
(1) Processing manufacturing or repacking
goods for other persons doing business outside the
Philippines which goods are subsequently
exported, . . .
xxx xxx xxx
"Gross receipts" means the total amount of
money or its equivalent representing the contract
price, compensation or service fee, including the
amount charged for materials supplied with the
services and deposits or advance payments actually
or constructively received during the taxable quarter
for the service performed or to be performed for
another person, excluding value-added tax.
(b) Determination of the tax. — (1) Tax billed
as a separate item in the invoice. — If the tax is
billed as a separate item in the invoice, the tax shall
be based on the gross receipts, excluding the tax.
(2) Tax not billed separately or is billed
erroneously in the invoice. — If the tax is not billed
separately or is billed erroneously in the invoice, the
 tax shall be determined by multiplying the gross
receipts (including the amount intended to cover the
tax or the tax billed erroneously) by 1/11. (Emphasis
supplied)
Persons subject to amusement tax under the NIRC of 1977, as
amended, however, were exempted from the coverage of VAT. 49
On February 19, 1988, then Commissioner Bienvenido A.
Tan, Jr. issued RMC 8-88, which clarified that the power to
impose amusement tax on gross receipts derived from admission
tickets was exclusive with the local government units and that
only the gross receipts of amusement places derived from
sources other than from admission tickets were subject to
amusement tax under the NIRC of 1977, as amended. Pertinent
portions of RMC 8-88 read: DAEaTS
Under the Local Tax Code (P.D. 231, as
amended), the jurisdiction to levy amusement tax on
gross receipts arising from admission to places of
amusement has been transferred to the local
governments to the exclusion of the national
government.
xxx xxx xxx
Since the promulgation of the Local Tax
Code which took effect on June 28, 1973 none of the
amendatory laws which amended the National
Internal Revenue Code, including the value added
tax law under Executive Order No. 273, has amended
the provisions of Section 11 of the Local Tax Code.
Accordingly, the sole jurisdiction for collection of
amusement tax on admission receipts in places of
amusement rests exclusively on the local
government, to the exclusion of the national
government. Since the Bureau of Internal Revenue is
an agency of the national government, then it
follows that it has no legal mandate to levy
amusement tax on admission receipts in the said
places of amusement.
Considering the foregoing legal background,
the provisions under Section 123 of the National
Internal Revenue Code as renumbered by Executive
Order No. 273 (Sec. 228, old NIRC) pertaining to
amusement taxes on places of amusement shall be
implemented in accordance with BIR RULING, dated
December 4, 1973 and BIR RULING NO. 231-86 dated
November 5, 1986 to wit:
". . . Accordingly, only the gross receipts of
the amusement places derived from sources other
than from admission tickets shall be subject
to . . . amusement tax prescribed under Section 228
of the Tax Code, as amended(now Section 123, NIRC,
as amended by E.O. 273). The tax on gross receipts
derived from admission tickets shall be levied and
collected by the city government pursuant to
Section 23 of Presidential Decree No. 231, as
amended x x x" or by the provincial government,
pursuant to Section 11 of P.D. 231, otherwise known
as the Local Tax Code. (Emphasis supplied)
On October 10, 1991, the LGC of 1991 was passed into
law. The local government retained the power to impose
amusement tax on proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia, and other places
of amusement at a rate of not more than thirty percent (30%) of
the gross receipts from admission fees under Section 140
thereof. 50 In the case of theaters or cinemas, the tax shall first
be deducted and withheld by their proprietors, lessees, or
operators and paid to the local government before the gross
receipts are divided between said proprietors, lessees, or
operators and the distributors of the cinematographic films.
However, the provision in theLocal Tax Code expressly excluding
the national government from collecting tax from the proprietors,
lessees, or operators of theaters, cinematographs, concert halls,
circuses and other places of amusements was no longer
included.DEaCSA
In 1994, RA 7716 restructured the VAT system by widening
its tax base and enhancing its administration. Three years
later, RA 7716 was amended by RA 8241. Shortly thereafter,
the NIRC of 1997 51 was signed into law. Several
amendments 52 were made to expand the coverage of VAT.
However, none pertain to cinema/theater operators or proprietors.
At present, only lessors or distributors of cinematographic films
are subject to VAT. While persons subject to amusement
tax 53 under the NIRC of 1997 are exempt from the coverage of
VAT. 54 Based on the foregoing, the following facts can be
established:
 (1) Historically, the activity of showing motion
pictures, films or movies by cinema/theater
operators or proprietors has always been
considered as a form of entertainment
subject to amusement tax.
(2) Prior to the Local Tax Code, all forms of
amusement tax were imposed by the national
government.
(3) When the Local Tax Code was enacted,
amusement tax on admission tickets from
theaters, cinematographs, concert halls,
circuses and other places of amusements
were transferred to the local government.
(4) Under the NIRC of 1977, the national government
imposed amusement tax only on proprietors,
lessees or operators of cabarets, day and
night clubs, Jai-Alai and race tracks.
(5) The VAT law was enacted to replace the tax on
original and subsequent sales tax and
percentage tax on certain services.
(6) When the VAT law was implemented, it exempted
persons subject to amusement tax under
the NIRC from the coverage of VAT.
(7) When the Local Tax Code was repealed by
the LGC of 1991, the local government
continued to impose amusement tax on
admission tickets from theaters,
cinematographs, concert halls, circuses and
other places of amusements.
(8) Amendments to the VAT law have been
consistent in exempting persons subject to
amusement tax under the NIRC from the
coverage of VAT.
(9) Only lessors or distributors of cinematographic
films are included in the coverage of VAT.
These reveal the legislative intent not to impose VAT on
persons already covered by the amusement tax. This holds true
even in the case of cinema/theater operators taxed under
the LGC of 1991 precisely because the VAT lawwas intended to
replace the percentage tax on certain services. The mere fact
that they are taxed by the local government unit and not by the
national government is immaterial. The Local Tax Code, in
transferring the power to tax gross receipts derived by
cinema/theater operators or proprietor from admission tickets to
the local government, did not intend to treat cinema/theater
houses as a separate class. No distinction must, therefore, be
made between the places of amusement taxed by the national
government and those taxed by the local government. EIAScH
To hold otherwise would impose an unreasonable burden
on cinema/theater houses operators or proprietors, who would be
paying an additional 10% 55 VAT on top of the 30% amusement
tax imposed by Section 140 of the LGC of 1991, or a total of 40%
tax. Such imposition would result in injustice, as persons taxed
under the NIRC of 1997 would be in a better position than those
taxed under the LGC of 1991. We need not belabor that a literal
application of a law must be rejected if it will operate unjustly or
lead to absurd results. 56 Thus, we are convinced that the
legislature never intended to include cinema/theater operators or
proprietors in the coverage of VAT.
On this point, it is apropos to quote the case of Roxas v.
Court of Tax Appeals, 57 to wit:
The power of taxation is sometimes called
also the power to destroy. Therefore, it should be
exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector
kill the "hen that lays the golden egg." And, in order
to maintain the general public's trust and
confidence in the Government this power must be
used justly and not treacherously.
The repeal of the Local Tax Code by the LGC of 1991 is not a
legal basis for the imposition of VAT
Petitioner, in issuing the assessment notices for
deficiency VAT against respondents, ratiocinated that:
Basically, it was acknowledged that a
cinema/theater operator was then subject to
amusement tax under Section 260 of Commonwealth
Act No. 466, otherwise known as the National
Internal Revenue Code of 1939, computed on the
amount paid for admission. With the enactment of
the Local Tax Code under Presidential Decree (PD)
 No. 231, dated June 28, 1973, the power of imposing and in harmony with, the law they seek to apply and
taxes on gross receipts from admission of persons implement. 60
to cinema/theater and other places of amusement
In view of the foregoing, there is no need to discuss
had, thereafter, been transferred to the provincial
whether RMC No. 28-2001 complied with the procedural due
government, to the exclusion of the national or
process for tax issuances as prescribed under RMC No. 20-86.
municipal government (Sections 11 & 13, Local Tax
Code). However, the said provision containing the Rule on tax exemption does not apply
exclusive power of the provincial government to
Moreover, contrary to the view of petitioner, respondents
impose amusement tax, had also been repealed
need not prove their entitlement to an exemption from the
and/or deleted by Republic Act (RA) No. 7160,
coverage of VAT. The rule that tax exemptions should be
otherwise known as the Local Government Code of
construed strictly against the taxpayer presupposes that the
1991, enacted into law on October 10, 1991.
taxpayer is clearly subject to the tax being levied against
Accordingly, the enactment of RA No. 7160, thus,
him. 61 The reason is obvious: it is both illogical and impractical
eliminating the statutory prohibition on the national
to determine who are exempted without first determining who
government to impose business tax on gross
are covered by the provision. 62 Thus, unless a statute imposes a
receipts from admission of persons to places of
tax clearly, expressly and unambiguously, what applies is the
amusement, led the way to the valid imposition of
equally well-settled rule that the imposition of a tax cannot be
the VAT pursuant to Section 102 (now Section 108) of
presumed. 63 In fact, in case of doubt, tax laws must be
the old Tax Code, as amended by the Expanded VAT
construed strictly against the government and in favor of the
Law (RA No. 7716) and which was implemented
taxpayer. 64
beginning January 1, 1996. 58 (Emphasis supplied)
WHEREFORE, the Petition is hereby DENIED. The assailed
We disagree.
April 30, 2008 Decision of the Court of Tax Appeals En
The repeal of the Local Tax Code by the LGC of 1991 is Banc holding that gross receipts derived by respondents from
not a legal basis for the imposition of VAT on the gross receipts admission tickets in showing motion pictures, films or movies are
of cinema/theater operators or proprietors derived from not subject to value-added tax under Section 108 of the National
admission tickets. The removal of the prohibition under the Local Internal Revenue Code of 1997, as amended, and its June 24,
Tax Code did not grant nor restore to the national government the 2008 Resolution denying the motion for reconsideration
power to impose amusement tax on cinema/theater operators or are AFFIRMED.
proprietors. Neither did it expand the coverage of VAT. Since the
SO ORDERED.
imposition of a tax is a burden on the taxpayer, it cannot be
presumed nor can it be extended by implication. A law will not be ||| (Commissioner of Internal Revenue v. SM Prime Holdings, Inc., G.R.
construed as imposing a tax unless it does so clearly, expressly, No. 183505, [February 26, 2010], 627 PHIL 581-605)
and unambiguously. 59 As it is, the power to impose amusement
tax on cinema/theater operators or proprietors remains with the
local government. IDSaTE
Revenue Memorandum Circular No. 28-2001 is invalid
Considering that there is no provision of law imposing VAT
on the gross receipts of cinema/theater operators or proprietors
derived from admission tickets, RMC No. 28-2001 which imposes
VAT on the gross receipts from admission to cinema houses must
be struck down. We cannot overemphasize that RMCs must not
override, supplant, or modify the law, but must remain consistent
 EN BANC

[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., respondents.

Taxation; Value-Added Tax (VAT); Words and Phrases; 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; Being an
indirect tax on expenditure, the seller of goods or services may pass
on the amount of tax paid to the buyer; 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.—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. Being an indirect tax on expenditure, the seller of goods or
services may pass on the amount of tax paid to the buyer, with the
seller acting merely as a tax collector. 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. Examples are individual and corporate
income taxes, transfer taxes, and residence taxes.
Same; Same; Same; 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, then 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; 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.—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. 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. It was only in 1987, when President Corazon C. Aquino
issued Ex-ecutive 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.” E.O. No. 273 was followed by
R.A. No. 7716 or the Expanded VAT Law, R.A. No. 8241 or the
Improved VAT Law, R.A. No. 8424 or the Tax Reform Act of 1997, and
finally, the presently beleaguered R.A. No. 9337, also referred to by
respondents as the VAT Reform Act.
Congress; Bicameral Conference Committee; Legislative Rules; It
should be borne in mind that the power of internal regulation and
discipline are intrinsic in any legislative body, and 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.—
Petitioners now beseech the Court to define the powers of the Bi-
cameral 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.” Thus, Article VI, Section 16 (3) of the
Constitution provides that “each House may determine the rules of
its proceed-ings.” 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.
Same; Same; Same; Separation of Powers; Judicial Review; Congress
is the best judge of how it should conduct its own business
expeditiously and in the most orderly manner; If 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;
Even the expanded jurisdiction of the Supreme 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.—Akin to the Fariñas case, 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 the earlier cases of Philippine Judges Association vs. Prado and
Finance, the Court already made the pronouncement that “[i]f a Tolentino vs. Secretary of Finance, the Court recognized the
change is desired in the practice [of the Bicameral Conference longstanding legislative practice of giving said conference
Committee] it must be sought in Congress since this question is not committee ample latitude for compromising differences between the
covered by any constitutional provision but is only an internal rule of Senate and the House. Thus, in the Tolentino case, it was held
each house.”To date, Congress has not seen it fit to make such that: . . . it is within the power of a conference committee to include
changes adverted to by the Court. It seems, therefore, that Congress in its report an entirely new provision that is not found either in the
finds the practices of the bicameral conference committee to be House bill or in the Senate bill. If the committee can propose an
very useful for purposes of prompt and efficient legislative action. amendment consisting of one or two provisions, there is no reason
why it cannot propose several provisions, collectively considered as
Same; Same; Same; Words and Phrases; The term “settle” is
an “amendment in the nature of a substitute,” so long as such
synonymous to “reconcile” and “harmonize”; To reconcile or
amendment is germane to the subject of the bills before the
harmonize disagreeing provisions, the Bicameral Conference
committee. After all, its report was not final but needed the approval
Committee may then (a) adopt the specific provisions of either the
of both houses of Congress to become valid as an act of the
House bill or Senate bill, (b) decide that neither provisions in the
legislative department. The charge that in this case the Conference
House bill or the provisions in the Senate bill would be carried into
Committee acted as a third legislative chamber is thus without any
the final form of the bill, and/or (c) try to arrive at a compromise
basis.
between the disagreeing provisions.—Under the provisions of both
the Rules of the House of Representatives and Senate Rules, the
Bicameral Conference Committee is mandated to settle the
Same; Same; Same; “No Amendment” Rule; The “no-amend-ment rule”
differences between the disagreeing provisions in the House bill and
refers only to the procedure to be followed by each house of
the Senate bill. The term “settle” is synonymous to “reconcile” and
Congress with regard to bills initiated in each of said respective
“harmonize.” To reconcile or harmonize disagreeing provisions, the
houses, before said bill is transmitted to the other house for its
Bicameral Conference Committee may then (a) adopt the specific
concurrence or amendment—Art. VI, Sec. 26 (2) of the Constitution
provisions of either the House bill or Senate bill, (b) decide that
cannot be taken to mean that the introduction by the Bicameral
neither provisions in the House bill or the provisions in the Senate
Conference Committee of amendments and modifications to
bill would be carried into the final form of the bill, and/or (c) try to
disagreeing provisions in bills that have been acted upon by both
arrive at a compromise between the disagreeing provisions.
houses of Congress is prohibited.—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
Same; Same; Same; It is within the power of a conference committee
respective houses, before said bill is transmitted to the other house
to include in its report an entirely new provision that is not found
for its concurrence or amendment. Verily, to construe said provision
either in the House bill or in the Senate bill—if the committee can
in a way as to proscribe any further changes to a bill after one house
propose an amendment consisting of one or two provisions, there is
has voted on it would lead to absurdity as this would mean that the
no reason why it cannot propose several provisions, collectively
other house of Congress would be deprived of its constitutional
considered as an “amendment in the nature of a substitute,” so long
power to amend or introduce changes to said bill. Thus, Art. VI, Sec.
as such amendment is germane to the subject of the bills before the
26 (2) of the Constitution cannot be taken to mean that the
committee.—All the changes or modifications made by the Bicameral
introduction by the Bicameral Conference Committee of amendments
Conference Committee were germane to subjects of the provisions
and modifications to disagreeing provisions in bills that have been
referred to it for reconciliation. Such being the case, the Court does
acted upon by both houses of Congress is prohibited.
not see any grave abuse of discretion amounting to lack or excess of
jurisdiction committed by the Bicameral Conference Committee. In
Same; Origin of Bills; Revenue Bills; Since there is no question that
the revenue bill 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—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.—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? * * * 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.
Same; Same; Same; 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, and the Senate,
approaching the measures from the point of national perspective,
can introduce amendments within the purposes of those bills, like
providing ways that would soften the impact of the VAT measure on
the consumer.—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.
Same; Same; Same; Germaneness Rule; 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, and the sections referring to other percentage and
excise taxes are germane to the reforms to the VAT system, as these
sections would cushion the effects of VAT on consumers.—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.
Separation of Powers; Delegation of Powers; A logical corollary to the
doctrine of separation of powers is the principle of non-delegation of
powers, a doctrine 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.—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. 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.” 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.
Same; Same; Exception to the Non-Delegation of Legislative Powers;
Words and Phrases; The powers which Congress is prohibited from
delegating are those which are strictly, or inherently and exclusively,
legislative—appertaining exclusively to the legislative department;
Purely legislative power 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; 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.—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. 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.
Same; Same; Same; Tests of Valid Delegation; A delegation 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, 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; A sufficient standard is one which
defines legislative policy, marks its limits, maps out its boundaries
and specifies the public agency to apply it.—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; 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. 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. 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.
Same; Same; Taxation; 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, the rationale being 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; 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.
—The legislature may delegate to execu-tive 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. 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. 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. 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.
Same; Same; Same; Statutory Construction; 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; No
discretion would be exercised by the President; The use of the word
“shall” connotes a mandatory order.—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. 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. 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.
Same; Same; Presidency; Control Power; Doctrine of Qualified
Political Agency; 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—as such, he 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.”— 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.”
Same; Same; Same; Same; Same; 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, and 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, becoming the
means or tool by which legislative policy is determined and
implemented.—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. 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.
Same; Same; 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.—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 (2 4/5%) or the national
government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 1/2%). 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. 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.
Same; Same; Taxation; Value-Added Tax; 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.—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.
Judicial Review; 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.—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.
Same; Separation of Powers; Statutory Construction; Rewriting the
law is a forbidden ground that only Congress may tread upon.—
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 2 4/5 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 1 1/2%.
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.
Taxation; Value-Added Tax; Fiscal Adequacy; Words and Phrases; The
principle of fiscal adequacy as a characteristic of a sound tax
system, which was originally stated by Adam Smith in his Canons of
Taxation, simply means that sources of revenues must be adequate
to meet government expenditures and their variations.— 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. It simply means that sources of
revenues must be adequate to meet government expenditures and
their variations.
Same; Same; Due Process; Equal Protection; 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.—
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.
Same; Same; Words and Phrases; 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.—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.
Same; Same; Due Process; Vested Rights; 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 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 limit; The distinction
between statutory privileges and vested rights must be borne in
mind for persons have no vested rights in statutory privileges.—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. 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. This
was adopted by the Expanded VAT Law (R.A. No. 7716), and The Tax
Reform Act of 1997 (R.A. No. 8424). 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.
Same; Same; 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; For whatever is the purpose of the 60-month
amortization, this involves executive economic policy and legislative
wisdom in which the Court cannot intervene.—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. 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. 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. 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.
Same; Same; With regard to the 5% creditable withholding tax
imposed on payments made by the government for taxable
transactions, Section 114 (C) of the National Internal Revenue Code
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.—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: * * * 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.
Same; Same; Words and Phrases; In tax usage, “final,” as opposed to
creditable, means full; As applied to value-added tax, taxable
transactions with the government are subject to a 5% tax rate, which
constitutes as full payment of the tax payable on the transaction.—
The Court observes, however, that the law 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.
Same; Same; It is clear that Congress intended to treat differently
transactions with the government; Since it has not been shown that
the class subject to the final 5% final withholding tax has been
unreasonably narrowed, there is no reason to invalidate the
provision.—The Court need not explore the rationale behind the
provision. It is clear that Congress intended to treat differently
taxable transactions with the government. 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.
Same; Same; Judicial Review; 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, “full of sound and fury,
signifying nothing”; 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.—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 Shake-
speare describes life in Macbeth, “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.
Same; Same; Equal Protection; The power of the State to make
reasonable and natural classifications for the purposes of taxation
has long been established.—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.” 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.
Same; Same; Same; The equal protection clause does not require the
universal application of the laws on all persons or things without
distinction; 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.—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
Same; Same; Equitable Taxation; R.A. No. 9337 is equitable.— R.A.
with the government, is not based on real and substantial
No. 9337 is also equitable. The law is equipped with a threshold
differences to meet a valid classification. The argument is pedantic,
margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of
if not outright baseless. The law does not make any classification in
goods or services with gross annual sales or receipts not exceeding
the subject of taxation, the kind of property, the rates to be levied or
P1,500,000.00. Also, basic marine and agricultural food products in
the amounts to be raised, the methods of assessment, valuation and
their original state are still not subject to the tax, thus ensuring that
collection. Petitioners’ alleged distinctions are based on variables
prices at the grassroots level will remain accessible. As was stated
that bear different consequences. While the implementation of the
in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs.
law may yield varying end results depending on one’s profit margin
Tan: The disputed sales tax is also equitable. It is imposed only on
and value-added, the Court cannot go beyond what the legislature
sales of goods or services by persons engaged in business with an
has laid down and interfere with the affairs of business. The equal
aggregate gross annual sales exceeding P200,000.00. Small corner
protection clause does not require the universal application of the
sari-sari stores are consequently exempt from its application.
laws on all persons or things without distinction. This might in fact
Likewise exempt from the tax are sales of farm and marine products,
sometimes result in unequal protection. What the clause requires is
so that the costs of basic food and other necessities, spared as they
equality among equals as determined according to a valid
are from the incidence of the VAT, are expected to be relatively lower
classification. By classification is meant the grouping of persons or
and within the reach of the general public.
things similar to each other in certain particulars and different from
all others in these same particulars.

Same; Same; Progressive Taxation; Progressive taxation is built on

the principle of the taxpayer’s ability to pay—taxation is progressive
Same; Same; Same; Uniformity of Taxation; The rule of uniform
when its rate goes up depending on the resources of the person
taxation does not deprive Congress of the power to classify subjects
affected.—Petitioners contend that the limitation on the creditable
of taxation, and only demands uniformity within the particular class.
input tax is anything but regressive. It is the smaller business with
—Uniformity in taxation means that all taxable articles or kinds of
higher input tax-output tax ratio that will suffer the consequences.
property of the same class shall be taxed at the same rate. Different
Progressive taxation is built on the principle of the taxpayer’s ability
articles may be taxed at different amounts provided that the rate is
to pay. This principle was also lifted from Adam Smith’s Canons of
uniform on the same class everywhere with all people at all times. In
Taxation, and it states: I. The subjects of every state ought to
this case, the tax law is uniform as it provides a standard rate of 0%
contribute towards the support of the government, as nearly as
or 10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A.
possible, in proportion to their respective abilities; that is, in
No. 9337, amending Sections 106, 107 and 108, respectively, of the
proportion to the revenue which they respectively enjoy under the
NIRC, provide for a rate of 10% (or 12%) on sale of goods and
protection of the state. Taxation is progressive when its rate goes up
properties, importation of goods, and sale of services and use or
depending on the resources of the person affected.
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 Same; Same; Same; The VAT is an antithesis of progressive taxation
paid on purchase of capital goods or the 5% final withholding tax by —by its very nature, it is regressive; The principle of progressive
the government. It must be stressed that the rule of uniform taxation taxation has no relation with the VAT system inasmuch as the VAT
does not deprive Congress of the power to classify subjects of paid by the consumer or business for every goods bought or services
taxation, and only demands uniformity within the particular class. enjoyed is the same regardless of income.—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.
Same; Same; Same; The Constitution does not really prohibit the
imposition of indirect taxes, like the VAT.—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)
Same; Same; Judicial Review; The Court cannot strike down a law as
unconstitutional simply because of its yokes.—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. Abakada Guro Party
List vs. Ermita, 469 SCRA 14, G.R. No. 168056, G.R. No. 168207, G.R.
No. 168461, G.R. No. 168463, G.R. No. 168730 September 1, 2005
DECISION
AUSTRIA-MARTINEZ, J p:
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. 3555 2 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. 3705 3 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. 1950 4 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. ACTIcS
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 the NIRC, requiring that the input tax on
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 1/2%).
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
depreciable goods shall be amortized over a
60-month period, if the acquisition, excluding
the VAT components, exceeds One Million
Pesos (P1,000,000.00);
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 EIDTAa
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 P1,000,000.00, 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. cEAHSC
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.
xxx xxx xxx
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.
xxx xxx xxx
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. ADCETI
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 Sec. 108 of NIRC) NIRC); 12% VAT on and use or lease of
government. importation of goods
properties (amending
Moreover, as far back as 1994 or more than ten years ago, and
in the case of Tolentino vs. Secretary of Finance, 23 the Court reduced rates for
Sec. 108 of NIRC)
already made the pronouncement that "[i]f a change is desired in certain
the practice [of the Bicameral Conference Committee] it must be imported products
sought in Congress since this question is not covered by any including petroleum
constitutional provision but is only an internal rule of each products (amending
house." 24 To date, Congress has not seen it fit to make such Sec.
changes adverted to by the Court. It seems, therefore, that 107 of NIRC); and 12%
Congress finds the practices of the bicameral conference VAT on sale of services
committee to be very useful for purposes of prompt and efficient
and use or lease of
legislative action.
properties and a
Nevertheless, just to put minds at ease that no blatant reduced
irregularities tainted the proceedings of the bicameral rate for certain
conference committees, the Court deems it necessary to dwell services
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 including power
follows: generation (amending

House Bill No. 3555 House Bill No. 3705 Senate Bill No. 1950 Sec. 108 of NIRC)

With regard to "Stand-By Authority" in favor of President With regard to the "no pass-on" provision

Provides for 12% VAT Provides for 12% VAT Provides for a single No similar provision Provides that the VAT Provides that the VAT
on every sale of goods in general on sales of rate of 10% VAT on sale imposed on power imposed on sales of
or properties goods or properties electricity by
of goods or properties generation and on the
(amending and generation
reduced rates for sale companies and
Sec. 106 of NIRC); 12% (amending Sec. 106 of sale of petroleum
of services of
VAT on importation of certain locally NIRC), 10% VAT on transmission
products shall be
manufactured goods sale of services companies
goods (amending Sec. absorbed by
and including and distribution
petroleum products generation
107 of NIRC); and 12% sale of electricity by companies or sellers, companies, as well as
and
raw materials to be respectively, and shall those of franchise
VAT on sale of services generation companies,
used not be passed on to grantees of electric
in the manufacture
and use or lease of transmission and consumers utilities shall not apply
thereof
to residential end-
properties (amending (amending Sec. 106 of distribution companies,
users.
 VAT shall be absorbed Provided for
No similar provision No similar provision
by amendments
generation, to several NIRC
transmission, provisions regarding
and distribution corporate income,
companies. percentage,
franchise and
With regard to 70% limit on input tax credit excise taxes

The disagreements between the provisions in the House

Provides that the Provides that the
No similar provision bills and the Senate bill were with regard to (1) what rate of VAT
input input
is to be imposed; (2) whether only the VAT imposed on electricity
tax credit for capital tax credit for capital
generation, transmission and distribution companies should not
goods on which a VAT goods on which a VAT be passed on to consumers, as proposed in the Senate bill, or
has been paid shall be has been paid shall be both the VAT imposed on electricity generation, transmission and
equally distributed equally distributed distribution companies and the VAT imposed on sale of petroleum
over over products should not be passed on to consumers, as proposed in
5 years or the 5 years or the the House bill; (3) in what manner input tax credits should be
depreciable depreciable limited; (4) and whether the NIRC provisions on corporate income
life of such capital life of such capital taxes, percentage, franchise and excise taxes should be
goods; goods; amended. CSaHDT
the input tax credit for the input tax credit for
There being differences and/or disagreements on the
goods and services goods and services foregoing provisions of the House and Senate bills, the Bicameral
other other Conference Committee was mandated by the rules of both
than capital goods than capital goods houses of Congress to act on the same by settling said
shall shall differences and/or disagreements. The Bicameral Conference
not exceed 5% of the not exceed 90% of the Committee acted on the disagreeing provisions by making the
total amount of such output VAT. following changes:
goods and services;
1. With regard to the disagreement on the rate of VAT to
and
be imposed, it would appear from the Conference Committee
for persons engaged
Report that the Bicameral Conference Committee tried to bridge
in
the gap in the difference between the 10% VAT rate proposed by
retail trading of goods, the Senate, and the various rates with 12% as the highest VAT
the allowable input rate proposed by the House, by striking a compromise whereby
tax the present 10% VAT rate would be retained until certain
credit shall not conditions arise, i.e., the value-added tax collection as a
exceed percentage of gross domestic product (GDP) of the previous year
11% of the total exceeds 2 4/5%, or National Government deficit as a percentage
amount of GDP of the previous year exceeds 1 1/2%, when the President,
of goods purchased. upon recommendation of the Secretary of Finance shall raise the
rate of VAT to 12% effective January 1, 2006.

With regard to amendments to be made to NIRC provisions 2. With regard to the disagreement on whether only the
regarding income and excise taxes 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. — . . .
xxx xxx xxx
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 (P1,000,000.00):
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. ACDTcE
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. Prado 29 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
theConstitution.
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? ATHCac
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.
xxx xxx xxx
. . . 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.
xxx xxx xxx
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 P64.3
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 P48.7 billion amount is from the
VAT on twelve goods and services. The rest of the
tab — P10.5 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 P10.5
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. AaITCH
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.
xxx xxx xxx
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 1/2%).
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. EITcaD
 (i) value-added tax collection as a impose, tariff rates, import and export quotas,
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 or exchange of goods and properties as well as on the sale or
percentage of GDP of the previous
year exceeds one and one-half
percent (1 1/2%).
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 Finance is not mandated to give a favorable recommendation and
percentage of GDP of the previous
year exceeds one and one-half
percent (1 1/2%). (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
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
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
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. DaAISH
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.
xxx xxx xxx
'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.'
xxx xxx xxx
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 1/2%).
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. DcITHE
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 (2 4/5%) or the national
government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 1/2%). 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 2 4/5 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 1 1/2%.
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
1/2%).
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 Fariñascase, 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 cEaCTS
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
(P1,000,000.00): 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 P1 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. TAcSaC
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 value-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. aHTCIc
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 P1,500,000.00. 88 Also, 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 P200,000.00. 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 P1.5 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 products 91 and
natural gas 92 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. TSacCH
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 Constitutionfrom 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. Avelino 101 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 v. Ermita, G.R. Nos. 168056, 168207,
168461, 168463 & 168730, [September 1, 2005])
[G.R. No. 180356. February 16, 2010.]
SOUTH AFRICAN AIRWAYS, petitioner, vs.
COMMISSIONER OF INTERNAL
REVENUE, respondent.
Taxation; Tax Refund; Since an action for a tax refund
partakes of the nature of an exemption, which cannot be
allowed unless granted in the most explicit and categorical
language, it is strictly construed against the claimant who
must discharge such burden convincingly.—Preliminarily, we
emphasize that petitioner is claiming that it is exempted from
being taxed for its sale of passage documents in the
Philippines. Petitioner, however, failed to sufficiently prove
such contention. In Commissioner of Internal Revenue v.
Acesite (Philippines) Hotel Corporation, 516 SCRA 93 (2007)
we held, “Since an action for a tax refund partakes of the
nature of an exemption, which cannot be allowed unless
granted in the most explicit and categorical language, it is
strictly construed against the claimant who must discharge
such burden convincingly.”
Same; Income Taxation; Air Transportation; Gross Philippine
Billings (GPB); As long as the uplifts of passengers and cargo
occur to or from the Philippines, income is included in Gross
Philippine Billings (GPB).—Prior to the 1997 NIRC, GPB
referred to revenues from uplifts anywhere in the world,
provided that the passage documents were sold in the
Philippines. Legislature departed from such concept in the
1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):
“Gross Philippine Billings” refers to the amount of gross
revenue derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place
of sale or issue and the place of payment of the ticket or
passage document. Now, it is the place of sale that is
irrelevant; as long as the uplifts of passengers and cargo
occur to or from the Philippines, income is included in GPB.
Same; Same; Same; Same; Off-line air carriers having general
sales agents in the Philippines are engaged in or doing
business in the Philippines and that their income from sales
of passage documents here is income from within the
Philippines.—In Commissioner of Internal Revenue v. British
Overseas Airways Corporation (British Overseas Airways), 149
SCRA 395 (1987), which was decided under similar factual
circumstances, this Court ruled that off-line air carriers
having general sales agents in the Philippines are engaged in
or doing business in the Philippines and that their income
from sales of passage documents here is income from within
the Philippines. Thus, in that case, we held the off-line air
carrier liable for the 32% tax on its taxable income.
Same; Same; Same; Same; Sec. 28(A)(3)(a) of the 1997
National Internal Revenue Code (NIRC) does not, in any
categorical term, exempt all international air carriers from
the coverage of Sec. 28(A)(1) of the 1997 NIRC—had
legislature’s intentions been to completely exclude all
international air carriers from the application of the general
rule under Sec. 28(A)(1), it would have used the appropriate
language to do so.—We point out that Sec. 28(A)(3)(a) of the
1997 NIRC does not, in any categorical term, exempt all
international air carriers from the coverage of Sec. 28(A)(1) of
the 1997 NIRC. Certainly, had legislature’s intentions been to
completely exclude all international air carriers from the
application of the general rule under Sec. 28(A)(1), it would
have used the appropriate language to do so; but the
legislature did not. Thus, the logical interpretation of such
provisions is that, if Sec. 28(A)(3)(a) is applicable to a
taxpayer, then the general rule under Sec. 28(A)(1) would not
apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident
foreign corporation, whether an international air carrier or
not, would be liable for the tax under Sec. 28(A)(1).
Same; Same; Same; Same; Evidence; Statutory Construction;
It is a well-settled doctrine in this jurisdiction that
statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of
that body and are, consequently, not controlling in the
interpretation of law.—Petitioner further reiterates its
argument that the intention of Congress in amending the
definition of GPB is to exempt off-line air carriers from
income tax by citing the pronouncements made by Senator
Juan Ponce Enrile during the deliberations on the provisions
of the 1997 NIRC. Such pronouncements, however, are not
controlling on this Court. We said in Espino v. Cleofe, 52 SCRA
92 (1973): A cardinal rule in the interpretation of statutes is
that the meaning and intention of the law-making body must
be sought, first of all, in the words of the statute itself, read
and considered in their natural, ordinary, commonly-accepted
and most obvious significations, according to good and
approved usage and without resorting to forced or subtle
construction. Courts, therefore, as a rule, cannot presume
that the law-making body does not know the meaning of
words and rules of grammar. Consequently, the grammatical
reading of a statute must be presumed to yield its correct
sense. x x x It is also a well-settled doctrine in this
jurisdiction that statements made by individual members of
Congress in the consideration of a bill do not necessarily
reflect the sense of that body and are, consequently, not
controlling in the interpretation of law.
Same; Same; Same; Same; Words and Phrases; An exception
is defined as that which would otherwise be included in the
provision from which it is excepted, a clause which exempts
something from the operation of a statute by express words;
An exception need not be introduced by the words “except” or
“unless”—an exception will be construed as such if it removes
something from the operation of a provision of law; If an
international air carrier maintains flights to and from the
Philippines, it shall be taxed at the rate of 2 1/2% of its Gross
Philippine Billings, while international air carriers that do not
have flights to and from the Philippines but nonetheless earn
income from other activities in the country will be taxed at
the rate of 32% of such income.—Sec. 28(A)(1) of the 1997
NIRC is a general rule that resident foreign corporations are
liable for 32% tax on all income from sources within the
Philippines. Sec. 28(A)(3) is an exception to this general rule.
An exception is defined as “that which would otherwise be
included in the provision from which it is excepted. It is a
clause which exempts something from the operation of a
statute by express words.” Further, “an exception need not be
introduced by the words ‘except’ or ‘unless.’ An exception will
be construed as such if it removes something from the
operation of a provision of law.” In the instant case, the
general rule is that resident foreign corporations shall be
liable for a 32% income tax on their income from within the
Philippines, except for resident foreign corporations that are
international carriers that derive income “from carriage of
persons, excess baggage, cargo and mail originating from the
Philippines” which shall be taxed at 2 1/2% of their Gross
Philippine Billings. Petitioner, being an international carrier
with no flights originating from the Philippines, does not fall
under the exception. As such, petitioner must fall under the
general rule. This principle is embodied in the Latin maxim,
exception firmat regulam in casibus non exceptis, which
means, a thing not being excepted must be regarded as
coming within the purview of the general rule. To reiterate,
the correct interpretation of the above provisions is that, if an
international air carrier maintains flights to and from the
Philippines, it shall be taxed at the rate of 2 1/2% of its Gross
Philippine Billings, while international air carriers that do not
have flights to and from the Philippines but nonetheless earn
income from other activities in the country will be taxed at
the rate of 32% of such income.
Same; Same; Compensation; Taxes cannot be subject to
compensation for the simple reason that the government and
the taxpayer are not creditors and debtors of each other—
debts are due to the Government in its corporate capacity,
while taxes are due to the Government in its sovereign
capacity.—And we ruled in Philex Mining Corporation v.
Commissioner of Internal Revenue, 294 SCRA 687 (1998) thus:
In several instances prior to the instant case, we have
already made the pronouncement that taxes cannot be
subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors of
each other. There is a material distinction between a tax and
debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its
sovereign capacity. We find no cogent reason to deviate from
the aforementioned distinction.
Same; Same; Even though petitioner is not entitled to a
refund due to the question on the propriety of petitioner’s tax
return subject of the instant controversy, it would not be
proper to deny such claim without making a determination of
petitioner’s liability under Sec. 28(A)(1).—Petitioner’s similar
tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner,
although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is
liable under Sec. 28(A)(1), the correctness of the return filed
by petitioner is now put in doubt. As such, we cannot grant
the prayer for a refund. Be that as it may, this Court is unable
to affirm the assailed decision and resolution of the CTA En
Banc on the outright denial of petitioner’s claim for a refund.
Even though petitioner is not entitled to a refund due to the
question on the propriety of petitioner’s tax return subject of
the instant controversy, it would not be proper to deny such
claim without making a determination of petitioner’s liability
under Sec. 28(A)(1). It must be remembered that the tax
under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is
based on taxable income, that is, gross income less
deductions and exemptions, if any. It cannot be assumed that
petitioner’s liabilities under the two provisions would be the
same. There is a need to make a determination of petitioner’s
liability under Sec. 28(A)(1) to establish whether a tax refund
is forthcoming or that a tax deficiency exists. The assailed
decision fails to mention having computed for the tax due
under Sec. 28(A)(1) and the records are bereft of any
evidence sufficient to establish petitioner’s taxable income.
There is a necessity to receive evidence to establish such
amount vis-à-vis the claim for refund. It is only after such
amount is established that a tax refund or deficiency may be
correctly pronounced. South African Airways vs.
Commissioner of Internal Revenue, 612 SCRA 665, G.R. No.
180356 February 16, 2010
DECISION
VELASCO, JR., J p:
The Case
This Petition for Review on Certiorari under Rule 45 seeks
the reversal of the July 19, 2007 Decision 1 and October 30, 2007
Resolution 2 of the Court of Tax Appeals (CTA) En Banc in CTA
E.B. Case No. 210, entitled South African Airways v.
Commissioner of Internal Revenue. The assailed decision
affirmed the Decision dated May 10, 2006 3 and Resolution dated
August 11, 2006 4 rendered by the CTA First Division.
The Facts
Petitioner South African Airways is a foreign corporation
organized and existing under and by virtue of the laws of the
Republic of South Africa. Its principal office is located at Airways
Park, Jones Road, Johannesburg International Airport, South
Africa. In the Philippines, it is an internal air carrier having no
landing rights in the country. Petitioner has a general sales agent
in the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel
sells passage documents for compensation or commission for
petitioner's off-line flights for the carriage of passengers and
cargo between ports or points outside the territorial jurisdiction
of the Philippines. Petitioner is not registered with the Securities
and Exchange Commission as a corporation, branch office, or
partnership. It is not licensed to do business in the Philippines.
For the taxable year 2000, petitioner filed separate
quarterly and annual income tax returns for its off-line flights,
summarized as follows: cAEaSC
2.5% Gross
Period Date Filed Phil. Billings
For Passenger 1st Quarter May 30, 2000 PhP222,531.25 Thus, petitioner filed a Petition for Review before the
CTA En Banc, reiterating its claim for a refund of its tax payment
2nd Quarter August 29, 2000 424,046.95
on its GPB. This was denied by the CTA in its assailed decision. A
November 29,
3rd Quarter 422,466.00 subsequent Motion for Reconsideration by petitioner was also
2000
denied in the assailed resolution of the CTA En Banc.
4th Quarter April 16, 2000 453,182.91
Hence, petitioner went to us.
–––––––––––––
Sub-total PhP1,522,227.11 The Issues
============ Whether or not petitioner, as an off-line
For Cargo 1st Quarter May 30, 2000 PhP81,531.00 international carrier selling passage documents
through an independent sales agent in the
2nd Quarter August 29, 2000 50,169.65
Philippines, is engaged in trade or business in the
November 29, Philippines subject to the 32% income tax imposed
3rd Quarter 36,383.74
2000 by Section 28 (A)(1) of the 1997 NIRC.
4th Quarter April 16, 2000 37,454.88
Whether or not the income derived by
–––––––––––––
petitioner from the sale of passage documents
Subtotal PhP205,539.27 covering petitioner's off-line flights is Philippine-
––––––––––––– source income subject to Philippine income
TOTAL 1,727,766.38 tax. IDEHCa
============ Whether or not petitioner is entitled to a
refund or a tax credit of erroneously paid tax on
Gross Philippine Billings for the taxable year 2000 in
Thereafter, on February 5, 2003, petitioner filed with the
the amount of P1,727,766.38. 5
Bureau of Internal Revenue, Revenue District Office No. 47, a
claim for the refund of the amount of PhP1,727,766.38 as The Court's Ruling
erroneously paid tax on Gross Philippine Billings (GPB) for the
taxable year 2000. Such claim was unheeded. Thus, on April 14, This petition must be denied.
2003, petitioner filed a petition for Review with the CTA for the Petitioner is Subject to Income Tax
refund of the abovementioned amount. The case was docketed at the Rate of 32% of its Taxable Income
as CTA Case No. 6656.
Preliminarily, we emphasize that petitioner is claiming
On May 10, 2006, the CTA First Division issued a Decision that it is exempted from being taxed for its sale of passage
denying the petition for lack of merit. The CTA ruled that documents in the Philippines. Petitioner, however, failed to
petitioner is a resident foreign corporation engaged in trade or sufficiently prove such contention.
business in the Philippines. It further ruled that petitioner was
not liable to pay tax on its GPB under Section 28 (A) (3) (a) of In Commissioner of Internal Revenue v. Acesite
the National Internal Revenue Code (NIRC) of 1997. The CTA, (Philippines) Hotel Corporation, 6 we held, "Since an action for a
however, stated that petitioner is liable to pay a tax of 32% on its tax refund partakes of the nature of an exemption, which cannot
income derived from the sales of passage documents in the be allowed unless granted in the most explicit and categorical
Philippines. On this ground, the CTA denied petitioner's claim for language, it is strictly construed against the claimant who must
a refund. discharge such burden convincingly."

Petitioner's Motion for Reconsideration of the above Petitioner has failed to overcome such burden.
decision was denied by the CTA First Division in a Resolution In essence, petitioner calls upon this Court to determine
dated August 11, 2006. the legal implication of the amendment to Sec. 28 (A) (3) (a) of
the 1997 NIRC defining GPB. It is petitioner's contention that,
with the new definition of GPB, it is no longer liable under Sec. 28
(A) (3) (a). Further, petitioner argues that because the 2 1/2% tax
on GPB is inapplicable to it, it is thereby excluded from the
imposition of any income tax.
Sec. 28 (b) (2) of the 1939 NIRC provided:
(2) Resident Corporations. — A corporation
organized, authorized, or existing under the laws of a
foreign country, engaged in trade or business within
the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net
income received in the preceding taxable year from
all sources within the Philippines: Provided,
however, that international carriers shall pay a tax
of two and one-half percent on their gross Philippine
billings. IcDCaT
This provision was later amended by Sec. 24 (B) (2) of
the 1977 NIRC, which defined GPB as follows:
"Gross Philippine billings" include gross
revenue realized from uplifts anywhere in the world
by any international carrier doing business in the
Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail,
provided the cargo or mail originates from the
Philippines.
In the 1986 and 1993 NIRCs, the definition of GPB was
further changed to read:
"Gross Philippine Billings" means gross
revenue realized from uplifts of passengers
anywhere in the world and excess baggage, cargo
and mail originating from the Philippines, covered by
passage documents sold in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to
revenues from uplifts anywhere in the world, provided that the
passage documents were sold in the Philippines. Legislature
departed from such concept in the 1997 NIRC where GPB is now
defined under Sec. 28 (A) (3) (a):
"Gross Philippine Billings" refers to the
amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating
from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale
or issue and the place of payment of the ticket or
passage document. HIAESC
Now, it is the place of sale that is irrelevant; as long as
the uplifts of passengers and cargo occur to or from the
Philippines, income is included in GPB.
As correctly pointed out by petitioner, inasmuch as it does
not maintain flights to or from the Philippines, it is not taxable
under Sec. 28 (A) (3) (a) of the 1997 NIRC. This much was also
found by the CTA. But petitioner further posits the view that due
to the non-applicability of Sec. 28 (A) (3) (a) to it, it is precluded
from paying any other income tax for its sale of passage
documents in the Philippines.
Such position is untenable.
In Commissioner of Internal Revenue v. British Overseas
Airways Corporation (British Overseas Airways), 7 which was
decided under similar factual circumstances, this Court ruled
that off-line air carriers having general sales agents in the
Philippines are engaged in or doing business in the Philippines
and that their income from sales of passage documents here is
income from within the Philippines. Thus, in that case, we held
the off-line air carrier liable for the 32% tax on its taxable
income.
Petitioner argues, however, that because British Overseas
Airways was decided under the 1939 NIRC, it does not apply to
the instant case, which must be decided under the 1997 NIRC.
Petitioner alleges that the 1939 NIRC taxes resident foreign
corporations, such as itself, on all income from sources within
the Philippines. Petitioner's interpretation of Sec. 28 (A) (3) (a) of
the 1997 NIRC is that, since it is an international carrier that
does not maintain flights to or from the Philippines, thereby
having no GPB as defined, it is exempt from paying any income
tax at all. In other words, the existence of Sec. 28 (A) (3) (a)
according to petitioner precludes the application of Sec. 28 (A)
(1) to it.
Its argument has no merit.
First, the difference cited by petitioner between the 1939
and 1997 NIRCs with regard to the taxation of off-line air carriers
is more apparent than real. HICSaD
 We point out that Sec. 28 (A) (3) (a) of the 1997 NIRC does
not, in any categorical term, exempt all international air carriers
from the coverage of Sec. 28 (A) (1) of the 1997 NIRC. Certainly,
had legislature's intentions been to completely exclude all
international air carriers from the application of the general rule
under Sec. 28 (A) (1), it would have used the appropriate
language to do so; but the legislature did not. Thus, the logical
interpretation of such provisions is that, if Sec. 28 (A) (3) (a) is
applicable to a taxpayer, then the general rule under Sec. 28 (A)
(1) would not apply. If, however, Sec. 28 (A) (3) (a) does not apply,
a resident foreign corporation, whether an international air
carrier or not, would be liable for the tax under Sec. 28 (A) (1).
Clearly, no difference exists between British Overseas
Airways and the instant case, wherein petitioner claims that the
former case does not apply. Thus, British Overseas
Airways applies to the instant case. The findings therein that an
off-line air carrier is doing business in the Philippines and that
income from the sale of passage documents here is Philippine-
source income must be upheld.
Petitioner further reiterates its argument that the
intention of Congress in amending the definition of GPB is to
exempt off-line air carriers from income tax by citing the
pronouncements made by Senator Juan Ponce Enrile during the
deliberations on the provisions of the 1997 NIRC. Such
pronouncements, however, are not controlling on this Court. We
said in Espino v. Cleofe: 8
A cardinal rule in the interpretation of
statutes is that the meaning and intention of the
law-making body must be sought, first of all, in the
words of the statute itself, read and considered in
their natural, ordinary, commonly-accepted and
most obvious significations, according to good and
approved usage and without resorting to forced or
subtle construction. Courts, therefore, as a rule,
cannot presume that the law-making body does not
know the meaning of words and rules of grammar.
Consequently, the grammatical reading of a statute
must be presumed to yield its correct sense. . . . It is
also a well-settled doctrine in this jurisdiction that
statements made by individual members of Congress
in the consideration of a bill do not necessarily
reflect the sense of that body and are, consequently,
not controlling in the interpretation of
law. (Emphasis supplied.) ScTCIE
Moreover, an examination of the subject provisions of the
law would show that petitioner's interpretation of those
provisions is erroneous.
Sec. 28 (A) (1) and (A) (3) (a) provides:
SEC. 28. Rates of Income Tax on Foreign
Corporations. —
(A) Tax on Resident Foreign Corporations. —
(1) In General. — Except as otherwise
provided in this Code, a corporation organized,
authorized, or existing under the laws of any foreign
country, engaged in trade or business within the
Philippines, shall be subject to an income tax
equivalent to thirty-five percent (35%) of the taxable
income derived in the preceding taxable year from
all sources within the Philippines: provided, That
effective January 1, 1998, the rate of income tax
shall be thirty-four percent (34%); effective January
1, 1999, the rate shall be thirty-three percent (33%),
and effective January 1, 2000 and thereafter, the
rate shall be thirty-two percent (32%).
xxx xxx xxx
(3) International Carrier. — An international
carrier doing business in the Philippines shall pay a
tax of two and one-half percent (2 1/2%) on its
'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. — 'Gross
Philippine Billings' refers to the amount of
gross revenue derived from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines in a
continuous and uninterrupted flight,
irrespective of the place of sale or issue and
the place of payment of the ticket or passage
document: Provided, That tickets revalidated,
exchanged and/or indorsed to another
international airline form part of the Gross
Philippine Billings if the passenger boards a
plane in a port or point in the Philippines:
 Provided, further, That for a flight which
originates from the Philippines, but
transshipment of passenger takes place at
any port outside the Philippines on another
airline, only the aliquot portion of the cost of
the ticket corresponding to the leg flown
from the Philippines to the point of
transshipment shall form part of Gross
Philippine Billings. EAICTS
Sec. 28 (A) (1) of the 1997 NIRC is a general rule that
resident foreign corporations are liable for 32% tax on all income
from sources within the Philippines. Sec. 28 (A) (3) is an
exception to this general rule.
An exception is defined as "that which would otherwise
be included in the provision from which it is excepted. It is a
clause which exempts something from the operation of a statue
by express words." 9 Further, "an exception need not be
introduced by the words 'except' or 'unless.' An exception will be
construed as such if it removes something from the operation of
a provision of law." 10
In the instant case, the general rule is that resident
foreign corporations shall be liable for a 32% income tax on their
income from within the Philippines, except for resident foreign
corporations that are international carriers that derive income
"from carriage of persons, excess baggage, cargo and mail
originating from the Philippines" which shall be taxed at 2 1/2%
of their Gross Philippine Billings. Petitioner, being an
international carrier with no flights originating from the
Philippines, does not fall under the exception. As such, petitioner
must fall under the general rule. This principle is embodied in the
Latin maxim, exception firmat regulam in casibus non
exceptis, which means, a thing not being excepted must be
regarded as coming within the purview of the general rule. 11
To reiterate, the correct interpretation of the above
provisions is that, if an international air carrier maintains flights
to and from the Philippines, it shall be taxed at the rate of 2 1/2%
of its Gross Philippine Billings, while international air carriers
that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country will
be taxed at the rate of 32% of such income. EDcIAC
As to the denial of petitioner's claim for refund, the CTA
denied the claim on the basis that petitioner is liable for income
tax under Sec. 28 (A) (1) of the 1997 NIRC. Thus, petitioner raises
the issue of whether the existence of such liability would
preclude their claim for a refund of tax paid on the basis of Sec.
28 (A) (3) (a). In answer to petitioner's motion for reconsideration,
the CTA First Division ruled in its Resolution dated August 11,
2006, thus:
On the fourth argument, petitioner avers that
a deficiency tax assessment does not, in any way,
disqualify a taxpayer from claiming a tax refund
since a refund claim can proceed independently of a
tax assessment and that the assessment cannot be
offset by its claim for refund.
Petitioner's argument is erroneous. Petitioner
premises its argument on the existence of an
assessment. In the assailed Decision, this Court did
not, in any way, assess petitioner of any deficiency
corporate income tax. The power to make
assessments against taxpayers is lodged with the
respondent. For an assessment to be made,
respondent must observe the formalities provided in
Revenue Regulations No. 12-99. This Court merely
pointed out that petitioner is liable for the regular
corporate income tax by virtue of Section 28(A)(3) of
the Tax Code. Thus, there is no assessment to speak
of. 12
Precisely, petitioner questions the offsetting of its
payment of the tax under Sec. 28 (A) (3) (a) with their liability
under Sec. 28 (A) (1), considering that there has not yet been any
assessment of their obligation under the latter provision.
Petitioner argues that such offsetting is in the nature of legal
compensation, which cannot be applied under the circumstances
present in this case.
Article 1279 of the Civil Code contains the elements of
legal compensation, to wit:
Art. 1279. In order that compensation may be
proper, it is necessary:
(1) That each one of the obligors be
bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum
of money, or if the things due are
 consumable, they be of the same kind, and
also of the same quality if the latter has been
stated; CEaDAc
(3) That the two debts be due;
(4) That they be liquidated and
demandable;
(5) That over neither of them there be
any retention or controversy, commenced by
third persons and communicated in due time
to the debtor.
And we ruled in Philex Mining Corporation
Commissioner of Internal Revenue, 13 thus:
In several instances prior to the instant case,
we have already made the pronouncement that
taxes cannot be subject to compensation for the
simple reason that the government and the taxpayer
are not creditors and debtors of each other. There is
a material distinction between a tax and debt. Debts
are due to the Government in its corporate capacity,
while taxes are due to the Government in its
sovereign capacity. We find no cogent reason to
deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v.
Intermediate Appellate Court, we categorically held
that taxes cannot be subject to set-off or
compensation, thus:
We have consistently ruled that there
can be no off-setting of taxes against the
claims that the taxpayer may have against
the government. A person cannot refuse to
pay a tax on the ground that the government
owes him an amount equal to or greater than
the tax being collected. The collection of a
tax cannot await the results of a lawsuit
against the government.
The ruling in Francia has been applied to the
subsequent case of Caltex Philippines, Inc. v.
Commission on Audit, which reiterated that:
. . . a taxpayer may not offset taxes
due from the claims that he may have against
the government. Taxes cannot be the subject
of compensation because the government
and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is
not such a debt, demand, contract or
judgment as is allowed to be set-off.
Verily, petitioner's argument is correct that the offsetting
of its tax refund with its alleged tax deficiency is unavailing
under Art. 1279 of the Civil Code. DaEATc
v. Commissioner of Internal Revenue v. Court of Tax
Appeals, 14 however, granted the offsetting of a tax refund with a
tax deficiency in this wise:
Further, it is also worth noting that the Court
of Tax Appeals erred in denying petitioner's
supplemental motion for reconsideration alleging
bringing to said court's attention the existence of
the deficiency income and business tax assessment
against Citytrust. The fact of such deficiency
assessment is intimately related to and inextricably
intertwined with the right of respondent bank to
claim for a tax refund for the same year. To award
such refund despite the existence of that deficiency
assessment is an absurdity and a polarity in
conceptual effects. Herein private respondent
cannot be entitled to refund and at the same time be
liable for a tax deficiency assessment for the same
year.
The grant of a refund is founded on the
assumption that the tax return is valid, that is, the
facts stated therein are true and correct. The
deficiency assessment, although not yet final,
created a doubt as to and constitutes a challenge
against the truth and accuracy of the facts stated in
said return which, by itself and without
unquestionable evidence, cannot be the basis for
the grant of the refund.
Section 82, Chapter IX of the National
Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed,
provides that "(w)hen an assessment is made in
case of any list, statement, or return, which in the
opinion of the Commissioner of Internal Revenue
was false or fraudulent or contained any
understatement or undervaluation, no tax collected
under such assessment shall be recovered by any
suits unless it is proved that the said list, statement,
or return was not false nor fraudulent and did not
contain any understatement or undervaluation; but
this provision shall not apply to statements or
returns made or to be made in good faith regarding
annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without
determination of the proper assessment and the tax
due would inevitably result in multiplicity of
proceedings or suits. If the deficiency assessment
should subsequently be upheld, the Government will
be forced to institute anew a proceeding for the
recovery of erroneously refunded taxes which
recourse must be filed within the prescriptive period
of ten years after discovery of the falsity, fraud or
omission in the false or fraudulent return involved.
This would necessarily require and entail additional
efforts and expenses on the part of the Government,
impose a burden on and a drain of government
funds, and impede or delay the collection of much-
needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and
unnecessary difficulties or expenses, it is both
logically necessary and legally appropriate that the
issue of the deficiency tax assessment against
Citytrust be resolved jointly with its claim for tax
refund, to determine once and for all in a single
proceeding the true and correct amount of tax due
or refundable.
In fact, as the Court of Tax Appeals itself has
heretofore conceded, it would be only just and fair
that the taxpayer and the Government alike be given
equal opportunities to avail of remedies under the
law to defeat each other's claim and to determine all
matters of dispute between them in one single case.
It is important to note that in determining whether
or not petitioner is entitled to the refund of the
amount paid, it would [be] necessary to determine
how much the Government is entitled to collect as
taxes. This would necessarily include the
determination of the correct liability of the taxpayer
and, certainly, a determination of this case would
constitute res judicata on both parties as to all the
matters subject thereof or necessarily involved
therein. (Emphasis supplied.) aDcEIH
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72,
Chapter XI of the 1997 NIRC. The above pronouncements are,
therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that
the tax return that it filed was correct. Given, however, the
finding of the CTA that petitioner, although not liable under Sec.
28 (A) (3) (a) of the 1997 NIRC, is liable under Sec. 28 (A) (1), the
correctness of the return filed by petitioner is now put in doubt.
As such, we cannot grant the prayer for a refund.
Be that as it may, this Court is unable to affirm the
assailed decision and resolution of the CTA En Banc on the
outright denial of petitioner's claim for a refund. Even though
petitioner is not entitled to a refund due to the question on the
propriety of petitioner's tax return subject of the instant
controversy, it would not be proper to deny such claim without
making a determination of petitioner's liability under Sec. 28 (A)
(1).
It must be remembered that the tax under Sec. 28 (A) (3)
(a) is based on GPB, while Sec. 28 (A) (1) is based on taxable
income, that is, gross income less deductions and exemptions, if
any. It cannot be assumed that petitioner's liabilities under the
two provisions would be the same. There is a need to make a
determination of petitioner's liability under Sec. 28 (A) (1) to
establish whether a tax refund is forthcoming or that a tax
deficiency exists. The assailed decision fails to mention having
computed for the tax due under Sec. 28 (A) (1) and the records
are bereft of any evidence sufficient to establish petitioner's
taxable income. There is a necessity to receive evidence to
establish such amount vis-Ã -vis the claim for refund. It is only
after such amount is established that a tax refund or deficiency
may be correctly pronounced.
WHEREFORE, the assailed July 19, 2007 Decision and
October 30, 2007 Resolution of the CTA En Banc in CTA E.B. Case
No. 210 are SET ASIDE. The instant case is REMANDED to the
CTA En Banc for further proceedings and appropriate action,
 more particularly, the reception of evidence for both parties and
the corresponding disposition of CTA E.B. Case No. 210 not
otherwise inconsistent with our judgment in this
Decision. aCcEHS
SO ORDERED.
||| (South African Airways v. Commissioner of Internal Revenue, G.R.
No. 180356, [February 16, 2010], 626 PHIL 566-580)

[G.R. No. 195909. September 26, 2012.]

COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. ST. LUKE'S MEDICAL
CENTER, INC., respondent.

[G.R. No. 195960. September 26, 2012.]

ST. LUKE'S MEDICAL CENTER,

INC., petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.

Taxation; Tax Exemptions; The Supreme Court holds that

Section 27(B) of the National Internal Revenue Code (NIRC)
does not remove the income tax exemption of proprietary
non-profit hospitals under Section 30(E) and (G). ―The Court
partly grants the petition of the BIR but on a different ground.
We hold that Section 27(B) of the NIRC does not remove the
income tax exemption of proprietary non-profit hospitals
under Section 30(E) and (G). Section 27(B) on one hand, and
Section 30(E) and (G) on the other hand, can be construed
together without the removal of such tax exemption. The
effect of the introduction of Section 27(B) is to subject the
taxable income of two specific institutions, namely,
proprietary non-profit educational institutions and proprietary
non-profit hospitals, among the institutions covered by
Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(1).
Same; Preferential Tax Rate; Section 27(B) of the National
Internal Revenue Code (NIRC) imposes a 10% preferential tax
rate on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals.―Section
27(B) of the NIRC imposes a 10% preferential tax rate on the
income of (1) proprietary non-profit educational institutions
and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary
and non-profit. “Proprietary” means private, following the
definition of a “proprietary educational institution” as “any
private school maintained and administered by private
individuals or groups” with a government permit. “Non-profit”
means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset
devoted to the institution’s purposes and all its activities
conducted not for profit.
Same; “Non-profit” does not necessarily mean
“charitable.”―“Non-profit” does not necessarily mean
“charitable.” In Collector of Internal Revenue v. Club Filipino
Inc. de Cebu, 5 SCRA 321 (1962), this Court considered as
non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was
primarily funded by membership fees and dues. If it had
profits, they were used for overhead expenses and improving
its golf course. The club was non-profit because of its
purpose and there was no evidence that it was engaged in a
profit-making enterprise.
Same; Tax Exemptions; Charity is essentially a gift to an
indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for
free goods and services to the public which would otherwise
fall on the shoulders of government; The government forgoes
taxes which should have been spent to address public needs,
because certain private entities already assume a part of the
burden.―To be a charitable institution, however, an
organization must meet the substantive test of charity in
Lung Center of the Philippines vs. Quezon City, 433 SCRA 119
(2004). The issue in Lung Center concerns exemption from
real property tax and not income tax. However, it provides for
the test of charity in our jurisdiction. Charity is essentially a
gift to an indefinite number of persons which lessens the
burden of government. In other words, charitable institutions
provide for free goods and services to the public which would
otherwise fall on the shoulders of government. Thus, as a
matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because
certain private entities already assume a part of the burden.
This is the rationale for the tax exemption of charitable
institutions. The loss of taxes by the government is
compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury.
Same; Same; Charitable institutions are not ipso facto
entitled to a tax exemption. The requirements for a tax
exemption are specified by the law granting it.―Charitable
institutions, however, are not ipso facto entitled to a tax
exemption. The requirements for a tax exemption are
specified by the law granting it. The power of Congress to tax
implies the power to exempt from tax. Congress can create
tax exemptions, subject to the constitutional provision that
“[n]o law granting any tax exemption shall be passed without
the concurrence of a majority of all the Members of
Congress.” The requirements for a tax exemption are strictly
construed against the taxpayer because an exemption
restricts the collection of taxes necessary for the existence
of the government.
Same; Same; Income Taxation; Real Estate Taxes; For real
property taxes, the incidental generation of income is
permissible because the test of exemption is the use of the
property; The effect of failing to meet the use requirement is
simply to remove from the tax exemption that portion of the
property not devoted to charity.―For real property taxes, the
incidental generation of income is permissible because the
test of exemption is the use of the property. The Constitution
provides that “[c]haritable institutions, churches and
personages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from
taxation.” The test of exemption is not strictly a requirement
on the intrinsic nature or character of the institution. The test
requires that the institution use the property in a certain way,
i.e. for a charitable purpose. Thus, the Court held that the
Lung Center of the Philippines did not lose its charitable
character when it used a portion of its lot for commercial
purposes. The effect of failing to meet the use requirement is
simply to remove from the tax exemption that portion of the
property not devoted to charity.
Same; Same; The Constitution exempts charitable institutions
only from real property taxes. In the National Internal
Revenue Code (NIRC), Congress decided to extend the
exemption to income taxes.―The Constitution exempts
charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income
taxes. However, the way Congress crafted Section 30(E) of
the NIRC is materially different from Section 28(3), Article VI
of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax.
On the other hand, Section 28(3), Article VI of the
Constitution does not define a charitable institution, but
requires that the institution “actually, directly and
exclusively” use the property for a charitable purpose.
Same; Same; Real Estate Taxes; Income Taxation; To be
exempt from real property taxes, Section 28(3), Article VI of
the Constitution requires that a charitable institution use the
property “actually, directly and exclusively” for charitable
purposes. To be exempt from income taxes, Section 30(E) of
the National Internal Revenue Code (NIRC) requires that a
charitable institution must be “organized and operated
exclusively” for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the National Internal
Revenue Code (NIRC) requires that the institution be
“operated exclusively” for social welfare.―There is no dispute
that St. Luke’s is organized as a non-stock and non-profit
charitable institution. However, this does not automatically
exempt St. Luke’s from paying taxes. This only refers to the
organization of St. Luke’s. Even if St. Luke’s meets the test of
charity, a charitable institution is not ipso facto tax exempt.
To be exempt from real property taxes, Section 28(3), Article
VI of the Constitution requires that a charitable institution
use the property “actually, directly and exclusively” for
charitable purposes. To be exempt from income taxes, Section
30(E) of the NIRC requires that a charitable institution must
be “organized and operated exclusively” for charitable
purposes. Likewise, to be exempt from income taxes, Section
30(G) of the NIRC requires that the institution be “operated
exclusively” for social welfare.
Same; Same; Even if the charitable institution must be
“organized and operated exclusively” for charitable purposes,
it is nevertheless allowed to engage in “activities conducted
for profit” without losing its tax exempt status for its not-for-
profit activities.―Even if the charitable institution must be
“organized and operated exclusively” for charitable purposes,
it is nevertheless allowed to engage in “activities conducted
for profit” without losing its tax exempt status for its not-for-
profit activities. The only consequence is that the “income of
whatever kind and character” of a charitable institution “from
any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax.”
Prior to the introduction of Section 27(B), the tax rate on such
income from for-profit activities was the ordinary corporate
rate under Section 27(A). With the introduction of Section
27(B), the tax rate is now 10%.
Same; Income Taxation; Preferential Tax Rate; The Supreme
Court finds that St. Luke’s is a corporation that is not
“operated exclusively” for charitable or social welfare
purposes insofar as its revenues from paying patients are
concerned; Such income from for-profit activities, under the
last paragraph of Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B). ―The Court
finds that St. Luke’s is a corporation that is not “operated
exclusively” for charitable or social welfare purposes insofar
as its revenues from paying patients are concerned. This
ruling is based not only on a strict interpretation of a
provision granting tax exemption, but also on the clear and
plain text of Section 30(E) and (G). Section 30(E) and (G) of
the NIRC requires that an institution be “operated
exclusively” for charitable or social welfare purposes to be
completely exempt from income tax. An institution under
Section 30(E) or (G) does not lose its tax exemption if it earns
income from its for-profit activities. Such income from for-
profit activities, under the last paragraph of Section 30, is
merely subject to income tax, previously at the ordinary
corporate rate but now at the preferential 10% rate pursuant
to Section 27(B).
Same; Tax Exemptions; A tax exemption is effectively a social
subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet
benefits from them.―A tax exemption is effectively a social
subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet
benefits from them. Tax exemptions for charitable institutions
should therefore be limited to institutions beneficial to the
public and those which improve social welfare. A profit-
making entity should not be allowed to exploit this subsidy to
the detriment of the government and other taxpayers.
Commissioner of Internal Revenue vs. St. Luke's Medical
Center, Inc., 682 SCRA 66, G.R. No. 195909 September 26,
2012
DECISION
CARPIO, J p:
The Case
These are consolidated 1 petitions for review
on certiorari under Rule 45 of the Rules of Court assailing the
Decision of 19 November 2010 of the Court of Tax Appeals
(CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case
No. 6746. This Court resolves this case on a pure question of law,
which involves the interpretation of Section 27 (B) vis-à-
vis Section 30 (E) and (G) of the National Internal Revenue Code
of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital
organized as a non-stock and non-profit corporation. Under its
articles of incorporation, among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-
stock, non-profit Christian, benevolent, charitable
and scientific hospital which shall give curative,
rehabilitative and spiritual care to the sick,
diseased and disabled persons; provided that
purely medical and surgical services shall be
performed by duly licensed physicians and
surgeons who may be freely and individually
contracted by patients;
(b) To provide a career of health science education
and provide medical services to the community
through organized clinics in such specialties as
the facilities and resources of the corporation
make possible;
(c) To carry on educational activities related to the
maintenance and promotion of health as well as
provide facilities for scientific and medical
researches which, in the opinion of the Board of
Trustees, may be justified by the facilities,
personnel, funds, or other requirements that are
available;
(d) To cooperate with organized medical societies,
agencies of both government and private sector;
establish rules and regulations consistent with the
highest professional ethics; IDaEHC
xxx xxx xxx 3
On 16 December 2002, the Bureau of Internal Revenue
(BIR) assessed St. Luke's deficiency taxes amounting to
P76,063,116.06 for 1998, comprised of deficiency income tax,
value-added tax, withholding tax on compensation and expanded
withholding tax. The BIR reduced the amount to P63,935,351.57
during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative
protest with the BIR against the deficiency tax assessments. The
BIR did not act on the protest within the 180-day period
under Section 228 of the NIRC. Thus, St. Luke's appealed to the
CTA.
 The BIR argued before the CTA that Section 27 (B) of Court, 11 this Court's review power is generally limited to "cases
the NIRC, which imposes a 10% preferential tax rate on the in which only an error or question of law is involved." 12 This
income of proprietary non-profit hospitals, should be applicable Court cannot depart from this limitation if a party fails to invoke
to St. Luke's. According to the BIR, Section 27 (B), introduced in a recognized exception.
1997, "is a new provision intended to amend the exemption on
The Ruling of the Court of Tax Appeals
non-profit hospitals that were previously categorized as non-
stock, non-profit corporations under Section 26 of the 1997 Tax The CTA En Banc Decision on 19 November 2010
Code . . . ." 5 It is a specific provision which prevails over the affirmed in toto the CTA First Division Decision dated 23 February
general exemption on income tax granted under Section 30 (E) 2009 which held: ISaTCD
and (G) for non-stock, non-profit charitable institutions and civic
WHEREFORE, the Amended Petition for
organizations promoting social welfare. 6
Review [by St. Luke's] is hereby PARTIALLY
The BIR claimed that St. Luke's was actually operating for GRANTED. Accordingly, the 1998 deficiency VAT
profit in 1998 because only 13% of its revenues came from assessment issued by respondent against petitioner
charitable purposes. Moreover, the hospital's board of trustees, in the amount of P110,000.00 is
officers and employees directly benefit from its profits and herebyCANCELLED and WITHDRAWN. However,
assets. St. Luke's had total revenues of P1,730,367,965 or petitioner is hereby ORDERED to PAY deficiency
approximately P1.73 billion from patient services in 1998. 7 income tax and deficiency expanded withholding tax
for the taxable year 1998 in the respective amounts
St. Luke's contended that the BIR should not consider its
of P5,496,963.54 and P778,406.84 or in the sum of
total revenues, because its free services to patients was
P6,275,370.38, . . . .
P218,187,498 or 65.20% of its 1998 operating income ( i.e., total
revenues less operating expenses) of P334,642,615.8 St. Luke's xxx xxx xxx
also claimed that its income does not inure to the benefit of any
individual. In addition, petitioner is
hereby ORDERED to PAY twenty percent (20%)
St. Luke's maintained that it is a non-stock and non-profit delinquency interest on the total amount of
institution for charitable and social welfare purposes under P6,275,370.38 counted from October 15, 2003 until
Section 30 (E) and (G) of the NIRC. It argued that the making of full payment thereof, pursuant to Section 249(C)(3)
profit per se does not destroy its income tax exemption. of the NIRC of 1997.
The petition of the BIR before this Court in G.R. SO ORDERED. 13
No. 195909 reiterates its arguments before the CTA that Section
27 (B) applies to St. Luke's. The petition raises the sole issue of The deficiency income tax of P5,496,963.54, ordered by
whether the enactment of Section 27 (B) takes proprietary non- the CTA En Banc to be paid, arose from the failure of St. Luke's to
profit hospitals out of the income tax exemption under Section 30 prove that part of its income in 1998 (declared as "Other Income-
of the NIRC and instead, imposes a preferential rate of 10% on Net") 14 came from charitable activities. The CTA cancelled the
their taxable income. The BIR prays that St. Luke's be ordered to remainder of the P63,113,952.79 deficiency assessed by the BIR
pay P57,659,981.19 as deficiency income and expanded based on the 10% tax rate under Section 27 (B) of the NIRC,
withholding tax for 1998 with surcharges and interest for late which the CTA En Banc held was not applicable to St. Luke's. 15
payment.
The CTA ruled that St. Luke's is a non-stock and non-profit
The petition of St. Luke's in G.R. No. 195960 raises factual charitable institution covered by Section 30 (E) and (G) of
matters on the treatment and withholding of a part of its the NIRC. This ruling would exempt all income derived by St.
income, 9 as well as the payment of surcharge and delinquency Luke's from services to its patients, whether paying or non-
interest. There is no ground for this Court to undertake such a paying. The CTA reiterated its earlier decision in St. Luke's
factual review. Under the Constitution 10 and the Rules of Medical Center, Inc. v. Commissioner of Internal
Revenue, 16 which examined the primary purposes of St. Luke's
under its articles of incorporation and various
documents 17 identifying St. Luke's as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios,
Inc. v. Pasay City, 18 which states that "a charitable institution
does not lose its charitable character and its consequent
exemption from taxation merely because recipients of its
benefits who are able to pay are required to do so, where funds
derived in this manner are devoted to the charitable purposes of
the institution . . . ." 19 The generation of income from paying
patients does not per se destroy the charitable nature of St.
Luke's. TIaDHE
Hospital de San Juan cited Jesus Sacred Heart College v.
Collector of Internal Revenue, 20 which ruled that the old
NIRC (Commonwealth Act No. 466, as amended) 21 "positively
exempts from taxation those corporations or associations which,
otherwise, would be subject thereto, because of the existence
of . . . net income." 22 The NIRC of 1997 substantially reproduces
the provision on charitable institutions of the old NIRC. Thus, in
rejecting the argument that tax exemption is lost whenever there
is net income, the Court in Jesus Sacred Heart College declared:
"[E]very responsible organization must be run to at least insure
its existence, by operating within the limits of its own resources,
especially its regular income. In other words, it should always
strive, whenever possible, to have a surplus." 23
The CTA held that Section 27 (B) of the present NIRC does
not apply to St. Luke's. 24 The CTA explained that to apply the
10% preferential rate, Section 27 (B) requires a hospital to be
"non-profit." On the other hand, Congress specifically used the
word "non-stock" to qualify a charitable "corporation or
association" in Section 30 (E) of the NIRC. According to the CTA,
this is unique in the present tax code, indicating an intent to
exempt this type of charitable organization from income tax.
Section 27 (B) does not require that the hospital be "non-stock."
The CTA stated, "it is clear that non-stock, non-profit hospitals
operated exclusively for charitable purpose are exempt from
income tax on income received by them as such, applying the
provision of Section 30 (E) of the NIRC of 1997, as amended." 25
The Issue
The sole issue is whether St. Luke's is liable for
deficiency income tax in 1998 under Section 27 (B) of the NIRC,
which imposes a preferential tax rate of 10% on the income of
proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of
St. Luke's in G.R. No. 195960 because the petition raises factual
issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he
petition shall raise only questions of law which must be distinctly
set forth." St. Luke's cites Martinez v. Court of Appeals 26 which
permits factual review "when the Court of Appeals [in this case,
the CTA] manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would
justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant
facts. St. Luke's itself stated that the CTA "disregarded the
testimony of [its] witness, Romeo B. Mary, being allegedly self-
serving, to show the nature of the 'Other Income-
Net' . . . ." 28 This is not a case of overlooking or failing to
consider relevant evidence. The CTA obviously considered the
evidence and concluded that it is self-serving. The CTA declared
that it has "gone through the records of this case and found no
other evidence aside from the self-serving affidavit executed by
[the] witnesses [of St. Luke's] . . . ." 29
The deficiency tax on "Other Income-Net" stands. Thus,
St. Luke's is liable to pay the 25% surcharge under Section
248 (A) (3) of the NIRC. There is "[f]ailure to pay the deficiency
tax within the time prescribed for its payment in the notice of
assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency
interest under Section 249 (C) (3) of the NIRC. 31 As explained by
the CTA En Banc, the amount of P6,275,370.38 in the dispositive
portion of the CTA First Division Decision includes only
deficiency interest under Section 249 (A) and (B) of the NIRC and
not delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It
involves the effect of the introduction of Section 27 (B) in
the NIRC of 1997 vis-à-vis Section 30 (E) and (G) on the income
tax exemption of charitable and social welfare institutions. The
10% income tax rate under Section 27 (B) specifically pertains to
proprietary educational institutions and proprietary non-profit
hospitals. The BIR argues that Congress intended to remove the
exemption that non-profit hospitals previously enjoyed under
Section 27 (E) of the NIRC of 1977, which is now substantially
reproduced in Section 30 (E) of the NIRC of 1997. 33 Section 27
(B) of the present NIRC provides: CTIDcA
SEC. 27. Rates of Income Tax on Domestic
Corporations. —
xxx xxx xxx
(B) Proprietary Educational Institutions and
Hospitals. — Proprietary educational institutions
and hospitals which are non-profit shall pay a tax
of ten percent (10%) on their taxable
income except those covered by Subsection (D)
hereof: Provided, That if the gross income from
unrelated trade, business or other activity exceeds
fifty percent (50%) of the total gross income
derived by such educational institutions or
hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the
entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or
other activity' means any trade, business or other
activity, the conduct of which is not substantially
related to the exercise or performance by such
educational institution or hospital of its primary
purpose or function. A 'proprietary educational
institution' is any private school maintained and
administered by private individuals or groups with
an issued permit to operate from the Department
of Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or the
Technical Education and Skills Development
Authority (TESDA), as the case may be, in
accordance with existing laws and regulations.
(Emphasis supplied)
St. Luke's claims tax exemption under Section 30 (E) and
(G) of the NIRC. It contends that it is a charitable institution and
an organization promoting social welfare. The arguments of St.
Luke's focus on the wording of Section 30 (E) exempting from
income tax non-stock, non-profit charitable institutions. 34 St.
Luke's asserts that the legislative intent of introducing Section
27 (B) was only to remove the exemption for "proprietary non-
profit" hospitals. 35 The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. —
The following organizations shall not be taxed
under this Title in respect to income received by
them as such:
xxx xxx xxx
(E) Nonstock corporation or association organized
and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific
person; cCTIaS
xxx xxx xxx
(G) Civic league or organization not organized for
profit but operated exclusively for the promotion of
social welfare;
xxx xxx xxx
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and
character of the foregoing organizations from any
of their properties, real or personal, or from any of
their activities conducted for profit regardless of
the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis
supplied)
The Court partly grants the petition of the BIR but on a
different ground. We hold that Section 27 (B) of the NIRC does not
remove the income tax exemption of proprietary non-profit
hospitals under Section 30 (E) and (G). Section 27 (B) on one
hand, and Section 30 (E) and (G) on the other hand, can be
construed together without the removal of such tax exemption.
The effect of the introduction of Section 27 (B) is to subject the
taxable income of two specific institutions, namely, proprietary
non-profit educational institutions 36 and proprietary non-profit
hospitals, among the institutions covered by Section 30, to the
10% preferential rate under Section 27 (B) instead of the ordinary
30% corporate rate under the last paragraph of Section 30 in
relation to Section 27 (A) (1).
Section 27 (B) of the NIRC imposes a 10% preferential tax
rate on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary and
non-profit. "Proprietary" means private, following the definition of
a "proprietary educational institution" as "any private school
maintained and administered by private individuals or groups"
with a government permit. "Non-profit" means no net income or
asset accrues to or benefits any member or specific person, with
all the net income or asset devoted to the institution's purposes
and all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable."
In Collector of Internal Revenue v. Club Filipino, Inc. de
Cebu, 37 this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders
and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses
and improving its golf course. 38 The club was non-profit because
of its purpose and there was no evidence that it was engaged in
a profit-making enterprise. 39 EACIaT
The sports club in Club Filipino, Inc. de Cebu may be non-
profit, but it was not charitable. The Court defined "charity"
in Lung Center of the Philippines v. Quezon City 40 as "a gift, to
be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and
hearts under the influence of education or religion, by assisting
them to establish themselves in life or [by] otherwise lessening
the burden of government." 41 A non-profit club for the benefit of
its members fails this test. An organization may be considered as
non-profit if it does not distribute any part of its income to
stockholders or members. However, despite its being a tax
exempt institution, any income such institution earns from
activities conducted for profit is taxable, as expressly provided in
the last paragraph of Section 30.
To be a charitable institution, however, an organization
must meet the substantive test of charity in Lung Center. The
issue in Lung Center concerns exemption from real property tax
and not income tax. However, it provides for the test of charity in
our jurisdiction. Charity is essentially a gift to an indefinite
number of persons which lessens the burden of government. In
other words, charitable institutions provide for free goods and
services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to
address public needs, because certain private entities already
assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works
which would have been funded by appropriations from the
Treasury. 42
Charitable institutions, however, are not ipso
facto entitled to a tax exemption. The requirements for a tax
exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress
can create tax exemptions, subject to the constitutional
provision that "[n]o law granting any tax exemption shall be
passed without the concurrence of a majority of all the Members
of Congress." 43 The requirements for a tax exemption are
strictly construed against the taxpayer 44 because an exemption
restricts the collection of taxes necessary for the existence of
the government.
The Court in Lung Center declared that the Lung Center of
the Philippines is a charitable institution for the purpose of
exemption from real property taxes. This ruling uses the same
premise as Hospital de San Juan 45 and Jesus Sacred Heart
College 46 which says that receiving income from paying
patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable
institution does not lose its character as such and
its exemption from taxes simply because it derives
income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from
the government, so long as the money received is
devoted or used altogether to the charitable object
which it is intended to achieve; and no money inures
to the private benefit of the persons managing or
operating the institution. 47
For real property taxes, the incidental generation of
income is permissible because the test of exemption is the use of
the property. The Constitution provides that "[c]haritable
institutions, churches and personages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings,
and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt
from taxation." 48 The test of exemption is not strictly a
requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the property
in a certain way, i.e., for a charitable purpose. Thus, the Court
held that the Lung Center of the Philippines did not lose its
charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use
requirement is simply to remove from the tax exemption that
portion of the property not devoted to charity. HIaAED
The Constitution exempts charitable institutions only
from real property taxes. In the NIRC, Congress decided to
extend the exemption to income taxes. However, the way
Congress crafted Section 30 (E) of the NIRC is materially
different from Section 28 (3), Article VI of the Constitution.
Section 30 (E) of the NIRC defines the corporation or association
that is exempt from income tax. On the other hand, Section 28
(3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution "actually, directly and
exclusively" use the property for a charitable purpose.
Section 30 (E) of the NIRC provides that a charitable
institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to
or inure to the benefit of any member,
organizer, officer or any specific person.
Thus, both the organization and operations of the charitable
institution must be devoted "exclusively" for charitable purposes.
The organization of the institution refers to its corporate form, as
shown by its articles of incorporation, by-laws and other
constitutive documents. Section 30 (E) of the NIRC specifically
requires that the corporation or association be non-stock, which
is defined by the Corporation Code as "one where no part of its
income is distributable as dividends to its members, trustees, or
officers" 49 and that any profit "obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation
was organized." 50 However, under Lung Center, any profit by a
charitable institution must not only be plowed back "whenever
necessary or proper," but must be "devoted or used altogether to
the charitable object which it is intended to achieve." 51 SDIaCT
The operations of the charitable institution generally refer
to its regular activities. Section 30 (E) of the NIRC requires that
these operations be exclusive to charity. There is also a specific
requirement that "no part of [the] net income or asset shall
belong to or inure to the benefit of any member, organizer, officer
or any specific person." The use of lands, buildings and
improvements of the institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-
stock and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's meets
the test of charity, a charitable institution is not ipso facto tax
exempt. To be exempt from real property taxes, Section 28 (3),
Article VI of the Constitution requires that a charitable institution
use the property "actually, directly and exclusively" for charitable
purposes. To be exempt from income taxes, Section 30 (E) of
the NIRC requires that a charitable institution must be "organized
and operated exclusively" for charitable purposes. Likewise, to be
exempt from income taxes, Section 30 (G) of the NIRC requires
that the institution be "operated exclusively" for social welfare.
However, the last paragraph of Section 30 of
the NIRC qualifies the words "organized and operated
exclusively" by providing that:
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and
character of the foregoing organizations from any
of their properties, real or personal, or from any of
their activities conducted for profit regardless of
the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis
supplied) HDTSIE
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts "any" activity for profit,
such activity is not tax exempt even as its not-for-profit activities
remain tax exempt. This paragraph qualifies the requirements in
Section 30 (E) that the "[n]on-stock corporation or association
[must be] organized and operated exclusively for . . . charitable . .
. purposes . . . ." It likewise qualifies the requirement in Section
30 (G) that the civic organization must be "operated exclusively"
for the promotion of social welfare.
Thus, even if the charitable institution must be "organized
and operated exclusively" for charitable purposes, it is
nevertheless allowed to engage in "activities conducted for
profit" without losing its tax exempt status for its not-for-profit
activities. The only consequence is that the "income of whatever "[e]xclusive" is defined as possessed and enjoyed
kind and character" of a charitable institution "from any of its to the exclusion of others; debarred from
activities conducted for profit, regardless of the disposition made participation or enjoyment; and "exclusively" is
of such income, shall be subject to tax." Prior to the introduction defined, "in a manner to exclude; as enjoying a
of Section 27 (B), the tax rate on such income from for-profit privilege exclusively." . . . The words "dominant
activities was the ordinary corporate rate under Section 27 (A). use" or "principal use" cannot be substituted for
With the introduction of Section 27 (B), the tax rate is now 10%. the words "used exclusively" without doing
violence to the Constitution and the law. Solely is
In 1998, St. Luke's had total revenues of P1,730,367,965
synonymous with exclusively. 54
from services to paying patients. It cannot be disputed that a
hospital which receives approximately P1.73 billion The Court cannot expand the meaning of the words "operated
from paying patients is not an institution "operated exclusively" exclusively" without violating the NIRC. Services to paying
for charitable purposes. Clearly, revenues from paying patients patients are activities conducted for profit. They cannot be
are income received from "activities conducted for considered any other way. There is a "purpose to make profit over
profit." 52 Indeed, St. Luke's admits that it derived profits from and above the cost" of services. 55 The P1.73 billion total
its paying patients. St. Luke's declared P1,730,367,965 as revenues from paying patients is not even incidental to St. Luke's
"Revenues from Services to Patients" in contrast to its "Free charity expenditure of P218,187,498 for non-paying patients.
Services" expenditure of P218,187,498. In its Comment in G.R.
No. 195909, St. Luke's showed the following "calculation" to St. Luke's claims that its charity expenditure of
support its claim that 65.20% of its "income after expenses was P218,187,498 is 65.20% of its operating income in 1998. However,
allocated to free or charitable services" in 1998. 53 if a part of the remaining 34.80% of the operating income is
reinvested in property, equipment or facilities used for services
to paying and non-paying patients, then it cannot be said that the
income is "devoted or used altogether to the charitable object
REVENUES FROM SERVICES P1,730,367,965.00
which it is intended to achieve." 56 The income is plowed back to
TO PATIENTS
the corporation not entirely for charitable purposes, but for profit
OPERATING EXPENSES
as well. In any case, the last paragraph of Section 30 of
Professional care of patients P1,016,608,394.00
the NIRC expressly qualifies that income from activities for profit
Administrative 287,319,334.00
is taxable "regardless of the disposition made of such income."
Household and Property 91,797,622.00
———————————— Jesus Sacred Heart College declared that there is no
———— official legislative record explaining the phrase "any activity
P1,395,725,350.00 conducted for profit." However, it quoted a deposition of Senator
============== Mariano Jesus Cuenco, who was a member of the Committee of
INCOME FROM OPERATIONS P334,642,615.00 100% Conference for the Senate, which introduced the phrase "or from
Free Services- 218,187,498.00 - any activity conducted for profit." DcHSEa
65.20
% P. Cuando ha hablado de la Universidad de Santo
———————————— Tomàs que tiene un hospital, no cree Vd. que
———— es una actividad esencial dicho hospital para
INCOME FROM OPERATIONS, P116,455,117.00 34.80 el funcionamiento del colegio de medicina de
Net of FREE SERVICES % dicha universidad?
OTHER INCOME 17,482,304.00 xxx xxx xxx
EXCESS OF REVENUES OVER P133,937,421.00
EXPENSES R. Si el hospital se limita a recibir enformos pobres,
mi contestación seria afirmativa; pero
In Lung Center, this Court declared: HATEDC considerando que el hospital tiene cuartos
 de pago, y a los mismos generalmente van
enfermos de buena posición social
económica, lo que se paga por estos
enfermos debe estar sujeto a 'income tax', y
es una de las razones que hemos tenido para
insertar las palabras o frase 'or from any
activity conducted for profit.' 57
The question was whether having a hospital is essential
to an educational institution like the College of Medicine of the
University of Santo Tomas. Senator Cuenco answered that if the
hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He
said that this was one of the reasons Congress inserted the
phrase "or any activity conducted for profit."
The question in Jesus Sacred Heart College involves an
educational institution. 58 However, it is applicable to charitable
institutions because Senator Cuenco's response shows an intent
to focus on the activities of charitable institutions. Activities for
profit should not escape the reach of taxation. Being a non-stock
and non-profit corporation does not, by this reason alone,
completely exempt an institution from tax. An institution cannot
use its corporate form to prevent its profitable activities from
being taxed.
The Court finds that St. Luke's is a corporation that
is not "operated exclusively" for charitable or social welfare
purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation
of a provision granting tax exemption, but also on the clear and
plain text of Section 30 (E) and (G). Section 30 (E) and (G) of
the NIRC requires that an institution be "operated exclusively" for
charitable or social welfare purposes to be completely exempt
from income tax. An institution under Section 30 (E) or (G) does
not lose its tax exemption if it earns income from its for-profit
activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27 (B). DaTEIc
A tax exemption is effectively a social subsidy granted by
the State because an exempt institution is spared from sharing in
the expenses of government and yet benefits from them. Tax
exemptions for charitable institutions should therefore be limited
to institutions beneficial to the public and those which improve
social welfare. A profit-making entity should not be allowed to
exploit this subsidy to the detriment of the government and other
taxpayers.
St. Luke's fails to meet the requirements under Section 30
(E) and (G) of the NIRC to be completely tax exempt from all its
income. However, it remains a proprietary non-profit hospital
under Section 27 (B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St. Luke's, as a proprietary
non-profit hospital, is entitled to the preferential tax rate of 10%
on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in
1998 under Section 27 (B) of the NIRC. However, St. Luke's has
good reasons to rely on the letter dated 6 June 1990 by the BIR,
which opined that St. Luke's is "a corporation
for purely charitable and social welfare purposes" 59 and thus
exempt from income tax. 60 In Michel J. Lhuillier, Inc. v.
Commissioner of Internal Revenue n, 61 the Court said that "good
faith and honest belief that one is not subject to tax on the basis
of previous interpretation of government agencies tasked to
implement the tax law, are sufficient justification to delete the
imposition of surcharges and interest." 62 SHAcID
WHEREFORE, the petition of the Commissioner of Internal
Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision of
the Court of Tax Appeals En Banc dated 19 November 2010 and
its Resolution dated 1 March 2011 in CTA Case No. 6746
are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO
PAY the deficiency income tax in 1998 based on the 10%
preferential income tax rate under Section 27 (B) of the National
Internal Revenue Code. However, it is not liable for surcharges
and interest on such deficiency income tax under Sections 248
and 249 of the National Internal Revenue Code. All other parts of
the Decision and Resolution of the Court of Tax Appeals
areAFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No.
195960 is DENIED for violating Section 1, Rule 45 of the Rules of
Court.
SO ORDERED.
||| (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc., G.R. No. 195909, 195960, [September 26, 2012], 695 PHIL 867-
895)
 [G.R. Nos. 28502-03. April 18, 1989.]

COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. ESSO STANDARD
EASTERN, INC. and THE COURT TAX
APPEALS, respondents.

SYLLABUS

1. TAXATION; INCOME TAX; OVERPAYMENT THEREOF BY MISTAKE;

RIGHT OF PAYOR TO REIMBURSEMENT ARISES FROM THE MOMENT
PAYMENT IS MADE AND NOT FROM THE TIME THAT THE PAYEE
ADMITS THE OBLIGATION TO REIMBURSE. — As early as July 15,
1960, the Government already had in its hands the sum of
P221,033.00 representing excess income tax payment. Having been
paid and received by mistake, that sum unquestionably belonged to
ESSO, and the Government had the obligation to return it to ESSO.
That acknowledgment of the erroneous payment came some four (4)
years afterwards in nowise negates or detracts from its actuality.
The obligation to return money mistakenly paid arises from the
moment that payment is made, and not from the time that the payee
admits the obligation to reimburse. The obligation of the payee to
reimburse an amount paid to him results from the mistake, not from
the payee's confession of the mistake or recognition of the obligation
to reimburse. In other words, since the amount of P221,033.00
belonging to ESSO was already in the hands of the Government as of
July, 1960, although the latter hand not right whatever to the amount
and indeed was bound to return it to ESSO, it was neither legally nor
logically possible for ESSO thereafter to be considered a debtor of
the Government in that amount of P221,033.00; and whatever other
obligation ESSO might subsequently incur in favor of the Government
would have to be reduced by that sum, in respect of which no
interest could be charged.

2. ID.; TAX LAWS; INTERPRETATION THEREOF; LEGISLATIVE INTENT

PREVAILS WHERE LITERAL INTERPRETATION OF THE STATUTE
RESULTS IN ABSURDITY. — In Interpreting a statute, "Nothing is
better settled than that courts are not to give words a meaning
which would lead to absurd or unreasonable consequences. That is a
principle that goes back to In re Allen (2 Phil. 630) decided on
October 29, 1903, where it was held that a literal interpretation is to
be rejected if it would be unjust or lead to absurd results." "Statutes
should receive a sensible construction, such as will give effect to the
legislative intention and so as to avoid an unjust or absurd
conclusion."
DECISION
NARVASA, J p:
In two (2) cases appealed to it 1 by the private respondent, hereafter
simply referred to as ESSO, the Court of Tax Appeals rendered
judgment, 2 sustaining the decisions of the Commissioner of Internal
Revenue excepted to, save "the refund-claim . . . in the amount of
P39,787.94 as overpaid interest" which it ordered refunded to ESSO.
Reversal of this decision is sought by the Commissioner by a petition
for review on certiorari filed with this Court. He ascribes to the Tax
Court one sole error: "of applying the tax credit for overpayment of
the 1959 income tax of . . . ESSO, granted by the petitioner
(Commissioner), to . . . (ESSO'S) basic 1960 deficiency income tax
liability . . . and imposing the 1-1/2% monthly interest 3 only on the
remaining balance thereof in the sum of P146,961.00" 5 Reversal of
the same judgment of the Court of Tax Appeals is also sought by
ESSO in its own appeal (docketed as G.R. Nos. L-28508-09); but in the
brief filed by it in this case, it indicates that it will not press its
appeal in the event that "the instant petition for review be denied
and that judgment be rendered affirming the decision of the Court of
Tax Appeals."
The facts are simple enough and are quite quickly recounted.
ESSO overpaid its 1959 income tax by P221,033.00. It was
accordingly granted a tax credit in this amount by the Commissioner
on August 5, 1964. However, ESSO's payment of its income tax for
1960 was found to be short by P367,994.00. So, on July 10, 1964, the
Commissioner wrote to ESSO demanding payment of the deficiency
tax, together with interest thereon for the period from April 18, 1961
to April 18, 1964. On August 10, 1964, ESSO paid under protest the
amount alleged to be due, including the interest as reckoned by the
Commissioner. It protested the computation of interest, contending it
was more than. that properly due. It claimed that it should not have
been required to pay interest on the total amount of the deficiency
tax, P367,994.00, but only on the amount of P146,961.00 —
representing the difference between said deficiency, P367,994.00,
and ESSO's earlier overpayment of P221,033.00 (for which it had
been granted a tax credit). ESSO thus asked for a refund.
The Internal Revenue Commissioner denied the claim for refund.
ESSO appealed to the Court of Tax Appeals. As aforestated, that
Court ordered payment to ESSO of its "refund-claim x x in the
amount of P39,787.94 as overpaid interest. Hence, this appeal by the
Commissioner.
The CTA justified its award of the refund as follows:
". . . In the letter of August 5, 1964, . . . (the
Commissioner) admitted that . . (ESSO) had overpaid
its 1959 income tax by P221,033.00. Accordingly . .
(the Commissioner) granted to . . (ESSO) a tax credit
of P221,033.00. In short, the said sum of
P221,033.00 of (ESSO's) money was in the
Government's hands at the latest on July 15, 1960
when it (ESSO) paid in full its second installment of
income tax for 1959. On July 10, 1964 x x (the
Commissioner) claimed that for 1960, . . . (ESSO)
underpaid its income tax by P367,994.00. However,
instead of deducting from P367,994.00 the tax credit
of P221,033.00 which . . . (the Commissioner) had
already admitted was due . . . (ESSO), . . . (the
Commissioner) still insists in collecting the interest
on the full amount of P367,994.00 for the period April
18, 1961 to April 18, 1964 when the Government had
already in its hands the sum of P221,033.00 of . . .
(ESSO's) money even before the latter's income tax
for 1960 was due and payable. If the imposition of
interest does not amount to a penalty but merely a
just compensation to the State for the delay in
paying the tax, and for the concomitant use by the
taxpayer of funds that rightfully should be in the
Government's hand (Castro v. Collector, G.R. No. L-
1274, Dec. 28, 1962), the collection of the interest on
the full amount of P367,994.00 without deducting
first the tax credit of P221,033.00, which has long
been in the hands of the Government, becomes
erroneous, illegal and arbitrary. llcd
". . . (ESSO) could hardly be charged of delinquency
in paying P221,033.00 out of the deficiency income
tax of P367,994.00, for which the State should be
compensated by the payment of interest because
the said amount of P221,033.00 was already in the
coffers of the Government. Neither could . . . (ESSO)
be charged for the concomitant use of funds that
 rightfully belong to the Government because as
early as July 15, 1960, it was the Government that
was using . . . (ESSO's) funds of P221,033.00. In the
circumstances, we find it unfair and unjust for . . .
(the Commissioner) to exact the interest on the said
sum of P221,033.00 which, after all, was paid to and
received by the Government even before the
incidence of the deficiency income tax of
P367,994.00. (Itogon-Suyoc Mines, Inc. v.
Commissioner, C.T.A. Case No. 1327, Sept. 30, 1965).
On the contrary, the Government should be the first
to blaze the trail and set the example of fairness and
honest dealing in the administration of tax laws.
"Accordingly, we hold that the tax credit of
P221,033.00 for 1959 should first be deducted from
the basic deficiency tax of P367,994.00 for 1960 and
the resulting difference of P146,961.00 would be
subject to the 18% interest prescribed by Section 51
(d) of the Revenue Code. According to the prayer
of . . . (ESSO) . . . (the Commissioner) is hereby
ordered to refund to . . . (ESSO) the amount of
P39,787.94 as overpaid interest in the settlement of
its 1960 income tax liability. However, as the
collection of the tax was not attended with
arbitrariness because . . . (ESSO) itself followed . . .
(the Commissioner's) manner of computing the tax
in paying the sum of P213,189.93 on August 10, 1964,
the prayer of . . . (ESSO) that it be granted the legal
rate of interest on its overpayment of P39,787.94
from August 10, 1964 to the time it is actually
refunded is denied. (See Collector of Internal
Revenue v. Binalbagan Estate, Inc., G.R. No. L-12752,
Jan. 30, 1965)."
The Commissioner's position is that income taxes are determined
and paid on an annual basis, and that such determination and
payment of annual taxes are separate and independent transactions;
and that a tax credit could not be so considered until it has been
finally approved and the taxpayer duly notified thereof. Since in this
case, he argues, the tax credit of P221,033.00 was approved only on
August 5, 1964, it could not be availed of in reduction of ESSO's
earlier tax deficiency for the year 1960; as of that year, 1960, there
was as yet no tax credit to speak of, which would reduce the
deficiency tax liability for 1960. In support of his position, the
Commissioner invokes the provisions of Section 51 of the Tax Code
pertinently reading as follows:
"(c) Definition of deficiency. As used in this Chapter
in respect of tax imposed by this Title, the term
`deficiency' means:
(1) The amount by which the tax Imposed by this
Title exceeds the amount shown as the tax by the
taxpayer upon his return; but the amount so shown
on the return shall first be increased by the amounts
previously assessed (or collected without
assessment) as a deficiency, and decreased by the
amount previously abated, credited, returned, or
otherwise in respect of such tax; . . .
xxx xxx xxx
(d) Interest on deficiency. — Interest upon the
amount determined as deficiency shall be assessed
at the same time as the deficiency and shall be paid
upon notice and demand from the Commissioner of
Internal Revenue; and shall be collected as a part of
the tax, at the rate of six per centum per annum
from the date prescribed for the payment of the tax
(or, if the tax is paid in installments, from the date
prescribed for the payment of the first installment)
to the date the deficiency is
assessed; Provided, That the amount that may be
collected as interest on deficiency shall in no case
exceed the amount corresponding to a period of
three years, the present provision regarding
prescription to the contrary notwithstanding."
The fact is that, as respondent Court of Tax Appeals has stressed, as
early as July 15, 1960, the Government already had in its hands the
sum of P221,033.00 representing excess payment. Having been paid
and received by mistake, as petitioner Commissioner subsequently
acknowledged, that sum unquestionably belonged to ESSO, and the
Government had the obligation to return it to ESSO. That
acknowledgment of the erroneous payment came some four (4) years
afterward in nowise negates or detracts from its actuality. The
obligation to return money mistakenly paid arises from the moment
that payment is made, and not from the time that the payee admits
the obligation to reimburse. The obligation of the payee to reimburse
an amount paid to him results from the mistake, not from the payee's
confession of the mistake or recognition of the obligation to
reimburse. In other words, since the amount of P221,033.00
belonging to ESSO was already in the hands of the Government as of
July, 1960, although the latter hand not right whatever to the amount
and indeed was bound to return it to ESSO, it was neither legally nor
logically possible for ESSO thereafter to be considered a debtor of
the Government in that amount of P221,033.00; and whatever other
obligation ESSO might subsequently incur in favor of the Government
would have to be reduced by that sum, in respect of which no
interest could be charged. To interpret the words of the statute in
such a manner as to subvert these truisms simply can not and should
not be countenanced. "Nothing is better settled than that courts are
not to give words a meaning which would lead to absurd or
unreasonable consequences. That is a principle that goes back to In
re Allen (2 Phil. 630) decided on October 29, 1903, where it was held
that a literal interpretation is to be rejected if it would be unjust or
lead to absurd results." 6 "Statutes should receive a sensible
construction, suck as will give effect to the legislative intention and
so as to avoid an unjust or absurd conclusion." 7
WHEREFORE, the petition for review is DENIED, and the Decision of
the Court of Tax Appeals dated October 28, 1967 subject of the
petition is AFFIRMED, without pronouncement as to costs.
||| (Commissioner of Internal Revenue v. ESSO Standard Eastern, Inc.,
G.R. Nos. 28502-03, [April 18, 1989], 254 PHIL 367-373)
THIRD DIVISION
[G.R. No. 177279. October 13, 2010.]
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. HON. RAUL M. GONZALEZ,
Secretary of Justice, L. M. CAMUS ENGINEERING
CORPORATION (represented by LUIS M. CAMUS and
LINO D. MENDOZA),respondents.
Taxation; Tax Evasion; “The crime is complete when the
taxpayer has knowingly and willfully filed a fraudulent return
with intent to evade and defeat the tax.”—For the crime of tax
evasion in particular, compliance by the taxpayer with such
subpoena, if any had been issued, is irrelevant. As we held in
Ungab v. Cusi, Jr., 97 SCRA 877 (1980), “[t]he crime is
complete when the [taxpayer] has x x x knowingly and
willfully filed [a] fraudulent [return] with intent to evade and
defeat x x x the tax.” Thus, respondent Secretary erred in
holding that petitioner committed forum shopping when it
filed the present criminal complaint during the pendency of
its appeal from the City Prosecutor’s dismissal of I.S. No. 00-
956 involving the act of disobedience to the summons in the
course of the preliminary investigation on LMCEC’s correct
tax liabilities for taxable years 1997, 1998 and 1999.
Same; Same; The lack of consent of the taxpayer under
investigation does not imply that the Bureau of Internal
Revenue (BIR) obtained the information from third parties
illegally or that the information received is false or malicious;
Nor does the lack of consent preclude the Bureau of Internal
Revenue (BIR) from assessing deficiency taxes on the
taxpayer based on the documents.—Private respondents’
assertions regarding the qualifications of the “informer” of
the Bureau deserve scant consideration. We have held that
the lack of consent of the taxpayer under investigation does
not imply that the BIR obtained the information from third
parties illegally or that the information received is false or
malicious. Nor does the lack of consent preclude the BIR from
assessing deficiency taxes on the taxpayer based on the
documents. In the same vein, herein private respondents
cannot be allowed to escape criminal prosecution under
Sections 254 and 255 of the NIRC by mere imputation of a
“fictitious” or disqualified informant under Section 282 simply
because other than disclosure of the official registry number
of the third party “informer,” the Bureau insisted on
maintaining the confidentiality of the identity and personal
circumstances of said “informer.”
Same; Same; Notice of Assessment; A notice of assessment
is a declaration of deficiency taxes issued to a taxpayer who
fails to respond to a Pre-Assessment Notice (PAN) within the
prescribed period of time, or whose reply to the PAN was
found to be without merit.—A notice of assessment is: [A]
declaration of deficiency taxes issued to a [t]axpayer who
fails to respond to a Pre-Assessment Notice (PAN) within the
prescribed period of time, or whose reply to the PAN was
found to be without merit. The Notice of Assessment shall
inform the [t]axpayer of this fact, and that the report of
investigation submitted by the Revenue Officer conducting
the audit shall be given due course. The formal letter of
demand calling for payment of the taxpayer’s deficiency tax
or taxes shall state the fact, the law, rules and regulations or
jurisprudence on which the assessment is based, otherwise
the formal letter of demand and the notice of assessment
shall be void.
Same; Same; Same; The formality of a control number in the
assessment notice is not a requirement for its validity but
rather the contents thereof which should inform the taxpayer
of the declaration of deficiency tax against said taxpayer.—As
it is, the formality of a control number in the assessment
notice is not a requirement for its validity but rather the
contents thereof which should inform the taxpayer of the
declaration of deficiency tax against said taxpayer. Both the
formal letter of demand and the notice of assessment shall
be void if the former failed to state the fact, the law, rules and
regulations or jurisprudence on which the assessment is
based, which is a mandatory requirement under Section 228
of the NIRC.
Same; Same; Same; Since immunity from audit and
investigation does not preclude the collection of revenue
generated from audit and enforcement activities, it follows
that the Bureau is likewise not barred from collecting any tax
deficiency discovered as a result of tax fraud investigations.
—RR No. 2-99 issued on February 7, 1999 explained in its
Policy Statement that considering the scarcity of financial
and human resources as well as the time constraints within
which the Bureau has to “clean the Bureau’s backlog of
unaudited tax returns in order to keep updated and be
focused with the most current accounts” in preparation for
the full implementation of a computerized tax administration,
the said revenue regulation was issued “providing for last
priority in audit and investigation of tax returns” to
accomplish the said objective “without, however,
compromising the revenue collection that would have been
generated from audit and enforcement activities.” The
program named as “Economic Recovery Assistance Payment
(ERAP) Program” granted immunity from audit and
investigation of income tax, VAT and percentage tax returns
for 1998. It expressly excluded withholding tax returns
(whether for income, VAT, or percentage tax purposes). Since
such immunity from audit and investigation does not preclude
the collection of revenues generated from audit and
enforcement activities, it follows that the Bureau is likewise
not barred from collecting any tax deficiency discovered as a
result of tax fraud investigations. Respondent Secretary’s
opinion that RR No. 2-99 contains the feature of a tax
amnesty is thus misplaced.
Same; Same; Tax Amnesty; Tax amnesty is a general pardon
to taxpayers who want to start a clean tax state; A tax
amnesty, much like a tax exemption, is never favored nor
presumed in law and if granted by statute, the terms of the
amnesty like that of a tax exemption must be construed
strictly against the taxpayer and liberally in favor of the
taxing authority.—Tax amnesty is a general pardon to
taxpayers who want to start a clean tax slate. It also gives
the government a chance to collect uncollected tax from tax
evaders without having to go through the tedious process of a
tax case. Even assuming arguendo that the issuance of RR
No. 2-99 is in the nature of tax amnesty, it bears noting that a
tax amnesty, much like a tax exemption, is never favored nor
presumed in law and if granted by statute, the terms of the
amnesty like that of a tax exemption must be construed
strictly against the taxpayer and liberally in favor of the
taxing authority.
Same; Same; Same; Estoppel; The State can never be in
estoppel, and this is particularly true in matters involving
taxation.—Given the explicit conditions for the grant of
immunity from audit under RR No. 2-99, RR No. 8-2001 and RR
No. 10-2001, we hold that respondent Secretary gravely erred
in declaring that petitioner is now estopped from assessing
any tax deficiency against LMCEC after issuance of the
aforementioned documents of immunity from
audit/investigation and settlement of tax liabilities. It is
axiomatic that the State can never be in estoppel, and this is
particularly true in matters involving taxation. The errors of
certain administrative officers should never be allowed to
jeopardize the government’s financial position.
Same; Same; Same; Same; Tax assessment by tax examiners
are presumed correct and made in good faith, and all
presumptions are in favor of the correctness of a tax
assessment unless proven otherwise.—Tax assessments by
tax examiners are presumed correct and made in good faith,
and all presumptions are in favor of the correctness of a tax
assessment unless proven otherwise. We have held that a
taxpayer’s failure to file a petition for review with the Court of
Tax Appeals within the statutory period rendered the disputed
assessment final, executory and demandable, thereby
precluding it from interposing the defenses of legality or
validity of the assessment and prescription of the
Government’s right to assess. Indeed, any objection against
the assessment should have been pursued following the
avenue paved in Section 229 (now Section 228) of the NIRC
on protests on assessments of internal revenue taxes.
Same; Same; Same; Same; An assessment may be protested
by filing a request for reconsideration or reinvestigation
within 30 days from receipt of the assessment by the
taxpayer.—Records bear out that the assessment notice and
Formal Letter of Demand dated August 7, 2002 were duly
served on LMCEC on October 1, 2002. Private respondents did
not file a motion for reconsideration of the said assessment
notice and formal demand; neither did they appeal to the
Court of Tax Appeals. Section 228 of the NIRC provides the
remedy to dispute a tax assessment within a certain period
of time. It states that an assessment may be protested by
filing a request for reconsideration or reinvestigation within
30 days from receipt of the assessment by the taxpayer. No
such administrative protest was filed by private respondents
seeking reconsideration of the August 7, 2002 assessment
notice and formal letter of demand. Private respondents
cannot belatedly assail the said assessment, which they
allowed to lapse into finality, by raising issues as to its
validity and correctness during the preliminary investigation
after the BIR has referred the matter for prosecution under
Sections 254 and 255 of the NIRC. Commissioner of Internal
Revenue vs. Gonzalez, 633 SCRA 139, G.R. No. 177279
October 13, 2010
Year
DECISION
VILLARAMA, JR., J p:
This is a petition for review on certiorari under Rule 45 of
the 1997 Rules of Civil Procedure, as amended, assailing the
Decision 1 dated October 31, 2006 and Resolution 2 dated March
6, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 93387
which affirmed the Resolution 3 dated December 13, 2005 of
respondent Secretary of Justice in I.S. No. 2003-774 for violation
of Sections 254 and 255 of the National Internal Revenue Code of
1997 (NIRC).
The facts as culled from the records:
Pursuant to Letter of Authority (LA) No. 00009361 dated
August 25, 2000 issued by then Commissioner of Internal
Revenue (petitioner) Dakila B. Fonacier, Revenue Officers
Remedios C. Advincula, Jr., Simplicio V. Cabantac, Jr., Ricardo L.
Suba, Jr. and Aurelio Agustin T. Zamora supervised by Section
Chief Sixto C. Dy, Jr. of the Tax Fraud Division (TFD), National
Office, conducted a fraud investigation for all internal revenue
taxes to ascertain/determine the tax liabilities of respondent L.
M. Camus Engineering Corporation (LMCEC) for the taxable years
1997, 1998 and 1999. 4 The audit and investigation against
LMCEC was precipitated by the information provided by an
"informer" that LMCEC had substantial underdeclared income for
the said period. For failure to comply with the subpoena duces
tecum issued in connection with the tax fraud investigation, a
criminal complaint was instituted by the Bureau of Internal
Revenue (BIR) against LMCEC on January 19, 2001 for violation of
Section 266 of the NIRC (I.S. No. 00-956 of the Office of the City
Prosecutor of Quezon City). 5
Based on data obtained from an "informer" and various
clients of LMCEC, 6 it was discovered that LMCEC filed
fraudulent tax returns with substantial underdeclarations of
taxable income for the years 1997, 1998 and 1999. Petitioner thus
assessed the company of total deficiency taxes amounting to
P430,958,005.90 (income tax — P318,606,380.19 and value-added
tax [VAT] — P112,351,625.71) covering the said period. The
Preliminary Assessment Notice (PAN) was received by LMCEC on
February 22, 2001. 7
LMCEC's alleged underdeclared income was summarized
by petitioner as follows: IHCSTE
Income Income Per Undeclared Percentage of
Per ITR Investigation Income Underdeclaratio
 n years 1997, 1998 and 1999; under the NIRC, only one examination
of the books of accounts is allowed per taxable year. 13

1997 96,638,540.00 283,412,140.84 186,733,600.84 193.30% LMCEC further averred that it had availed of the Bureau's
Tax Amnesty Programs (Economic Recovery Assistance Payment
1998 86,793,913.00 236,863,236.81 150,069,323.81 172.90%
[ERAP] Program and the Voluntary Assessment Program [VAP])
1999 88,287,792.00 251,507,903.13 163,220,111.13 184.90% 8 for 1998 and 1999; for 1997, its tax liability was terminated and
closed under Letter of Termination 14 dated June 1, 1999 issued
In view of the above findings, assessment notices by petitioner and signed by the Chief of the Assessment
together with a formal letter of demand dated August 7, 2002 Division. 15 LMCEC claimed it made payments of income tax, VAT
were sent to LMCEC through personal service on October 1, and expanded withholding tax (EWT), as follows:
2002. 9 Since the company and its representatives refused to TAXABLE AMOUNT OF TAXES
receive the said notices and demand letter, the revenue officers
YEAR PAID
resorted to constructive service 10 in accordance with Section 3,
Revenue Regulations (RR) No. 12-9911 .
Termination Letter Under
On May 21, 2003, petitioner, through then Commissioner 1997 EWT - P6,000.00
Letter
Guillermo L. Parayno, Jr., referred to the Secretary of Justice for
of Authority No. 174600
preliminary investigation its complaint against LMCEC, Luis M. VAT - 540,605.02
Dated
Camus and Lino D. Mendoza, the latter two were sued in their
November 4, 1998 IT - 3,000.00
capacities as President and Comptroller, respectively. The case
was docketed as I.S. No. 2003-774. In the Joint Affidavit executed
by the revenue officers who conducted the tax fraud 1998 ERAP Program pursuant WC - 38,404.55
investigation, it was alleged that despite the receipt of the final
to RR #2-99 VAT - 61,635.40
assessment notice and formal demand letter on October 1, 2002,
LMCEC failed and refused to pay the deficiency tax assessment 1999 VAP Program pursuant IT - 878,495.28
in the total amount of P630,164,631.61, inclusive of increments,
which had become final and executory as a result of the said to RR #8-2001 VAT - 1,324,317.00 16
taxpayer's failure to file a protest thereon within the thirty (30)-
day reglementary period. 12 ESTCHa
LMCEC argued that petitioner is now estopped from
Camus and Mendoza filed a Joint Counter-Affidavit further taking any action against it and its corporate officers
contending that LMCEC cannot be held liable whatsoever for the concerning the taxable years 1997 to 1999. With the grant of
alleged tax deficiency which had become due and demandable. immunity from audit from the company's availment of ERAP and
Considering that the complaint and its annexes all showed that VAP, which have a feature of a tax amnesty, the element of fraud
the suit is a simple civil action for collection and not a tax is negated the moment the Bureau accepts the offer of
evasion case, the Department of Justice (DOJ) is not the proper compromise or payment of taxes by the taxpayer. The act of the
forum for BIR's complaint. They also assail as invalid the revenue officers in finding justification under Section 6 (B) of the
assessment notices which bear no serial numbers and should be NIRC (Best Evidence Obtainable) is misplaced and unavailing
shown to have been validly served by an Affidavit of Constructive because they were not able to open the books of the company for
Service executed and sworn to by the revenue officers who the second time, after the routine examination, issuance of
served the same. As stated in LMCEC's letter-protest dated termination letter and the availment of ERAP and VAP. LMCEC
December 12, 2002 addressed to Revenue District Officer (RDO) thus maintained that unless there is a prior determination of
Clavelina S. Nacar of RD No. 40, Cubao, Quezon City, the company fraud supported by documents not yet incorporated in the docket
had already undergone a series of routine examinations for the of the case, petitioner cannot just issue LAs without first
terminating those previously issued. It emphasized the fact that
the BIR officers who filed and signed the Affidavit-Complaint in
this case were the same ones who appeared as complainants in
an earlier case filed against Camus for his alleged "failure to
obey summons in violation of Section 5 punishable under Section
266 of the NIRC of 1997" (I.S. No. 00-956 of the Office of the City
Prosecutor of Quezon City). After preliminary investigation, said
case was dismissed for lack of probable cause in a Resolution
issued by the Investigating Prosecutor on May 2, 2001. 17 IEcaHS
LMCEC further asserted that it filed on April 20, 2001 a
protest on the PAN issued by petitioner for having no basis in fact
and law. However, until now the said protest remains unresolved.
As to the alleged informant who purportedly supplied the
"confidential information," LMCEC believes that such person is
fictitious and his true identity and personality could not be
produced. Hence, this case is another form of harassment
against the company as what had been found by the Office of the
City Prosecutor of Quezon City in I.S. No. 00-956. Said case and
the present case both have something to do with the
audit/examination of LMCEC for taxable years 1997, 1998 and
1999 pursuant to LA No. 00009361. 18
In the Joint Reply-Affidavit executed by the Bureau's
revenue officers, petitioner disagreed with the contention of
LMCEC that the complaint filed is not criminal in nature, pointing
out that LMCEC and its officers Camus and Mendoza were being
charged for the criminal offenses defined and penalized under
Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful
Failure to Pay Tax) of the NIRC. This finds support in Section 205
of the same Code which provides for administrative (distraint,
levy, fine, forfeiture, lien, etc.) and judicial (criminal or civil
action) remedies in order to enforce collection of taxes. Both
remedies may be pursued either independently or
simultaneously. In this case, the BIR decided to simultaneously
pursue both remedies and thus aside from this criminal action,
the Bureau also initiated administrative proceedings against
LMCEC. 19
On the lack of control number in the assessment notice,
petitioner explained that such is a mere office requirement in the
Assessment Service for the purpose of internal control and
monitoring; hence, the unnumbered assessment notices should
not be interpreted as irregular or anomalous. Petitioner stressed
that LMCEC already lost its right to file a protest letter after the
lapse of the thirty (30)-day reglementary period. LMCEC's protest-
letter dated December 12, 2002 to RDO Clavelina S. Nacar, RD No.
40, Cubao, Quezon City was actually filed only on December 16,
2002, which was disregarded by the petitioner for being filed out
of time. Even assuming for the sake of argument that the
assessment notices were invalid, petitioner contended that such
could not affect the present criminal action, 20 citing the ruling
in the landmark case of Ungab v. Cusi, Jr. 21
As to the Letter of Termination signed by Ruth Vivian G.
Gandia of the Assessment Division, Revenue Region No. 7,
Quezon City, petitioner pointed out that LMCEC failed to mention
that the undated Certification issued by RDO Pablo C. Cabreros,
Jr. of RD No. 40, Cubao, Quezon City stated that the report of the
1997 Internal Revenue taxes of LMCEC had already been
submitted for review and approval of higher authorities. LMCEC
also cannot claim as excuse from the reopening of its books of
accounts the previous investigations and examinations. Under
Section 235 (a), an exception was provided in the rule on once a
year audit examination in case of "fraud, irregularity or mistakes,
as determined by the Commissioner". Petitioner explained that
the distinction between a Regular Audit Examination and Tax
Fraud Audit Examination lies in the fact that the former is
conducted by the district offices of the Bureau's Regional
Offices, the authority emanating from the Regional Director,
while the latter is conducted by the TFD of the National Office
only when instances of fraud had been determined by the
petitioner. 22
Petitioner further asserted that LMCEC's claim that it was
granted immunity from audit when it availed of the VAP and ERAP
programs is misleading. LMCEC failed to state that its availment
of ERAP under RR No. 2-99 is not a grant of absolute immunity
from audit and investigation, aside from the fact that said
program was only for income tax and did not cover VAT and
withholding tax for the taxable year 1998. As for LMCEC'S
availment of VAP in 1999 under RR No. 8-2001 dated August 1,
2001 as amended by RR No. 10-2001 dated September 3, 2001,
the company failed to state that it covers only income tax and
VAT, and did not include withholding tax. However, LMCEC is not
actually entitled to the benefits of VAP under Section 1 (1.1 and
1.2) of RR No. 10-2001. As to the principle of estoppel invoked by
LMCEC, estoppel clearly does not lie against the BIR as this
involved the exercise of an inherent power by the government to
collect taxes. 23 ISDCaT
Petitioner also pointed out that LMCEC's assertion
correlating this case with I.S. No. 00-956 is misleading because
said case involves another violation and offense (Sections 5 and
266 of the NIRC). Said case was filed by petitioner due to the
failure of LMCEC to submit or present its books of accounts and
other accounting records for examination despite the issuance of
subpoena duces tecum against Camus in his capacity as
President of LMCEC. While indeed a Resolution was issued by
Asst. City Prosecutor Titus C. Borlas on May 2, 2001 dismissing
the complaint, the same is still on appeal and pending resolution
by the DOJ. The determination of probable cause in said case is
confined to the issue of whether there was already a violation of
the NIRC by Camus in not complying with the subpoena duces
tecum issued by the BIR. 24
Petitioner contended that precisely the reason for the
issuance to the TFD of LA No. 00009361 by the Commissioner is
because the latter agreed with the findings of the investigating
revenue officers that fraud exists in this case. In the conduct of
their investigation, the revenue officers observed the proper
procedure under Revenue Memorandum Order (RMO) No. 49-2000
wherein it is required that before the issuance of a Letter of
Authority against a particular taxpayer, a preliminary
investigation should first be conducted to determine if a prima
facie case for tax fraud exists. As to the allegedly unresolved
protest filed on April 20, 2001 by LMCEC over the PAN, this has
been disregarded by the Bureau for being pro forma and having
been filed beyond the 15-day reglementary period. A subsequent
letter dated April 20, 2001 was filed with the TFD and signed by a
certain Juan Ventigan. However, this was disregarded and
considered a mere scrap of paper since the said signatory had
not shown any prior authorization to represent LMCEC. Even
assuming said protest letter was validly filed on behalf of the
company, the issuance of a Formal Demand Letter and
Assessment Notice through constructive service on October 1,
2002 is deemed an implied denial of the said protest. Lastly, the
details regarding the "informer" being confidential, such
information is entitled to some degree of protection, including
the identity of the informant against LMCEC. 25
In their Joint Rejoinder-Affidavit, 26 Camus and Mendoza
reiterated their argument that the identity of the alleged
informant is crucial to determine if he/she is qualified under
Section 282 of the NIRC. Moreover, there was no assessment that
has already become final, the validity of its issuance and service
has been put in issue being anomalous, irregular and oppressive.
It is contended that for criminal prosecution to proceed before
assessment, there must be a prima facie showing of a willful
attempt to evade taxes. As to LMCEC's availment of the VAP and
ERAP programs, the certificate of immunity from audit issued to
it by the BIR is plain and simple, but petitioner is now saying it
has the right to renege with impunity from its undertaking.
Though petitioner deems LMCEC not qualified to avail of the
benefits of VAP, it must be noted that if it is true that at the time
the petitioner filed I.S. No. 00-956 sometime in January 2001 it
had already in its custody that "Confidential Information No. 29-
2000 dated July 7, 2000", these revenue officers could have
rightly filed the instant case and would not resort to filing said
criminal complaint for refusal to comply with a subpoena duces
tecum.
On September 22, 2003, the Chief State Prosecutor issued
a Resolution 27 finding no sufficient evidence to establish
probable cause against respondents LMCEC, Camus and
Mendoza. It was held that since the payments were made by
LMCEC under ERAP and VAP pursuant to the provisions of RR
Nos. 2-99 and 8-2001 which were offered to taxpayers by the BIR
itself, the latter is now in estoppel to insist on the criminal
prosecution of the respondent taxpayer. The voluntary payments
made thereunder are in the nature of a tax amnesty. The
unnumbered assessment notices were found highly irregular and
thus their validity is suspect; if the amounts indicated therein
were collected, it is uncertain how these will be accounted for
and if it would go to the coffers of the government or elsewhere.
On the required prior determination of fraud, the Chief State
Prosecutor declared that the Office of the City Prosecutor in I.S.
No. 00-956 has already squarely ruled that (1) there was no prior
determination of fraud, (2) there was indiscriminate issuance of
LAs, and (3) the complaint was more of harassment. In view of
such findings, any ensuing LA is thus defective and allowing the
collection on the assailed assessment notices would already be
in the context of a "fishing expedition" or "witch-hunting."
Consequently, there is nothing to speak of regarding the finality
of assessment notices in the aggregate amount of
P630,164,631.61.
Petitioner filed a motion for reconsideration which was
denied by the Chief State Prosecutor. 28 THaDAE
Petitioner appealed to respondent Secretary of Justice
but the latter denied its petition for review under Resolution
dated December 13, 2005. 29
The Secretary of Justice found that petitioner's claim that
there is yet no finality as to LMCEC's payment of its 1997 taxes
since the audit report was still pending review by higher
authorities, is unsubstantiated and misplaced. It was noted that
the Termination Letter issued by the Commissioner on June 1,
1999 is explicit that the matter is considered closed. As for
taxable year 1998, respondent Secretary stated that the record
shows that LMCEC paid VAT and withholding tax in the amount of
P61,635.40 and P38,404.55, respectively. This eventually gave
rise to the issuance of a certificate of immunity from audit for
1998 by the Office of the Commissioner of Internal Revenue. For
taxable year 1999, respondent Secretary found that pursuant to
earlier LA No. 38633 dated July 4, 2000, LMCEC's 1999 tax
liabilities were still pending investigation for which reason
LMCEC assailed the subsequent issuance of LA No. 00009361
dated August 25, 2000 calling for a similar investigation of its
alleged 1999 tax deficiencies when no final determination has
yet been arrived on the earlier LA No. 38633. 30
On the allegation of fraud, respondent Secretary ruled
that petitioner failed to establish the existence of the following
circumstances indicating fraud in the settlement of LMCEC's tax
liabilities: (1) there must be intentional and substantial
understatement of tax liability by the taxpayer; (2) there must be
intentional and substantial overstatement of deductions or
exemptions; and (3) recurrence of the foregoing
circumstances. First, petitioner miserably failed to explain why
the assessment notices were unnumbered; second, the claim
that the tax fraud investigation was precipitated by an alleged
"informant" has not been corroborated nor was it clearly
established, hence there is no other conclusion but that the
Bureau engaged in a "fishing expedition"; and furthermore,
petitioner's course of action is contrary to Section 235 of
the NIRC allowing only once in a given taxable year such
examination and inspection of the taxpayer's books of accounts
and other accounting records. There was no convincing proof
presented by petitioner to show that the case of LMCEC falls
under the exceptions provided in Section 235. Respondent
Secretary duly considered the issuance of Certificate of
Immunity from Audit and Letter of Termination dated June 1, 1999
issued to LMCEC. 31
Anent the earlier case filed against the same taxpayer
(I.S. No. 00-956), the Secretary of Justice found petitioner to have
engaged in forum shopping in view of the fact that while there is
still pending an appeal from the Resolution of the City Prosecutor
of Quezon City in said case, petitioner hurriedly filed the instant
case, which not only involved the same parties but also similar
substantial issues (the joint complaint-affidavit also alleged the
issuance of LA No. 00009361 dated August 25, 2000). Clearly, the
evidence of litis pendentia is present. Finally, respondent
Secretary noted that if indeed LMCEC committed fraud in the
settlement of its tax liabilities, then at the outset, it should have
been discovered by the agents of petitioner, and consequently
petitioner should not have issued the Letter of Termination and
the Certificate of Immunity From Audit. Petitioner thus should
have been more circumspect in the issuance of said
documents. 32
Its motion for reconsideration having been denied,
petitioner challenged the ruling of respondent
Secretary via a certiorari petition in the CA.
On October 31, 2006, the CA rendered the assailed
decision 33 denying the petition and concurred with the findings
and conclusions of respondent Secretary. Petitioner's motion for
reconsideration was likewise denied by the appellate court. 34 It
appears that entry of judgment was issued by the CA stating that
its October 31, 2006 Decision attained finality on March 25,
2007. 35 However, the said entry of judgment was set aside upon
manifestation by the petitioner that it has filed a petition for
review before this Court subsequent to its receipt of the
Resolution dated March 6, 2007 denying petitioner's motion for
reconsideration on March 20, 2007. 36
The petition is anchored on the following grounds:
I.
The Honorable Court of Appeals erroneously
sustained the findings of the Secretary of Justice
who gravely abused his discretion by dismissing the
complaint based on grounds which are not even
elements of the offenses charged.
II.
The Honorable Court of Appeals erroneously
sustained the findings of the Secretary of Justice
who gravely abused his discretion by dismissing
petitioner's evidence, contrary to law.
III.
The Honorable Court of Appeals erroneously
sustained the findings of the Secretary of Justice
who gravely abused his discretion by inquiring into
 the validity of a Final Assessment Notice which has
become final, executory and demandable pursuant
to Section 228 of the Tax Code of 1997 for failure of
private respondent to file a protest against the
same. 37
The core issue to be resolved is whether LMCEC and its
corporate officers may be prosecuted for violation of Sections
254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to
Supply Correct and Accurate Information and Pay Tax).
Petitioner filed the criminal complaint against the private
respondents for violation of the following provisions of the NIRC,
as amended:
SEC. 254. Attempt to Evade or Defeat Tax. —
Any person who willfully attempts in any manner to
evade or defeat any tax imposed under this Code or
the payment thereof shall, in addition to other
penalties provided by law, upon conviction thereof,
be punished by a fine of not less than Thirty
thousand pesos (P30,000) but not more than One
hundred thousand pesos (P100,000) and suffer
imprisonment of not less than two (2) years but not
more than four (4) years: Provided, That the
conviction or acquittal obtained under this Section
shall not be a bar to the filing of a civil suit for the
collection of taxes.
SEC. 255. Failure to File Return, Supply
Correct and Accurate Information, Pay Tax, Withhold
and Remit Tax and Refund Excess Taxes Withheld on
Compensation. — Any person required under this
Code or by rules and regulations promulgated
thereunder to pay any tax, make a return, keep any
record, or supply any correct and accurate
information, who willfully fails to pay such tax, make
such return, keep such record, or supply such
correct and accurate information, or withhold or
remit taxes withheld, or refund excess taxes
withheld on compensations at the time or times
required by law or rules and regulations shall, in
addition to other penalties provided by law, upon
conviction thereof, be punished by a fine of not less
than Ten thousand pesos (P10,000) and suffer
imprisonment of not less than one (1) year but not
more than ten (10) years. SDEHCc
xxx xxx xxx (Emphasis supplied.)
Respondent Secretary concurred with the Chief State
Prosecutor's conclusion that there is insufficient evidence to
establish probable cause to charge private respondents under
the above provisions, based on the following findings: (1) the tax
deficiencies of LMCEC for taxable years 1997, 1998 and 1999
have all been settled or terminated, as in fact LMCEC was issued
a Certificate of Immunity and Letter of Termination, and availed
of the ERAP and VAP programs; (2) there was no prior
determination of the existence of fraud; (3) the assessment
notices are unnumbered, hence irregular and suspect; (4) the
books of accounts and other accounting records may be subject
to audit examination only once in a given taxable year and there
is no proof that the case falls under the exceptions provided in
Section 235 of the NIRC;and (5) petitioner committed forum
shopping when it filed the instant case even as the earlier
criminal complaint (I.S. No. 00-956) dismissed by the City
Prosecutor of Quezon City was still pending appeal.
Petitioner argues that with the finality of the assessment
due to failure of the private respondents to challenge the same in
accordance with Section 228 of the NIRC, respondent Secretary
has no jurisdiction and authority to inquire into its validity.
Respondent taxpayer is thereby allowed to do indirectly what it
cannot do directly — to raise a collateral attack on the
assessment when even a direct challenge of the same is legally
barred. The rationale for dismissing the complaint on the ground
of lack of control number in the assessment notice likewise
betrays a lack of awareness of tax laws and jurisprudence, such
circumstance not being an element of the offense. Worse, the
final, conclusive and undisputable evidence detailing a crime
under our taxation laws is swept under the rug so easily on mere
conspiracy theories imputed on persons who are not even the
subject of the complaint.
We grant the petition.
There is no dispute that prior to the filing of the complaint
with the DOJ, the report on the tax fraud investigation conducted
on LMCEC disclosed that it made substantial underdeclarations
in its income tax returns for 1997, 1998 and 1999. Pursuant to RR
No. 12-99, 38 a PAN was sent to and received by LMCEC on
February 22, 2001 wherein it was notified of the proposed
assessment of deficiency taxes amounting to P430,958,005.90
(income tax — P318,606,380.19 and VAT — P112,351,625.71)
covering taxable years 1997, 1998 and 1999. 39 In response to
said PAN, LMCEC sent a letter-protest to the TFD, which denied
the same on April 12, 2001 for lack of legal and factual basis and
also for having been filed beyond the 15-day reglementary
period. 40
As mentioned in the PAN, the revenue officers were not
given the opportunity to examine LMCEC's books of accounts and
other accounting records because its officers failed to comply
with the subpoena duces tecum earlier issued, to verify its
alleged underdeclarations of income reported by the Bureau's
informant under Section 282 of the NIRC. Hence, a criminal
complaint was filed by the Bureau against private respondents
for violation of Section 266 which provides:
SEC. 266. Failure to Obey Summons. — Any
person who, being duly summoned to appear to
testify, or to appear and produce books of accounts,
records, memoranda, or other papers, or to furnish
information as required under the pertinent
provisions of this Code, neglects to appear or to
produce such books of accounts, records,
memoranda, or other papers, or to furnish such
information, shall, upon conviction, be punished by a
fine of not less than Five thousand pesos (P5,000)
but not more than Ten thousand pesos (P10,000) and
suffer imprisonment of not less than one (1) year but
not more than two (2) years.
It is clear that I.S. No. 00-956 involves a separate offense
and hence litis pendentia is not present considering that the
outcome of I.S. No. 00-956 is not determinative of the issue as to
whether probable cause exists to charge the private respondents
with the crimes of attempt to evade or defeat tax and willful
failure to supply correct and accurate information and pay tax
defined and penalized under Sections 254 and 255, respectively.
For the crime of tax evasion in particular, compliance by the
taxpayer with such subpoena, if any had been issued, is
irrelevant. As we held in Ungab v. Cusi, Jr., 41 "[t]he crime is
complete when the [taxpayer] has . . . knowingly and willfully
filed [a] fraudulent [return] with intent to evade and defeat . . .
the tax." Thus, respondent Secretary erred in holding that
petitioner committed forum shopping when it filed the present
criminal complaint during the pendency of its appeal from the
City Prosecutor's dismissal of I.S. No. 00-956 involving the act of
disobedience to the summons in the course of the preliminary
investigation on LMCEC's correct tax liabilities for taxable years
1997, 1998 and 1999.
In the Details of Discrepancies attached as Annex B of the
PAN, 42 private respondents were already notified that inasmuch
as the revenue officers were not given the opportunity to
examine LMCEC's books of accounts, accounting records and
other documents, said revenue officers gathered information
from third parties. Such procedure is authorized under Section 5
of the NIRC, which provides:
SEC. 5. Power of the Commissioner to Obtain
Information, and to Summon, Examine, and Take
Testimony of Persons. — In ascertaining the
correctness of any return, or in making a return
when none has been made, or in determining the
liability of any person for any internal revenue tax, or
in collecting any such liability, or in evaluating tax
compliance, the Commissioner is authorized:
(A) To examine any book, paper, record or
other data which may be relevant or material to such
inquiry; aEHASI
(B) To obtain on a regular basis from any
person other than the person whose internal
revenue tax liability is subject to audit or
investigation, or from any office or officer of the
national and local governments, government
agencies and instrumentalities, including
the Bangko Sentral ng Pilipinas and government-
owned or -controlled corporations, any information
such as, but not limited to, costs and volume of
production, receipts or sales and gross incomes of
taxpayers, and the names, addresses, and financial
statements of corporations, mutual fund companies,
insurance companies, regional operating
headquarters of multinational companies, joint
accounts, associations, joint ventures or consortia
and registered partnerships, and their members;
(C) To summon the person liable for tax or
required to file a return, or any officer or employee
of such person, or any person having possession,
custody, or care of the books of accounts and other
accounting records containing entries relating to the
business of the person liable for tax, or any other
 person, to appear before the Commissioner or his
duly authorized representative at a time and place
specified in the summons and to produce such
books, papers, records, or other data, and to give
testimony;
(D) To take such testimony of the person
concerned, under oath, as may be relevant or
material to such inquiry; . . .
xxx xxx xxx (Emphasis supplied.)
Private respondents' assertions regarding the
qualifications of the "informer" of the Bureau deserve scant
consideration. We have held that the lack of consent of the
taxpayer under investigation does not imply that the BIR
obtained the information from third parties illegally or that the
information received is false or malicious. Nor does the lack of
consent preclude the BIR from assessing deficiency taxes on the
taxpayer based on the documents. 43 In the same vein, herein
private respondents cannot be allowed to escape criminal
prosecution under Sections 254 and 255 of the NIRC by mere
imputation of a "fictitious" or disqualified informant under
Section 282 simply because other than disclosure of the official
registry number of the third party "informer," the Bureau insisted
on maintaining the confidentiality of the identity and personal
circumstances of said "informer."
Subsequently, petitioner sent to LMCEC by constructive
service allowed under Section 3 of RR No. 12-99, assessment
notice and formal demand informing the said taxpayer of the law
and the facts on which the assessment is made, as required
by Section 228 of the NIRC. Respondent Secretary, however, fully
concurred with private respondents' contention that the
assessment notices were invalid for being unnumbered and the
tax liabilities therein stated have already been settled and/or
terminated.
We do not agree.
A notice of assessment is:
[A] declaration of deficiency taxes issued to
a [t]axpayer who fails to respond to a Pre-
Assessment Notice (PAN) within the prescribed
period of time, or whose reply to the PAN was found
to be without merit. The Notice of Assessment shall
inform the [t]axpayer of this fact, and that the report
of investigation submitted by the Revenue Officer
conducting the audit shall be given due course.
The formal letter of demand calling for
payment of the taxpayer's deficiency tax or taxes
shall state the fact, the law, rules and regulations or
jurisprudence on which the assessment is based,
otherwise the formal letter of demand and the
notice of assessment shall be void. 44
As it is, the formality of a control number in the
assessment notice is not a requirement for its validity but rather
the contents thereof which should inform the taxpayer of the
declaration of deficiency tax against said taxpayer. Both the
formal letter of demand and the notice of assessment shall be
void if the former failed to state the fact, the law, rules and
regulations or jurisprudence on which the assessment is based,
which is a mandatory requirement under Section 228 of the NIRC.
Section 228 of the NIRC provides that the taxpayer shall
be informed in writing of the law and the facts on which the
assessment is made. Otherwise, the assessment is void. To
implement the provisions of Section 228 of the NIRC, RR No. 12-
99 was enacted. Section 3.1.4 of the revenue regulation reads:
3.1.4. Formal Letter of Demand and
Assessment Notice. — The formal letter of demand
and assessment notice shall be issued by the
Commissioner or his duly authorized
representative. The letter of demand calling for
payment of the taxpayer's deficiency tax or taxes
shall state the facts, the law, rules and regulations,
or jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and
assessment notice shall be void. The same shall be
sent to the taxpayer only by registered mail or by
personal delivery. . . . . 45 (Emphasis supplied.)
The Formal Letter of Demand dated August 7, 2002
contains not only a detailed computation of LMCEC's tax
deficiencies but also details of the specified discrepancies,
explaining the legal and factual bases of the assessment. It also
reiterated that in the absence of accounting records and other
documents necessary for the proper determination of the
company's internal revenue tax liabilities, the investigating
revenue officers resorted to the "Best Evidence Obtainable" as
provided in Section 6 (B) of the NIRC (third party information) and
in accordance with the procedure laid down in RMC No. 23-
2000 dated November 27, 2000. Annex "A" of the Formal Letter of
Demand thus stated:
Thus, to verify the validity of the information
previously provided by the informant, the assigned
revenue officers resorted to third party information.
Pursuant to Section 5(B) of the NIRC of 1997, access
letters requesting for information and the
submission of certain documents (i.e., Certificate of
Income Tax Withheld at Source and/or Alphabetical
List showing the income payments made to L.M.
Camus Engineering Corporation for the taxable
years 1997 to 1999) were sent to the various clients
of the subject corporation, including but not limited
to the following:
1. Ayala Land, Inc.
2. Filinvest Alabang, Inc.
3. D.M. Consunji, Inc.
4. SM Prime Holdings, Inc.
5. Alabang Commercial Corporation
6. Philam Properties Corporation
7. SM Investments, Inc.
8. Shoemart, Inc.
9. Philippine Securities Corporation
10. Makati Development Corporation TcHEaI
From the documents gathered and the data
obtained therein, the substantial underdeclaration
as defined under Section 248(B) of the NIRC of
1997 by your corporation of its income had been
confirmed. . . . 46 (Emphasis supplied.)
In the same letter, Assistant Commissioner Percival T.
Salazar informed private respondents that the estimated tax
liabilities arising from LMCEC's underdeclaration amounted to
P186,773,600.84 in 1997, P150,069,323.81 in 1998 and
P163,220,111.13 in 1999. These figures confirmed that the non-
declaration by LMCEC for the taxable years 1997, 1998 and 1999
of an amount exceeding 30% income 47 declared in its return is
considered a substantial underdeclaration of income, which
constituted prima facie evidence of false or fraudulent return
under Section 248 (B) 48 of the NIRC, as amended. 49
On the alleged settlement of the assessed tax
deficiencies by private respondents, respondent Secretary found
the latter's claim as meritorious on the basis of the Certificate of
Immunity from Audit issued on December 6, 1999 pursuant to RR
No. 2-99 and Letter of Termination dated June 1, 1999 issued by
Revenue Region No. 7 Chief of Assessment Division Ruth Vivian
G. Gandia. Petitioner, however, clarified that the certificate of
immunity from audit covered only income tax for the year 1997
and does not include VAT and withholding taxes, while the Letter
of Termination involved tax liabilities for taxable year 1997 (EWT,
VAT and income taxes) but which was submitted for review of
higher authorities as per the Certification of RD No. 40 District
Officer Pablo C. Cabreros, Jr. 50 For 1999, private respondents
supposedly availed of the VAP pursuant to RR No. 8-2001.
RR No. 2-99 issued on February 7, 1999 explained in its
Policy Statement that considering the scarcity of financial and
human resources as well as the time constraints within which
the Bureau has to "clean the Bureau's backlog of unaudited tax
returns in order to keep updated and be focused with the most
current accounts" in preparation for the full implementation of a
computerized tax administration, the said revenue regulation was
issued "providing forlast priority in audit and investigation of tax
returns" to accomplish the said objective "without, however,
compromising the revenue collection that would have been
generated from audit and enforcement activities." The program
named as "Economic Recovery Assistance Payment (ERAP)
Program" granted immunity from audit and investigation of
income tax, VAT and percentage tax returns for 1998. It expressly
excluded withholding tax returns (whether for income, VAT, or
percentage tax purposes). Since such immunity from audit and
investigation does not preclude the collection of revenues
generated from audit and enforcement activities, it follows that
the Bureau is likewise not barred from collecting any tax
deficiency discovered as a result of tax fraud investigations.
Respondent Secretary's opinion that RR No. 2-99 contains the
feature of a tax amnesty is thus misplaced.
Tax amnesty is a general pardon to taxpayers who want to
start a clean tax slate. It also gives the government a chance to
collect uncollected tax from tax evaders without having to go
through the tedious process of a tax case. 51Even
assuming arguendo that the issuance of RR No. 2-99 is in the
nature of tax amnesty, it bears noting that a tax amnesty, much
like a tax exemption, is never favored nor presumed in law and if
granted by statute, the terms of the amnesty like that of a tax
exemption must be construed strictly against the taxpayer and
liberally in favor of the taxing authority. 52
For the same reason, the availment by LMCEC of VAP
under RR No. 8-2001 as amended by RR No. 10-2001, through
payment supposedly made in October 29, 2001 before the said
program ended on October 31, 2001, did not amount to
settlement of its assessed tax deficiencies for the period 1997 to
1999, nor immunity from prosecution for filing fraudulent return
and attempt to evade or defeat tax. As correctly asserted by
petitioner, from the express terms of the aforesaid revenue
regulations, LMCEC is not qualified to avail of the VAP granting
taxpayers the privilege of last priority in the audit and
investigation of all internal revenue taxes for the taxable year
2000 and all prior years under certain conditions, considering
that first, it was issued a PAN on February 19,
2001, and second, it was the subject of investigation as a result
of verified information filed by a Tax Informer under Section 282
of the NIRC duly recorded in the BIR Official Registry as
Confidential Information (CI) No. 29-2000 53 even prior to the
issuance of the PAN.
Section 1 of RR No. 8-2001 provides:
SECTION 1. COVERAGE. — . . .
Any person, natural or juridical, including
estates and trusts, liable to pay any of the above-
cited internal revenue taxes for the above specified
period/s who, due to inadvertence or otherwise,
erroneously paid his internal revenue tax liabilities
or failed to file tax return/pay taxes may avail of the
Voluntary Assessment Program (VAP), except those
falling under any of the following instances: cTEICD
1.1 Those covered by a Preliminary
Assessment Notice (PAN), Final Assessment Notice
(FAN), or Collection Letter issued on or before July
31, 2001; or
1.2 Persons under investigation as a result of
verified information filed by a Tax Informer under
Section 282 of the Tax Code of 1997, duly processed
and recorded in the BIR Official Registry Book on or
before July 31, 2001;
1.3 Tax fraud cases already filed and pending
in courts for adjudication; and
xxx xxx xxx (Emphasis supplied.)
Moreover, private respondents cannot invoke LMCEC's
availment of VAP to foreclose any subsequent audit of its account
books and other accounting records in view of the strong finding
of underdeclaration in LMCEC's payment of correct income tax
liability by more than 30% as supported by the written report of
the TFD detailing the facts and the law on which such finding is
based, pursuant to the tax fraud investigation authorized by
petitioner under LA No. 00009361. This conclusion finds support
in Section 2 of RR No. 8-2001 as amended by RR No. 10-
2001 provides:
SEC. 2. TAXPAYER'S BENEFIT FROM
AVAILMENT OF THE VAP. — A taxpayer who has
availed of the VAP shall not be audited except upon
authorization and approval of the Commissioner of
Internal Revenue when there is strong evidence or
finding of understatement in the payment of
taxpayer's correct tax liability by more than thirty
percent (30%) as supported by a written report of
the appropriate office detailing the facts and the law
on which such finding is based: Provided, however,
that any VAP payment should be allowed as tax
credit against the deficiency tax due, if any, in case
the concerned taxpayer has been subjected to tax
audit.
xxx xxx xxx
Given the explicit conditions for the grant of immunity
from audit under RR No. 2-99, RR No. 8-2001 and RR No. 10-2001,
we hold that respondent Secretary gravely erred in declaring that
petitioner is now estopped from assessing any tax deficiency
against LMCEC after issuance of the aforementioned documents
of immunity from audit/investigation and settlement of tax
liabilities. It is axiomatic that the State can never be in estoppel,
and this is particularly true in matters involving taxation. The
errors of certain administrative officers should never be allowed
to jeopardize the government's financial position. 54
 Respondent Secretary's other ground for assailing the
course of action taken by petitioner in proceeding with the audit
and investigation of LMCEC — the alleged violation of the general
rule in Section 235 of the NIRC allowing the examination and
inspection of taxpayer's books of accounts and other accounting
records only once in a taxable year — is likewise untenable. As
correctly pointed out by petitioner, the discovery of substantial
underdeclarations of income by LMCEC for taxable years 1997,
1998 and 1999 upon verified information provided by an
"informer" under Section 282 of the NIRC, as well as the
necessity of obtaining information from third parties to ascertain
the correctness of the return filed or evaluation of tax
compliance in collecting taxes (as a result of the disobedience to
the summons issued by the Bureau against the private
respondents), are circumstances warranting exception from the
general rule in Section 235. 55
As already stated, the substantial underdeclared income
in the returns filed by LMCEC for 1997, 1998 and 1999 in amounts
equivalent to more than 30% (the computation in the final
assessment notice showed underdeclarations of almost 200%)
constitutes prima facie evidence of fraudulent return
under Section 248(B) of the NIRC. Prior to the issuance of the
preliminary and final notices of assessment, the revenue officers
conducted a preliminary investigation on the information and
documents showing substantial understatement of LMCEC's tax
liabilities which were provided by the Informer, following the
procedure under RMO No. 15-95. 56 Based on the prima
facie finding of the existence of fraud, petitioner issued LA No.
00009361 for the TFD to conduct a formal fraud investigation of
LMCEC. 57 Consequently, respondent Secretary's ruling that the
filing of criminal complaint for violation of Sections 254 and 255
of the NIRC cannot prosper because of lack of prior
determination of the existence of fraud, is bereft of factual basis
and contradicted by the evidence on record.
Tax assessments by tax examiners are presumed correct
and made in good faith, and all presumptions are in favor of the
correctness of a tax assessment unless proven otherwise. 58 We
have held that a taxpayer's failure to file a petition for review
with the Court of Tax Appeals within the statutory period
rendered the disputed assessment final, executory and
demandable, thereby precluding it from interposing the defenses
of legality or validity of the assessment and prescription of the
Government's right to assess. 59 Indeed, any objection against
the assessment should have been pursued following the avenue
paved in Section 229 (now Section 228) of the NIRC on protests
on assessments of internal revenue taxes. 60 aSCHcA
Records bear out that the assessment notice and Formal
Letter of Demand dated August 7, 2002 were duly served on
LMCEC on October 1, 2002. Private respondents did not file a
motion for reconsideration of the said assessment notice and
formal demand; neither did they appeal to the Court of Tax
Appeals. Section 228 of the NIRC 61 provides the remedy to
dispute a tax assessment within a certain period of time. It
states that an assessment may be protested by filing a request
for reconsideration or reinvestigation within 30 days from receipt
of the assessment by the taxpayer. No such administrative
protest was filed by private respondents seeking reconsideration
of the August 7, 2002 assessment notice and formal letter of
demand. Private respondents cannot belatedly assail the said
assessment, which they allowed to lapse into finality, by raising
issues as to its validity and correctness during the preliminary
investigation after the BIR has referred the matter for
prosecution under Sections 254 and 255 of the NIRC.
As we held in Marcos II v. Court of Appeals: 62
It is not the Department of Justice which is
the government agency tasked to determine the
amount of taxes due upon the subject estate, but the
Bureau of Internal Revenue, whose determinations
and assessments are presumed correct and made in
good faith. The taxpayer has the duty of proving
otherwise. In the absence of proof of any
irregularities in the performance of official duties,
an assessment will not be disturbed. Even an
assessment based on estimates is prima facie valid
and lawful where it does not appear to have been
arrived at arbitrarily or capriciously. The burden of
proof is upon the complaining party to show clearly
that the assessment is erroneous. Failure to present
proof of error in the assessment will justify the
judicial affirmance of said assessment. . . . .
Moreover, these objections to the
assessments should have been raised, considering
the ample remedies afforded the taxpayer by the Tax
Code, with the Bureau of Internal Revenue and the
Court of Tax Appeals, as described earlier, and
cannot be raised now via Petition
for Certiorari, under the pretext of grave abuse of
 discretion. The course of action taken by the ||| (Commissioner of Internal Revenue v. Gonzalez, G.R. No. 177279,
petitioner reflects his disregard or even repugnance [October 13, 2010], 647 PHIL 462-494)
of the established institutions for governance in the
scheme of a well-ordered society. The subject tax
assessments having become final, executory and
enforceable, the same can no longer be contested
by means of a disguised protest. In the
main, Certiorari may not be used as a substitute for
a lost appeal or remedy. This judicial policy becomes
more pronounced in view of the absence of
sufficient attack against the actuations of
government. (Emphasis supplied.)

The determination of probable cause is part of the

discretion granted to the investigating prosecutor and ultimately,
the Secretary of Justice. However, this Court and the CA possess
the power to review findings of prosecutors in preliminary
investigations. Although policy considerations call for the widest
latitude of deference to the prosecutor's findings, courts should
never shirk from exercising their power, when the circumstances
warrant, to determine whether the prosecutor's findings are
supported by the facts, or by the law. In so doing, courts do not
act as prosecutors but as organs of the judiciary, exercising their
mandate under the Constitution, relevant statutes, and remedial
rules to settle cases and controversies. 63 Clearly, the power of
the Secretary of Justice to review does not preclude this Court
and the CA from intervening and exercising our own powers of
review with respect to the DOJ's findings, such as in the
exceptional case in which grave abuse of discretion is
committed, as when a clear sufficiency or insufficiency of
evidence to support a finding of probable cause is ignored. 64
WHEREFORE, the petition is GRANTED. The Decision
dated October 31, 2006 and Resolution dated March 6, 2007 of
the Court of Appeals in CA-G.R. SP No. 93387 are
hereby REVERSED and SET ASIDE. The Secretary of Justice is
hereby DIRECTED to order the Chief State Prosecutor to file
before the Regional Trial Court of Quezon City, National Capital
Judicial Region, the corresponding Information against L. M.
Camus Engineering Corporation, represented by its President
Luis M. Camus and Comptroller Lino D. Mendoza, for Violation of
Sections 254 and 255 of the National Internal Revenue Code of
1997.
No costs. CTHDcS
SO ORDERED.

THIRD DIVISION
[G.R. No. 120082. September 11, 1996.]
MACTAN CEBU INTERNATIONAL AIRPORT
AUTHORITY, petitioner, vs. HON. FERDINAND J.
MARCOS, in his capacity as the Presiding Judge of
the Regional Trial Court, Branch 20, Cebu City, THE
CITY OF CEBU, represented by its Mayor, HON.
TOMAS R. OSMEÑA, and EUSTAQUIO B.
CESA, respondents.
SYLLABUS
Taxation; As a general rule, the power to tax is an incident of
sovereignty and is unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is to be found only
in the responsibility of the legislature which imposes the tax on the
constituency who are to pay it.—As a general rule, the power to tax
is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against
its abuse is to be found only in the responsibility of the legislature
which imposes the tax on the constituency who are to pay it.
Nevertheless, effective limitations thereon may be imposed by the
people through their Constitutions. Our Constitution, for instance,
provides that the rule of taxation shall be uniform and equitable and
Congress shall evolve a progressive system of taxation. So potent
indeed is the power that it was once opined that “the power to tax
involves the power to destroy.”
Same; Statutory Construction; Since taxation is a destructive power
which interferes with the personal and property rights of the people
and takes from them a portion of their property for the support of the
government, tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer; But since taxes are
what we pay for civilized society, or are the lifeblood of the nation,
the law frowns against exemptions from taxation and statutes
granting tax exemptions are thus construed strictissimi juris against
the taxpayer and liberally in favor of the taxing authority.—Verily,
taxation is a destructive power which interferes with the personal
and property rights of the people and takes from them a portion of
their property for the support of the government. Accordingly, tax
statutes must be construed strictly against the government and
liberally in favor of the taxpayer. But since taxes are what we pay for
civilized society, or are the lifeblood of the nation, the law frowns
against exemptions from taxation and statutes granting tax
exemptions are thus construed stricissimi juris against the taxpayer
and liberally in favor of the taxing authority. A claim of exemption
from tax payments must be clearly shown and based on language in
the law too plain to be mistaken. Elsewise stated, taxation is the
rule, exemption therefrom is the exception. However, if the grantee of
the exemption is a political subdivision or instrumentality, the rigid
rule of construction does not apply because the practical effect of
the exemption is merely to reduce the amount of money that has to
be handled by the government in the course of its operations.
Same; Local Government Units; The power to tax is primarily vested
in the Congress but in our jurisdiction, it may be exercised by local
legislative bodies, no longer merely by virtue of a valid delegation
but pursuant to direct authority conferred by the Constitution.— The
power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer
merely by virtue of a valid delegation as before, but pursuant to
direct authority conferred by Section 5, Article X of the Constitution.
Under the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide which,
however, must be consistent with the basic policy of local autonomy.
Same; Same; Non-Impairment Clause; Since taxation is the rule and
exemption therefrom the exception, the exemption may be withdrawn
at the pleasure of the taxing authority, the only exception being
where the exemption was granted to private parties based on
material consideration of a mutual nature, which then becomes
contractual and thus covered by the non-impairment clause of the
Constitution.—There can be no question that under Section 14 of R.A.
No. 6958 the petitioner is exempt from the payment of realty taxes
imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since
taxation is the rule and exemption therefrom the exception, the
exemption may thus be withdrawn at the pleasure of the taxing
authority. The only exception to this rule is where the exemption was
granted to private parties based on material consideration of a
mutual nature, which then becomes contractual and is thus covered
by the nonimpairment clause of the Constitution.
Same; Same; Local Government Code; Words and Phrases; “Fees” and
“Charges,” Explained.—Section 133 of the LGC prescribes the
common limitations on the taxing powers of local government units.
Needless to say, the last item (item 0 of Sec. 133 of the LGC) is
pertinent to this case. The “taxes, fees or charges” referred to are “of
any kind;” hence, they include all of these, unless otherwise provided
by the LGC. The term “taxes” is well understood so as to need no
further elaboration, especially in light of the above enumeration. The
term “fees” means charges fixed by law or ordinance for the
regulation or inspection of business or activity, while “charges” are
pecuniary liabilities such as rents or fees against persons or
property.
Same; Same; Same; Since the last paragraph of Section 234 of the
LGC unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or
juridical persons, including government-owned or controlled
corporations, except as provided in the said section, and Mactan
Cebu International Airport Authority is a government-owned
corporation, it necessarily follows that its exemption from such tax
granted it in Section 14 of its Charter, R.A 6958, has been withdrawn.
—Since the last paragraph of Section 234 unequivocally withdrew,
upon the effectivity of the LGC, exemptions from payment of real
property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in
the said section, and the petitioner is, undoubtedly, a government-
owned corporation, it necessarily follows that its exemption from
such tax granted it in Section 14 of its Charter, R.A. No. 6958, has
been withdrawn. Any claim to the contrary can only be justified if the
petitioner can seek refuge under any of the exceptions provided in
Section 234, but not under Section 133, as it now asserts, since, as
shown above, the said section is qualified by Sections 232 and 234.
Same; Words and Phrases; The terms “Republic of the Philippines”
and “National Government” are not interchangeable—the former is
broader and synonymous with “Government of the Republic of the
Philippines” while the latter refers “to the entire machinery of the
central government, as distinguished from the different forms of
local governments."—The terms “Republic of the Philippines” and
“National Government” are not interchangeable. The former is
broader and synonymous with “Government of the Republic of the
Philippines” which the Administrative Code of 1987 defines as the
“corporate governmental entity through which the functions of
government are exercised throughout the Philippines, including, save
as the contrary appears from the context, the various arms through
which political authority is made effective in the Philippines, whether
pertaining to the autonomous regions, the provincial, city, municipal
or barangay subdivisions or other forms of local government.” These
“autonomous regions, provincial, city, municipal or barangay
subdivisions” are the political subdivisions. On the other hand,
“National Government” refers “to the entire machinery of the central
government, as distinguished from the different forms of local
governments.” The National Government then is composed of the
three great departments: the executive, the legislative and the
judicial.
Same; Same; “Agency” and “Instrumentality,” Explained.—An
“agency” of the Government refers to “any of the various units of the
Government, including a department, bureau, office, instrumental“ity,
or government-owned or controlled corporation, or a local
government or a distinct unit therein;” while an “instrumentality”
refers to “any agency of the National Government, not integrated
within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy,
usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned and controlled
corporations.”
Same; Local Government Units; Local Autonomy; The power to tax is
the most effective instrument to raise needed revenues to finance
and support myriad activities of local government units for the
delivery of basic services essential to the promotion of the general
welfare and the enhancement of peace, progress, and prosperity of
the people.—The justification for this restricted exemption in Section
234(a) seems obvious: to limit further tax exemption privileges,
especially in light of the general provision on withdrawal of tax
exemption privileges in Section 193 and the special provision on
withdrawal of exemption from payment of real property taxes in the
last paragraph of Section 234. These policy considerations are
consistent with the State policy to ensure autonomy to local
governments and the objective of the LGC that they enjoy genuine
and meaningful local autonomy to enable them to attain their fullest
development as selfreliant communities and make them effective
partners in the attainment of national goals. The power to tax is the
most effective instrument to raise needed revenues to finance and
support myriad activities of local government units for the delivery of
basic services essential to the promotion of the general welfare and
the enhancement of peace, progress, and prosperity of the people. It
may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned
and controlled corporations and all other units of government were
that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and
there was a need for these entities to share in the requirements of
development, fiscal or otherwise, by paying the taxes and other
charges due from them.
Same; Mactan Cebu International Airport Authority cannot claim that
it was never a “taxable person” under its Charter—it was only
exempted from the payment of real property taxes.—Moreover, the
petitioner cannot claim that it was never a “taxable person” under its
Charter. It was only exempted from the payment of real property
taxes. The grant of the privilege only in respect of this tax is
conclusive proof of the legislative intent to make it a taxable person
subject to all taxes, except real property tax.
Same; Local Government Units; Local Government Code; Reliance on
Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA
52 (1991), is unavailing since it was decided before the effectivity of
the LGC.—Accordingly, the position taken by the petitioner is
untenable. Reliance on Basco vs. Philippine Amusement and Gaming
Corporation is unavailing since it was decided before the effectivity
of the LGC. Besides, nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the Government
performing governmental functions may be subject to tax. Where it is
done precisely to fulfill a constitutional mandate and national policy,
no one can doubt its wisdom. Mactan Cebu International Airport
Authority vs. Marcos, 261 SCRA 667, G.R. No. 120082 September 11,
1996
||| D E C I S I O N
DAVIDE, JR., J p:
For review under Rule 45 of the Rules of Court on a pure
question of law are the decision of 22 March 1995 1 of the
Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the
petition for declaratory relief in Civil Case No. CEB-16900,
entitled "Mactan Cebu International Airport Authority vs . City of
Cebu," and its order of 4 May 1995 2 denying the motion to
reconsider the decision.
We resolved to give due course to this petition for it raises
issues dwelling on the scope of the taxing power of local
government units and the limits of tax exemption privileges of
government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized
in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority
(MCIAA) was created by virtue of Republic Act No. 6958,
mandated to "principally undertake the economical, efficient and
effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug
Airport in Cebu City, . . . and such other airports as may be
established in the Province of Cebu . . ." (Sec. 3, RA 6958). It is
also mandated to:
a) encourage, promote and develop international and
domestic air traffic in the Central Visayas
and Mindanao regions as a means of making
the regions centers of international trade and
tourism, and accelerating the development of
the means of transportation and
communication in the country; and,
 b) upgrade the services and facilities of the airports
and to formulate internationally acceptable
standards of airport accommodation and
service.
Since the time of its creation, petitioner MCIAA enjoyed
the privilege of exemption from payment of realty taxes in
accordance with Section 14 of its Charter:
Sec. 14. Tax Exemptions. — The Authority
shall be exempt from realty taxes imposed by the
National Government or any of its political
subdivisions, agencies and instrumentalities . . ..
On October 11, 1994, however, Mr. Eustaquio B. Cesa,
Officer-in-Charge, Office of the Treasurer of the City of Cebu,
demanded payment for realty taxes on several parcels of land
belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd.,
746 and 991-A), located at Barrio Apas and Barrio Kasambagan,
Lahug, Cebu City, in the total amount of P2,229,078.79.
Petitioner objected to such demand for payment as
baseless and unjustified, claiming in its favor the aforecited
Section 14 of RA 6958 which exempts it from payment of realty
taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing Section
133 of the Local Government Code of 1991 which puts limitations
on the taxing powers of local government units:
Section 133. Common Limitations on the
Taxing Powers of Local Government Units . — Unless
otherwise provided herein, the exercise of the taxing
powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the
following:
a) . . .
xxx xxx xxx
o) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government units.
(italics supplied)
Respondent City refused to cancel and set aside
petitioner's realty tax account, insisting that the MCIAA is a
government-controlled corporation whose tax exemption
privilege has been withdrawn by virtue of Sections 193 and 234
of the Local Government Code that took effect on January 1,
1992:
Section 193. Withdrawal of Tax Exemption
Privilege. — Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently
enjoyed by all persons whether natural or
juridical, including government-owned or controlled
corporations, except local water districts,
cooperatives duly registered under RA No. 6938,
non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the
effectivity of this Code. (italics supplied)
xxx xxx xxx
Section 234. Exemptions from Real Property
Taxes. — . . .
(a) . . .
xxx xxx xxx
(e) . . .
Except as provided herein, any
exemption from payment of real property tax
previously granted to, or presently enjoyed by
all persons, whether natural or juridical,
including government-owned or controlled
corporations are hereby withdrawn upon the
effectivity of this Code.
As the City of Cebu was about to issue a
warrant of levy against the properties of petitioner,
the latter was compelled to pay its tax account
"under protest" and thereafter filed a Petition for
Declaratory Relief with the Regional Trial Court of
Cebu, Branch 20, on December 29, 1994. MCIAA
basically contended that the taxing powers of local
government units do not extend to the levy of taxes
or fees of any kind on an instrumentality of the
national government. Petitioner insisted that while it
is indeed a government-owned corporation, it
nonetheless stands on the same footing as an
agency or instrumentality of the national
 government by the very nature of its powers and
functions.
Respondent City, however, asserted that
MCIAA is not an instrumentality of the government
but merely a government-owned corporation
performing proprietary functions. As such, all
exemptions previously granted to it were deemed
withdrawn by operation of law, as provided under
Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992. 3
The petition for declaratory relief was docketed as Civil
Case No. CEB-16900.
In its decision of 22 March 1995, 4 the trial court
dismissed the petition in light of its findings, to wit:
A close reading of the New Local
Government Code of 1991 or RA 7160 provides the
express cancellation and withdrawal of exemption of
taxes by government-owned and controlled
corporation per Sections after the effectivity of said
Code on January 1, 1992, to wit: [proceeds to quote
Sections 193 and 234]
Petitioners claimed that its real properties
assessed by respondent City Government of Cebu
are exempted from paying realty taxes in view of the
exemption granted under RA 6958 to pay the same
(citing Section 14 of RA 6958).
However, RA 7160 expressly provides that
"All general and special laws, acts, city charters,
decrees [sic], executive orders, proclamations and
administrative regulations, or part or parts thereof
which are inconsistent with any of the provisions of
this Code are hereby repealed or modified
accordingly." (/f/, Section 534, RA 7160).
With that repealing clause in RA 7160, it is
safe to infer and state that the tax exemption
provided for in RA 6958 creating petitioner had been
expressly repealed by the provisions of the
New Local Government Code of 1991.
So that petitioner in this case has to pay the
assessed realty tax of its properties effective after
January 1, 1992 until the present.
This Court's ruling finds expression to give
impetus and meaning to the overall objectives of the
New Local Government Code of 1991, RA 7160. "It is
hereby declared the policy of the State that the
territorial and political subdivisions of the State
shall enjoy genuine and meaningful local autonomy
to enable them to attain their fullest development as
self-reliant communities and make them more
effective partners in the attainment of national
goals. Toward this end, the State shall provide for a
more responsive and accountable local government
structure instituted through a system of
decentralization whereby local government units
shall be given more powers, authority,
responsibilities, and resources. The process of
decentralization shall proceed from the national
government to the local government units. . . ." 5
Its motion for reconsideration having been denied by the
trial court in its 4 May 1995 order, the petitioner filed the instant
petition based on the following assignment of errors:
I. RESPONDENT JUDGE ERRED IN FAILING TO RULE
THAT THE PETITIONER IS VESTED WITH
GOVERNMENT POWERS AND FUNCTIONS
WHICH PLACE IT IN THE SAME CATEGORY AS
AN INSTRUMENTALITY OR AGENCY OF THE
GOVERNMENT.
II. RESPONDENT JUDGE ERRED IN RULING THAT
PETITIONER IS LIABLE TO PAY REAL
PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that
although it is a government-owned or controlled corporation, it is
mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government
is one created to perform governmental functions primarily to
promote certain aspects of the economic life of the
people. 6 Considering its task "not merely to efficiently operate
and manage the Mactan-Cebu International Airport, but more
importantly, to carry out the Government policies of promoting
and developing the Central Visayas and Mindanao regions as
centers of international trade and tourism, and accelerating the
development of the means of transportation and communication
in the country," 7 and that it is an attached agency of the
Department of Transportation and Communication (DOTC), 8 the
petitioner "may stand in [sic] the same footing as an agency or
instrumentality of the national government." Hence, its tax
exemption privilege under Section 14 of its Charter "cannot be
considered withdrawn with the passage of the Local Government
Code of 1991 (hereinafterLGC) because Section 133 thereof
specifically states that the 'taxing powers of local government
units shall not extend to the levy of taxes or fees or charges of
any kind on the national government, its agencies and
instrumentalities.'"
As to the second assigned error, the petitioner contends
that being an instrumentality of the National Government,
respondent City of Cebu has no power nor authority to impose
realty taxes upon it in accordance with the aforesaid Section 133
of the LGC, as explained in Basco vs. Philippine Amusement and
Gaming Corporation: 9
Local governments have no power to tax
instrumentalities of the National Government.
PAGCOR is a government owned or controlled
corporation with an original charter, PD 1869. All of
its shares of stock are owned by the National
Government. . . .
PAGCOR has a dual role, to operate and
regulate gambling casinos. The latter role is
governmental, which places it in the category of an
agency or instrumentality of the Government. Being
an instrumentality of the Government, PAGCOR
should be and actually is exempt from local
taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local
government. cdtai
The states have no power by taxation or
otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws
enacted by Congress to carry into execution the
powers vested in the federal government (McCulloch
v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the
"supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme
Court, made reference to the entire absence of
power on the part of the States to touch, in that way
(taxation) at least, the instrumentalities of the
United States (Johnson v. Maryland, 254 USA 51)
and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in
such a way as to prevent it from consummating its
federal responsibilities, or even to seriously burden
it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140)
Otherwise, mere creatures of the State can
defeat National policies thru extermination of what
local authorities may perceive to be undesirable
activities or enterprise using the power to tax as "a
tool for regulation" (U.S. v. Sanchez, 340 US 42). The
power to tax which was called by Justice Marshall
as the "power to destroy" (Mc Culloch v. Maryland,
supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which
has the inherent power to wield it. (italics supplied)
It then concludes that the respondent Judge "cannot
therefore correctly say that the questioned provisions of the
Code do not contain any distinction between a government
corporation performing governmental functions as against one
performing merely proprietary ones such that the exemption
privilege withdrawn under the said Code would apply
to all government corporations." For it is clear from Section 133,
in relation to Section 234, of the LGC that the legislature meant
to exclude instrumentalities of the national government from the
taxing powers of the local government units. cdasia
In its comment, respondent City of Cebu alleges that as a
local government unit and a political subdivision, it has the power
to impose, levy, assess, and collect taxes within its jurisdiction.
Such power is guaranteed by theConstitution 10 and enhanced
further by the LGC. While it may be true that under its Charter the
petitioner was exempt from the payment of realty taxes, 11 this
exemption was withdrawn by Section 234 of the LGC. In response
to the petitioner's claim that such exemption was not repealed
because being an instrumentality of the National Government,
Section 133 of the LGC prohibits local government units from
imposing taxes, fees, or charges of any kind on it, respondent
City of Cebu points out that the petitioner is likewise a
government-owned corporation, and Section 234 thereof does not
distinguish between government-owned or controlled
corporations performing governmental and purely proprietary
functions. Respondent City of Cebu urges this Court to apply by
analogy its ruling that the Manila International Airport Authority
is a government-owned corporation, 12 and to reject the
application of Basco because it was "promulgated . . . before the
enactment and the signing into law of R.A. No. 7160," and was
not, therefore, decided "in the light of the spirit and intention of
the framers of" the said law.
As a general rule, the power to tax is an incident of
sovereignty and is unlimited in its range, acknowledging in its
very nature no limits, so that security against its abuse is to be
found only in the responsibility of the legislature which imposes
the tax on the constituency who are to pay it. Nevertheless,
effective limitations thereon may be imposed by the people
through their Constitutions. 13 Our Constitution, for instance,
provides that the rule of taxation shall be uniform and equitable
and Congress shall evolve a progressive system of
taxation. 14 So potent indeed is the power that it was once
opined that "the power to tax involves the power to
destroy." 15 Verily, taxation is a destructive power which
interferes with the personal and property rights of the people and
takes from them a portion of their property for the support of the
government. Accordingly, tax statutes must be construed strictly
against the government and liberally in favor of the
taxpayer. 16 But since taxes are what we pay for civilized
society, 17 or are the lifeblood of the nation, the law frowns
against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority. 18 A claim
of exemption from tax payments must be clearly shown and
based on language in the law too plain to be mistaken. 19
Elsewise stated, taxation is the rule, exemption therefrom is the
exception. 20 However, if the grantee of the exemption is a
political subdivision or instrumentality, the rigid rule of
construction does not apply because the practical effect of the
exemption is merely to reduce the amount of money that has to
be handled by the government in the course of its operations. 21
The power to tax is primarily vested in the Congress;
however, in our jurisdiction, it may be exercised by local
legislative bodies, no longer merely by virtue of a valid delegation
as before, but pursuant to direct authority conferred by Section 5,
Article X of the Constitution. 22 Under the latter, the exercise of
the power may be subject to such guidelines and limitations as
the Congress may provide which, however, must be consistent
with the basic policy of local autonomy.
There can be no question that under Section 14 of R.A.
No. 6958 the petitioner is exempt from the payment of realty
taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless,
since taxation is the rule and exemption therefrom the exception,
the exemption may thus be withdrawn at the pleasure of the
taxing authority. The only exception to this rule is where the
exemption was granted to private parties based on material
consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of
the Constitution. 23
The LGC, enacted pursuant to Section 3, Article X of
the Constitution, provides for the exercise by local government
units of their power to tax, the scope thereof or its limitations,
and the exemptions from taxation.
Section 133 of the LGC prescribes the common limitations
on the taxing powers of local government units as follows:
SEC. 133. Common Limitations on the Taxing
Power of Local Government Units. — Unless
otherwise provided herein, the exercise of the taxing
powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the
following:
(a) Income tax, except when levied on banks
and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts,
legacies and other
acquisitions mortis causa, except as
otherwise provided herein;
(d) Customs duties, registration fees of
vessel and wharfage on wharves,
 tonnage dues, and all other kinds of
customs fees, charges and dues
except wharfage on wharves
constructed and maintained by the
local government unit concerned;
(e) Taxes, fees and charges and other
impositions upon goods carried into
or out of, or passing through, the
territorial jurisdictions of local
government units in the guise of
charges for wharfage, tolls for bridges
or otherwise, or other taxes, fees or
charges in any form whatsoever upon
such goods or merchandise;
(f) Taxes, fees or charges on agricultural and
aquatic products when sold by
marginal farmers or fishermen;
(g) Taxes on business enterprises certified to
by the Board of Investments as
pioneer or non-pioneer for a period of
six (6) and four (4) years, respectively
from the date of registration;
(h) Excise taxes on articles enumerated
under the National Internal Revenue
Code, as amended, and taxes, fees or
charges on petroleum products;
(i) Percentage or value-added tax (VAT) on
sales, barters or exchanges or similar
transactions on goods or services
except as otherwise provided herein;
(j) Taxes on the gross receipts of
transportation contractors and
persons engaged in the transportation
of passengers or freight by hire and
common carriers by air, land or water,
except as provided in this Code;
(k) Taxes on premiums paid by way of
reinsurance or retrocession;
(l) Taxes, fees or charges for the registration
of motor vehicles and for the issuance
of all kinds of licenses or permits for
the driving thereof, except, tricycles;
(m) Taxes, fees, or other charges on
Philippine products actually exported,
except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside
and Barangay Business Enterprises
and cooperatives duly registered
under R.A. No. 6810 and Republic Act
Numbered Sixty-nine hundred thirty-
eight (R.A. No. 6938) otherwise known
as the "Cooperatives Code of the
'Philippines' respectively; and
(o) TAXES, FEES OR CHARGES OF ANY KIND
ON THE NATIONAL GOVERNMENT, ITS
AGENCIES AND INSTRUMENTALITIES,
AND LOCAL GOVERNMENT UNITS.
(italics supplied)
Needless to say, the last item (item o) is pertinent to this case.
The "taxes, fees or charges" referred to are "of any kind"; hence,
they include all of these, unless otherwise provided by the LGC.
The term "taxes" is well understood so as to need no further
elaboration, especially in light of the above enumeration. The
term "fees" means charges fixed by law or ordinance for the
regulation or inspection of business or
activity, 24 while "charges" are pecuniary liabilities such as rents
or fees against persons or property. 25
Among the "taxes" enumerated in the LGC is real property
tax, which is governed by Section 232. It reads as follows:
SEC. 232. Power to Levy Real Property Tax . —
A province or city or a municipality within the
Metropolitan Manila Area may levy an annual ad
valorem tax on real property such as land, building,
machinery, and other improvements not hereafter
specifically exempted.
Section 234 of the LGC provides for the exemptions from
payment of real property taxes and withdraws previous
exemptions therefrom granted to natural and juridical persons,
including government-owned and controlled corporations, except
as provided therein. It provides:
 SEC. 234. Exemptions from Real Property (a) Ownership Exemptions. Exemptions from real
Tax. — The following are exempted from payment of property taxes on the basis of ownership are
the real property tax: real properties owned by: (i) the Republic, (ii)
a province, (iii) a city, (iv) a municipality, (v) a
(a) Real property owned by the Republic of barangay, and (vi) registered cooperatives.
the Philippines or any of its political
subdivisions except when the (b) Character Exemptions. Exempted from real
beneficial use thereof had been property taxes on the basis of their character
granted, for consideration or are: (i) charitable institutions, (ii) houses and
otherwise, to a taxable person; temples of prayer like churches, parsonages
or convents appurtenant thereto, mosques,
(b) Charitable institutions, churches, and (iii) non-profit or religious cemeteries.
parsonages or convents appurtenant
thereto, mosques, non-profit or (c) Usage exemptions. Exempted from real property
religious cemeteries and all lands, taxes on the basis of the actual, direct and
buildings and improvements actually, exclusive use to which they are devoted are:
directly, and exclusively used for (i) all lands, buildings and improvements
religious, charitable or educational which are actually directly and exclusively
purposes; used for religious, charitable or educational
purposes; (ii) all machineries and equipment
(c) All machineries and equipment that are actually, directly and exclusively used by
actually, directly and exclusively used local water districts or by government-owned
by local water districts and or controlled corporations engaged in the
government-owned or controlled supply and distribution of water and/or
corporations engaged in the supply generation and transmission of electric
and distribution of water and/or power; and (iii) all machinery and equipment
generation and transmission of used for pollution control and environmental
electric power; protection.
(d) All real property owned by duly registered To help provide a healthy environment in the
cooperatives as provided for under midst of the modernization of the country, all
R.A. No. 6938; and machinery and equipment for pollution control and
(e) Machinery and equipment used for environmental protection may not be taxed by local
pollution control and environmental governments.
protection. 2. Other Exemptions Withdrawn. All other
Except as provided herein, any exemption exemptions previously granted to natural or
from payment of real property tax previously granted juridical persons including government-
to, or presently enjoyed by, all persons, whether owned or controlled corporations are
natural or juridical, including all government-owned withdrawn upon the effectivity of the
or controlled corporations are hereby withdrawn Code. 26
upon the effectivity of this Code. Section 193 of the LGC is the general provision on
These exemptions are based on the ownership, character, withdrawal of tax exemption privileges. It provides:
and use of the property. Thus: SEC. 193. Withdrawal of Tax Exemption
Privileges. — Unless otherwise provided in this
 Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled
corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non-
stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the
effectivity of this Code.
On the other hand, the LGC authorizes local government
units to grant tax exemption privileges. Thus, Section 192 thereof
provides:
SEC. 192. Authority to Grant Tax Exemption
Privileges. — Local government units may, through
ordinances duly approved, grant tax exemptions,
incentives or reliefs under such terms and
conditions as they may deem necessary.
The foregoing sections of the LGC speak of: (a) the
limitations on the taxing powers of local government units and
the exceptions to such limitations; and (b) the rule on tax
exemptions and the exceptions thereto. The use
ofexceptions or provisos in these sections, as shown by the
following clauses:
(1) "unless otherwise provided herein" in the
opening paragraph of Section 133;
(2) "Unless otherwise provided in this Code" in
Section 193;
(3) "not hereafter specifically exempted" in Section
232; and
(4) "Except as provided herein" in the last paragraph
of Section 234
initially hampers a ready understanding of the sections. Note,
too, that the aforementioned clause in Section 133 seems to be
inaccurately worded. Instead of the clause "unless otherwise
provided herein," with the "herein" to mean, of course, the
section, it should have used the clause "unless otherwise
provided in this Code." The former results in absurdity since the
section itself enumerates what are beyond the taxing powers of
local government units and, where exceptions were intended, the
exceptions are explicitly indicated in the next. For instance, in
item (a) which excepts income taxes "when levied on banks and
other financial institutions"; item (d) which excepts "wharfage on
wharves constructed and maintained by the local government
unit concerned"; and item (1) which excepts taxes, fees and
charges for the registration and issuance of licenses or permits
for the driving of "tricycles." It may also be observed that within
the body itself of the section, there are exceptions which can be
found only in other parts of the LGC, but the section
interchangeably uses therein the clause, "except as otherwise
provided herein" as in items (c) and (i), or the clause "except as
provided in this Code" in item (j). These clauses would be
obviously unnecessary or mere surplusages if the opening clause
of the section were "Unless otherwise provided in this Code"
instead of "Unless otherwise provided herein." In any event, even
if the latter is used, since under Section 232 local government
units have the power to levy real property tax, except those
exempted therefrom under Section 234, then Section 232 must be
deemed to qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of
the LGC, we conclude that as a general rule, as laid down in
Section 133, the taxing powers of local government units cannot
extend to the levy of, inter alia, "taxes, fees and charges of any
kind on the National Government, its agencies and
instrumentalities, and local government units"; however, pursuant
to Section 232, provinces, cities, and municipalities in the
Metropolitan Manila Area may impose the real property tax
except on, inter alia, "real property owned by the Republic of the
Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person," as provided in item (a) of the
first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently
enjoyed by natural or judicial persons, including government-
owned and controlled corporations, Section 193 of the
LGC prescribes the general rule, viz., they arewithdrawn upon the
effectivity of the LGC, except those granted to local water
districts, cooperatives duly registered under R.A. No. 6938, non-
stock and non-profit hospitals and educational institutions, and
unless otherwise provided in the LGC. The latter proviso could
refer to Section 234 which enumerates the properties exempt
from real property tax. But the last paragraph of Section 234
further qualifies the retention of the exemption insofar as real
property taxes are concerned by limiting the retention only to
those enumerated therein; all others not included in the
enumeration lost the privilege upon the effectivity of the LGC.
Moreover, even as to real property owned by the Republic of the
Philippines or any of its political subdivisions covered by item (a)
of the first paragraph of Section 234, the exemption is withdrawn
if the beneficial use of such property has been granted to a
taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally
withdrew, upon the effectivity of the LGC, exemptions from
payment of real property taxes granted to natural or juridical
persons, including government-owned or controlled corporations,
except as provided in the said section, and the petitioner is,
undoubtedly, a government-owned corporation, it necessarily
follows that its exemption from such tax granted it in Section 14
of its Charter, R.A. No. 6958, has been withdrawn. Any claim to
the contrary can only be justified if the petitioner can seek
refuge under any of the exceptions provided in Section 234, but
not under Section 133, as it now asserts, since, as shown above,
the said section is qualified by Sections 232 and 234. LLphil
In short, the petitioner can no longer invoke the general
rule in Section 133 that the taxing powers of the local
government units cannot extend to the levy of:
(o) taxes, fees or charges of any kind on the National
Government, its agencies or
instrumentalities, and local government
units.
It must show that the parcels of land in question, which
are real property, are any one of those enumerated in Section
234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under any
explicit provision of the said section, for none exists. In light of
the petitioner's theory that it is an "instrumentality of the
Government," it could only be within the first item of the first
paragraph of the section by expanding the scope of the term
"Republic of the Philippines" to embrace its "instrumentalities"
and "agencies." For expediency, we quote:
(a) real property owned by the Republic of the
Philippines, or any of its political subdivisions
except when the beneficial use thereof has
been granted, for consideration or otherwise,
to a taxable person.
This view does not persuade us. In the first place, the
petitioner's claim that it is an instrumentality of the Government
is based on Section 133(o), which expressly mentions the word
"instrumentalities"; and, in the second place, it fails to consider
the fact that the legislature used the phrase "National
Government, its agencies and instrumentalities" in Section
133(o), but only the phrase "Republic of the Philippines or any of
its political subdivisions" in Section 234(a).
The terms "Republic of the Philippines" and "National
Government" are not interchangeable. The former is broader and
synonymous with "Government of the Republic of the Philippines"
which the Administrative Code of 1987 defines as the "corporate
governmental entity through which the functions of government
are exercised throughout the Philippines, including, save as the
contrary appears from the context, the various arms through
which political authority is made effective in the Philippines,
whether pertaining to the autonomous regions, the provincial,
city, municipal or barangay subdivisions or other forms of local
government." 27 These "autonomous regions, provincial, city,
municipal or barangay subdivisions" are the political
subdivisions. 28
On the other hand, "National Government" refers "to the
entire machinery of the central government, as distinguished
from the different forms of local governments." 29 The National
Government then is composed of the three great departments:
the executive, the legislative and the judicial. 30
An "agency" of the Government refers to "any of the
various units of the Government, including a department, bureau,
office, instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit
therein;" 31 while an "instrumentality" refers to "any agency of
the National Government, not integrated within the department
framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually
through a charter. This term includes regulatory agencies,
chartered institutions and government-owned and controlled
corporations." 32
If Section 234(a) intended to extend the exception therein
to the withdrawal of the exemption from payment of real property
taxes under the last sentence of the said section to the agencies
and instrumentalities of the National Government mentioned in
Section 133(o), then it should have restated the wording of the
latter. Yet, it did not. Moreover, that Congress did not wish to
expand the scope of the exemption in Section 234(a) to include
real property owned by other instrumentalities or agencies of the
government including government-owned and controlled
corporations is further borne out by the fact that the source of
this exemption is Section 40(a) of P.D. No. 464, otherwise known
as The Real Property Tax Code, which reads:
SEC. 40. Exemptions from Real Property Tax .
— The exemption shall be as follows:
(a) Real property owned by the Republic of the
Philippines or any of its political subdivisions
and any government-owned or controlled
corporation so exempt by its
charter: Provided, however, That this
exemption shall not apply to real property of
the above-mentioned entities the beneficial
use of which has been granted, for
consideration or otherwise, to a taxable
person.
Note that as reproduced in Section 234(a), the phrase "and any
government-owned or controlled corporation so exempt by its
charter" was excluded. The justification for this restricted
exemption in Section 234(a) seems obvious: to limit further tax
exemption privileges, especially in light of the general provision
on withdrawal of tax exemption privileges in Section 193 and the
special provision on withdrawal of exemption from payment of
real property taxes in the last paragraph of Section 234. These
policy considerations are consistent with the State policy to
ensure autonomy to local governments 33 and the objective of
the LGC that they enjoy genuine and meaningful local autonomy
to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment
of national goals. 34 The power to tax is the most effective
instrument to raise needed revenues to finance and support
myriad activities of local government units for the delivery of
basic services essential to the promotion of the general welfare
and the enhancement of peace, progress, and prosperity of the
people. It may also be relevant to recall that the original reasons
for the withdrawal of tax exemption privileges granted to
government-owned and controlled corporations and all other
units of government were that such privilege resulted in serious
tax base erosion and distortions in the tax treatment of similarly
situated enterprises, and there was a need for these entities to
share in the requirements of development, fiscal or otherwise, by
paying the taxes and other charges due from them. 35
The crucial issues then to be addressed are: (a) whether
the parcels of land in question belong to the Republic of the
Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person."
Section 15 of the petitioner's Charter provides:
Sec. 15. Transfer of Existing Facilities and
Intangible Assets. — All existing public airport
facilities, runways, lands, buildings and other
properties, movable or immovable, belonging to or
presently administered by the airports, and all
assets, powers, rights, interests and privileges
relating on airport works or air operations,
including all equipment which are necessary for
the operations of air navigation, aerodrome control
towers, crash, fire, and rescue facilities are hereby
transferred to the Authority: Provided, however,
that the operations control of all equipment
necessary for the operation of radio aids to air
navigation, airways communication, the approach
control office, and the area control center shall be
retained by the Air Transportation Office. No
equipment, however, shall be removed by the Air
Transportation Office from Mactan without the
concurrence of the Authority. The Authority may
assist in the maintenance of the Air Transportation
Office equipment.
The "airports" referred to are the "Lahug Air Port" in Cebu
City and the "Mactan International Airport in the Province of
Cebu," 36 which belonged to the Republic of the Philippines, then
under the Air Transportation Office (ATO). 37
It may be reasonable to assume that the term "lands"
refer to "lands" in Cebu City then administered by the Lahug Air
Port and included the parcels of land the respondent City of Cebu
seeks to levy on for real property taxes. This section involves a
"transfer" of the "lands," among other things, to the petitioner
and not just the transfer of the beneficial use thereof, with the
ownership being retained by the Republic of the Philippines.
This "transfer" is actually an absolute conveyance of the
ownership thereof because the petitioner's authorized capital
stock consists of, inter alia, "the value of such real estate owned
and/or administered by the airports." 38Hence, the petitioner is
 now the owner of the land in question and the exception in
Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a
"taxable person" under its Charter. It was only exempted from
the payment of real property taxes . The grant of the privilege
only in respect of this tax is conclusive proof of the legislative
intent to make it a taxable person subject to all taxes, except
real property tax.
Finally, even if the petitioner was originally not a taxable
person for purposes of real property tax, in light of the foregoing
disquisitions, it had already become, even if it be conceded to be
an "agency" or "instrumentality" of the Government, a taxable
person for such purpose in view of the withdrawal in the last
paragraph of Section 234 of exemptions from the payment of real
property taxes, which, as earlier adverted to, applies to the
petitioner.
Accordingly, the position taken by the petitioner is
untenable. Reliance on Basco vs. Philippine Amusement and
Gaming Corporation 39 is unavailing since it was decided before
the effectivity of the LGC. Besides, nothing can prevent Congress
from decreeing that even instrumentalities or agencies of the
Government performing governmental functions may be subject
to tax. Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The
challenged decision and order of the Regional Trial Court of Cebu,
Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
||| (Mactan Cebu International Airport Authority v. Marcos, G.R. No.
120082, [September 11, 1996], 330 PHIL 392-420)
EN BANC
[G.R. No. L-75697. June 18, 1987.]
VALENTIN TIO doing business under the name and
style of OMI
ENTERPRISES, petitioner, vs. VIDEOGRAM
REGULATORY BOARD, MINISTER OF FINANCE,
METRO MANILA COMMISSION, CITY MAYOR and
CITY TREASURER OF MANILA, respondents.
Constitutional Law; Constitutional requirement that “every
bill shall embrace only one subject which shall be expressed
in the title thereof’ is sufficiently complied with if the title be
comprehensive enough to include the general purpose it
seeks to achieve and if all the parts of the statute are related
and germane to the subject matter expressed in the title or
as long as they are not inconsistent with or foreign to the
general subject and title.—The Constitutional requirement
that “every bill shall embrace only one subject which shall be
expressed in the title thereof” is sufficiently complied with if
the title be comprehensive enough to include the general
purpose which a statute seeks to achieve. It is not necessary
that the title express each and every end that the statute
wishes to accomplish. The requirement is satisfied if all the
parts of the statute are related, and are germane to the
subject matter expressed in the title, or as long as they are
not inconsistent with or foreign to the general subject and
title. An act having a single general subject, indicated in the
title, may contain any number of provisions, no matter how
diverse they may be, so long as they are not inconsistent with
or foreign to the general subject, and may be considered in
furtherance of such subject by providing for the method and
means of carrying out the general object.” The rule also is
that the constitutional requirement as to the title of a bill
should not be so narrowly construed as to cripple or impede
the power of legislation. It should be given a practical rather
than technical construction.
Same; Same; Section 10 PD 1987 otherwise known as
Videogram Regulatory Board is not a Rider.—Section 10. Tax
on Sale, Lease or Disposition of Videograms. Notwithstanding
any provision of law to the contrary, the province shall collect
a tax of thirty percent (30%) of the purchase price or rental
rate, as the case may be, for every sale, lease or disposition
of a videogram containing a reproduction of any motion
picture or audiovisual program. Fifty percent (50%) of the
proceeds of the tax collected shall accrue to the province,
and the other fifty percent (50%) shall accrue to the
municipality where the tax is collected; PROVIDED, That in
Metropolitan Manila, the tax shall be shared equally by the
City/Municipality and the Metropolitan Manila Commission. x
x x x” The foregoing provision is allied and germane to, and is
reasonably necessary for the accomplishment of, the general
object of the DECREE, which is the regulation of the video
industry through the Videogram Regulatory Board as
expressed in its title. The tax provision is not inconsistent
with, nor foreign to that general subject and title. As a tool for
regulation it is simply one of the regulatory and control
mechanisms scattered throughout the DECREE. The express
purpose of the DECREE to include taxation of the video
industry in order to regulate and rationalize the heretofore
uncontrolled distribution of videograms is evident from
Preambles 2 and 5, supra. Those preambles explain the
motives of the lawmaker in presenting the measure. The title
of the DECREE, which is the creation of the Videogram
Regulatory Board, is comprehensive enough to include the
purposes expressed in its Preamble and reasonably covers all
its provisions. It is unnecessary to express all those
objectives in the title or that the latter be an index to the
body of the DECREE,
Same; Same; Same; Tax imposed under the Decree is not
harsh; oppressive, confiscatory and in restraint of trade but
regulatory and a revenue measure; The levy is for a public
purpose.—Petitioner also submits that the thirty percent
(30%) tax imposed is harsh and oppressive, confiscatory, and
in restraint of trade. However, it is beyond serious question
that a tax does not cease to be valid merely because it
regulates, discourages, or even definitely deters the activities
taxed. The power to impose taxes is one so unlimited in force
and so searching in extent, that the courts scarcely venture
to declare that it is subject to any restrictions whatever,
except such as rest in the discretion of the authority which
exercises it. In imposing a tax, the legislature acts upon its
constituents. This is, in general, a sufficient security against
erroneous and oppressive taxation. The tax imposed by the
DECREE is not only a regulatory but also a revenue measure
prompted by the realization that earnings of videogram
establishments of around P600 million per annum have not
been subjected to tax, thereby depriving the Government of
an additional source of revenue. It is an end-user tax,
imposed on retailers for every videogram they make available
for public viewing, It is similar to the 30% amusement tax
imposed or borne by the movie industry which the theater-
owners pay to the government, but which is passed on to the
entire cost of the admission ticket, thus shifting the tax
burden on the buying or the viewing public. It is a tax that is
imposed uniformly on all videogram operators. The levy of the
30% tax is for a public purpose. It was imposed primarily to
answer the need for regulating the video industry, particularly
because of the rampant film piracy, the flagrant violation of
intellectual property rights, and the proliferation of
pornographic video tapes. And while it was also an objective
of the DECREE to protect the movie industry, the tax remains
a valid imposition.
Same; Same; Same; Same; PD 1987 not an undue delegation
of legislative power.—Neither can it be successfully argued
that the DECREE contains an undue delegation of legislative
power. The grant in Section 11 of the DECREE of authority to
the BOARD to “solicit the direct assistance of other agencies
and Units of the government and deputize, for a fixed and
limited period, the heads or personnel of such agencies and
units to perform enforcement functions for the Board” is not a
delegation of the power to legislate but merely a conferment
of authority or discretion as to its execution, enforcement,
and implementation. “The true distinction is between the
delegation of power to make the law, which necessarily
involves a discretion as to what it shall be, and conferring
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.” Besides, in the
very language of the decree, the authority of the BOARD to
solicit such assistance is for a “fixed and limited period” with
the deputized agencies concerned being “subject to the
direction and control of the BOARD.” That the grant of such
authority might be the source of graft and corruption would
not stigmatize the DECREE as unconstitutional. Should the
eventuality occur, the aggrieved parties will not be without
adequate remedy in law. Tio vs. Videogram Regulatory Board,
151 SCRA 208, No. L-75697 June 18, 1987
DECISION
MELENCIO-HERRERA, J p:
This petition was filed on September 1, 1986 by petitioner on his own
behalf and purportedly on behalf of other videogram operators
adversely affected. It assails the constitutionality of Presidential
Decree No. 1987 entitled "An Act Creating the Videogram Regulatory
Board" with broad powers to regulate and supervise the videogram
industry (hereinafter briefly referred to as the BOARD). The Decree
was promulgated on October 5, 1985 and took effect on April 10,
1986, fifteen (15) days after completion of its publication in the
Official Gazette. LibLex
On November 5, 1985, a month after the promulgation of the
abovementioned decree, Presidential Decree No. 1994 amended the
National Internal Revenue Code providing, inter alia:
"SEC. 134. Video Tapes. — There shall be collected
on each processed video-tape cassette, ready for
playback, regardless of length, an annual tax of five
pesos; Provided, That locally manufactured or
imported blank video tapes shall be subject to sales
tax."
On October 23, 1986, the Greater Manila Theaters Association,
Integrated Movie Producers, Importers and Distributors Association
of the Philippines, and Philippine Motion Pictures Producers
Association, hereinafter collectively referred to as the Intervenors,
were permitted by the Court to intervene in the case, over
petitioner's opposition, upon the allegations that intervention was
necessary for the complete protection of their rights and that their
"survival and very existence is threatened by the unregulated
proliferation of film piracy." The Intervenors were thereafter allowed
to file their Comment in Intervention.
The rationale behind the enactment of the DECREE, is set out in its
preambular clauses as follows:
"1. WHEREAS, the proliferation and unregulated
circulation of videograms including, among others,
videotapes, discs, cassettes or any technical
improvement or variation thereof, have greatly
prejudiced the operations of moviehouses and
theaters, and have caused a sharp decline in
theatrical attendance by at least forty percent (40%)
and a tremendous drop in the collection of sales,
contractor's specific, amusement and other taxes,
thereby resulting in substantial losses estimated at
P450 Million annually in government revenues;
"2. WHEREAS, videogram(s) establishments
collectively earn around P600 Million per annum
from rentals, sales and disposition of videograms,
and such earnings have not been subjected to tax,
thereby depriving the Government of approximately
P180 Million in taxes each year;
"3. WHEREAS, the unregulated activities of
videogram establishments have also affected the
viability of the movie industry, particularly the more
than 1,200 movie houses and theaters throughout
the country, and occasioned industry-wide
displacement and unemployment due to the
shutdown of numerous moviehouses and theaters;
"4. WHEREAS, in order to ensure national economic
recovery, it is imperative for the Government to
create an environment conducive to growth and
development of all business industries, including the
movie industry which has an accumulated
investment of about P3 Billion.
"5. WHEREAS, proper taxation of the activities of
videogram establishments will not only alleviate the
dire financial condition of the movie industry upon
which more than 75,000 families and 500,00 workers
depend for their livelihood, but also provide an
additional source of revenue for the Government,
and at the same time rationalize the heretofore
distribution of videograms;
 "6. WHEREAS, the rampant and unregulated showing
of obscene videogram features constitutes a clear
and present danger to the moral and spiritual well-
being of the youth, and impairs the mandate of
the Constitution for the State to support the rearing
of the youth for civic efficiency and the development
of moral character and promote their physical,
intellectual, and social being;
"7. WHEREAS, civic-minded citizens and groups have
called for remedial measures to curb these blatant
malpractice's which have flaunted our censorship
and copyright law;
"8. WHEREAS, in the face of these grave
emergencies corroding the moral values of the
people and betraying the national economic
recovery program, bold emergency measures must
be adopted with dispatch; . . ." (Numbering of
paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on
the following grounds:
"1. Section 10 thereof, which imposes a tax of 30%
on the gross receipts payable to the local
government is a RIDER and the same is not germane
to the subject matter thereof;
"2. The tax imposed is harsh, confiscatory,
oppressive and/or in unlawful restraint of trade in
violation of the due process clause of
the Constitution;
"3. There is no factual nor legal basis for the
exercise by the President of the vast powers
conferred upon him by Amendment No. 6;
"4. There is undue delegation of power and
authority;
"5. The Decree is an ex-post facto law; and
"6. There is over regulation of the video industry as
if it were a nuisance, which it is not."
We shall consider the foregoing objections in seriatim.
1. The Constitutional requirement that "every bill shall embrace only
one subject which shall be expressed in the title thereof" 1 is
sufficiently complied with if the title be comprehensive enough to
include the general purpose which a statute seeks to achieve. It is
not necessary that the title express each and every end that the
statute wishes to accomplish. The requirement is satisfied if all the
parts of the statute are related, and are germane to the subject
matter expressed in the title, or as long as they are not inconsistent
with or foreign to the general subject and title. 5
Tested by the foregoing criteria, petitioner's contention that the tax
provision of the DECREE is a rider is without merit. That section
reads, inter alia:
"Section 10. Tax on Sale, Lease or Disposition of
Videograms. — Notwithstanding any provision of law
to the contrary, the province shall collect a tax of
thirty percent (30%) of the purchase price or rental
rate, as the case may be, for every sale, lease or
disposition of a videogram containing a reproduction
of any motion picture or audiovisual program. Fifty
percent (50%) of the proceeds of the tax collected
shall accrue to the province, and the other fifty
percent (50%) shall accrue to the municipality
where the tax is collected; PROVIDED, That in
Metropolitan Manila, the tax shall be shared equally
by the City/Municipality and the Metropolitan Manila
Commission.
xxx xxx xxx
The foregoing provision is allied and germane to, and is reasonably
necessary for the accomplishment of, the general object of the
DECREE, which is the regulation of the video industry through the
Videogram Regulatory Board as expressed in its title. The tax
provision is not inconsistent with, nor foreign to that general subject
and title. As a tool for regulation 6 it is simply one of the regulatory
and control mechanisms scattered throughout the DECREE. The
express purpose of the DECREE to include taxation of the video
industry in order to regulate and rationalize the heretofore
uncontrolled distribution of videograms is evident from Preambles 2
and 5, supra. Those preambles explain the motives of the lawmaker
in presenting the measure. The title of the DECREE, which is the
creation of the Videogram Regulatory Board, is comprehensive
enough to include the purposes expressed in its Preamble and
reasonably covers all its provisions. It is unnecessary to express all
those objectives in the title or that the latter be an index to the body
of the DECREE. 7
2. Petitioner also submits that the thirty percent (30%) tax imposed
is harsh and oppressive, confiscatory, and in restraint of trade.
However, it is beyond serious question that a tax does not cease to
be valid merely because it regulates, discourages, or even definitely
deters the activities taxed. 8 The power to impose taxes is one so
unlimited in force and so searching in extent, that the courts
scarcely venture to declare that it is subject to any restrictions
whatever, except such as rest in the discretion of the authority which
exercises it. 10
The tax imposed by the DECREE is not only a regulatory but also a
revenue measure prompted by the realization that earnings of
videogram establishments of around P600 million per annum have
not been subjected to tax, thereby depriving the Government of an
additional source of revenue. It is an end-user tax, imposed on
retailers for every videogram they make available for public viewing.
It is similar to the 30% amusement tax imposed or borne by the
movie industry which the theater-owners pay to the government, but
which is passed on to the entire cost of the admission ticket, thus
shifting the tax burden on the buying or the viewing public. It is a tax
that is imposed uniformly on all videogram operators. LexLib
The levy of the 30% tax is for a public purpose. It was imposed
primarily to answer the need for regulating the video industry,
particularly because of the rampant film piracy, the flagrant violation
of intellectual property rights, and the proliferation of pornographic
video tapes. And while it was also an objective of the DECREE to
protect the movie industry, the tax remains a valid imposition.
"The public purpose of a tax may legally exist even if
the motive which impelled the legislature to impose
the tax was to favor one industry over another. 11
"It is inherent in the power to tax that a state be
free to select the subjects of taxation, and it has
been repeatedly held that "inequities which result
from a singling out of one particular class for
taxation or exemption infringe no constitutional
limitation'." 12 Taxation has been made the
implement of the state's police power. 13
At bottom, the rate of tax is a matter better addressed to the taxing
legislature.
3. Petitioner argues that there was no legal nor factual basis for the
promulgation of the DECREE by the former President under
Amendment No. 6 of the 1973 Constitution providing that "whenever
in the judgment of the President . . ., there exists a grave emergency
or a threat or imminence thereof, or whenever the interim Batasang
Pambansa or the regular National Assembly fails or is unable to act
adequately on any matter for any reason that in his judgment
requires immediate action, he may, in order to meet the exigency,
issue the necessary decrees, orders, or letters of instructions, which
sharp form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office aver
that the 8th "whereas" clause sufficiently summarizes the
justification in that grave emergencies corroding the moral values of
the people and betraying the national economic recovery problem
necessitated bold emergency measures to be adopted with dispatch.
Whatever the reasons "in the judgment" of the then President,
considering that the issue of the validity of the exercise of legislative
power under the said Amendment still pends resolution in several
other cases, we reserve resolution of the question raised at the
proper time.
4. Neither can it be successfully argued that the DECREE contains
an undue delegation of legislative power. The grant in Section 11 of
the DECREE of authority to the BOARD to "solicit the direct
assistance of other agencies and units of the government and
deputize, for a fixed and limited period, the heads or personnel of
such agencies and units to perform enforcement functions for the
Board" is not a delegation of the power to legislate but merely a
conferment of authority or discretion as to its execution,
enforcement, and implementation. "The true distinction is between
the delegation of power to make the law, which necessarily involves
a discretion as to what it shall be, and conferring 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." 14 Besides, in the very language of the decree, the
authority of the BOARD to solicit such assistance is for a "fixed and
limited period" with the deputized agencies concerned being
"subject to the direction and control of the BOARD." That the grant of
such authority might be the source of graft and corruption would not
stigmatize the DECREE as unconstitutional. Should the eventuality
occur, the aggrieved parties will not be without adequate remedy in
law.
5. The DECREE is not violative of the ex post facto principle. An ex
post facto law is, among other categories, one which "alters the
legal rules of evidence, and authorizes conviction upon less or
different testimony than the law required at the time of the
commission of the offense." It is petitioner's position that Section 15
of the DECREE in providing that:
"All videogram establishments in the Philippines are
hereby given a period of forty-five (45) days after the
effectivity of this Decree within which to register
with and secure a permit from the BOARD to engage
in the videogram business and to register with the
BOARD all their inventories of videograms, including
videotapes, discs, cassettes or other technical
improvements or variations thereof, before they
could be sold, leased, or otherwise disposed of.
Thereafter any videogram found in the possession of
any person engaged in the videogram business
without the required proof of registration by the
BOARD, shall be prima facie evidence of violation of
the Decree, whether the possession of such
videogram be for private showing and/or public
exhibition."
raises immediately a prima facie evidence of violation of the
DECREE when the required proof of registration of any videogram
cannot be presented and thus partakes of the nature of an ex
post facto law.
The argument is untenable. As this Court held in the recent case
of Vallarta vs. Court of Appeals, et al. 15
". . . it is now well settled that 'there is no
constitutional objection to the passage of a law
providing that the presumption of innocence may be
overcome by a contrary presumption founded upon
the experience of human conduct, and enacting
what evidence shall be sufficient to overcome such
presumption of innocence' (People vs. Mingoa, 92
Phil. 856 [1953] at 858-59, citing 1 COOLEY, A
TREATISE ON THE CONSTITUTIONAL LIMITATIONS,
639-641). And the 'legislature may enact that when
certain facts have been proved that they shall
be prima facie evidence of the existence of the guilt
of the accused and shift the burden of proof
provided there be a rational connection between the
facts proved and the ultimate facts presumed so
that the inference of the one from proof of the
others is not unreasonable and arbitrary because of
lack of connection between the two in common
experience'." 16
Applied to the challenged provision, there is no question that there is
a rational connection between the fact proved, which is non-
registration, and the ultimate fact presumed which is violation of the
DECREE, besides the fact that theprima facie presumption of
violation of the DECREE attaches only after a forty-five-day period
counted from its effectivity and is, therefore, neither retrospective in
character.
6. We do not share petitioner's fears that the video industry is being
over-regulated and being eased out of existence as if it were a
nuisance. Being a relatively new industry, the need for its regulation
was apparent. While the underlying objective of the DECREE is to
protect the moribund movie industry, there is no question that public
welfare is at bottom of its enactment, considering "the unfair
competition posed by rampant film piracy; the erosion of the moral
fiber of the viewing public brought about by the availability of
unclassified and unreviewed video tapes containing pornographic
films and films with brutally violent sequences; and losses in
government revenues due to the drop in theatrical attendance, not to
mention the fact that the activities of video establishments are
virtually untaxed since mere payment of Mayor's permit and
municipal license fees are required to engage in business." 17
The enactment of the Decree since April 10, 1986 has not brought
about the "demise" of the video industry. On the contrary, video
establishments are seen to have proliferated in many places
notwithstanding the 30% tax imposed.
In the last analysis, what petitioner basically questions is the
necessity, wisdom and expediency of the DECREE. These
considerations, however, are primarily and exclusively a matter of
legislative concern.
"Only congressional power or competence, not the
wisdom of the action taken, may be the basis for
declaring a statute invalid. This is as it ought to be.
The principle of separation of powers has in the
main wisely allocated the respective authority of
each department and confined its jurisdiction to
such a sphere. There would then be intrusion not
allowable under the Constitution if on a matter left
to the discretion of a corporate branch, the judiciary
 would substitute its own. If there be adherence to
the rule of law, as there ought to be, the last
offender should be courts of justice, to which rightly
litigants submit their controversy precisely to
maintain unimpaired the supremacy of legal norms
and prescriptions. The attack on the validity of the
challenged provision likewise insofar as there may
be objections, even if valid and cogent, on its
wisdom cannot be sustained." 18

In fine, petitioner has not overcome the presumption of validity

which attaches to a challenged statute. We find no clear violation of
the Constitution which would justify us in pronouncing Presidential
Decree No. 1987 as unconstitutional and void. LLphil

WHEREFORE, the instant Petition is hereby dismissed.

No costs.

SO ORDERED.

||| (Tio v. Videogram Regulatory Board, G.R. No. L-75697, [June 18,
1987], 235 PHIL 198-211)

EN BANC
[G.R. No. L-10405. December 29, 1960.]
WENCESLAO PASCUAL, in his official capacity as
Provincial Governor of Rizal, petitioner and
appellant, vs. THE SECRETARY OF PUBLIC WORKS
AND COMMUNICATIONS, ET AL., respondents and
appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for
appellant.
Asst. Solicitor General Jose G. Bautista and Solicitor A.A.
Torres for appellee.
SYLLABUS
1. CONSTITUTIONAL LAW; LEGISLATIVE POWERS;
APPROPRIATION OF PUBLIC REVENUES ONLY FOR PUBLIC
PURPOSES; WHAT DETERMINES VALIDITY OF A PUBLIC
EXPENDITURE. — "It is a general rule that the legislature is
without power to appropriate public revenues for anything but a
public purpose. . . . It is the essential character of the direct
object of the expenditure which must determine its validity as
justifying a tax and not the magnitude of the interests to be
affected nor the degree to which the general advantage of the
community, and thus the public welfare, may be ultimately
benefited by their promotion. Incidental advantage to the public
or to the state, which results from the promotion of private
interests, and the prosperity of private enterprises or business,
does not justify their aid by the use of public money." (23 R. L. C.
pp. 398-450).
2. ID.; ID.; ID.; UNDERLYING REASON FOR THE RULE. —
Generally, under the express or implied provisions of
the constitution, public funds may be used only for a public
purpose. The right of the legislature to appropriate public funds
is correlative with its right to tax, and, under constitutional
provisions against taxation except for public purposes and
prohibiting the collection of a tax for one purpose and the
devotion thereof to another purpose, no appropriate of state
funds can be made for other than a public purpose. (81 C.J.S. p.
1147).
3. ID.; ID.; ID.; TEST OF CONSTITUTIONALITY. — The test
of the constitutionality of a statute requiring the use of public
funds is whether the statute is designed to promote the public
interests, as opposed to the furtherance of the advantage of
individuals, although such advantage to individuals might
incidentally serve the public. (81 C.J.S. p. 1147).
4. ID.; ID.; ID.; ID.; POWERS OF CONGRESS AT THE TIME OF
PASSAGE OF A STATUTE SHOULD BE CONSIDERED. — The validity
of a statute depends upon the powers of Congress at the time of
its passage or approval, not upon events occurring, or acts
performed, subsequently thereto, unless the latter consist of an
amendment of the organic law, removing, with retrospective
operation, the constitutional limitation infringed by said statute.
5. ID.; ID.; ID.; APPROPRIATION FOR A PRIVATE PURPOSE
NULL AND VOID; SUBSEQUENT DONATION TO GOVERNMENT NOT
CURATIVE OF DEFECT. — Where the land on which projected
feeder roads are to be constructed belongs to a private person,
an appropriation made by Congress for that purpose is null and
void, and a donation to the Government, made over five (5)
months after the approval and effectivity of the Act for the
purpose of giving a "semblance of legality" to the appropriation,
does not cure the basic defect. Consequently, a judicial
nullification of said donation need not precede the declaration of
unconstitutionality of said appropriation.
6. ID.; ID.; ID.; ID.; RIGHT OF TAXPAYERS TO CONTEST
CONSTITUTIONALITY OF A LEGISLATION. — The relation between
the people of the Philippines and its taxpayers, on the one hand,
and the Republic of the Philippines, on the other, is not identical
to that obtaining between the people and taxpayers of the U.S.
and its Federal Government. It is closer, from a domestic
viewpoint, to that existing between the people and taxpayers of
each state and the government thereof, except that the authority
of the Republic of the Philippines over the people of the
Philippines is more fully direct than that of the states of the
Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those
imposed by the Federal Constitution upon the states of the Union,
and those imposed upon the Federal Government in the interest
of the states of the Union. For this reason, the rule recognizing
the right of taxpayers to assailed the constitutionality of a
legislation appropriating local or state public funds - which has
been upheld by the Federal Supreme Court (Crampton vs.
Zabriskie, 101 U.S. 601) - has greater application in the
Philippines than that adopted with respect to acts of Congress of
the United States appropriating federal funds.
7. CONTRACTS; DEFENSE OF ILLEGALITY; EXCEPTIONS
TO ARTICLE 1421 OF THE CIVIL CODE.— Article 1421 of the Civil
Code is subject to exceptions. For instance, the creditors of a
party to an illegal contract may, under the conditions set forth in
Article 1177 of said Code, exercise the rights and actions of the
latter, except only those which are inherent in his person,
including his right to the annulment of said contract, even though
such creditors are not affected by the same, except indirectly, in
the manner indicated in said legal provision.
DECISION
CONCEPCION, J p:
Appeal, by petitioner Wenceslao Pascual, from a decision
of the Court of First Instance of Rizal, dismissing the above
entitled case and dissolving the writ of preliminary injunction
therein issued, without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as
Provincial Governor of Rizal, instituted this action for declaratory
relief, with injunction upon the ground that Republic Act No. 920,
entitled An Act Appropriating Funds for Public Works", approved
on June 20, 1953, contained, in section 1-C (a) thereof, an item
(43[h]) of P85,000.00, "for the construction, reconstruction,
repair, extension and improvement" of "Pasig feeder road
terminals (Gen. Roxas — Gen. Araneta — Gen. Lucban — Gen.
Capinpin — Gen. Segundo — Gen. Delgado — Gen. Malvar — Gen.
Lim)"; that, at the time of the passage and approval of said Act,
the aforementioned feeder roads were "nothing but projected and
planned subdivision roads, not yet constructed, . . . within the
Antonio Subdivision . . . situated at . . . Pasig, Rizal" (according to
the tracings attached to the petition as Annexes A and B, near
Shaw Boulevard, nor far away from the intersection between the
latter and Highway 54), which projected feeder roads "do not
connect any government property or any important premises to
the main highway"; that the aforementioned Antonio Subdivision
(as well as the lands on which said feeder roads were to be
constructed) were private respondent Jose C. Zulueta, who, at
the time of the passage and approval of said Act, was a member
of the Senate of the Philippines; that on May 29, 1953, respondent
Zulueta, addressed a letter to the Municipal Council of Pasig,
Rizal, offering to donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13, 1953, the offer was
accepted by the council, subject to the condition "that the donor
would submit a plan of the said roads and agree to change the
names of two of them"; that no deed of donation in favor of the
municipality of Pasig was, however, executed; that on July 10,
1953, respondent Zulueta wrote another letter to said council,
calling attention to the approval of Republic Act No. 920, and the
sum of P85,000.00 appropriated therein for the construction of
the projected feeder reads in question; that the municipal council
of Pasig endorsed said letter of respondent Zulueta to the District
Engineer of Rizal, who, up to the present "has not made any
endorsement thereon"; that inasmuch as the projected feeder
roads in question were private property at the time of the
passage and approval of Republic Act No. 920, the appropriation
of P85,000.00 therein made, for the construction, reconstruction,
repair, extension and improvement of said projected feeder roads,
was "illegal and, therefore, void ab initio"; that said appropriation
of P85,000.00 was made by Congress because its members were
made to believe that the projected feeder roads in question were
"public roads and not private streets of a private subdivision";
that, "in order to give a semblance of legality, when there is
absolutely none, to the aforementioned appropriation",
respondent Zulueta executed, on December 12, 1953, while he
was a member of the Senate of the Philippines, an alleged deed
of donation — copy of which is annexed to the petition — of the
four (4) parcels of land constituting said project feeder roads, in
favor of the Government of the Republic of the Philippines; that
said alleged deed of donation was on the same date, accepted by
the ten Executive Secretary; that being subject to an onerous
condition, said donation partook of the nature of a contract; that,
such, said donation violated the provision of our fundamental law
prohibition members of Congress from being directly or indirectly
financially interested in any contract with the Government, and,
hence, is unconstitutional, as well as null and void ab initio, for
the construction of the projected feeder roads in question with
public funds would greatly enhance or increase the value of the
aforementioned subdivision of respondent Zulueta, "aside from
relieving him from the burden of constructing his subdivision
streets or roads at his own expense"; that the construction of
said projected feeder roads was then being undertaken by the
Bureau of Public Highways; and that, unless restrained by the
court, the respondents would continue to execute, comply with,
follow and implement the aforementioned illegal provision of law,
"to the irreparable damage, detriment and prejudice not only to
the petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item
of Republic Act No. 920 be declared null and void; that the
alleged deed of donation of the feeder roads in question be
"declared unconstitutional and, therefore, illegal"; that a writ of
injunction be issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works, the
Commissioner of the Bureau of Public Highways and Jose C.
Zulueta from ordering or allowing the continuance of the above-
mentioned feeder roads project, and from making and securing
any new and further releases on the aforementioned item
of Republic Act No. 926 and the disbursing officers of the
Department of Public Works and Communications, the Bureau of
Public Works and the Bureau of Public Highways from making any
further payments out of said funds provided for in Republic Act
No. 920; and that pending final hearing on the merits, a writ of
preliminary injunction be issued enjoining the aforementioned
parties respondent from making and securing any new and
further releases on the aforesaid item of Republic Act No.
920 and from making any further payments out of said illegally
appropriated funds.
Respondents moved to dismiss the petition upon the
ground that petitioner had "no legal capacity to sue", and that
the petition did "not state a cause of action". In support to this
motion, respondent Zulueta alleged that the Provincial Fiscal of
Rizal, not its provincial governor, should represent the Province
Administrative Code; that said respondent "not aware of any law
which makes illegal the appropriation of public funds for the
improvement of . . . private proper"; and that, the constitutional
provision invoked by petitioner inapplicable to the donation in
question, the same being a pure act of liberality, not a contract.
The other respondents, in turn, maintained that petitioner could
not assail the appropriation in question because "there is no
actual bona fide case . . . in which the validity of Republic Act No.
920 is necessarily involved and petitioner "has not shown that he
has a personal and substantial interest" in said Act "and that its
enforcement has caused or will cause him a direct injury".
Acting upon said motion to dismiss, the lower court
rendered the aforementioned decision, dated October 29, 1953,
holding that, since public interest is involved in this case, the
Provincial Governor of Rizal and the provincial fiscal thereof who
represents him therein, "have the requisite personalities" to
question the constitutionality of the disputed item of Republic
Act No. 920; that "the legislature is without power to appropriate
public revenues for anything but a public purpose", that the
construction and improvement of the feeder roads in question, if
such roads were private property, would not be a public purpose;
that, being subject to the following condition:
"The within donation is hereby made upon the
condition that the Government of the Republic of the
Philippines will use the parcels of land hereby
donated for street purposes only and for no other
purposes whatsoever; it being expressly understood
that should the Government of the Republic of the
Philippines violate the condition hereby imposed
upon it, the title to the land hereby donated shall,
upon such violation, ipso facto revert to the DONOR,
JOSE C. ZULUETA." (Italics supplied.)
which is onerous, the donation in question is a contract; that said
donation or contract is "absolutely forbidden by the Constitution"
and consequently illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existent and void from the very beginning
contracts "whose cause, object or purpose is contrary to law,
morals . . . or public policy"; that the legality of said donation may
not be contested, however, by petitioner herein, because his
"interests are not directly affected" thereby; and that,
accordingly, the appropriation in question "should be upheld" and
the case dismissed.
 At the outset, it should be noted that we are concerned
with a decision granting the aforementioned motions to dismiss,
which as such, are deemed to have admitted hypothetically the
allegations of fact made in the petition of appellant herein.
According to said petition, respondent Zulueta is the owner of
several parcels of residential land, situated in Pasig Rizal, and
known as the Antonio Subdivision, certain portions of which had
been reserved for the projected feeder roads aforementioned,
which, admittedly, were private property of said respondent
when Republic Act No. 920, appropriating P85,000.00 for the
"construction, reconstruction, repair, extension and
improvement" of said roads, was passed by Congress, as well as
when it was approved by the President on June 20, 1953. The
petition further alleges that the construction of said feeder
roads, to be undertaken with the aforementioned appropriation of
P85,000.00, would have the effect of relieving respondent Zulueta
of the burden of constructing its subdivision streets or roads at
following language:
his own expenses, 1 and would greatly enhance or increase the
value of the subdivision" of said respondent. The lower court held
that under these circumstances, the appropriation in question
was "clearly for a private, not a public purpose."
Respondents do not deny the accuracy of this conclusion,
which is self-evident. 2 However, respondent Zulueta contended,
in his motion to dismiss that:
Explaining the reason underlying said rule, Corpus Juris
"A law passed by Congress and approved by the
Secundum states:
President can never be illegal because Congress is
the source of all laws . . .. Aside from the fact that
the movant is not aware of any law which makes
illegal the appropriation of public funds for the
improvement of what we, in the meantime, may
assume as private property . . .." (Record on Appeal,
pp. 33.)
The first proposition must be rejected most emphatically,
it being inconsistent with the nature of the Government
established under the Constitution of the Philippines and the
system of checks and balances underlying our political structure.
Moreover, it is refuted by the decisions of this Court invalidating
legislative enactments deemed violative of the Constitution or
organic laws. 3
As regards the legal feasibility of appropriating public
funds for a private purpose the principle according to Ruling Case
Law, is this:
"It is a general rule that the legislature is without
power to appropriate public revenue for anything but
a public purpose. . . . It is the essential character of
the direct object of the expenditure which must
determine its validity as justifying a tax, and not the
magnitude of the interests to be affected nor the
degree to which the general advantage of the
community, and thus the public welfare, may be
ultimately benefited by their
promotion. Incidental advantage to the public or to
the state, which results from the promotion of
private interests and the prosperity of private
enterprises or business, does not justify their aid by
the use of public money." (25 R.L.C. pp. 398-400;
Italics supplied.)
The rule is set forth in Corpus Juris Secundum in the
"In accordance with the rule that the taxing power
must be exercised for public purposes
only, discussed supra sec. 14, money raised by
taxation can be expanded only for public purposes
and not for the advantage of private individuals." (85
C.J.S. pp. 645-646; italics supplied.)
"Generally, under the express or implied provisions
of the constitution, public funds may be used for a
public purpose. The right of the legislature to
appropriate funds is correlative with its right to
tax, under constitutional provisions against taxation
except for public purposes and prohibiting the
collection of a tax for one purpose and the devotion
thereof to another purpose, no appropriation of state
funds can be made for other than a public
purpose. . .
xxx xxx xxx
"The test of the constitutionality of a statute
requiring the use of public funds is whether the
statute is designed to promote the public interests,
as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals
 might incidentally serve the public. . . ." (81 C.J.S. p.
1147; italics supplied.)
Needless to say, this Court is fully in accord with the
foregoing views which, apart from being patently sound, are a
necessary corollary to our democratic system of government,
which, as such, exists primarily for the promotion of the general
welfare. Besides, reflecting as they do, the established
jurisprudence in the United States, after whose constitutional
system ours has been patterned, said views and jurisprudence
are, likewise, part and parcel of our own constitutional law.
This notwithstanding, the lower court felt constrained to
uphold the appropriation in question, upon the ground that
petitioner may not contest the legality of the donation above
referred to because the same does not affect him directly. This
conclusion is, presumably, based upon the following premises
namely: (1) that, if valid, said donation cured the constitutional
infirmity of the aforementioned appropriation; (2) that the latter
may not be annulled without a previous declaration of
unconstitutionality of the said donation; and (3) that the rule set
forth in Article 1421 of the Civil Code is absolute, and admits of
no exception. We do not agree with these premises.
The validity of a statute depends upon the powers of
Congress at the time of its passage or approval, not upon events
occupying, or acts performed, subsequently thereto, unless the
latter consist of an amendment of the organic law, removing,
with retrospective operation, the constitutional limitation
infringed by said statute. Referring to the P85,000.00
appropriation for the projected feeder roads in question, the
legality thereof depended upon whether said roads were public or
private property when the bill, which, later on, became Republic
Act No. 920, was passed by Congress, or when said bill was
approved by the President and the disbursement of said sum
became effective, or on June 20, 1953 (see section 13 of said
Act). Inasmuch as the land on which the projected feeder roads
were to be constructed belonged then to respondent Zulueta, the
result is that said appropriation sought a private purpose, and,
hence, was null and void. 4 The donation to the Government, over
five (5) months after the approval and effectivity of said Act,
made according to the petition, for the purpose of giving a
"semblance of legality", or legalizing, the appropriation in
question, did not cure its aforementioned basic defect.
Consequently, a judicial nullification of said donation need not
precede the declaration of unconstitutionality of said
appropriation.
Again, Article 1421 of our Civil Code, like many other
statutory enactments, is subject to exceptions. For instance, the
creditors of a party to an illegal contract may, under the
conditions set forth in Article 1177 of said Code, exercise the
rights and actions of the latter, except only those which are
inherent in his person, including, therefore, his right to the
annulment of said contract, even though such creditors are not
affected by the same, except indirectly, in the manner indicated
in said legal provision.
Again, it is well settled that the validity of a statute may
be contested only by one who will sustain a direct injury in
consequence of its enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws providing for the
disbursement of public funds, 5 upon the theory that "the
expenditure of public funds by an officer of the State for the
purpose of administering an unconstitutional act constitutes an
misapplication of such funds," which may be enjoined at the
request of a taxpayer. 6 Although there are some decisions to the
contrary, 7 the prevailing view in the United States is stated in
the American Jurisprudence as follows:
"In the determination of the degree of interest
essential to give the requisite standing to attack the
constitutionality of a statute the general rule is that
only persons individually affected, but
also taxpayers, have sufficient interest in preventing
the illegal expenditure of moneys raised by taxation
and may therefore question the constitutionality of
statutes requiring expenditure of public moneys." (11
Am. Jur. 761; italics supplied.)
However, this view was not favored by the Supreme Court
of the U.S. in Frothingham vs. Mellon (262 U.S. 447), insofar
as federal laws are concerned, upon the ground that the
relationship of a taxpayer of the U.S. to its Federal Government is
different from that of a taxpayer of a municipal corporation to its
government. Indeed, under the composite system of government
existing in the U.S., states of the Union are integral part of the
Federation from aninternational viewpoint, but, each state enjoys
internally a substantial measure of sovereignty, subject to the
limitations imposed by the Federal Constitution. In fact, the same
was made by representatives of each state of the Union, not of
the people of the U.S., except insofar as the former represented
the people of the respective States, and the people of each State
has, independently of that of the others, ratified
said Constitution. In other words, the FederalConstitution and the
Federal statutes have become binding upon the people of the U.S.
in consequence of an act of, and, in this sense, through the
respective states of the Union of which they are citizens. The
peculiar nature of the relation between said people and the
Federal Government of the U.S. is reflected in the election of its
President, who is chosen directly, not by the people of the U.S.,
but by electors chosen by each State, in such manner as the
legislature thereof may direct (Article II, section 2, of the
Federal Constitution).
The relation between the people of the Philippines and its
taxpayers, on the other hand, and the Republic of the Philippines,
on the other, is not identical to that obtaining between the people
and taxpayers of the U.S. and its Federal Government. It is closer,
from a domestic viewpoint, to that existing between the people
and taxpayers of each state and the government thereof, except
that the authority of the Republic of the Philippines over the
people of the Philippines is more fully direct than that of the
states of the Union, insofar as the simple and unitary type of our
national government is not subject to limitations analogous to
those imposed by the Federal Constitution upon the states of the
Union, and those imposed upon the Federal Government in the
interest of the states of the Union. For this reason, the rule
recognizing the right of taxpayers to assail the constitutionality
of a legislation appropriating local or state public funds — which
has been upheld by the Federal Supreme Court (Crampton vs.
Zabriskie, 101 U.S. 601) — has greater application in the
Philippines than that adopted with respect to acts of Congress of
the United States appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil.,
257), involving the expropriation of a land by the Province of
Tayabas, two (2) taxpayers thereof were allowed to intervene for
the purpose of contesting the price being paid to the owner
thereof, as unduly exorbitant. It is true that in Custodio vs.
President of the Senate (42 Off. Gaz., 1243), a taxpayer and
employee of the Government was not permitted to question the
constitutionality of an appropriation for backpay of members of
Congress. However, in Rodriguez vs. Treasurer of the Philippines
and Barredo vs. Commission on Election (84 Phil., 368; 45 Off.
Gaz., 4411), we entertained the action of taxpayers impugning
the validity of certain appropriations of public funds, and
invalidated the same. Moreover, the reason that impelled this
Court to take such position in said two (2) cases — the
importance of the issues therein raised — is present in the case
at bar. Again, like the petitioners in the Rodriguez and Barredo
cases, petitioner herein is not merely a taxpayer. The province of
Rizal, which he represents officially as it Provincial Governor, is
our most populated political subdivision, 7 and, the taxpayers
therein bear a substantial portion of the burden of taxation, in the
Philippines.
Hence, it is our considered opinion that the
circumstances surrounding this case sufficiently justify
petitioner's action in contesting the appropriation and donation
in question; that this action should not have been dismissed by
the lower court; and that the writ of preliminary injunction should
have been maintained.
Wherefore, the decision appealed from is hereby reversed,
and the records are remanded to the lower court for further
proceedings not inconsistent with this decision, with the costs of
this instance against respondent Jose C. Zulueta. It is so
ordered.
Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador,
Reyes, J.B.L., Barrera, Gutierrez David, Paredes and Dizon,
JJ., concur.
||| (Pascual v. Secretary of Public Works and Communications, G.R.
No. L-10405, [December 29, 1960], 110 PHIL 331-346)
EN BANC
[G.R. No. 159796. July 17, 2007.]
ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and
ENVIRONMENTALIST CONSUMERS NETWORK, INC.
(ECN), petitioners, vs. DEPARTMENT OF ENERGY
(DOE), ENERGY REGULATORY COMMISSION (ERC),
NATIONAL POWER CORPORATION (NPC), POWER
SECTOR ASSETS AND LIABILITIES MANAGEMENT
GROUP (PSALM Corp.), STRATEGIC POWER
UTILITIES GROUP (SPUG), and PANAY ELECTRIC
COMPANY INC. (PECO), respondents.
Courts; Judicial Review; Hierarchy of Courts; Petitioners
violated the doctrine of hierarchy of courts when they filed
this “Complaint” directly with the Supreme Court—the Court’s
jurisdiction to issue writs of certiorari, prohibition,
mandamus, quo warranto, and habeas corpus, while
concurrent with that of the regional trial courts and the Court
of Appeals, does not give litigants unrestrained freedom of
choice of forum from which to seek such relief.—Petitioners
filed before us an original action particularly denominated as
a Complaint assailing the constitutionality of Sec. 34 of the
EPIRA imposing the Universal Charge and Rule 18 of the
EPIRA’s IRR. No doubt, petitioners have locus standi. They
impugn the constitutionality of Sec. 34 of the EPIRA because
they sustained a direct injury as a result of the imposition of
the Universal Charge as reflected in their electric bills.
However, petitioners violated the doctrine of hierarchy of
courts when they filed this “Complaint” directly with us.
Furthermore, the Complaint is bereft of any allegation of
grave abuse of discretion on the part of the ERC or any of the
public respondents, in order for the Court to consider it as a
petition for certiorari or prohibition. But this Court’s
jurisdiction to issue writs of certiorari, prohibition,
mandamus, quo warranto, and habeas corpus, while
concurrent with that of the regional trial courts and the Court
of Appeals, does not give litigants unrestrained freedom of
choice of forum from which to seek such relief. It has long
been established that this Court will not entertain direct
resort to it unless the redress desired cannot be obtained in
the appropriate courts, or where exceptional and compelling
circumstances justify availment of a remedy within and call
for the exercise of our primary jurisdiction. This circumstance
alone warrants the outright dismissal of the present action.
Police Power; Taxation; Police power is the power of the state
to promote public welfare by restraining and regulating the
use of liberty and property—it is the most pervasive, the least
limitable, and the most demanding of the three fundamental
powers of the State and the justification is found in the Latin
maxims salus populi est suprema lex (the welfare of the
people is the supreme law) and sic utere tuo ut alienum non
laedas (so use your property as not to injure the property of
others); The theory behind the exercise of the power to tax
emanates from necessity, without taxes, government cannot
fulfill its mandate of promoting the general welfare and well-
being of the people; That the power to “regulate” means the
power to protect, foster, promote, preserve, and control, with
due regard for the interests, first and foremost, of the public,
then of the utility and of its patrons.—The power to tax is an
incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security
against its abuse is to be found only in the responsibility of
the legislature which imposes the tax on the constituency
that is to pay it. It is based on the principle that taxes are the
lifeblood of the government, and their prompt and certain
availability is an imperious need. Thus, the theory behind the
exercise of the power to tax emanates from necessity;
without taxes, government cannot fulfill its mandate of
promoting the general welfare and well-being of the people.
On the other hand, police power is the power of the state to
promote public welfare by restraining and regulating the use
of liberty and property. It is the most pervasive, the least
limitable, and the most demanding of the three fundamental
powers of the State. The justification is found in the Latin
maxims salus populi est suprema lex (the welfare of the
people is the supreme law) and sic utere tuo ut alienum non
laedas (so use your property as not to injure the property of
others). As an inherent attribute of sovereignty which
virtually extends to all public needs, police power grants a
wide panoply of instruments through which the State, as
parens patriae, gives effect to a host of its regulatory powers.
We have held that the power to “regulate” means the power to
protect, foster, promote, preserve, and control, with due
regard for the interests, first and foremost, of the public, then
of the utility and of its patrons.
Same; Same; Electric Power Industry Reform Act of 2001
(EPIRA); If generation of revenue is the primary purpose and
regulation is merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that revenue is
incidentally raised does not make the imposition a tax; In
exacting the assailed Universal Charge through Sec. 34 of the
Electric Power Industry Reform Act of 2001 (EPIRA), the
State’s police power, particularly its regulatory dimension, is
invoked.—The conservative and pivotal distinction between
these two powers rests in the purpose for which the charge is
made. If generation of revenue is the primary purpose and
regulation is merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that revenue is
incidentally raised does not make the imposition a tax. In
exacting the assailed Universal Charge through Sec. 34 of the
EPIRA, the State’s police power, particularly its regulatory
dimension, is invoked. Such can be deduced from Sec. 34
which enumerates the purposes for which the Universal
Charge is imposed and which can be amply discerned as
regulatory in character.
Same; Same; Same; It is a well-established doctrine that the
taxing power may be used as an implement of police power.—
It is a well-established doctrine that the taxing power may be
used as an implement of police power. In Valmonte v. Energy
Regulatory Board, et al., 162 SCRA 521 (1988), and in Gaston
v. Republic Planters Bank, 158 SCRA 626 (1988), this Court
held that the Oil Price Stabilization Fund (OPSF) and the
Sugar Stabilization Fund (SSF) were exactions made in the
exercise of the police power. The doctrine was reiterated in
Osmeña v. Orbos, 220 SCRA 703 (1993), with respect to the
OPSF. Thus, we disagree with petitioners that the instant
case is different from the aforementioned cases. With the
Universal Charge, a Special Trust Fund (STF) is also created
under the administration of PSALM.
Delegation of Powers; Separation of Powers; A logical
corollary to the doctrine of separation of powers is the
principle of nondelegation of powers, as expressed in the
Latin maxim potestas delegata non delegari potest (what has
been delegated cannot be delegated).—The principle of
separation of powers ordains that each of the three branches
of government has exclusive cognizance of and is supreme in
matters falling within its own constitutionally allocated
sphere. 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 (what has been delegated cannot be delegated). This
is based on the ethical principle that such 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.
Same; Subordinate Legislation; Completeness Test and
Sufficient Standard Test; Given the volume and variety of
interactions in today’s society, it is doubtful if the legislature
can promulgate laws that will deal adequately with and
respond promptly to the minutiae of everyday life, hence, the
need to delegate to administrative bodies the authority to
promulgate rules and regulations to implement a given
statute and effectuate its policies; All that is required for the
valid exercise of this power of subordinate legislation is that
the regulation be germane to the objects and purposes of the
law and that the regulation be not in contradiction to, but in
conformity with, the standards prescribed by the law, which
requirements are denominated as the completeness test and
the sufficient standard test.—In the face of the increasing
complexity of modern life, delegation of legislative power to
various specialized administrative agencies is allowed as an
exception to this principle. Given the volume and variety of
interactions in today’s society, it is doubtful if the legislature
can promulgate laws that will deal adequately with and
respond promptly to the minutiae of everyday life. Hence, the
need to delegate to administrative bodies—the principal
agencies tasked to execute laws in their specialized fields—
the authority to promulgate rules and regulations to
implement a given statute and effectuate its policies. All that
is required for the valid exercise of this power of subordinate
legislation is that the regulation be germane to the objects
and purposes of the law and that the regulation be not in
contradiction to, but in conformity with, the standards
prescribed by the law. These requirements are denominated
as the completeness test and the sufficient standard test.
Under the first test, the law must be complete in all its terms
and conditions when it leaves the legislature such that when
it reaches the delegate, the only thing he will have to do is to
enforce it. The second test mandates adequate guidelines or
limitations in the law to determine the boundaries of the
delegate’s authority and prevent the delegation from running
riot. The Court finds that the EPIRA, read and appreciated in
its entirety, in relation to Sec. 34 thereof, is complete in all its
essential terms and conditions, and that it contains sufficient
standards.
Same; Same; Same; Provisions of the Electric Power Industry
Reform Act of 2001 (EPIRA) such as, among others, “to ensure
the total electrification of the country and the quality,
reliability, security and affordability of the supply of electric
power” and “watershed rehabilitation and management” meet
the requirements for valid delegation, as they provide the
limitations on the Energy Regulatory Commission’s (ERC’s)
power to formulate the Implementing Rules and Regulations
(IRR).—As to the second test, this Court had, in the past,
accepted as sufficient standards the following: “interest of
law and order”; “adequate and efficient instruction”; “public
interest”; “justice and equity;” “public convenience and
welfare;” “simplicity, economy and efficiency”;
“standardization and regulation of medical education”; and
“fair and equitable employment practices.” Provisions of the
EPIRA such as, among others, “to ensure the total
electrification of the country and the quality, reliability,
security and affordability of the supply of electric power” and
“watershed rehabilitation and management” meet the
requirements for valid delegation, as they provide the
limitations on the ERC’s power to formulate the IRR. These
are sufficient standards.
Police Power; Over the years, however, the range of police
power was no longer limited to the preservation of public
health, safety and morals, which used to be the primary
social interests in earlier times. Police power now requires
the State to “assume an affirmative duty to eliminate the
excesses and injustices that are the concomitants of an
unrestrained industrial economy,” and police power is now
exerted “to further the public welfare—a concept as vast as
the good of society itself.”—In his Concurring and Dissenting
Opinion in the same case, then Associate Justice, now Chief
Justice, Reynato S. Puno described the immensity of police
power in relation to the delegation of powers to the ERC and
its regulatory functions over electric power as a vital public
utility, to wit: Over the years, however, the range of police
power was no longer limited to the preservation of public
health, safety and morals, which used to be the primary
social interests in earlier times. Police power now requires
the State to “assume an affirmative duty to eliminate the
excesses and injustices that are the concomitants of an
unrestrained industrial economy.” Police power is now
exerted “to further the public welfare—a concept as vast as
the good of society itself.” Hence, “police power is but
another name for the governmental authority to further the
welfare of society that is the basic end of all government.”
When police power is delegated to administrative bodies with
regulatory functions, its exercise should be given a wide
latitude. Police power takes on an even broader dimension in
developing countries such as ours, where the State must take
a more active role in balancing the many conflicting interests
in society. The Questioned Order was issued by the ERC,
acting as an agent of the State in the exercise of police
power. We should have exceptionally good grounds to curtail
its exercise. This approach is more compelling in the field of
rate-regulation of electric power rates. Electric power
generation and distribution is a traditional instrument of
economic growth that affects not only a few but the entire
nation. It is an important factor in encouraging investment
and promoting business. The engines of progress may come
to a screeching halt if the delivery of electric power is
impaired. Billions of pesos would be lost as a result of power
outages or unreliable electric power services. The State thru
the ERC should be able to exercise its police power with great
flexibility, when the need arises.
Taxation; Judicial Review; The determination of whether or
not a tax is excessive, oppressive or confiscatory is an issue
which essentially involves questions of fact, and thus, this
Court is precluded from reviewing the same.—Petitioners
failed to pursue in their Memorandum the contention in the
Complaint that the imposition of the Universal Charge on all
end-users is oppressive and confiscatory, and amounts to
taxation without representation. Hence, such contention is
deemed waived or abandoned per Resolution of August 3,
2004. Moreover, the determination of whether or not a tax is
excessive, oppressive or confiscatory is an issue which
essentially involves questions of fact, and thus, this Court is
precluded from reviewing the same.
Electric Power Industry Reform Act of 2001 (EPIRA); One of
the landmark pieces of legislation enacted by Congress in
recent years is the Electric Power Industry Reform Act of
2001 (EPIRA) which established a new policy, legal structure
and regulatory framework for the electric power industry—the
new thrust is to tap private capital for the expansion and
improvement of the industry as the large government debt
and the highly capital-intensive character of the industry
itself have long been acknowledged as the critical
constraints to the program.—As a penultimate statement, it
may be well to recall what this Court said of EPIRA: One of
the landmark pieces of legislation enacted by Congress in
recent years is the EPIRA. It established a new policy, legal
structure and regulatory framework for the electric power
industry. The new thrust is to tap private capital for the
expansion and improvement of the industry as the large
government debt and the highly capital-intensive character of
the industry itself have long been acknowledged as the
critical constraints to the program. To attract private
investment, largely foreign, the jaded structure of the
industry had to be addressed. While the generation and
transmission sectors were centralized and monopolistic, the
distribution side was fragmented with over 130 utilities,
mostly small and uneconomic. The pervasive flaws have
caused a low utilization of existing generation capacity;
extremely high and uncompetitive power rates; poor quality of
service to consumers; dismal to forgettable performance of
the government power sector; high system losses; and an
inability to develop a clear strategy for overcoming these
shortcomings. Thus, the EPIRA provides a framework for the
restructuring of the industry, including the privatization of the
assets of the National Power Corporation (NPC), the transition
to a competitive structure, and the delineation of the roles of
various government agencies and the private entities. The
law ordains the division of the industry into four (4) distinct
sectors, namely: generation, transmission, distribution and
supply. Corollarily, the NPC generating plants have to
privatized and its transmission business spun off and
privatized thereafter. Gerochi vs. Department of Energy, 527
SCRA 696, G.R. No. 159796 July 17, 2007
DECISION
NACHURA, J p:
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and
Environmentalist Consumers Network, Inc. (ECN) (petitioners), come
before this Court in this original action praying that Section 34
of Republic Act (RA) 9136, otherwise known as the "Electric Power
Industry Reform Act of 2001" (EPIRA), imposing the Universal
Charge, 1 and Rule 18 of the Rules and Regulations (IRR) 2 which
seeks to implement the said imposition, be declared
unconstitutional. Petitioners also pray that the Universal Charge
imposed upon the consumers be refunded and that a preliminary
injunction and/or temporary restraining order (TRO) be issued
directing the respondents to refrain from implementing, charging,
and collecting the said charge. 3 The assailed provision of law reads:
SECTION 34. Universal Charge. — Within one
(1) year from the effectivity of this Act, a universal
charge to be determined, fixed and approved by the
ERC, shall be imposed on all electricity end-users for
the following purposes:
(a) Payment for the stranded debts 4 in excess of the
amount assumed by the National Government
and stranded contract costs of NPC 5 and as
well as qualified stranded contract costs of
distribution utilities resulting from the
restructuring of the industry;
(b) Missionary electrification; 6
(c) The equalization of the taxes and royalties
applied to indigenous or renewable sources
of energy vis-à-vis imported energy fuels;
(d) An environmental charge equivalent to one-fourth
of one centavo per kilowatt-hour
(P0.0025/kWh), which shall accrue to an
environmental fund to be used solely for
watershed rehabilitation and management.
Said fund shall be managed by NPC under
existing arrangements; and
(e) A charge to account for all forms of cross-
subsidies for a period not exceeding three (3)
years.
The universal charge shall be a non-
bypassable charge which shall be passed on and
collected from all end-users on a monthly basis by
the distribution utilities. Collections by the
distribution utilities and the TRANSCO in any given
month shall be remitted to the PSALM Corp. on or
before the fifteenth (15th) of the succeeding month,
net of any amount due to the distribution utility. Any
end-user or self-generating entity not connected to a
distribution utility shall remit its corresponding
universal charge directly to the TRANSCO. The
PSALM Corp., as administrator of the fund, shall
create a Special Trust Fund which shall be disbursed
 only for the purposes specified herein in an open
and transparent manner. All amount collected for the
universal charge shall be distributed to the
respective beneficiaries within a reasonable period
to be provided by the ERC.
The Facts
Congress enacted the EPIRA on June 8, 2001; on June 26,
2001, it took effect. 7
On April 5, 2002, respondent National Power Corporation-
Strategic Power Utilities Group 8 (NPC-SPUG) filed with respondent
Energy Regulatory Commission (ERC) a petition for the availment
from the Universal Charge of its share for Missionary Electrification,
docketed as ERC Case No. 2002-165. 9
On May 7, 2002, NPC filed another petition with ERC, docketed
as ERC Case No. 2002-194, praying that the proposed share from the
Universal Charge for the Environmental charge of P0.0025 per
kilowatt-hour (/kWh), or a total of P119,488,847.59, be approved for
withdrawal from the Special Trust Fund (STF) managed by
respondent Power Sector Assets and Liabilities Management Group
(PSALM) 10 for the rehabilitation and management of watershed
areas. 11
On December 20, 2002, the ERC issued an Order 12 in ERC
On August 13, 2003, NPC-SPUG filed a Motion for
Case No. 2002-165 provisionally approving the computed amount of
Reconsideration asking the ERC, among others, 14 to set aside the
P0.0168/kWh as the share of the NPC-SPUG from the Universal
above-mentioned Decision, which the ERC granted in its Order dated
Charge for Missionary Electrification and authorizing the National
October 7, 2003, disposing:
Transmission Corporation (TRANSCO) and Distribution Utilities to
collect the same from its end-users on a monthly basis.
On June 26, 2003, the ERC rendered its Decision 13 (for ERC
Case No. 2002-165) modifying its Order of December 20, 2002, thus:
WHEREFORE, the foregoing premises
considered, the provisional authority granted to
petitioner National Power Corporation-Strategic
Power Utilities Group (NPC-SPUG) in the Order dated
December 20, 2002 is hereby modified to the effect
that an additional amount of P0.0205 per kilowatt-
hour should be added to the P0.0168 per kilowatt-
hour provisionally authorized by the Commission in
the said Order. Accordingly, a total amount of
P0.0373 per kilowatt-hour is hereby APPROVED for
withdrawal from the Special Trust Fund managed by
PSALM as its share from the Universal Charge for
Missionary Electrification (UC-ME) effective on the
following billing cycles:
(a) June 26-July 25, 2003 for National
Transmission Corporation (TRANSCO);
and
(b) July 2003 for Distribution Utilities (Dus).
Relative thereto, TRANSCO and Dus are
directed to collect the UC-ME in the amount of
P0.0373 per kilowatt-hour and remit the same to
PSALM on or before the 15th day of the succeeding
month.
In the meantime, NPC-SPUG is directed to
submit, not later than April 30, 2004, a detailed
report to include Audited Financial Statements and
physical status (percentage of completion) of the
projects using the prescribed format.
Let copies of this Order be furnished
petitioner NPC-SPUG and all distribution utilities
(Dus).
SO ORDERED.
WHEREFORE, the foregoing premises
considered, the "Motion for Reconsideration" filed by
petitioner National Power Corporation-Small Power
Utilities Group (NPC-SPUG) is hereby GRANTED.
Accordingly, the Decision dated June 26, 2003 is
hereby modified accordingly.
Relative thereto, NPC-SPUG is directed to
submit a quarterly report on the following:
1. Projects for CY 2002 undertaken;
2. Location
3. Actual amount utilized to complete the
project;
4. Period of completion;
 5. Start of Operation; and
6. Explanation of the reallocation of UC-ME
funds, if any.
SO ORDERED. 15
Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-
194, authorizing the NPC to draw up to P70,000,000.00 from PSALM
for its 2003 Watershed Rehabilitation Budget subject to the
availability of funds for the Environmental Fund component of the
Universal Charge. 16
On the basis of the said ERC decisions, respondent Panay
Electric Company, Inc. (PECO) charged petitioner Romeo P. Gerochi
and all other end-users with the Universal Charge as reflected in
their respective electric bills starting from the month of July
2003. 17
Hence, this original action.
Petitioners submit that the assailed provision of law and
its IRR which sought to implement the same are unconstitutional on
the following grounds:
1) The universal charge provided for under Sec. 34 of
the EPIRA and sought to be implemented
under Sec. 2, Rule 18 of the IRR of the said
law is a tax which is to be collected from all
electric end-users and self-generating
entities. The power to tax is strictly a
legislative function and as such, the
delegation of said power to any executive or
administrative agency like the ERC is
unconstitutional, giving the same unlimited
authority. The assailed provision clearly
provides that the Universal Charge is to be
determined, fixed and approved by the ERC,
hence leaving to the latter complete
discretionary legislative authority.
2) The ERC is also empowered to approve and
determine where the funds collected should
be used.
3) The imposition of the Universal Charge on all end-
users is oppressive and confiscatory and
amounts to taxation without representation
as the consumers were not given a chance to
be heard and represented. 18
Petitioners contend that the Universal Charge has the
characteristics of a tax and is collected to fund the operations of the
NPC. They argue that the cases 19 invoked by the respondents
clearly show the regulatory purpose of the charges imposed therein,
which is not so in the case at bench. In said cases, the respective
funds 20 were created in order to balance and stabilize the prices of
oil and sugar, and to act as buffer to counteract the changes and
adjustments in prices, peso devaluation, and other variables which
cannot be adequately and timely monitored by the legislature. Thus,
there was a need to delegate powers to administrative
bodies. 21 Petitioners posit that the Universal Charge is imposed not
for a similar purpose.
On the other hand, respondent PSALM through the Office of
the Government Corporate Counsel (OGCC) contends that unlike a
tax which is imposed to provide income for public purposes, such as
support of the government, administration of the law, or payment of
public expenses, the assailed Universal Charge is levied for a
specific regulatory purpose, which is to ensure the viability of the
country's electric power industry. Thus, it is exacted by the State in
the exercise of its inherent police power. On this premise, PSALM
submits that there is no undue delegation of legislative power to the
ERC since the latter merely exercises a limited authority or
discretion as to the execution and implementation of the provisions
of the EPIRA. 22
Respondents Department of Energy (DOE), ERC, and NPC,
through the Office of the Solicitor General (OSG), share the same
view that the Universal Charge is not a tax because it is levied for a
specific regulatory purpose, which is to ensure the viability of the
country's electric power industry, and is, therefore, an exaction in
the exercise of the State's police power. Respondents further
contend that said Universal Charge does not possess the essential
characteristics of a tax, that its imposition would redound to the
benefit of the electric power industry and not to the public, and that
its rate is uniformly levied on electricity end-users, unlike a tax
which is imposed based on the individual taxpayer's ability to pay.
Moreover, respondents deny that there is undue delegation of
legislative power to the ERC since the EPIRA sets forth sufficient
determinable standards which would guide the ERC in the exercise of
the powers granted to it. Lastly, respondents argue that the
imposition of the Universal Charge is not oppressive and
confiscatory since it is an exercise of the police power of the State
and it complies with the requirements of due process. 23
On its part, respondent PECO argues that it is duty-bound to
collect and remit the amount pertaining to the Missionary
Electrification and Environmental Fund components of the Universal
Charge, pursuant to Sec. 34 of the EPIRAand the Decisions in ERC
Case Nos. 2002-194 and 2002-165. Otherwise, PECO could be held
liable under Sec. 46 24 of the EPIRA, which imposes fines and
penalties for any violation of its provisions or its IRR. 25
The Issues
The ultimate issues in the case at bar are:
1) Whether or not, the Universal Charge imposed
under Sec. 34 of the EPIRA is a tax; and
2) Whether or not there is undue delegation of
legislative power to tax on the part of the
ERC. 26
Before we discuss the issues, the Court shall first deal with
an obvious procedural lapse.
Petitioners filed before us an original action particularly
denominated as a Complaint assailing the constitutionality of Sec.
34 of the EPIRA imposing the Universal Charge and Rule 18 of
the EPIRA's IRR. No doubt, petitioners havelocus standi. They impugn
the constitutionality of Sec. 34 of the EPIRA because they sustained
a direct injury as a result of the imposition of the Universal Charge
as reflected in their electric bills.
However, petitioners violated the doctrine of hierarchy of
courts when they filed this "Complaint" directly with us.
Furthermore, the Complaint is bereft of any allegation of grave abuse
of discretion on the part of the ERC or any of the public respondents,
in order for the Court to consider it as a petition for certiorari or
prohibition.
Article VIII, Section 5 (1) and (2) of the 1987
Constitution 27 categorically provides that:
SECTION 5. The Supreme Court shall have
the following powers:
1. Exercise original jurisdiction over cases affecting
ambassadors, other public ministers and
consuls, and over petitions for certiorari,
prohibition, mandamus, quo warranto, and
habeas corpus.
2. Review, revise, reverse, modify, or affirm on
appeal or certiorari, as the law or the rules of
court may provide, final judgments and
orders of lower courts in:
(a) All cases in which the constitutionality or
validity of any treaty, international or
executive agreement, law,
presidential decree, proclamation,
order, instruction, ordinance, or
regulation is in question.
But this Court's jurisdiction to issue writs of certiorari,
prohibition, mandamus, quo warranto, and habeas corpus, while
concurrent with that of the regional trial courts and the Court of
Appeals, does not give litigants unrestrained freedom of choice of
forum from which to seek such relief. 28 It has long been
established that this Court will not entertain direct resort to it
unless the redress desired cannot be obtained in the appropriate
courts, or where exceptional and compelling circumstances justify
availment of a remedy within and call for the exercise of our
primary jurisdiction. 29 This circumstance alone warrants the
outright dismissal of the present action.
This procedural infirmity notwithstanding, we opt to resolve
the constitutional issue raised herein. We are aware that if the
constitutionality of Sec. 34 of the EPIRA is not resolved now, the
issue will certainly resurface in the near future, resulting in a repeat
of this litigation, and probably involving the same parties. In the
public interest and to avoid unnecessary delay, this Court renders its
ruling now.
The instant complaint is bereft of merit.
The First Issue
To resolve the first issue, it is necessary to distinguish the
State's power of taxation from the police power.
The power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so
that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the
constituency that is to pay it. 30 It is based on the principle that
taxes are the lifeblood of the government, and their prompt and
certain availability is an imperious need. 31 Thus, the theory behind efficiency and enhance the competitiveness
the exercise of the power to tax emanates from necessity; without of Philippine products in the global market;
taxes, government cannot fulfill its mandate of promoting the
general welfare and well-being of the people. 32 (d) To enhance the inflow of private capital and
broaden the ownership base of the power
On the other hand, police power is the power of the state to generation, transmission and distribution
promote public welfare by restraining and regulating the use of sectors;
liberty and property. 33 It is the most pervasive, the least limitable,
and the most demanding of the three fundamental powers of the (e) To ensure fair and non-discriminatory treatment
State. The justification is found in the Latin maxims salus populi est of public and private sector entities in the
suprema lex (the welfare of the people is the supreme law) and sic process of restructuring the electric power
utere tuo ut alienum non laedas (so use your property as not to injure industry;
the property of others). As an inherent attribute of sovereignty which (f) To protect the public interest as it is affected by
virtually extends to all public needs, police power grants a wide the rates and services of electric utilities
panoply of instruments through which the State, as parens patriae, and other providers of electric power;
gives effect to a host of its regulatory powers. 34 We have held that
the power to "regulate" means the power to protect, foster, promote, (g) To assure socially and environmentally
preserve, and control, with due regard for the interests, first and compatible energy sources and
foremost, of the public, then of the utility and of its patrons. 35 infrastructure;

The conservative and pivotal distinction between these two (h) To promote the utilization of indigenous and new
powers rests in the purpose for which the charge is made. If and renewable energy resources in power
generation of revenue is the primary purpose and regulation is generation in order to reduce dependence on
merely incidental, the imposition is a tax; but if regulation is the imported energy;
primary purpose, the fact that revenue is incidentally raised does not
(i) To provide for an orderly and transparent
make the imposition a tax. 36
privatization of the assets and liabilities of
In exacting the assailed Universal Charge through Sec. 34 of the National Power Corporation (NPC);
the EPIRA, the State's police power, particularly its regulatory
(j) To establish a strong and purely independent
dimension, is invoked. Such can be deduced from Sec. 34 which
regulatory body and system to ensure
enumerates the purposes for which the Universal Charge is
consumer protection and enhance the
imposed 37 and which can be amply discerned as regulatory in
competitive operation of the electricity
character. The EPIRA resonates such regulatory purposes, thus:
market; and
SECTION 2. Declaration of Policy. — It is
(k) To encourage the efficient use of energy and
hereby declared the policy of the State:
other modalities of demand side
(a) To ensure and accelerate the total electrification management.
of the country;
From the aforementioned purposes, it can be gleaned that the
(b) To ensure the quality, reliability, security and assailed Universal Charge is not a tax, but an exaction in the
affordability of the supply of electric power; exercise of the State's police power. Public welfare is surely
promoted.
(c) To ensure transparent and reasonable prices of
electricity in a regime of free and fair Moreover, it is a well-established doctrine that the taxing
competition and full public accountability to power may be used as an implement of police power. 38 In Valmonte
achieve greater operational and economic v. Energy Regulatory Board, et al . 39 and in Gaston v. Republic
Planters Bank, 40 this Court held that the Oil Price Stabilization Fund
(OPSF) and the Sugar Stabilization Fund (SSF) were exactions made
in the exercise of the police power. The doctrine was reiterated
in Osmeña v. Orbos 41 with respect to the OPSF. Thus, we disagree
with petitioners that the instant case is different from the
aforementioned cases. With the Universal Charge, a Special Trust
Fund (STF) is also created under the administration of
PSALM. 42 The STF has some notable characteristics similar to the
OPSF and the SSF, viz.:
1)In the implementation of stranded cost recovery,
the ERC shall conduct a review to determine
whether there is under-recovery or over
recovery and adjust (true-up) the level of the
stranded cost recovery charge. In case of an
over-recovery, the ERC shall ensure that any
excess amount shall be remitted to the STF. A
separate account shall be created for these
amounts which shall be held in trust for any
future claims of distribution utilities for
stranded cost recovery. At the end of the
stranded cost recovery period, any remaining
amount in this account shall be used to
reduce the electricity rates to the end-
users. 43
2) With respect to the assailed Universal Charge, if
the total amount collected for the same is
greater than the actual availments against it,
the PSALM shall retain the balance within
the STF to pay for periods where a shortfall
occurs. 44
3) Upon expiration of the term of PSALM, the
administration of the STF shall be transferred
to the DOF or any of the DOF attached
agencies as designated by the DOF
Secretary. 45
The OSG is in point when it asseverates:
Evidently, the establishment and
maintenance of the Special Trust Fund, under the
last paragraph of Section 34, R.A. No. 9136, is well
within the pervasive and non-waivable power and
responsibility of the government to secure the
physical and economic survival and well-being of the
community, that comprehensive sovereign authority
we designate as the police power of the State. 46
This feature of the Universal Charge further boosts the
position that the same is an exaction imposed primarily in pursuit of
the State's police objectives. The STF reasonably serves and assures
the attainment and perpetuity of the purposes for which the
Universal Charge is imposed, i.e., to ensure the viability of the
country's electric power industry.
The Second Issue
The principle of separation of powers ordains that each of the
three branches of government has exclusive cognizance of and is
supreme in matters falling within its own constitutionally allocated
sphere. 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 (what has been
delegated cannot be delegated). This is based on the ethical
principle that such 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. 47
In the face of the increasing complexity of modern life,
delegation of legislative power to various specialized administrative
agencies is allowed as an exception to this principle. 48 Given the
volume and variety of interactions in today's society, it is doubtful if
the legislature can promulgate laws that will deal adequately with
and respond promptly to the minutiae of everyday life. Hence, the
need to delegate to administrative bodies — the principal agencies
tasked to execute laws in their specialized fields — the authority to
promulgate rules and regulations to implement a given statute and
effectuate its policies. All that is required for the valid exercise of
this power of subordinate legislation is that the regulation be
germane to the objects and purposes of the law and that the
regulation be not in contradiction to, but in conformity with, the
standards prescribed by the law. These requirements are
denominated as the completeness test and the sufficient standard
test.
Under the first test, the law must be complete in all its terms
and conditions when it leaves the legislature such that when it
reaches the delegate, the only thing he will have to do is to enforce
it. The second test mandates adequate guidelines or limitations in
the law to determine the boundaries of the delegate's authority and
prevent the delegation from running riot. 49
 The Court finds that the EPIRA, read and appreciated in its
entirety, in relation to Sec. 34 thereof, is complete in all its essential
terms and conditions, and that it contains sufficient standards.
Although Sec. 34 of the EPIRA merely provides that "within
one (1) year from the effectivity thereof, a Universal Charge to be
determined, fixed and approved by the ERC, shall be imposed on all
electricity end-users," and therefore, does not state the specific
amount to be paid as Universal Charge, the amount nevertheless is
made certain by the legislative parameters provided in the law itself.
For one, Sec. 43 (b) (ii) of the EPIRA provides:
SECTION 43. Functions of the ERC. — The
ERC shall promote competition, encourage market
development, ensure customer choice and penalize
abuse of market power in the restructured
electricity industry. In appropriate cases, the ERC is
authorized to issue cease and desist order after due
notice and hearing. Towards this end, it shall be
responsible for the following key functions in the
restructured industry:
the Universal Charge. Sec. 51 (d) and (e) of the EPIRA 50 clearly
provides:
SECTION 51. Powers. — The PSALM Corp.
shall, in the performance of its functions and for the
attainment of its objective, have the following
powers:
xxx xxx xxx
(d) To calculate the amount of the stranded debts
and stranded contract costs of NPC
which shall form the basis for ERC in the
determination of the universal charge;
(e) To liquidate the NPC stranded contract costs,
utilizing the proceeds from sales and other
property contributed to it, including the
proceeds from the universal charge.
Thus, the law is complete and passes the first test for valid
delegation of legislative power.

xxx xxx xxx As to the second test, this Court had, in the past, accepted as
sufficient standards the following: "interest of law and
(b) Within six (6) months from the effectivity order;" 51 "adequate and efficient instruction;" 52 "public
of this Act, promulgate and enforce, in accordance interest;" 53 "justice and equity;" 54 "public convenience and
with law, a National Grid Code and a Distribution welfare;" 55 "simplicity, economy and
Code which shall include, but not limited to the efficiency;" 56 "standardization and regulation of medical
following: education;" 57 and "fair and equitable employment
xxx xxx xxx practices." 58 Provisions of the EPIRA such as, among others, "to
ensure the total electrification of the country and the quality,
(ii) Financial capability standards for the reliability, security and affordability of the supply of electric
generating companies, the TRANSCO, distribution power" 59 and "watershed rehabilitation and management" 60 meet
utilities and suppliers: Provided, That in the the requirements for valid delegation, as they provide the limitations
formulation of the financial capability standards, the on the ERC's power to formulate the IRR. These are sufficient
nature and function of the entity shall be standards.
considered: Provided, further, That such standards
are set to ensure that the electric power industry It may be noted that this is not the first time that the ERC's
participants meet the minimum financial standards conferred powers were challenged. In Freedom from Debt Coalition v.
to protect the public interest. Determine, fix, and Energy Regulatory Commission, 61 the Court had occasion to say:
approve, after due notice and public hearings the In determining the extent of powers
universal charge, to be imposed on all electricity possessed by the ERC, the provisions of
end-users pursuant to Section 34 hereof; the EPIRA must not be read in separate parts.
Moreover, contrary to the petitioners' contention, the ERC Rather, the law must be read in its entirety, because
does not enjoy a wide latitude of discretion in the determination of a statute is passed as a whole, and is animated by
one general purpose and intent. Its meaning cannot
 to be extracted from any single part thereof but from
a general consideration of the statute as a whole.
Considering the intent of Congress in enacting
the EPIRA and reading the statute in its entirety, it is
plain to see that the law has expanded the
jurisdiction of the regulatory body, the ERC in this
case, to enable the latter to implement the reforms
sought to be accomplished by the EPIRA. When the
legislators decided to broaden the jurisdiction of the
ERC, they did not intend to abolish or reduce the
powers already conferred upon ERC's predecessors.
To sustain the view that the ERC possesses only the
powers and functions listed under Section 43 of
the EPIRA is to frustrate the objectives of the law.
In his Concurring and Dissenting Opinion 62 in the same case,
then Associate Justice, now Chief Justice, Reynato S. Puno
described the immensity of police power in relation to the delegation
of powers to the ERC and its regulatory functions over electric power
as a vital public utility, to wit:
Over the years, however, the range of police
power was no longer limited to the preservation of
public health, safety and morals, which used to be
the primary social interests in earlier times. Police
power now requires the State to "assume an
affirmative duty to eliminate the excesses and
injustices that are the concomitants of an
unrestrained industrial economy." Police power is
now exerted "to further the public welfare — a
concept as vast as the good of society itself."
Hence, "police power is but another name for the
governmental authority to further the welfare of
society that is the basic end of all
government." When police power is delegated to
administrative bodies with regulatory functions, its
exercise should be given a wide latitude. Police
power takes on an even broader dimension in
developing countries such as ours, where the State
must take a more active role in balancing the many
conflicting interests in society. The Questioned
Order was issued by the ERC, acting as an agent of
the State in the exercise of police power. We should
have exceptionally good grounds to curtail its
exercise. This approach is more compelling in the
field of rate-regulation of electric power
rates.Electric power generation and distribution is a
traditional instrument of economic growth that
affects not only a few but the entire nation. It is an
important factor in encouraging investment and
promoting business. The engines of progress may
come to a screeching halt if the delivery of electric
power is impaired. Billions of pesos would be lost as
a result of power outages or unreliable electric
power services. The State thru the ERC should be
able to exercise its police power with great
flexibility, when the need arises.
This was reiterated in National Association of Electricity
Consumers for Reforms v. Energy Regulatory Commission 63 where
the Court held that the ERC, as regulator, should have sufficient
power to respond in real time to changes wrought by multifarious
factors affecting public utilities.
From the foregoing disquisitions, we therefore hold that there
is no undue delegation of legislative power to the ERC.
Petitioners failed to pursue in their Memorandum the
contention in the Complaint that the imposition of the Universal
Charge on all end-users is oppressive and confiscatory, and amounts
to taxation without representation. Hence, such contention is
deemed waived or abandoned per Resolution 64 of August 3,
2004. 65 Moreover, the determination of whether or not a tax is
excessive, oppressive or confiscatory is an issue which essentially
involves questions of fact, and thus, this Court is precluded from
reviewing the same. 66
As a penultimate statement, it may be well to recall what this
Court said of EPIRA:
One of the landmark pieces of legislation
enacted by Congress in recent years is the EPIRA. It
established a new policy, legal structure and
regulatory framework for the electric power
industry. The new thrust is to tap private capital for
the expansion and improvement of the industry as
the large government debt and the highly capital-
intensive character of the industry itself have long
been acknowledged as the critical constraints to the
program. To attract private investment, largely
foreign, the jaded structure of the industry had to be
 addressed. While the generation and transmission
sectors were centralized and monopolistic, the
distribution side was fragmented with over 130
utilities, mostly small and uneconomic. The
pervasive flaws have caused a low utilization of
existing generation capacity; extremely high and
uncompetitive power rates; poor quality of service to
consumers; dismal to forgettable performance of the
government power sector; high system losses; and
an inability to develop a clear strategy for
overcoming these shortcomings.

Thus, the EPIRA provides a framework for the

restructuring of the industry, including the
privatization of the assets of the National Power
Corporation (NPC), the transition to a competitive
structure, and the delineation of the roles of various
government agencies and the private entities. The
law ordains the division of the industry into four (4)
distinct sectors, namely: generation, transmission,
distribution and supply. Corollarily, the NPC
generating plants have to privatized and its
transmission business spun off and privatized
thereafter. 67

Finally, every law has in its favor the presumption of

constitutionality, and to justify its nullification, there must be a clear
and unequivocal breach of the Constitution and not one that is
doubtful, speculative, or argumentative. 68Indubitably, petitioners
failed to overcome this presumption in favor of the EPIRA. We find no
clear violation of the Constitution which would warrant a
pronouncement that Sec. 34 of the EPIRA and Rule 18 of its IRR are
unconstitutional and void.

WHEREFORE, the instant case is hereby DISMISSED for lack

of merit.

SO ORDERED.

||| (Gerochi v. Department of Energy, G.R. No. 159796, [July 17, 2007],
554 PHIL 563-590)
 other tax concepts. One of these is tax deduction—defined as
a subtraction “from income for tax purposes,” or an amount
that is “allowed by law to reduce income prior to [the]
application of the tax rate to compute the amount of tax
which is due.” An example of a tax deduction is any of the
allowable deductions enumerated in Section 34 of the Tax
Code.
THIRD DIVISION

[G.R. No. 159647. April 15, 2005.] Same; Same; Same; Same; A tax credit differs from a tax
deduction; A tax credit reduces the tax due, including—
whenever applicable—the income tax that is determined after
COMMISSIONER OF INTERNAL
applying the corresponding tax rates to taxable income; A tax
REVENUE, petitioner,vs.CENTRAL LUZON DRUG
deduction reduces the income that is subject to tax in order
CORPORATION, respondent.
to arrive at taxable income.—A tax credit differs from a tax
deduction. On the one hand, a tax credit reduces the tax due,
including—whenever applicable—the income tax that is
Taxation; Tax Credits and Tax Deductions; Senior Citizens’
determined after applying the corresponding tax rates to
Law (R.A. No. 7432); The tax credit allowed under R.A. 7432 to
taxable income. A tax deduction, on the other, reduces the
establishments as a result of granting senior citizens 20%
income that is subject to tax in order to arrive at taxable
discount on their purchase of medicines from private
income. To think of the former as the latter is to avoid, if not
establishments may be claimed by such establishments even
entirely confuse, the issue. A tax credit is used only after the
though they are operating at a loss.— Section 4(a) of RA 7432
tax has been computed; a tax deduction, before.
grants to senior citizens the privilege of obtaining a 20
percent discount on their purchase of medicine from any
private establishment in the country. The latter may then
claim the cost of the discount as a tax credit. But can such
credit be claimed, even though an establishment operates at
a loss? We answer in the affirmative. Same; Same; Same; Under R.A. 7432, Congress has granted
without conditions a tax credit benefit to all covered
establishments; Although this tax credit benefit is available,
Same; Same; Same; Words and Phrases; Tax credit generally
it need not be used by losing ventures, since there is no tax
refers to an amount that is subtracted directly from one’s
liability that calls for its application—by its nature, the tax
total tax liability, an allowance against the tax itself, or a
credit may still be deducted from a future, not a present, tax
deduction from what is owed; Tax deduction is defined as a
liability, without which it does not have any use.—If a net loss
subtraction from income for tax purposes, or an amount that
is reported by, and no other taxes are currently due from, a
is allowed by law to reduce income prior to the application of
business establishment, there will obviously be no tax
the tax rate to compute the amount of tax which is due.—
liability against which any tax credit can be applied. For the
Although the term is not specifically defined in our Tax Code,
establishment to choose the immediate availment of a tax
tax credit generally refers to an amount that is “subtracted
credit will be premature and impracticable. Nevertheless, the
directly from one’s total tax liability.” It is an “allowance
irrefutable fact remains that, under RA 7432, Congress has
against the tax itself” or “a deduction from what is owed” by a
granted without conditions a tax credit benefit to all covered
taxpayer to the government. Examples of tax credits are
establishments. Although this tax credit benefit is available,
withheld taxes, payments of estimated tax, and investment
it need not be used by losing ventures, since there is no tax
tax credits. Tax credit should be understood in relation to
liability that calls for its application. Neither can it be
reduced to nil by the quick yet callow stroke of an
administrative pen, simply because no reduction of taxes can
instantly be effected. By its nature, the tax credit may still be
deducted from a future, not a present, tax liability, without
which it does not have any use. In the meantime, it need not
move. But it breathes.
Same; Same; Same; While a tax liability is essential to the
availment or use of any tax credit, prior tax payments are not
—for the existence or grant solely of such credit, neither a
tax liability nor a prior tax payment is needed.—While a tax
liability is essential to the availment or use of any tax credit,
prior tax payments are not. On the contrary, for the existence
or grant solely of such credit, neither a tax liability nor a prior
tax payment is needed. The Tax Code is in fact replete with
provisions granting or allowing tax credits, even though no
taxes have been previously paid.
Same; Same; Same; To deny the tax credit, despite the plain
mandate of the law and the regulations carrying out that
mandate, is indefensible.—RA 7432 specifically allows private
establishments to claim as tax credit the amount of
discounts they grant. In turn, the Implementing Rules and
Regulations, issued pursuant thereto, provide the procedures
for its availment. To deny such credit, despite the plain
mandate of the law and the regulations carrying out that
mandate, is indefensible.
Same; Same; Same; Words and Phrases; By ordinary
acceptation, a discount is an “abatement or reduction made
from the gross amount or value of anything.”—The definition
given by petitioner is erroneous. It refers to tax credit as the
amount representing the 20 percent discount that “shall be
deducted by the said establishments from their gross income
for income tax purposes and from their gross sales for value-
added tax or other percentage tax purposes.” In ordinary
business language, the tax credit represents the amount of
such discount. However, the manner by which the discount
shall be credited against taxes has not been clarified by the
revenue regulations. By ordinary acceptation, a discount is an
“abatement or reduction made from the gross amount or
value of anything.” To be more precise, it is in business
parlance “a deduction or lowering of an amount of money”; or
“a reduction from the full amount or value of something,
especially a price.” In business there are many kinds of
discount, the most common of which is that affecting the
income statement or financial report upon which the income
tax is based.
Same; Same; Same; Same; “Cash Discount,” “Sales Discount,”
“Quantity, Volume or Bulk Discount,” “Trade Discount,” “Chain
Discount,” and “Functional Discount,” Explained.—A cash
discount, for example, is one granted by business
establishments to credit customers for their prompt payment.
It is a “reduction in price offered to the purchaser if payment
is made within a shorter period of time than the maximum
time specified.” Also referred to as a sales discount on the
part of the seller and a purchase discount on the part of the
buyer, it may be expressed in such terms as “5/10, n/30.” A
quantity discount, however, is a “reduction in price allowed
for purchases made in large quantities, justified by savings in
packaging, shipping, and handling.” It is also called a volume
or bulk discount. A “percentage reduction from the list price x
x x allowed by manufacturers to wholesalers and by
wholesalers to retailers” is known as a trade discount. No
entry for it need be made in the manual or computerized
books of accounts, since the purchase or sale is already
valued at the net price actually charged the buyer. The
purpose for the discount is to encourage trading or increase
sales, and the prices at which the purchased goods may be
resold are also suggested. Even a chain discount—a series of
discounts from one list price—is recorded at net. Finally, akin
to a trade discount is a functional discount. It is “a supplier’s
price discount given to a purchaser based on the [latter’s]
role in the [former’s] distribution system.” This role usually
involves warehousing or advertising.
Same; Same; Same; Same; The term sales discounts is not
expressly defined in the Tax Code, but one provision adverts
to amounts whose sum—along with sales returns, allowances
and cost of goods sold—is deducted from gross sales to come
up with the gross income, profit or margin derived from
business.—The term sales discounts is not expressly defined
in the Tax Code, but one provision adverts to amounts whose
sum—along with sales returns, allowances and cost of goods
sold—is deducted from gross sales to come up with the gross
income, profit or margin derived from business. In another
provision therein, sales discounts that are granted and
indicated in the invoices at the time of sale—and that do not
depend upon the happening of any future event—may be
excluded from the gross sales within the same quarter they
were given. While determinative only of the VAT, the latter
provision also appears as a suitable reference point for
income tax purposes already embraced in the former. After
all, these two provisions affirm that sales discounts are
amounts that are always deductible from gross sales.
Same; Same; Same; To be sure, the privilege enjoyed by the
senior citizen must be equivalent to the tax credit benefit
enjoyed by the private establishment granting the discount.—
A distinguishing feature of the implementing rules of RA 7432
is the private establishment’s outright deduction of the
discount from the invoice price of the medicine sold to the
senior citizen. It is, therefore, expected that for each retail
sale made under this law, the discount period lasts no more
than a day, because such discount is given—and the net
amount thereof collected—immediately upon perfection of
the sale. Although prompt payment is made for an arm’s-
length transaction by the senior citizen, the real and
compelling reason for the private establishment giving the
discount is that the law itself makes it mandatory. What RA
7432 grants the senior citizen is a mere discount privilege,
not a sales discount or any of the above discounts in
particular. Prompt payment is not the reason for (although a
necessary consequence of) such grant. To be sure, the
privilege enjoyed by the senior citizen must be equivalent to
the tax credit benefit enjoyed by the private establishment
granting the discount. Yet, under the revenue regulations
promulgated by our tax authorities, this benefit has been
erroneously likened and confined to a sales discount.
Same; Same; Same; To stress, the effect of a sales discount
on the income statement and income tax return of an
establishment covered by R.A. 7432 is different from that
resulting from the availment or use of its tax credit benefit;
When the law says that the cost of the discount may be
claimed as a tax credit, it means that the amount—when
claimed—shall be treated as a reduction from any tax liability,
plain and simple.—To stress, the effect of a sales discount on
the income statement and income tax return of an
establishment covered by RA 7432 is different from that
resulting from the availment or use of its tax credit benefit.
While the former is a deduction before, the latter is a
deduction after, the income tax is computed. As mentioned
earlier, a discount is not necessarily a sales discount, and a
tax credit for a simple discount privilege should not be
automatically treated like a sales discount. Ubi lex non
distinguit, nec nos distinguere debemus. Where the law does
not distinguish, we ought not to distinguish. Sections 2.i and
4 of Revenue Regulations No. (RR) 2-94 define tax credit as
the 20 percent discount deductible from gross income for
income tax purposes, or from gross sales for VAT or other
percentage tax purposes. In effect, the tax credit benefit
under RA 7432 is related to a sales discount. This contrived
definition is improper, considering that the latter has to be
deducted from gross sales in order to compute the gross
income in the income statement and cannot be deducted
again, even for purposes of computing the income tax. When
the law says that the cost of the discount may be claimed as
a tax credit, it means that the amount—when claimed—shall
be treated as a reduction from any tax liability, plain and
simple. The option to avail of the tax credit benefit depends
upon the existence of a tax liability, but to limit the benefit to
a sales discount—which is not even identical to the discount
privilege that is granted by law—does not define it at all and
serves no useful purpose. The definition must, therefore, be
stricken down.
Same; Same; Same; Administrative Law; A law cannot be
amended by a mere regulation.—The law cannot be amended
by a mere regulation. In fact, a regulation that “operates to
create a rule out of harmony with the statute is a mere
nullity”; it cannot prevail. It is a cardinal rule that courts “will
and should respect the contemporaneous construction placed
upon a statute by the executive officers whose duty it is to
enforce it x x x.” In the scheme of judicial tax administration,
the need for certainty and predictability in the
implementation of tax laws is crucial. Our tax authorities fill
in the details that “Congress may not have the opportunity or
competence to provide.” The regulations these authorities
issue are relied upon by taxpayers, who are certain that these
will be followed by the courts. Courts, however, will not
uphold these authorities’ interpretations when clearly absurd,
erroneous or improper.
Same; Same; Same; Same; The administrative agency issuing
regulations may not enlarge, alter or restrict the provisions of
the law it administers—it cannot engraft additional
requirements not contemplated by the legislature.—In the
present case, the tax authorities have given the term tax
credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in
contrast to what RA 7432 provides. Their interpretation has
muddled up the intent of Congress in granting a mere
discount privilege, not a sales discount. The administrative
agency issuing these regulations may not enlarge, alter or
restrict the provisions of the law it administers; it cannot
engraft additional requirements not contemplated by the
legislature. In case of conflict, the law must prevail. A
“regulation adopted pursuant to law is law.” Conversely, a
regulation or any portion thereof not adopted pursuant to law
is no law and has neither the force nor the effect of law.
Same; Same; Same; Statutory Construction; The word “may”
in §4.a of R.A. 7432 implies that availability of the tax credit
benefit is neither unrestricted nor mandatory—what it means
is that the tax credit benefit is merely permissive, not
imperative.—The word may in the text of the statute implies
that the availability of the tax credit benefit is neither
unrestricted nor mandatory. There is no absolute right
conferred upon respondent, or any similar taxpayer, to avail
itself of the tax credit remedy whenever it chooses; “neither
does it impose a duty on the part of the government to sit
back and allow an important facet of tax collection to be at
the sole control and discretion of the taxpayer.” For the tax
authorities to compel respondent to deduct the 20 percent
discount from either its gross income or its gross sales is,
therefore, not only to make an imposition without basis in
law, but also to blatantly contravene the law itself. What
Section 4.a of RA 7432 means is that the tax credit benefit is
merely permissive, not imperative. Respondent is given two
options—either to claim or not to claim the cost of the
discounts as a tax credit. In fact, it may even ignore the
credit and simply consider the gesture as an act of
beneficence, an expression of its social conscience.
Same; Same; Same; It is the existence or the lack of a tax
liability that determines whether the cost of the discounts
can be used as a tax credit—R.A. 7432 does not give the
establishment the unfettered right to avail itself of the credit
whenever it pleases.—It is the existence or the lack of a tax
liability that determines whether the cost of the discounts
can be used as a tax credit. RA 7432 does not give
respondent the unfettered right to avail itself of the credit
whenever it pleases. Neither does it allow our tax
administrators to expand or contract the legislative mandate.
“The ‘plain meaning rule’ or verba legis in statutory
construction is thus applicable x x x. Where the words of a
statute are clear, plain and free from ambiguity, it must be
given its literal meaning and applied without attempted
interpretation.”
Same; Same; Same; Eminent Domain; Just Compensation; The
tax credit benefit granted to the establishments can be
deemed as their just compensation for private property taken
by the State for public use.—Sections 2.i and 4 of RR 2-94
deny the exercise by the State of its power of eminent
domain. Be it stressed that the privilege enjoyed by senior
citizens does not come directly from the State, but rather
from the private establishments concerned. Accordingly, the
tax credit benefit granted to these establishments can be
deemed as their just compensation for private property taken
by the State for public use.
Same; Same; Same; Same; Same; The discount privilege to
which our senior citizens are entitled is actually a benefit
enjoyed by the general public to which these citizens belong;
As a result of the 20 percent discount imposed by R.A. 7432,
an establishment becomes entitled to a just compensation,
and this term refers not only to the issuance of a tax credit
certificate indicating the correct amount of the discounts
given, but also to the promptness in its release.—The concept
of public use is no longer confined to the traditional notion of
use by the public, but held synonymous with public interest,
public benefit, public welfare, and public convenience. The
discount privilege to which our senior citizens are entitled is
actually a benefit enjoyed by the general public to which
these citizens belong. The discounts given would have
entered the coffers and formed part of the gross sales of the
private establishments concerned, were it not for RA 7432.
The permanent reduction in their total revenues is a forced
subsidy corresponding to the taking of private property for
public use or benefit. As a result of the 20 percent discount
imposed by RA 7432, respondent becomes entitled to a just
compensation. This term refers not only to the issuance of a
tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release.
Equivalent to the payment of property taken by the State,
such issuance—when not done within a reasonable time from
the grant of the discounts—cannot be considered as just
compensation. In effect, respondent is made to suffer the
consequences of being immediately deprived of its revenues
while awaiting actual receipt, through the certificate, of the
equivalent amount it needs to cope with the reduction in its
revenues.
Same; Same; Same; Same; Same; The taxation power can also
be used as an implement for the exercise of the power of
eminent domain.—The taxation power can also be used as an
implement for the exercise of the power of eminent domain.
Tax measures are but “enforced contributions exacted on
pain of penal sanctions” and “clearly imposed for a public
purpose.” In recent years, the power to tax has indeed
become a most effective tool to realize social justice, public
welfare, and the equitable distribution of wealth.
Same; Same; Same; Same; Same; Social Justice; The social
justice consecrated in our Constitution is not intended to
take away rights from a person and give them to another who
is not entitled thereto—for this reason, a just compensation
for income that is taken away from an establishment
becomes necessary.—While it is a declared commitment
under Section 1 of RA 7432, social justice “cannot be invoked
to trample on the rights of property owners who under our
Constitution and laws are also entitled to protection. The
social justice consecrated in our [C]onstitution [is] not
intended to take away rights from a person and give them to
another who is not entitled thereto.” For this reason, a just
compensation for income that is taken away from respondent
becomes necessary. It is in the tax credit that our legislators
find support to realize social justice, and no administrative
body can alter that fact.
Same; Same; Same; Statutory Construction; The deliberations
of the Bicameral Conference Committee which finalized RA
7432 disclose the true intent of the legislators to treat the
sales discount as a tax credit, rather than as a deduction
from gross income.—Congress has allowed all private
establishments a simple tax credit, not a deduction. In fact,
no cash outlay is required from the government for the
availment or use of such credit. The deliberations on February
5, 1992 of the Bicameral Conference Committee Meeting on
Social Justice, which finalized RA 7432, disclose the true
intent of our legislators to treat the sales discounts as a tax
credit, rather than as a deduction from gross income.
Same; Same; Same; Same; It is a canon of statutory
construction that a later statute, general in its terms and not
expressly repealing a prior special statute, will ordinarily not
affect the special provisions of such earlier statute—R.A.
7432 is an earlier law not expressly repealed by, and therefore
remains an exception to, the Tax Code, a later law.—RA 7432
is a special law that should prevail over the Tax Code—a
general law. “x x x [T]he rule is that on a specific matter the
special law shall prevail over the general law, which shall be
resorted to only to supply deficiencies in the former.” In
addition, “[w]here there are two statutes, the earlier special
and the later general—the terms of the general broad enough
to include the matter provided for in the special—the fact that
one is special and the other is general creates a presumption
that the special is to be considered as remaining an
exception to the general, one as a general law of the land, the
other as the law of a particular case.” “It is a canon of
statutory construction that a later statute, general in its
terms and not expressly repealing a prior special statute, will
ordinarily not affect the special provisions of such earlier
statute.” RA 7432 is an earlier law not expressly repealed by,
and therefore remains an exception to, the Tax Code—a later
law. When the former states that a tax credit may be claimed,
then the requirement of prior tax payments under certain
provisions of the latter, as discussed above, cannot be made
to apply. Neither can the instances of or references to a tax
deduction under the Tax Code be made to restrict RA 7432. No
provision of any revenue regulation can supplant or modify
the acts of Congress. Commissioner of Internal Revenue vs.
Central Luzon Drug Corporation, 456 SCRA 414, G.R. No.
159647 April 15, 2005
DECISION
PANGANIBAN, J p:
The 20 percent discount required by the law to be given to
senior citizens is a tax credit,not merely a tax deduction from the
gross income or gross sale of the establishment concerned. A tax
credit is used by a private establishment only after the tax has been
computed; a tax deduction, before the tax is computed. RA
7432 unconditionally grants a tax credit to all covered entities. Thus,
the provisions of the revenue regulation that withdraw or modify
such grant are void. Basic is the rule that administrative regulations
cannot amend or revoke the law.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules
of Court, seeking to set aside the August 29, 2002 Decision 2 and the
August 11, 2003 Resolution 3 of the Court of Appeals (CA) in CA-GR
SP No. 67439. The assailed Decision reads as follows:
"WHEREFORE, premises considered, the
Resolution appealed from is AFFIRMED in toto.No
costs." 4
The assailed Resolution denied petitioner's Motion
Reconsideration.
The Facts
The CA narrated the antecedent facts as follows:
"Respondent is a domestic corporation
primarily engaged in retailing of medicines and other
pharmaceutical products. In 1996, it operated six (6)
drugstores under the business name and style
'Mercury Drug.'
"From January to December 1996,
respondent granted twenty (20%) percent sales
discount to qualified senior citizens on their
purchases of medicines pursuant to Republic Act No.
[R.A.] 7432 and its Implementing Rules and
Regulations. For the said period, the amount
allegedly representing the 20% sales discount
granted by respondent to qualified senior citizens
totaled P904,769.00.
"On April 15, 1997, respondent filed its Annual
Income Tax Return for taxable year 1996 declaring
therein that it incurred net losses from its
operations.
"On January 16, 1998, respondent filed with
petitioner a claim for tax refund/credit in the amount
of P904,769.00 allegedly arising from the 20% sales
discount granted by respondent to qualified senior
citizens in compliance with [R.A.] 7432. Unable to
obtain affirmative response from petitioner,
respondent elevated its claim to the Court of Tax
Appeals [(CTA or Tax Court)] via a Petition for
Review. ACcISa
"On February 12, 2001, the Tax Court
rendered a Decision 5 dismissing respondent's
Petition for lack of merit. In said decision, the [CTA]
justified its ruling with the following ratiocination:
'...,if no tax has been paid to the
government, erroneously or illegally, or if no
amount is due and collectible from the
taxpayer, tax refund or tax credit is
unavailing. Moreover, whether the recovery of
the tax is made by means of a claim for
for
refund or tax credit, before recovery is
allowed[,] it must be first established that
 there was an actual collection and receipt by
the government of the tax sought to be
recovered. ...
'xxx xxx xxx
'Prescinding from the above, it could
logically be deduced that tax credit is
premised on the existence of tax liability on
the part of taxpayer. In other words, if there
is no tax liability, tax credit is not available.'
"Respondent lodged a Motion for
Reconsideration. The [CTA],in its assailed
resolution, 6 granted respondent's motion for
reconsideration and ordered herein petitioner to
issue a Tax Credit Certificate in favor of respondent
citing the decision of the then Special Fourth
Division of [the CA] in CA G.R. SP No. 60057 entitled
'Central [Luzon] Drug Corporation vs. Commissioner
of Internal Revenue' promulgated on May 31, 2001,
to wit:
'However, Sec. 229 clearly does not
apply in the instant case because the tax
sought to be refunded or credited by
petitioner was not erroneously paid or
illegally collected. We take exception to the
CTA's sweeping but unfounded statement
that ‘both tax refund and tax credit are
modes of recovering taxes which are either
erroneously or illegally paid to the
government.' Tax refunds or credits do not
exclusively pertain to illegally collected or
erroneously paid taxes as they may be other
circumstances where a refund is warranted.
The tax refund provided under Section 229
deals exclusively with illegally collected or
erroneously paid taxes but there are other
possible situations, such as the refund of
excess estimated corporate quarterly income
tax paid, or that of excess input tax paid by a
VAT-registered person, or that of excise tax
paid on goods locally produced or
manufactured but actually exported. The
standards and mechanics for the grant of a
refund or credit under these situations are
different from that under Sec. 229. Sec. 4[.a)]
of R.A. 7432, is yet another instance of a tax
credit and it does not in any way refer to
illegally collected or erroneously paid taxes, .
. .'" 7
Ruling of the Court of Appeals
The CA affirmed in toto the Resolution of the Court of Tax
Appeals (CTA) ordering petitioner to issue a tax credit certificate in
favor of respondent in the reduced amount of P903,038.39. It
reasoned that Republic Act No. (RA) 7432 required neither a tax
liability nor a payment of taxes by private establishments prior to the
availment of a tax credit. Moreover, such credit is not tantamount to
an unintended benefit from the law, but rather a just compensation
for the taking of private property for public use.
Hence this Petition. 8
The Issues
Petitioner raises the following issues for our consideration:
"Whether the Court of Appeals erred in
holding that respondent may claim the 20% sales
discount as a tax credit instead of as a deduction
from gross income or gross sales.
"Whether the Court of Appeals erred in
holding that respondent is entitled to a refund." 9
These two issues may be summed up in only one: whether
respondent, despite incurring a net loss, may still claim the 20
percent sales discount as a tax credit.
The Court's Ruling
The Petition is not meritorious.
Sole Issue:
Claim of 20 Percent Sales Discount
as Tax Credit Despite Net Loss
Section 4(a) of RA 7432 10 grants to senior citizens the
privilege of obtaining a 20 percent discount on their purchase of
medicine from any private establishment in the country. 11 The latter
may then claim the cost of the discount as a tax credit. 12 But can
such credit be claimed, even though an establishment operates at a
loss?
We answer in the affirmative. IcAaEH
 Tax Credit versus
Tax Deduction
Although the term is not specifically defined in our Tax
Code, 13 tax credit generally refers to an amount that is "subtracted
directly from one's total tax liability." 14 It is an "allowance against
the tax itself" 15 or "a deduction from what is owed" 16 by a
taxpayer to the government. Examples of tax credits are withheld
taxes, payments of estimated tax, and investment tax credits. 17
Tax credit should be understood in relation to other tax
concepts. One of these is tax deduction — defined as a subtraction
"from income for tax purposes," 18 or an amount that is "allowed by
law to reduce income prior to [the] application of the tax rate to
compute the amount of tax which is due." 19 An example of a tax
deduction is any of the allowable deductions enumerated in Section
34 20 of the Tax Code.
A tax credit differs from a tax deduction.On the one hand,
a tax credit reduces the tax due, including — whenever applicable —
the income tax that is determined after applying the corresponding
tax rates to taxable income. 21 A tax deduction,on the other,
reduces the income that is subject to tax 22 in order to arrive
at taxable income. 23 To think of the former as the latter is to avoid,
if not entirely confuse, the issue. A tax credit is used only after the
tax has been computed; a tax deduction,before.
Tax Liability Required
for Tax Credit
Since a tax credit is used to reduce directly the tax that is
due, there ought to be a tax liability before the tax credit can be
applied. Without that liability, any tax credit application will be
useless. There will be no reason for deducting the latter when there
is, to begin with, no existing obligation to the government. However,
as will be presented shortly, the existence of a tax credit or
its grant by law is not the same as the availment or use of such
credit. While the grant is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently
due from, a business establishment, there will obviously be no tax
liability against which any tax credit can be applied. 24 For the
establishment to choose the immediate availment of a tax credit will
be premature and impracticable. Nevertheless, the irrefutable fact
remains that, under RA 7432, Congress has granted without
conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be
used by losing ventures, since there is no tax liability that calls for
its application. Neither can it be reduced to nil by the quick yet
callow stroke of an administrative pen, simply because no reduction
of taxes can instantly be effected. By its nature, the tax credit may
still be deducted from a future,not a present,tax liability, without
which it does not have any use. In the meantime, it need not move.
But it breathes.
Prior Tax Payments Not
Required for Tax Credit
While a tax liability is essential to the availment or use of
any tax credit,prior tax payments are not. On the contrary, for
the existence or grant solely of such credit, neither a tax liability nor
a prior tax payment is needed. The Tax Code is in fact replete with
provisions granting or allowing tax credits,even though no taxes
have been previously paid.
For example, in computing the estate tax due,Section 86(E)
allows a tax credit — subject to certain limitations — for estate
taxes paid to a foreign country. Also found in Section 101(C) is a
similar provision for donor's taxes — again when paid to a foreign
country — in computing for the donor's tax due.The tax credits in
both instances allude to the prior payment of taxes, even if not made
to our government. cISDHE
Under Section 110, a VAT (Value-Added Tax) — registered
person engaging in transactions — whether or not subject to the VAT
— is also allowed a tax credit that includes a ratable portion of any
input tax not directly attributable to either activity. This input tax
may either be the VAT on the purchase or importation of goods or
services that is merely due from — not necessarily paid by — such
VAT-registered person in the course of trade or business; or the
transitional input tax determined in accordance with Section
111(A).The latter type may in fact be an amount equivalent to only
eight percent of the value of a VAT-registered person's beginning
inventory of goods, materials and supplies, when such amount — as
computed — is higher than the actual VAT paid on the said
items. 25 Clearly from this provision, the tax credit refers to an input
tax that is either due only or given a value by mere comparison with
the VAT actually paid — then later prorated. No tax is actually paid
prior to the availment of such credit.
 In Section 111(B),a one and a half percent input tax
credit that is merely presumptive is allowed. For the purchase of
primary agricultural products used as inputs — either in the
processing of sardines, mackerel and milk, or in the manufacture of
refined sugar and cooking oil — and for the contract price of public
work contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are
zero-rated or effectively zero-rated may, under Section 112(A),apply
for the issuance of a tax credit certificate for the amount of
creditable input taxes merely due — again not necessarily paid to —
the government and attributable to such sales, to the extent that the
input taxes have not been applied against output taxes. 26 Where a
taxpayer is engaged in zero-rated or effectively zero-rated sales and
also in taxable or exempt sales, the amount of creditable input taxes
due that are not directly and entirely attributable to any one of these
transactions shall be proportionately allocated on the basis of the
volume of sales. Indeed, in availing of such tax credit for VAT
purposes, this provision — as well as the one earlier mentioned —
shows that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is
another illustration of a tax credit allowed, even though no prior tax
payments are not required. Specifically, in this provision, the
imposition of a final withholding tax rate on cash and/or property
dividends received by a nonresident foreign corporation from a
domestic corporation is subjected to the condition that a foreign tax
credit will be given by the domiciliary country in an amount
equivalent to taxes that are merely deemed paid. 27 Although true,
this provision actually refers to the tax credit as a condition only for
the imposition of a lower tax rate, not as a deduction from the
corresponding tax liability. Besides, it is not our government but the
domiciliary country that credits against the income tax payable to
the latter by the foreign corporation, the tax to be foregone or
spared. 28
In contrast, Section 34(C)(3),in relation to Section 34(C)(7)
(b),categorically allows as credits, against the income tax imposable
under Title II, the amount of income taxes merely incurred — not
necessarily paid — by a domestic corporation during a taxable year
in any foreign country. Moreover, Section 34(C)(5) provides that for
such taxes incurred but not paid, a tax credit may be allowed,
subject to the condition precedent that the taxpayer shall simply
give a bond with sureties satisfactory to and approved by petitioner,
in such sum as may be required; and further conditioned upon
payment by the taxpayer of any tax found due, upon petitioner's
redetermination of it.
In addition to the above-cited provisions in the Tax Code,there
are also tax treaties and special laws that grant or allow tax
credits,even though no prior tax payments have been made.
Under the treaties in which the tax credit method is used as a
relief to avoid double taxation, income that is taxed in the state of
source is also taxable in the state of residence,but the tax paid in
the former is merely allowed as a credit against the tax levied in the
latter. 29 Apparently, payment is made to the state of source,not
the state of residence.No tax, therefore, has been previously paid to
the latter. ScCDET
Under special laws that particularly affect businesses, there
can also be tax credit incentives. To illustrate, the incentives
provided for in Article 48 of Presidential Decree No. (PD) 1789, as
amended by Batas Pambansa Blg. (BP) 391, include tax
credits equivalent to either five percent of the net value earned, or
five or ten percent of the net local content of exports. 30 In order to
avail of such credits under the said law and still achieve its
objectives, no prior tax payments are necessary.
From all the foregoing instances, it is evident that prior tax
payments are not indispensable to the availment of a tax credit.
Thus, the CA correctly held that the availment under RA 7432 did not
require prior tax payments by private establishments
concerned. 31 However, we do not agree with its finding 32 that the
carry-over of tax credits under the said special law to succeeding
taxable periods, and even their application against internal revenue
taxes, did not necessitate the existence of a tax liability.
The examples above show that a tax liability is certainly
important in the availment or use,not the existence or grant,of a tax
credit.Regarding this matter, a private establishment reporting a net
loss in its financial statements is no different from another that
presents a net income.Both are entitled to the tax credit provided for
under RA 7432, since the law itself accords that unconditional
benefit. However, for the losing establishment to immediately apply
such credit, where no tax is due, will be an improvident usance.
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim
as tax credit the amount of discounts they grant. 33 In turn, the
Implementing Rules and Regulations, issued pursuant thereto,
provide the procedures for its availment. 34 To deny such credit,
despite the plain mandate of the law and the regulations carrying out
that mandate, is indefensible.
First,the definition given by petitioner is erroneous. It refers
to tax credit as the amount representing the 20 percent discount
that "shall be deducted by the said establishments from their gross
income for income tax purposes and from their gross sales for value-
added tax or other percentage tax purposes." 35 In ordinary
business language, the tax credit represents the amount of such
discount. However, the manner by which the discount shall be
credited against taxes has not been clarified by the revenue
regulations.
By ordinary acceptation, a discount is an "abatement or
reduction made from the gross amount or value of anything." 36 To
be more precise, it is in business parlance "a deduction or lowering
of an amount of money;" 37 or "a reduction from the full amount or
value of something, especially a price." 38 In business there are
many kinds of discount, the most common of which is that affecting
the income statement 39 or financial report upon which the income
taxis based.
Business Discounts
Deducted from Gross Sales
A cash discount,for example, is one granted by business
establishments to credit customers for their prompt payment. 40 It is
a "reduction in price offered to the purchaser if payment is made
within a shorter period of time than the maximum time
specified." 41 Also referred to as a sales discount on the part of the
seller and a purchase discount on the part of the buyer, it may be
expressed in such terms as "5/10, n/30." 42
A quantity discount,however, is a "reduction in price allowed
for purchases made in large quantities, justified by savings in
packaging, shipping, and handling." 43 It is also called
a volume or bulk discount. 44
A "percentage reduction from the list price ...allowed by
manufacturers to wholesalers and by wholesalers to retailers" 45 is
known as a trade discount.No entry for it need be made in the
manual or computerized books of accounts,since the purchase or
sale is already valued at the net price actually charged the
buyer. 46 The purpose for the discount is to encourage trading or
increase sales, and the prices at which the purchased goods may be
resold are also suggested. 47 Even a chain discount — a series of
discounts from one list price — is recorded at net. 48
Finally, akin to a trade discount is a functional discount.It is
"a supplier's price discount given to a purchaser based on the
[latter's] role in the [former's] distribution system." 49 This role
usually involves warehousing or advertising. TEaADS
Based on this discussion, we find that the nature of a sales
discount is peculiar. Applying generally accepted accounting
principles (GAAP) in the country, this type of discount is reflected in
the income statement 50 as a line item deducted — along with
returns, allowances, rebates and other similar expenses —
from gross sales to arrive at net sales. 51 This type of presentation
is resorted to, because the accounts receivable and sales figures
that arise from sales discounts,— as well as from quantity, volume or
bulk discounts — are recorded in the manual and
computerized books of accounts and reflected in the financial
statements at the gross amounts of the invoices. 52 This manner of
recording credit sales — known as the gross method — is most
widely used, because it is simple, more convenient to apply than
the net method,and produces no material errors over time. 53
However, under the net method used in
recording trade,chain or functional discounts,only the net amounts of
the invoices — after the discounts have been deducted — are
recorded in the books of accounts 54 and reflected in the financial
statements. A separate line item cannot be shown, 55 because the
transactions themselves involving both accounts
receivable and sales have already been entered into, net of the said
discounts.
The term sales discounts is not expressly defined in the Tax
Code,but one provision adverts to amounts whose sum — along
with sales returns, allowances and cost of goods sold 56 — is
deducted from gross sales to come up with the gross income,
profit or margin 57 derived from business. 58 In another provision
therein, sales discounts that are granted and indicated in the
invoices at the time of sale — and that do not depend upon the
happening of any future event — may be excluded from the gross
sales within the same quarter they were given. 59 While
determinative only of the VAT, the latter provision also appears as a
suitable reference point for income tax purposes already embraced
in the former. After all, these two provisions affirm that sales
discounts are amounts that are always deductible from gross sales.
 Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA
7432 is the private establishment's outright deduction of the
discount from the invoice price of the medicine sold to the senior
citizen. 60 It is, therefore, expected that for each retail sale made
under this law, the discount period lasts no more than a day, because
such discount is given — and the net amount thereof collected —
immediately upon perfection of the sale. 61 Although prompt
payment is made for an arm's-length transaction by the senior
citizen, the real and compelling reason for the private establishment
giving the discount is that the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount
privilege, not a sales discount or any of the above discounts in
particular. Prompt payment is not the reason for (although a
necessary consequence of) such grant. To be sure, the privilege
enjoyed by the senior citizen must be equivalent to the tax
credit benefit enjoyed by the private establishment granting the
discount. Yet, under the revenue regulations promulgated by our tax
authorities, this benefit has been erroneously likened and confined
to a sales discount.
To a senior citizen, the monetary effect of the privilege may
be the same as that resulting from a sales discount.However, to a
private establishment, the effect is different from a simple reduction
in price that results from such discount. In other words, the tax
credit benefit is not the same as a sales discount.To repeat from our
earlier discourse, this benefit cannot and should not be treated as
a tax deduction.
To stress, the effect of a sales discount on the income
statement and income tax return of an establishment covered by RA
7432 is different from that resulting from the availment or use of
its tax credit benefit. While the former is a deduction before,the
latter is a deduction after,the income tax is computed. As mentioned
earlier, a discount is not necessarily a sales discount,and a tax
credit for a simple discount privilege should not be automatically
treated like asales discount.Ubi lex non distinguit, nec nos
distinguere debemus.Where the law does not distinguish, we ought
not to distinguish. TIDHCc
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94
define tax credit as the 20 percent discount deductible from gross
income for income tax purposes, or from gross sales for VAT or other
percentage tax purposes. In effect, the tax credit benefit under RA
7432 is related to a sales discount.This contrived definition is
improper, considering that the latter has to be deducted from gross
sales in order to compute the gross income in the income
statement and cannot be deducted again, even for purposes of
computing the income tax.
When the law says that the cost of the discount may be
claimed as a tax credit,it means that the amount — when claimed —
shall be treated as a reduction from any tax liability, plain and
simple. The option to avail of the tax creditbenefit depends upon the
existence of a tax liability, but to limit the benefit to a sales
discount — which is not even identical to the discount privilege that
is granted by law — does not define it at all and serves no useful
purpose. The definition must, therefore, be stricken down.
Laws Not Amended
by Regulations
Second, the law cannot be amended by a mere regulation. In
fact, a regulation that "operates to create a rule out of harmony with
the statute is a mere nullity"; 62 it cannot prevail.
It is a cardinal rule that courts "will and should respect the
contemporaneous construction placed upon a statute by the
executive officers whose duty it is to enforce it ..." 63 In the scheme
of judicial tax administration, the need for certainty and
predictability in the implementation of tax laws is crucial. 64 Our tax
authorities fill in the details that "Congress may not have the
opportunity or competence to provide." 65 The regulations these
authorities issue are relied upon by taxpayers, who are certain that
these will be followed by the courts. 66 Courts, however, will not
uphold these authorities' interpretations when clearly absurd,
erroneous or improper.
In the present case, the tax authorities have given the
term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in
contrast to what RA 7432 provides. Their interpretation has muddled
up the intent of Congress in granting a mere discount privilege, not
a sales discount.The administrative agency issuing these regulations
may not enlarge, alter or restrict the provisions of the law it
administers; it cannot engraft additional requirements not
contemplated by the legislature. 67
In case of conflict, the law must prevail. 68 A "regulation
adopted pursuant to law is law." 69 Conversely, a regulation or any
portion thereof not adopted pursuant to law is no law and has neither
the force nor the effect of law. 70
 Availment of Tax
Credit Voluntary
Third,the word may in the text of the statute 71 implies that
the availability of the tax credit benefit is neither unrestricted nor
mandatory. 72 There is no absolute right conferred upon respondent,
or any similar taxpayer, to avail itself of the tax credit remedy
whenever it chooses; "neither does it impose a duty on the part of
the government to sit back and allow an important facet of tax
collection to be at the sole control and discretion of the
taxpayer." 73 For the tax authorities to compel respondent to deduct
the 20 percent discount from either its gross income or its gross
sales 74 is, therefore, not only to make an imposition without basis in
law, but also to blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax
credit benefit is merely permissive, not imperative. Respondent is
given two options — either to claim or not to claim the cost of the
discounts as a tax credit.In fact, it may even ignore the credit and
simply consider the gesture as an act of beneficence, an expression
of its social conscience. CDHAcI
Granting that there is a tax liability and respondent claims
such cost as a tax credit,then the tax credit can easily be applied. If
there is none, the credit cannot be used and will just have to be
carried over and revalidated 75accordingly. If, however, the business
continues to operate at a loss and no other taxes are due, thus
compelling it to close shop, the credit can never be applied and will
be lost altogether.
In other words, it is the existence or the lack of a tax liability
that determines whether the cost of the discounts can be used as
a tax credit. RA 7432 does not give respondent the unfettered right
to avail itself of the credit whenever it pleases. Neither does it allow
our tax administrators to expand or contract the legislative mandate.
"The 'plain meaning rule' or verba legis in statutory construction is
thus applicable ...Where the words of a statute are clear, plain and
free from ambiguity, it must be given its literal meaning and applied
without attempted interpretation." 76
Tax Credit Benefit
Deemed Just Compensation
Fourth,Sections 2.i and 4 of RR 2-94 deny the exercise by the
State of its power of eminent domain. Be it stressed that the
privilege enjoyed by senior citizens does not come directly from the
State, but rather from the private establishments concerned.
Accordingly, the tax credit benefit granted to these establishments
can be deemed as their just compensation for private property taken
by the State for public use. 77
The concept of public use is no longer confined to the
traditional notion of use by the public,but held synonymous
with public interest, public benefit, public welfare ,and public
convenience. 78 The discount privilege to which our senior citizens
are entitled is actually a benefit enjoyed by the general public to
which these citizens belong. The discounts given would have entered
the coffers and formed part of the gross sales of the private
establishments concerned, were it not for RA 7432. The permanent
reduction in their total revenues is a forced subsidy corresponding to
the taking of private property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432,
respondent becomes entitled to a just compensation.This term refers
not only to the issuance of a tax credit certificate indicating the
correct amount of the discounts given, but also to the promptness in
its release. Equivalent to the payment of property taken by the State,
such issuance — when not done within a reasonable time from the
grant of the discounts — cannot be considered as just
compensation.In effect, respondent is made to suffer the
consequences of being immediately deprived of its revenues while
awaiting actual receipt, through the certificate, of the equivalent
amount it needs to cope with the reduction in its revenues. 79
Besides, the taxation power can also be used as an
implement for the exercise of the power of eminent domain. 80 Tax
measures are but "enforced contributions exacted on pain of penal
sanctions" 81 and "clearly imposed for apublic purpose." 82 In
recent years, the power to tax has indeed become a most effective
tool to realize social justice, public welfare,and the equitable
distribution of wealth. 83
While it is a declared commitment under Section 1 of RA
7432, social justice "cannot be invoked to trample on the rights of
property owners who under our Constitution and laws are also
entitled to protection. The social justice consecrated in our
[C]onstitution [is] not intended to take away rights from a person and
give them to another who is not entitled thereto." 84 For this reason,
a just compensation for income that is taken away from respondent
becomes necessary. It is in the tax credit that our legislators find
support to realize social justice, and no administrative body can alter
that fact.
 To put it differently, a private establishment that merely So, I think we have to put in also a provision here
breaks even 85 — without the discounts yet — will surely start to about the deductions from taxable income of
incur losses because of such discounts. The same effect is expected that private hospitals, di ba ganon 'yan?
if its mark-up is less than 20 percent, and if all its sales come from
retail purchases by senior citizens. Aside from the observation we MS. ADVENTO:
have already raised earlier, it will also be grossly unfair to an Kaya lang po sir, ang mga discounts po nila
establishment if the discounts will be treated merely as deductions affecting government and public institutions,
from either itsgross income or its gross sales.Operating at a loss so, puwede na po nating hindi isama yung
through no fault of its own, it will realize that the tax credit limitation mga less deductions ng taxable income.
under RR 2-94 is inutile, if not improper. Worse, profit-generating
businesses will be put in a better position if they avail themselves THE CHAIRMAN. (Rep. Unico):
of tax credits denied those that are losing, because no taxes are due
Puwede na. Yung about the private hospitals. Yung
from the latter. aDICET
isiningit natin?
Grant of Tax Credit
MS. ADVENTO:
Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior Singit na po ba yung 15% on credit. (inaudible/did
citizens are assisted by the community as a whole and to establish a not use the microphone).
program beneficial to them. 86 These objectives are consonant with SEN. ANGARA:
the constitutional policy of making "health ...services available to all
the people at affordable cost" 87 and of giving "priority for the needs Hindi pa, hindi pa.
of the . . . elderly." 88 Sections 2.i and 4 of RR 2-94, however,
THE CHAIRMAN. (Rep. Unico):
contradict these constitutional policies and statutory objectives.
Ah, 'di pa ba naisama natin?
Furthermore, Congress has allowed all private establishments
a simple tax credit,not a deduction. In fact, no cash outlay is SEN. ANGARA:
required from the government for the availment or use of such credit.
The deliberations on February 5, 1992 of the Bicameral Conference Oo. You want to insert that?
Committee Meeting on Social Justice, which finalized RA 7432,
THE CHAIRMAN (Rep. Unico):
disclose the true intent of our legislators to treat the sales
discounts as a tax credit,rather than as a deduction from gross Yung ang proposal ni Senator Shahani, e.
income.We quote from those deliberations as follows:
SEN. ANGARA:
"THE CHAIRMAN (Rep. Unico):
In the case of private hospitals they got the grant of
By the way, before that ano, about deductions from 15% discount, provided that, the private
taxable income. I think we incorporated hospitals can claim the expense as a tax
there a provision na — on the responsibility credit.
of the private hospitals and drugstores, hindi
ba? REP. AQUINO:

SEN. ANGARA: Yah could be allowed as deductions in the

perpetrations of (inaudible) income. cEaDTA
Oo.
SEN. ANGARA:
THE CHAIRMAN. (Rep. Unico):
I-tax credit na lang natin para walang cash-out ano?
REP. AQUINO: As a tax credit [rather] than a kuwan —
deduction,Okay.
Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng
establishments na covered. REP. AQUINO:

THE CHAIRMAN. (Rep. Unico): Okay.

Sa kuwan lang yon, as private hospitals lang. SEN. ANGARA:

REP. AQUINO: Sige Okay. Di subject to style na lang sa Letter

A". 89
Ano ba yung establishments na covered?
Special Law
SEN. ANGARA: Over General Law
Restaurant lodging houses, recreation centers. Sixth and last, RA 7432 is a special law that should prevail
over the Tax Code — a general law. ". . . [T]he rule is that on a
REP. AQUINO:
specific matter the special law shall prevail over the general law,
All establishments covered siguro? which shall be resorted to only to supply deficiencies in the
former." 90 In addition, "[w]here there are two statutes, the earlier
SEN. ANGARA: special and the later general — the terms of the general broad
From all establishments. Alisin na natin 'Yung enough to include the matter provided for in the special — the fact
kuwan kung ganon. Can we go back to that one is special and the other is general creates a presumption
Section 4 ha? that the special is to be considered as remaining an exception to the
general, 91 one as a general law of the land, the other as the law of a
REP. AQUINO: particular case." 92 "It is a canon of statutory construction that a
later statute, general in its terms and not expressly repealing a prior
Oho. special statute, will ordinarily not affect the special provisions of
SEN. ANGARA: such earlier statute." 93

Letter A. To capture that thought, we'll say the grant
of 20% discount from all establishments et
cetera, et cetera, provided that said
establishments — provided that private
establishments may claim the cost as a tax
credit. Ganon ba 'yon?
REP. AQUINO:
RA 7432 is an earlier law not expressly repealed by, and
therefore remains an exception to, the Tax Code — a later law. When
the former states that a tax credit may be claimed, then the
requirement of prior tax payments under certain provisions of the
latter, as discussed above, cannot be made to apply. Neither can the
instances of or references to a tax deduction under the Tax
Code 94 be made to restrict RA 7432. No provision of any revenue
regulation can supplant or modify the acts of Congress.

Yah. WHEREFORE, the Petition is hereby DENIED. The assailed

Decision and Resolution of the Court of Appeals AFFIRMED. No
SEN. ANGARA:
pronouncement as to costs. EacHCD
Dahil kung government, they don't need to claim it.
SO ORDERED.
THE CHAIRMAN. (Rep. Unico):
||| (Commissioner of Internal Revenue v. Central Luzon Drug Corp.,
Tax credit. G.R. No. 159647, [April 15, 2005], 496 PHIL 307-341)

SEN. ANGARA: