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VAT

(1) G.R. No. 81311 June 30, 1988


KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN
NG PILIPINAS, INC., HERMINIGILDO C. DUMLAO,
GERONIMO Q. QUADRA, and MARIO C.
VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of Internal
Revenue, respondent.
G.R. No. 81820 June 30, 1988
KILUSANG MAYO UNO LABOR CENTER (KMU), its officers
and affiliated labor federations and alliances,petitioners,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF
FINANCE, THE COMMISSIONER OF INTERNAL
REVENUE, and SECRETARY OF BUDGET, respondents.
G.R. No. 81921 June 30, 1988
INTEGRATED CUSTOMS BROKERS ASSOCIATION OF
THE PHILIPPINES and JESUS B. BANAL, petitioners,
vs.
The HON. COMMISSIONER, BUREAU OF INTERNAL
REVENUE, respondent.
G.R. No. 82152 June 30, 1988
RICARDO C. VALMONTE, petitioner,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF
FINANCE, COMMISSIONER OF INTERNAL REVENUE and
SECRETARY OF BUDGET, respondent.
PADILLA, J.:
FACTS: These 4 petitions seek to nullify Executive Order No. 273
which amended certain sections of the NIRC and adopted the valueadded tax (VAT), for being unconstitutional in that its enactment is
not alledgedly within the powers of the President; that the VAT is
oppressive, discriminatory, regressive, and violates the due process
and equal protection clauses and other provisions of the 1987
Constitution.
The Solicitor General prays for the dismissal of the petitions on the
ground that the petitioners have failed to show justification for the
exercise of its judicial powers. He also questions the legal standing of
the petitioners who, he contends, are merely asking for an advisory
opinion from the Court, there being no justiciable controversy for
resolution.
Objections to taxpayers' suit for lack of sufficient personality
standing, or interest are, however, in the main procedural matters.
Considering the importance to the public of the cases at bar, and in
keeping with the Court's duty, under the 1987 Constitution, to
determine whether or not the other branches of government have kept
themselves within the limits of the Constitution and the laws and that
they have not abused the discretion given to them, the Court has
brushed aside technicalities of procedure and has taken cognizance of
these petitions.
But, before resolving the issues raised, a brief look into the tax law in
question is in order.
The VAT is a tax levied on a wide range of goods and services. It
is a tax on the value, added by every seller, with aggregate gross
annual sales of articles and/or services, exceeding P200,00.00, to
his purchase of goods and services, unless exempt. VAT is
computed at the rate of 0% or 10% of the gross selling price of
goods or gross receipts realized from the sale of services.

The VAT is said to have eliminated privilege taxes, multiple rated


sales tax on manufacturers and producers, advance sales tax, and
compensating tax on importations. The framers of EO 273 that it
is principally aimed to rationalize the system of taxing goods and
services; simplify tax administration; and make the tax system
more equitable, to enable the country to attain economic
recovery.
The VAT is not entirely new. It was already in force, in a modified
form, before EO 273 was issued. As pointed out by the Solicitor
General, the Philippine sales tax system, prior to the issuance of EO
273, was essentially a single stage value added tax system computed
under the "cost subtraction method" or "cost deduction method" and
was imposed only on original sale, barter or exchange of articles by
manufacturers, producers, or importers. Subsequent sales of such
articles were not subject to sales tax. However, with the issuance of
PD 1991 on 31 October 1985, a 3% tax was imposed on a second
sale, which was reduced to 1.5% upon the issuance of PD 2006 on 31
December 1985, to take effect 1 January 1986. Reduced sales taxes
were imposed not only on the second sale, but on every subsequent
sale, as well. EO 273 merely increased the VAT on every sale to
10%, unless zero-rated or exempt.
ISSUE: Whether EO 273 is unconstitutional on the ground that the
President had no authority to issue the same
HELD: It should be recalled that under Proclamation No. 3, which
decreed a Provisional Constitution, sole legislative authority was
vested upon the President.
On 15 October 1986, the Constitutional Commission of 1986 adopted
a new Constitution for the Republic of the Philippines which was
ratified in a plebiscite conducted on 2 February 1987.
It should be noted that, under both the Provisional and the 1987
Constitutions, the President is vested with legislative powers until a
legislature under a new Constitution is convened. The first Congress,
created and elected under the 1987 Constitution, was convened on 27
July 1987. Hence, the enactment of EO 273 on 25 July 1987, two
(2) days before Congress convened on 27 July 1987, was within
the President's constitutional power and authority to legislate.
Petitioner Valmonte claims, additionally, that Congress was really
convened on 30 June 1987 (not 27 July 1987). He contends that the
word "convene" is synonymous with "the date when the elected
members of Congress assumed office."
The contention is without merit. The word "convene" which has been
interpreted to mean "to call together, cause to assemble, or
convoke," 1 is clearly different from assumption of office by
the individual members of Congress or their taking the oath of office.
To uphold the submission of petitioner Valmonte would stretch the
definition of the word "convene" a bit too far. It would also defeat the
purpose of the framers of the 1987 Constitutional and render
meaningless some other provisions of said Constitution.
The 1987 Constitution mentions a specific date when the President
loses her power to legislate. If the framers of said Constitution had
intended to terminate the exercise of legislative powers by the
President at the beginning of the term of office of the members of
Congress, they should have so stated (but did not) in clear and

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unequivocal terms. The Court has not power to re-write the


Constitution and give it a meaning different from that intended.

particular class for taxation or exemption infringe no


constitutional limitation." (Lutz v. Araneta, 98 Phil. 148,
153).

The Court also finds no merit in the petitioners' claim that EO 273
was issued by the President in grave abuse of discretion amounting to
lack or excess of jurisdiction. "Grave abuse of discretion" has been
defined, as follows:

The sales tax adopted in EO 273 is applied similarly on all goods


and services sold to the public, which are not exempt, at the
constant rate of 0% or 10%.

Grave abuse of discretion" implies such capricious and


whimsical exercise of judgment as is equivalent to lack of
jurisdiction, or, in other words, where the power is
exercised in an arbitrary or despotic manner by reason of
passion or personal hostility, and it must be so patent and
gross as to amount to an evasion of positive duty or to a
virtual refusal to perform the duty enjoined or to act at all
in contemplation of law.

The disputed sales tax is also equitable. It is imposed only on


sales of goods or services by persons engage 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, spared as they are from the incidence of the
VAT, are expected to be relatively lower and within the reach of
the general public. 6

Petitioners have failed to show that EO 273 was issued capriciously


and whimsically or in an arbitrary or despotic manner by reason of
passion or personal hostility. It appears that a comprehensive study of
the VAT had been extensively discussed by this framers and other
government agencies involved in its implementation, even under the
past administration. As the Solicitor General correctly sated. "The
signing of E.O. 273 was merely the last stage in the exercise of her
legislative powers. The legislative process started long before the
signing when the data were gathered, proposals were weighed and the
final wordings of the measure were drafted, revised and finalized.
Certainly, it cannot be said that the President made a jump, so to
speak, on the Congress, two days before it convened." 3

The Court likewise finds no merit in the contention of the petitioner


Integrated Customs Brokers Association of the Philippines that EO
273, more particularly the new Sec. 103 (r) of the National Internal
Revenue Code, unduly discriminates against customs brokers. The
contested provision states:

The petitioners have failed to adequately show that the VAT is


oppressive, discriminatory or unjust. Petitioners merely rely upon
newspaper articles which are actually hearsay and have evidentiary
value. To justify the nullification of a law, there must be a clear and
unequivocal breach of the Constitution, not a doubtful and
argumentative implication.
EO 273 satisfies all the requirements of a valid tax. It is uniform.
The court, in City of Baguio vs. De Leon, 5 said:
In Philippine Trust Company v. Yatco (69 Phil. 420),
Justice Laurel, speaking for the Court, stated: "A tax is
considered uniform when it operates with the same
force and effect in every place where the subject may be
found."
There was no occasion in that case to consider the possible
effect on such a constitutional requirement where there is a
classification. The opportunity came in Eastern Theatrical
Co. v. Alfonso (83 Phil. 852, 862). Thus: "Equality and
uniformity in taxation means that all taxable articles or
kinds of property of the same class shall be taxed at the
same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of
taxation; . . ."
To satisfy this requirement then, all that is needed as held
in another case decided two years later, (Uy Matias v. City
of Cebu, 93 Phil. 300) is that the statute or ordinance in
question "applies equally to all persons, firms and
corporations placed in similar situation." This Court is on
record as accepting the view in a leading American case
(Carmichael v. Southern Coal and Coke Co., 301 US 495)
that "inequalities which result from a singling out of one

Sec. 103. Exempt transactions. The following shall be


exempt from the value-added tax:
(r) Service performed in the exercise of profession or
calling (except customs brokers) subject to the occupation
tax under the Local Tax Code, and professional services
performed by registered general professional partnerships;
The phrase "except customs brokers" is not meant to
discriminate against customs brokers. It was inserted in Sec.
103(r) to complement the provisions of Sec. 102 of the Code,
which makes the services of customs brokers subject to the
payment of the VAT and to distinguish customs brokers from
other professionals who are subject to the payment of an
occupation tax under the Local Tax Code. Pertinent provisions of
Sec. 102 read:
Sec. 102. Value-added tax on sale of services. 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 call for the exercise or use of the
physical or mental faculties.
With the insertion of the clarificatory phrase "except customs
brokers" in Sec. 103(r), a potential conflict between the two sections,
(Secs. 102 and 103), insofar as customs brokers are concerned, is
averted.
At any rate, the distinction of the customs brokers from the other
professionals who are subject to occupation tax under the Local
Tax Code is based upon material differences, in that the activities

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of customs brokers (like those of stock, real estate and


immigration brokers) partake more of a business, rather than a
profession and were thus subjected to the percentage tax under
Sec. 174 of the National Internal Revenue Code prior to its
amendment by EO 273. EO 273 abolished the percentage tax and
replaced it with the VAT. If the petitioner Association did not
protest the classification of customs brokers then, the Court sees
no reason why it should protest now.
The Court takes note that EO 273 has been in effect for more than
five (5) months now, so that the fears expressed by the petitioners
that the adoption of the VAT will trigger skyrocketing of prices of
basic commodities and services, as well as mass actions and
demonstrations against the VAT should by now be evident. The fact
that nothing of the sort has happened shows that the fears and
apprehensions of the petitioners appear to be more imagined than
real. It would seem that the VAT is not as bad as we are made to
believe.
In any event, if petitioners seriously believe that the adoption and
continued application of the VAT are prejudicial to the general
welfare or the interests of the majority of the people, they should seek
recourse and relief from the political branches of the government.
The Court, following the time-honored doctrine of separation of
powers, cannot substitute its judgment for that of the President as to
the wisdom, justice and advisability of the adoption of the VAT. The
Court can only look into and determine whether or not EO 273 was
enacted and made effective as law, in the manner required by, and
consistent with, the Constitution, and to make sure that it was not
issued in grave abuse of discretion amounting to lack or excess of
jurisdiction; and, in this regard, the Court finds no reason to impede
its application or continued implementation.
Petitions DISMISSED.

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(2) EN BANC
[G.R. No. 115455. August 25, 1994.]
ARTURO M. TOLENTINO, Petitioner, v. THE
SECRETARY OF FINANCE and THE
COMMISSIONER OF INTERNAL
REVENUE, Respondent
MENDOZA, J.:
The valued-added tax (VAT) is levied on the sale, barter or exchange
of goods and properties as well as on the sale or exchange of services.
It is equivalent to 10% of the gross selling price or gross value in
money of goods or properties sold, bartered or exchanged or of the
gross receipts from the sale or exchange of services. Republic Act
No. 7716 seeks to widen the tax base of the existing VAT system and
enhance its administration by amending the NIRC.
These are various suits for certiorari and prohibition, challenging the
constitutionality of Republic Act No. 7716 on various grounds
summarized in the resolution of July 6, 1994 of this Court, as
follows:chanrob1es
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1aw
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I. Procedural Issues:
A. Does Republic Act No. 7716 violate Art. VI, 24 of the
Constitution?
B. Does it violate Art. VI, 26(2) of the Constitution?
C. What is the extent of the power of the Bicameral Conference
Committee?
II. Substantive Issues:
A. Does the law violate the following provisions in the Bill of Rights
(Art. III)?
B. Does the law violate the following other provisions of the
Constitution?
1. Art. VI, 28(1)
2. Art. VI, 28(3)
I. PROCEDURAL ISSUES
The contention of petitioners is that in enacting Republic Act No.
7716, or the Expanded Valued-Added Tax Law, Congress violated
the Constitution because, although H. No. 11197 had originated in
the House of Representatives, it was not passed by the Senate but was
simply consolidated with the Senate version (S. No. 1630) in the
Conference Committee to produce the bill which the President signed
into law. The following provisions of the Constitution are cited in
support of the proposition that because Republic Act No. 7716 was
passed in this manner, it did not originate in the House of
Representatives and it has not thereby become a law:brary
Art. VI, 24: All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application,
and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with
amendments.
Id., 26(2): No bill passed by either House shall become a law
unless it has passed three readings on separate days, and printed
copies thereof in its final form have been distributed to its
Members three days before its passage, except when the
President certifies to the necessity of its immediate enactment to
meet a public calamity or emergency. Upon the last reading of a
bill, no amendment thereto shall be allowed, and the vote thereon
shall be taken immediately thereafter, and the yeas and nays
entered
in
the
Journal.

It appears that on various dates between July 22, 1992 and August 31,
1993, several bills 1 were introduced in the House of Representatives
seeking to amend certain provisions of the National Internal Revenue
Code relative to the value-added tax or VAT.
The bill (H. No. 11197) was considered on second reading starting
November 6, 1993 and, on November 17, 1993, it was approved by
the House of Representatives after third and final reading.
It was sent to the Senate on November 23, 1993 and later referred by
that body to its Committee on Ways and Means. On February 7,
1994, the Senate Committee submitted its report recommending
approval of S. No. 1630, entitled
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT)
SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS
ADMINISTRATION, AMENDING FOR THESE PURPOSES
SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110 OF
TITLE IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE
IX, AND REPEALING SECTIONS 113, 114 and 116 OF TITLE V,
ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED,
AND
FOR
OTHER
PURPOSES.
It was stated that the bill was being submitted "in substitution of
Senate Bill No. 1129, taking into consideration P. S. Res. No. 734
and H. B. No. 11197."c
On February 8, 1994, the Senate began consideration of the bill (S.
No. 1630). It finished debates on the bill and approved it on second
reading on March 24, 1994. On the same day, it approved the bill on
third reading by the affirmative votes of 13 of its members, with one
abstention.
H. No. 1197 and its Senate version (S. No. 1630) were then referred
to a conference committee which, after meeting four times (April 13,
19, 21 and 25, 1994), recommended that "House Bill No. 11197, in
consolidation with Senate Bill No. 1630, be approved in accordance
with the attached copy of the bill as reconciled and approved by the
conferees."virtua1aw
library
The Conference Committee
bill, entitled "AN
ACT
RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,
WIDENING ITS TAX BASE AND ENHANCING ITS
ADMINISTRATION AND FOR THESE PURPOSES AMENDING
AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND
FOR OTHER PURPOSES," was thereafter approved by the House of
Representatives on April 27, 1994 and by the Senate on May 2, 1994.
The enrolled bill was then presented to the President of the
Philippines who, on May 5, 1994, signed it. It became Republic Act
No. 7716. On May 12, 1994, Republic Act No. 7716 was published
in two newspapers of general circulation and, on May 28, 1994, it
took effect, although its implementation was suspended until June 30,
1994 to allow time for the registration of business entities. It would
have been enforced on July 1, 1994 but its enforcement was stopped
because the Court, by the vote of 11 to 4 of its members, granted a
temporary
restraining
order
on
June
30,
1994.
First. Petitioners contention is that Republic Act No. 7716 did not
"originate exclusively" in the House of Representatives as required
by Art. VI, 24 of the Constitution, because it is in fact the result of
the consolidation of two distinct bills, H. No. 11197 and S. No. 1630.
In this connection, petitioners point out that although Art. VI, 24
was adopted from the American Federal Constitution, 2 it is notable
in two respects: the verb "shall originate" is qualified in the
Philippine Constitution by the word "exclusively" and the phrase "as
on other bills" in the American version is omitted. This means,

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according to them, that to be considered as having originated in the


House, Republic Act No. 7716 must retain the essence of H. No.
11197.
This argument will not bear analysis. To begin with, it is not the
law but the revenue bill which is required by the
Constitution to "originate exclusively" in the House of
Representatives. It is important to emphasize this, because a bill
originating in the House may undergo such extensive changes in
the Senate that the result may be a rewriting of the whole. The
possibility of a third version by the conference committee will be
discussed later. At this point, what is important to note is that, as
a result of the Senate action, a distinct bill may be produced. To
insist that a revenue statute and not only the bill which
initiated the legislative process culminating in the enactment of
the law must substantially be the same as the House bill would
be to deny the Senates power not only to "concur with
amendments" but also to" propose amendments." It would be to
violate the coequality of legislative power of the two houses of
Congress and in fact make the House superior to the Senate.
The contention that the constitutional design is to limit the Senates
power in respect of revenue bills in order to compensate for the grant
to the Senate of the treaty-ratifying power 3 and thereby equalize its
powers and those of the House overlooks the fact that the powers
being compared are different. We are dealing here with the legislative
power. which under the Constitution is vested not in any particular
chamber but in the Congress of the Philippines, consisting of "a
Senate and a House of Representatives." 4 The exercise of the treatyratifying power is not the exercise of legislative power. It is the
exercise of a check on the executive power. There is, therefore, no
justification for comparing the legislative powers of the House and of
the Senate on the basis of the possession of such nonlegislative power
by the Senate. The possession of a similar power by the U.S. Senate 5
has never been thought of as giving it more legislative powers than
the House of Representatives.
Indeed, what the Constitution simply means is that the initiative
for filing revenue, tariff, or tax bills, bills authorizing an increase
of the public debt, private bills and bills of local application must
come from the House of Representatives on the theory that,
elected as they are from the districts, the members of the House
can be expected to be more sensitive to the local needs and
problems. On the other hand, the senators, who are elected at
large, are expected to approach the same problems from the
national perspective. Both views are thereby made to bear on the
enactment of such laws. Nor does the Constitution prohibit the
filing in the Senate of a substitute bill in anticipation of its receipt
of the bill from the House, so long as action by the Senate as a
body is withheld pending receipt of the House bill.
Second. Enough has been said to show that it was within the power of
the Senate to propose S. No. 1630. We not pass to the next argument
of petitioners that S. No. 1630 did not pass three readings on separate
days as required by the Constitution 8 because the second and third
readings were done on the same day, March 24, 1994. But this was
because on February 24, 1994 9 and again on March 22, 1994, 10 the
President had certified S. No. 1630 as urgent. The presidential
certification dispensed with the requirement not only of printing but
also that of reading the bill on separate days. The phrase "except
when the President certifies to the necessity of its immediate
enactment, etc." in Art. VI, 26(2) qualified the two stated
conditions before a bill can become a law: (i) the bill has passed three
readings on separate days and (ii) it has been printed in its final form
and distributed three days before it is finally approved.
In other words, the "unless" clause must be read in relation to the

"except" clause, because the two are really coordinate clauses of


the same sentence. To construe the "except" clause as simply
dispensing with the second requirement in the "unless" clause
(i.e., printing and distribution three days before final approval)
would not only violate the rules of grammar. It would also negate
the very premise of the "except" clause: the necessity of securing
the immediate enactment of a bill which is certified in order to
meet a public calamity or emergency. For if it is only the printing
that is dispensed with by presidential certification, the time saved
would be so negligible as to be of any use in insuring immediate
enactment. It may well be doubted whether doing away with the
necessity of printing and distributing copies of the bill three days
before the third reading would insure speedy enactment of a law
in the face of an emergency requiring the calling of a special
election for President and Vice-President. Under the Constitution
such a law is required to be made within seven days of the
convening of Congress in emergency session.
That upon the certification of a bill by the President the requirement
of three readings on separate days and of printing and distribution can
be dispensed with is supported by the weight of legislative practice.
For example, the bill defining the certiorari jurisdiction of this Court
which, in consolidation with the Senate version, became Republic
Act No. 5440, was passed on second and third readings in the House
of Representatives on the same day (May 14, 1968) after the bill had
been certified by the President as urgent.
There is, therefore, no merit in the contention that presidential
certification dispenses only with the requirement for the printing of
the bill and its distribution three days before its passage but not with
the requirement of three readings on separate days, also.c
Third. Finally it is contended that the bill which became Republic Act
No. 7716 is the bill which the Conference Committee prepared by
consolidating H. No. 11197 and S. No. 1630. It is claimed that the
Conference Committee report included provisions not found in either
the House bill or the Senate bill and that these provisions were
"surreptitiously" inserted by the Conference Committee. Much is
made of the fact that in the last two days of its session on April 21
and 25, 1994 the Committee met behind closed doors. We are not
told, however, whether the provisions were not the result of the give
and take that often mark the proceedings of conference committees.
Nor is there anything unusual or extraordinary about the fact that the
Conference Committee met in executive sessions. Often the only way
to reach agreement on conflicting provisions is to meet behind closed
doors, with only the conferees present. Otherwise, no compromise is
likely to be made. The Court is not about to take the suggestion of a
cabal or sinister motive attributed to the conferees on the basis solely
of their "secret meetings" on April 21 and 25, 1994, nor read
anything into the incomplete remarks of the members, marked in the
transcript of stenographic notes by ellipses. The incomplete sentences
are probably due to the stenographers own limitations or to the
incoherence that sometimes characterize conversations. William
Safire noted some such lapses in recorded talks even by recent past
Presidents of the United States.
As to the possibility of an entirely new bill emergency out of a
Conference Committee, it has been explained:chanrob1es virtual 1aw
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Under congressional rules of procedure, conference committees are
not expected to make any material change in the measure at issue,
either by deleting provisions to which both houses have already
agreed or by inserting new provisions. But this is a difficult provision
to enforce. Note the problem when one house amends a proposal
originating in either house by striking out everything following the
enacting clause and substituting provisions which make it an entirely

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new bill. The versions are now altogether different, permitting a


conference committee to draft essentially a new bill.
The result is a third version, which is considered an "amendment
in the nature of a substitute," the only requirement for which
being that the third version be germane to the subject of the
House and Senate bills.
Indeed, this Court recently held that it is within the power of a
conference committee to include in its report an entirely new
provision that is not found either in the House bill or in the
Senate bill. 17 If the committee can propose an amendment
consisting of one or two provisions, there is no reason why it
cannot propose several provisions, collectively considered as an
"amendment in the nature of a substitute," so long as such
amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the
approval of both houses of Congress to become valid as an act of
the legislative department. The charge that in this case the
Conference Committee acted as a third legislative chamber is
thus without any basis.
Art. VI, 26(2) must, therefore, be construed as referring only to
bills introduced for the first time in either house of Congress, not to
the conference committee report. For if the purpose of requiring
three readings is to give members of Congress time to study bills, it
cannot be gainsaid that H. No. 11197 was passed in the House after
three reading; that in the Senate it was considered on first reading
and then referred to a committee of that body; that although the
Senate committee did not report out the House bill, it submitted a
version (S. No. 1630) which it had prepared by "taking into
consideration" the House bill; that for its part the Conference
Committee consolidated the two bills and prepared a compromise
version; that the Conference Committee Report was thereafter
approved by the House and the Senate, presumably after appropriate
study by their members. We cannot say that, as a matter of fact, the
members of Congress were not fully informed of the provisions of the
bill. The allegation that the Conference Committee usurped the
legislative power of Congress is, in our view, without warrant in fact
and in law.
Fourth. Whatever doubts there may be as to the formal validity of
Republic Act No. 7716 must be resolved in its favor. Our cases 20
manifest firm adherence to the rule that an enrolled copy of a bill is
conclusive not only of its provisions but also of its due enactment.
Not even claims that a proposed constitutional amendment was
invalid because the requisite votes for its approval had not been
obtained 21 or that certain provisions of a statute had been
"smuggled" in the printing of the bill 22 have moved or persuaded us
to look behind the proceedings of a coequal branch of the
government. There is no reason now to depart from this rule.
No claim is here made that the "enrolled bill" rule is absolute. In fact
in one case 23 we "went behind" an enrolled bill and consulted the
Journal to determine whether certain provisions of a statute had been
approved by the Senate in view of the fact that the President of the
Senate himself, who had signed the enrolled bill, admitted a mistake
and withdrew his signature, so that in effect there was no longer an
enrolled bill to consider.
But where allegations that the constitutional procedures for the
passage of bills have not been observed have no more basis than
another allegation that the Conference Committee "surreptitiously"
inserted provisions into a bill which it had prepared, we should
decline the invitation to go behind the enrolled copy of the bill. To
disregard the "enrolled bill" rule in such cases would be to disregard
the respect due the other two departments of our government.

Fifth. An additional attack on the formal validity of Republic Act No.


7716 is made by the Philippine Airlines, Inc., petitioner in G.R. No.
11582, namely, that it violates Art. IV, 26(1) which provides that
"Every bill passed by Congress shall embrace only one subject which
shall be expressed in the title thereof." It is contended that neither H.
No. 11197 nor S. No. 1630 provided for removal of exemption of
PAL transactions from the payment of the VAT and that this was
made only in the Conference Committee bill which became Republic
Act No. 7716 without reflecting this fact in its title.
The title of Republic Act No. 7716 is: AN ACT RESTRUCTURING
THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS
TAX BASE AND ENHANCING ITS ADMINISTRATION, AND
FOR THESE PURPOSES AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED, AND FOR OTHER
PURPOSES.
Among the provisions of the NIRC amended is sec. 103, which
originally
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Sec. 103. Exempt transactions. The following shall be exempt
from the value-added tax:
(q) Transactions which are exempt under special laws or international
agreements to which the Philippines is a signatory.
Among the transactions exempted from the VAT were those of PAL
because it was exempted under its franchise (P.D. No. 1590) from the
payment of all "other taxes . . . now or in the near future," in
consideration of the payment by it either of the corporate income tax
or a franchise tax of 2%.
As a result of its amendment by Republic Act No. 7716, 103 of the
NIRC now provides:
103. Exempt transactions. The following shall be exempt from
the value-added tax:
q) Transactions which are exempt under special laws, except those
granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .
The effect of the amendment is to remove the exemption granted to
PAL, as far as the VAT is concerned.
The question is whether this amendment of 103 of the NIRC is fairly
embraced in the title of Republic Act No. 7716, although no mention
is made therein of P.D. No. 1590 as among those which the statute
amends. We think it is, since the title states that the purpose of the
statute is to expand the VAT system, and one way of doing this is to
widen its base by withdrawing some of the exemptions granted
before. To insist that P.D. No. 1590 be mentioned in the title of the
law, in addition to 103 of the NIRC, in which it is specifically
referred to, would be to insist that the title of a bill should be a
complete index of its content.
The constitutional requirement that every bill passed by Congress
shall embrace only one subject which shall be expressed in its title is
intended to prevent surprise upon the members of Congress and to
inform the people of pending legislation so that, if they wish to, they
can be heard regarding it. If, in the case at bar, petitioner did not
know before that its exemption had been withdrawn, it is not because
of any defect in the title but perhaps for the same reason other
statutes, although published, pass unnoticed until some event
somehow calls attention to their existence. Indeed, the title of
Republic Act No. 7716 is not any more general than the title of
PALs own franchise under P.D. No. 1590, and yet no mention is

TAXATION 2
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made of its tax exemption. The title of P.D. No. 1590 is:chanrob1es
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AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE
AIRLINES, INC. TO ESTABLISH, OPERATE, AND MAINTAIN
AIR-TRANSPORT SERVICES IN THE PHILIPPINES AND
BETWEEN THE PHILIPPINES AND OTHER COUNTRIES.
The trend in our cases is to construe the constitutional requirement in
such a manner that courts do not unduly interfere with the enactment
of necessary legislation and to consider it sufficient if the title
expresses the general subject of the statute and all its provisions are
germane to the general subject thus expressed. In contrast, in the case
at bar, Republic Act No. 7716 expressly amends PALs franchise
(P.D. No. 1590) by specifically excepting from the grant of
exemptions from the VAT PALs exemption under P.D. No. 1590.
This is within the power of Congress to do under Art. XII, 11 of the
Constitution, which provides that the grant of a franchise for the
operation of a public utility is subject to amendment, alteration or
repeal by Congress when the common good so requires.
II. SUBSTANTIVE ISSUE
A. Claims of Press Freedom, Freedom of Thought and Religious
Freedom
The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is
a nonprofit organization of newspaper publishers established for the
improvement of journalism in the Philippines. On the other hand,
petitioner in G.R. No. 115781, the Philippine Bible Society (PBS), is
a nonprofit organization engaged in the printing and distribution of
bibles and other religious articles. Both petitioners claim violations of
their rights under 4 and 5 of the Bill of Rights as a result of the
enactment of the VAT Law.
The PPI question the law insofar as it has withdrawn the exemption
previously granted to the press under 103 (f) of the NIRC.
Although the exemption was subsequently restored by administrative
regulation with respect to the circulation income of newspapers, the
PPI presses its claim because of the possibility that the exemption
may still be removed by mere revocation of the regulation of the
Secretary of Finance. On the other hand, the PBS goes so far as to
question the Secretarys power to grant exemption for two reasons:
(1) The Secretary of Finance has no power to grant tax exemption
because this is vested in Congress and requires for its exercise the
vote of a majority of all its members 26 and (2) the Secretarys duty
is to execute the law.
103 of the NIRC contains a list of transactions exempted from VAT.
Among
the
transactions
previously
granted
exemption
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(f) Printing, publication, importation or sale of books and any
newspaper, magazine, review, or bulletin which appears at regular
intervals with fixed prices for subscription and sale and which is
devoted principally to the publication of advertisements.
Republic Act No. 7716 amended 103 by deleting par. (f) with the
result that print media became subject to the VAT with respect to all
aspects of their operations. Later, however, based on a memorandum
of the Secretary of Justice, respondent Secretary of Finance issued
Revenue Regulations No. 11-94, dated June 27, 1994, exempting the
"circulation income of print media pursuant to 4 Article III of the
1987 Philippine Constitution guaranteeing against abridgment of
freedom of the press, among others." The exemption of "circulation
income" has left income from advertisements still subject to the
VAT.

It is unnecessary to pass upon the contention that the exemption


granted is beyond the authority of the Secretary of Finance to
give, in view of PPIs contention that even with the exemption of
the circulation revenue of print media there is still an
unconstitutional abridgment of press freedom because of the
imposition of the VAT on the gross receipts of newspapers from
advertisements and on their acquisition of paper, ink and
services for publication. Even on the assumption that no
exemption has effectively been granted to print media
transactions, we find no violation of press freedom in these cases.
What it contends is that by withdrawing the exemption previously
granted to print media transactions involving printing, publication,
importation or sale of newspapers, Republic Act No. 7716 has
singled out the press for discriminatory treatment and that within the
class of mass media the law discriminates against print media by
giving broadcast media favored treatment. We have carefully
examined this argument, but we are unable to find a differential
treatment of the press by the law, much less any censorial motivation
for its enactment. If the press is now required to pay a valueadded tax on its transactions, it is not because it is being singled
out, much less targeted, for special treatment but only because of
the removal of the exemption previously granted to it by law. The
withdrawal of exemption is all that is involved in these cases.
Other transactions, likewise previously granted exemption, have
been delisted as part of the scheme to expand the base and the
scope of the VAT system. The law would perhaps be open to the
charge of discriminatory treatment if the only privilege withdrawn
had been that granted to the press. But that is not the case. virtual law
library
In the other case 30 invoked by the PPI, the press was also found to
have been singled out because everything was exempt from the "use
tax" on ink and paper, except the press. Minnesota imposed a tax on
the sales of goods in that state. To protect the sales tax, it enacted a
complementary tax on the privilege of "using, storing or consuming
in that state tangible personal property" by eliminating the residents
incentive to get goods from outside states where the sales tax might
be lower. The Minnesota Star Tribune was exempted from both taxes
from 1967 to 1971. In 1971, however, the state legislature amended
the tax scheme by imposing the "use tax" on the cost of paper and ink
used for publication. The law was held to have singled out the press
because (1) there was no reason for imposing the "use tax" since the
press was exempt from the sales tax and (2) the "use tax" was laid on
an "intermediate transaction rather than the ultimate retail sale."
Minnesota had a heavy burden of justifying the differential treatment
and it failed to do so. In addition, the U.S. Supreme Court found the
law to be discriminatory because the legislature, by again amending
the law so as to exempt the first $100,000 of paper and ink used,
further narrowed the coverage of the tax so that "only a handful of
publishers pay any tax at all and even fewer pay any significant
amount of tax." 31 The discriminatory purpose was thus very clear.
These cases come down to this: that unless justified, the differential
treatment of the press creates risks of suppression of expression. In
contrast, in the cases at bar, the statute applies to a wide range of
goods and services. The argument that, by imposing the VAT only on
print media whose gross sales exceeds P480,000 but not more than
P750,000, the law discriminates is without merit since it has not been
shown that as a result the class subject to tax has been unreasonably
narrowed. The fact is that this limitation does not apply to the
press alone but to all sales. Nor is impermissible motive shown by
the fact that print media and broadcast media are treated
differently. The press is taxed on its transactions involving
printing and publication, which are different from the
transactions of broadcast media. There is thus a reasonable basis
for the classification.

TAXATION 2
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This brings us to the question whether the registration provision of


the law, 37 although of general applicability, nonetheless is invalid
when applied to the press because it lays a prior restraint on its
essential freedom. The case of American Bible Society v. City of
Manila 38 is cited by both the PBS and the PPI in support of their
contention that the law imposes censorship. There, this Court held
that an ordinance of the City of Manila, which imposed a license fee
on those engaged in the business of general merchandise, could not
be applied to the appellants sale of bibles and other religious
literature. This Court relied on Murdock v. Pennsylvania 39 in which
it was held that, as a license fee is fixed in amount and unrelated to
the receipts of the taxpayer, the license fee, when applied to a
religious sect, was actually being imposed as a condition for the
exercise of the sects right under the Constitution. For that reason, it
was held, the license fee "restrains in advance those constitutional
liberties of press and religion and inevitably tends to suppress their
exercise."
But, in this case, the fee in 107, although a fixed amount
(P1,000), is not imposed for the exercise of a privilege but only for
the purpose of defraying part of the cost of registration. The
registration requirement is a central feature of the VAT system.
It is designed to provide a record of tax credits because any
person who is subject to the payment of the VAT pays an input
tax, even as he collects an output tax on sales made or services
rendered. The registration fee is thus a mere administrative fee,
one not imposed on the exercise of a privilege, much less a
constitutional right.
For the foregoing reasons, we find the attack on Republic Act No.
7716 on the ground that it offends the free speech, press and
freedom of religion guarantees of the Constitution to be without
merit. For the same reasons, we find the claim of the Philippine
Educational Publishers Association (PEPA) in G.R. No. 115931
that the increase in the price of books and other educational
materials as a result of the VAT would violate the constitutional
mandate to the government to give priority to education, science
and technology (Art. II, sec. 17) to be untenable.
B. Claims of Regressivity, Denial of Due Process, Equal Protection,
and
Impairment
of
Contracts
There is basis for passing upon claims that on its face the statute
violates the guarantees of freedom of speech, press and religion. The
possible "chilling effect" which it may have on the essential freedom
of the mind and conscience and the need to assure that the channels
of communication are open and operating importunately demand the
exercise of this Courts power of review.
There is, however, no justification for passing upon the claims that
the law also violates the rule that taxation must be progressive and
that it denies petitioners right to due process and the equal protection
of the laws. The reason for this different treatment has been cogently
stated by an eminent authority on constitutional law thus:" [W]hen
freedom of the mind is imperiled by law, it is freedom that
commands a moments of respect; when property is imperiled it is the
lawmakers judgment that commands respect. This dual standard may
not precisely reverse the presumption of constitutionality in civil
liberties cases, but obviously it does set up a hierarchy of values
within the due process clause."
Indeed, the absence of threat of immediate harm makes the need for
judicial intervention less evident and underscores the essential nature
of petitioners attack on the law on the grounds of regressivity, denial
of due process and equal protection and impairment of contracts as a
mere academic discussion of the merits of the law. For the fact is that

there have even been no notices of assessments issued to petitioners


and no determinations at the administrative levels of their claims so
as to illuminate the actual operation of the law and enable us to reach
sound judgment regarding so fundamental questions as those raised
in these suits.
Thus, the broad argument against the VAT is that it is regressive and
that it violates the requirement that "The rule of taxation shall be
uniform and equitable [and] Congress shall evolve a progressive
system of taxation." 42 Petitioners in G.R. No. 115781 quote from a
paper, entitled "VAT Policy Issues: Structure, Regressivity, Inflation
and Exports" by Alan A. Tait of the International Monetary Fund,
that "VAT payment by low-income households will be a higher
proportion of their incomes (and expenditures) than payments by
higher-income households. That is, the VAT will be regressive."
Petitioners contend that as a result of the uniform 10% VAT, the tax
on consumption goods of those who are in the higher-income bracket,
which before were taxed at a rate higher than 10%, has been reduced,
while basic commodities, which before were taxed at rates ranging
from 3% to 5%, are now taxed at a higher rate.
Just as vigorously as it is asserted that the law is regressive, the
opposite claim is pressed by respondents that in fact it distributes the
tax burden to as many goods and services as possible particularly to
those which are within the reach of higher-income groups, even as
the law exempts basic goods and services. It is thus equitable. The
goods and properties subject to the VAT are those used or consumed
by higher-income groups. These include real properties held
primarily for sale to customers or held for lease in the ordinary course
of business, the right or privilege to use industrial, commercial or
scientific equipment, hotels, restaurants and similar places, tourist
buses, and the like. On the other hand, small business establishments,
with annual gross sales of less than P500,000, are exempted. This,
according to respondents, removes from the coverage of the law
some 30,000 business establishments. On the other hand, an
occasional paper 43 of the Center for Research and Communication
cites a NEDA study that the VAT has minimal impact on inflation
and income distribution and that while additional expenditure for the
lowest income class is only P301 or 1.49% a year, that for a family
earning P500,000 a year or more is P8,340 or 2.2%.
Lacking empirical data on which to base any conclusion regarding
these arguments, any discussion whether the VAT is regressive in the
sense that it will hit the "poor" and middle-income group in society
harder than it will the "rich," as the Cooperative Union of the
Philippines (CUP) claims in G.R. No. 115873, is largely an academic
exercise. On the other hand, the CUPs contention that Congress
withdrawal of exemption of producers cooperatives, marketing
cooperatives, and service cooperatives, while maintaining that
granted to electric cooperatives, not only goes against the
constitutional policy to promote cooperatives as instruments of social
justice (Art. XII, 15) but also denies such cooperatives the equal
protection of the law is actually a policy argument. The legislature is
not required to adhere to a policy of "all or none" in choosing the
subject of taxation.
Nor is the contention of the Chamber of Real Estate and Builders
Association (CREBA), petitioner in G.R. 115754, that the VAT will
reduce the mark up of its members by as much as 85% to 90% any
more concrete. It is a mere allegation. On the other hand, the claim of
the Philippine Press Institute, petitioner in G.R. No. 115544, that the
VAT will drive some of its members out of circulation because their
profits from advertisements will not be enough to pay for their tax
liability, while purporting to be based on the financial statements of
the newspapers in question, still falls short of the establishment of
facts by evidence so necessary for adjudicating the question whether
the tax is oppressive and confiscatory.

TAXATION 2
VAT

Indeed, regressivity is not a negative standard for courts to


enforce. What Congress is required by the Constitution to do is to
"evolve a progressive system of taxation." This is a directive to
Congress, just like the directive to it to give priority to the
enactment of laws for the enhancement of human dignity and the
reduction of social, economic and political inequalities (Art. XIII,
1), or for the promotion of the right to "quality education"
(Art. XIV, 1). These provisions are put in the Constitution as
moral incentives to legislation, not as judicially enforceable
rights.
At all events, our 1988 decision in Kapatiran 45 should have laid to
rest the question now raised against the VAT. There similar
arguments made against the original VAT Law (Executive Order No.
273) were held to be hypothetical, with no more basis than newspaper
articles which this Court found to be "hearsay and [without]
evidentiary value." As Republic Act No. 7716 merely expands the
base of the VAT system and its coverage as provided in the original
VAT Law, further debate on the desirability and wisdom of the law
should
have
shifted
to
Congress.
Only slightly less abstract but nonetheless hypothetical is the
contention of CREBA that the imposition of the VAT on the sales
and leases of real estate by virtue of contracts entered into prior to the
effectivity of the law would violate the constitutional provision that
"No law impairing the obligation of contracts shall be passed." It is
enough to say that the parties to a contract cannot, through the
exercise of prophetic discernment, fetter the exercise of the taxing
power of the State. For not only are existing laws read into contracts
in order to fix obligations as between parties, but the reservation of
essential attributes of sovereign power is also read into contracts as a
basic postulate of the legal order. The policy of protecting contracts
against impairment presupposes the maintenance of a government
which retains adequate authority to secure the peace and good order
of society.
In truth, the Contract Clause has never been thought as a
limitation on the exercise of the States power of taxation save
only where a tax exemption has been granted for a valid
consideration. 47 Such is not the case of PAL in G.R. No. 115852,
and we do not understand it to make this claim. Rather, its
position, as discussed above, is that the removal of its tax
exemption cannot be made by a general, but only by a specific,
law.
The substantive issues raised in some of the cases are presented in
abstract, hypothetical form because of the lack of a concrete record.
We accept that this Court does not only adjudicate private cases; that
public actions by "non-Hohfeldian" 48 or ideological plaintiffs are
now cognizable provided they meet the standing requirement of the
Constitution; that under Art. VIII, 1, par. 2 the Court has a "special
function" of vindicating constitutional rights. Nonetheless the feeling
cannot be escaped that we do not have before us in these cases a fully
developed factual record that alone can impart to our adjudication the
impact of actuality 49 to insure that decision-making is informed and
well grounded. Needless to say, we do not have power to render
advisory opinions or even jurisdiction over petitions for declaratory
judgment. In effect we are being asked to do what the Conference
Committee is precisely accused of having done in these cases to
sit as a third legislative chamber to review legislation.
We are told, however, that the power of judicial review is not so
much power as it is duty imposed on this Court by the Constitution
and that we would be remiss in the performance of that duty if we
decline to look behind the barriers set by the principle of separation
of powers. Art. VIII, 1, par. 2 is cited in support of this view:

Judicial power includes the duty of the courts of justice to settle


actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not
there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or
instrumentality of the Government.
Justice Laurel echoed this justification in 1936 in Angara v. Electoral
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And when the judiciary mediates to allocate constitutional
boundaries, it does not assert any superiority over the other
departments; it does not in reality nullify or invalidate an act of the
legislature, but only asserts the solemn and sacred obligation assigned
to it by the Constitution to determine conflicting claims of authority
under the Constitution and to establish for the parties in an actual
controversy the rights which that instrument secures and guarantees
to them.
It does not add anything, therefore, to invoke this "duty" to
justify this Courts intervention in what is essentially a case that
at best is not ripe for adjudication. That duty must still be
performed in the context of a concrete case or controversy, as
Art. VIII, 5(2) clearly defines our justification in terms of
"cases," and nothing but "cases." That the other departments of
the government may have committed a grave abuse of discretion
is not an independent ground for exercising our power. Disregard
of the essential limits imposed by the case and controversy
requirement can in the long run only result in undermining our
authority as a court of law. For, as judges, what we are called
upon to render is judgment according to what may appear to be
the opinion of the day.
To sum up, we hold:
(1) That the procedural requirements of the Constitution have
been complied with by Congress in the enactment of the statute;
(2) That judicial inquiry whether the formal requirements for the
enactment of statutes beyond those prescribed by the
Constitution have been observed is precluded by the principle
of separation of powers;
(3) That the law does not abridge freedom of speech, expression
or the press, nor interfere with the free exercise of religion, nor
deny to any of the parties the right to an education; and
(4) That, in view of the absence of a factual foundation of record,
claims that the law is regressive, oppressive and confiscatory and
that it violates vested rights protected under the Contract Clause
are prematurely raised and do not justify the grant of prospective
relief by writ of prohibition.
WHEREFORE, the petitions in these cases are DISMISSED.

TAXATION 2
VAT

(3) 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
GR NO. 168056. September 1, 2005
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITOESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON,
ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO
R. OSMEA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR
V. PURISIMA, SECRETARY OF FINANCE, GUILLERMO L.
PARAYNO, JR., COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE, Respondents
GR NO. 168207. September 1, 2005
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC.
represented by its President, ROSARIO ANTONIO; PETRON
DEALERS ASSOCIATION represented by its President, RUTH
E. BARBIBI; ASSOCIATION OF CALTEX DEALERS OF
THE PHILIPPINES represented by its President,
MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing
business under the name and style of ANB NORTH SHELL
SERVICE STATION; LOURDES MARTINEZ doing business
under the name and style of SHELL GATE N. DOMINGO;
BETHZAIDA TAN doing business under the name and style of
ADVANCE SHELL STATION; REYNALDO P. MONTOYA
doing business under the name and style of NEW LAMUAN
SHELL SERVICE STATION; EFREN SOTTO doing business
under the name and style of RED FIELD SHELL SERVICE
STATION; DONICA CORPORATION represented by its
President, DESI TOMACRUZ; RUTH E. MARBIBI doing
business under the name and style of R&R PETRON
STATION; PETER M. UNGSON doing business under the
name and style of CLASSIC STAR GASOLINE SERVICE
STATION; MARIAN SHEILA A. LEE doing business under
the name and style of NTE GASOLINE & SERVICE
STATION; JULIAN CESAR P. POSADAS doing business
under the name and style of STARCARGA ENTERPRISES;
ADORACION MAEBO doing business under the name and
style of CMA MOTORISTS CENTER; SUSAN M. ENTRATA
doing business under the name and style of LEONAS
GASOLINE STATION and SERVICE CENTER;
CARMELITA BALDONADO doing business under the name
and style of FIRST CHOICE SERVICE CENTER;
MERCEDITAS A. GARCIA doing business under the name and
style of LORPED SERVICE CENTER; RHEAMAR A.
RAMOS doing business under the name and style of RJRAM
PTT GAS STATION; MA. ISABEL VIOLAGO doing business
under the name and style of VIOLAGO-PTT SERVICE
CENTER; MOTORISTS HEART CORPORATION
represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HARVARD CORPORATION
represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HERITAGE CORPORATION
represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; PHILIPPINE STANDARD OIL
CORPORATION represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL
doing business under the name and style of ROMMAN
GASOLINE STATION; ANTHONY ALBERT CRUZ III doing

business under the name and style of TRUE SERVICE


STATION, Petitioners
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the
Department of Finance and GUILLERMO L. PARAYNO, JR.,
in his capacity as Commissioner of Internal Revenue,
Respondents
GR NO. 168461. September 1, 2005
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO,
EMMANUEL JOEL J. VILLANUEVA, RODOLFO G. PLAZA,
DARLENE ANTONINO-CUSTODIO, OSCAR G.
MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN
EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO,
FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO B.
MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL.
GUINGONA III, RUY ELIAS C. LOPEZ, RODOLFO Q.
AGBAYANI and TEODORO A. CASIO, Petitioners
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance,
GUILLERMO L. PARAYNO, JR., in his capacity as
Commissioner of Internal Revenue, and EDUARDO R.
ERMITA, in his capacity as Executive Secretary, Respondents
GR NO. 168463. September 1, 2005
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR., Petitioner
vs.
HON. EDUARDO R. ERMITA, in his capacity as the Executive
Secretary; HON. MARGARITO TEVES, in his capacity as
Secretary of Finance; HON. JOSE MARIO BUNAG, in his
capacity as the OIC Commissioner of the Bureau of Internal
Revenue; and HON. ALEXANDER AREVALO, in his capacity
as the OIC Commissioner of the Bureau of Customs,
Respondents
GR NO. 168730. September 1, 2005
AUSTRIA-MARTINEZ
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
DOCTRINE: 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 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.
FACTS: RA 9337 is a consolidation of 3 legislative bills: HB Nos.
3555 and 3705 and SB 1950.

10

TAXATION 2
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House Bill No. 3555 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, 2005for immediate enactment.
On January 27, 2005, the House of Representatives approved the bill
on second and third reading.
House Bill No. 3705 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 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. 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 i.e. 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.
The Court directed the parties to file their respective Memoranda.
GR 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:
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 %).
Petitioners argue that the law is unconstitutional as it constitutes
abandonment by Congress of its exclusive authority to fix the
rate of taxes under Art. VI, Sec. 28(2) of the 1987 Phil.
Constitution.
GR NO. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition
forcertiorari 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.
GR NO. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by
the Association of Pilipinas Shell Dealers, Inc., et al., assailing the
following provisions of R.A. No. 9337:
1. Section 8, amending Section 110 (A)(2) of the NIRC, requiring
that the input tax on depreciable goods shall be amortized over a
60-month period, if the acquisition, excluding the VAT
components, exceeds One Million Pesos (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
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.

11

TAXATION 2
VAT

Petitioners argument is premised on the constitutional right of nondeprivation 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.

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 60month 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.
Respondents manifest that R.A. No. 9337 is the anchor of the
governments 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.

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.

PROCEDURAL ISSUE:
1. Whether R.A. No. 9337 violates the following provisions
of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2).

GR NO. 168463

SUBSTANTIVE ISSUES:
2. 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).
3. 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.

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, 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.
GR NO. 168730
Governor Enrique T. Garcia filed a petition forcertiorari 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.
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

HELD: 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 endconsumers.
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.
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
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.

12

TAXATION 2
VAT

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.
(1) 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 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 latters appropriate action.
Sec. 89. Conference Committee Reports. . . . Each report shall
contain a detailed, sufficiently explicit statement of the changes in or
amendments to the subject measure.
The Chairman of the House panel may be interpellated on the
Conference Committee Report prior to the voting thereon. The
House shall vote on the Conference Committee Report in the same
manner and procedure as it votes on a bill on third and final reading.

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.
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. 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.
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. 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. 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.

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.

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.

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.

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.

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.

Nonetheless, 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.

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

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

House Bill No.


3555

House Bill
No.3705

Senate Bill No.


1950

With regard to Stand-By Authority in favor of President

13

TAXATION 2
VAT

Provides
for
12% VAT on
every sale of
goods
or
properties
(amending Sec.
106 of NIRC);
12% VAT on
importation of
goods
(amending Sec.
107 of NIRC);
and 12% VAT
on
sale
of
services and use
or
lease
of
properties
(amending Sec.
108 of NIRC)

Provides for 12%


VAT in general on
sales of goods or
properties
and
reduced rates for
sale of certain
locally
manufactured
goods
and
petroleum products
and raw materials
to be used in the
manufacture
thereof (amending
Sec. 106 of NIRC);
12% VAT on
importation
of
goods and reduced
rates for certain
imported products
including
petroleum products
(amending
Sec.
107 of NIRC); and
12% VAT on sale
of services and use
or
lease
of
properties and a
reduced rate for
certain
services
including
power
generation
(amending
Sec.
108 of NIRC)

Provides
for
a
single rate of 10%
VAT on sale of
goods or properties
(amending Sec. 106
of NIRC), 10%
VAT on sale of
services including
sale of electricity by
generation
companies,
transmission
and
distribution
companies, and use
or
lease
of
properties
(amending Sec. 108
of NIRC)

Provides
that
the input tax
credit for capital
goods on which
a VAT has been
paid shall be
equally
distributed over
5 years or the
depreciable life
of such capital
goods; the input
tax credit for
goods
and
services other
than
capital
goods shall not
exceed 5% of
the total amount
of such goods
and
services;
and for persons
engaged in retail
trading
of
goods,
the
allowable input
tax credit shall
not exceed 11%
of the total
amount
of
goods
purchased.

No
provision

similar

Provides that the


input tax credit for
capital goods on
which a VAT has
been paid shall be
equally distributed
over 5 years or the
depreciable life of
such capital goods;
the input tax credit
for
goods
and
services other than
capital goods shall
not exceed 90% of
the output VAT.

With regard to amendments to be made to NIRC provisions


regarding income and excise taxes
With regard to the no pass-on provision

No
similar
provision

Provides that the


VAT imposed on
power generation
and on the sale of
petroleum products
shall be absorbed
by
generation
companies
or
sellers,
respectively, and
shall not be passed
on to consumers

Provides that the


VAT imposed on
sales of electricity
by
generation
companies
and
services
of
transmission
companies
and
distribution
companies, as well
as
those
of
franchise grantees
of electric utilities
shall not apply to
residential
end-users.
VAT
shall be absorbed
by
generation,
transmission, and
distribution
companies.

With regard to 70% limit on input tax credit

No similar
provision

No
provision

similar

Provided
for
amendments
to
several
NIRC
provisions
regarding corporate
income, percentage,
franchise and excise
taxes

The disagreements between the provisions in the House bills and the
Senate bill were with regard to (1) what rate of VAT is to be
imposed; (2) whether only the VAT imposed on electricity
generation, transmission and distribution companies should not be
passed on to consumers, as proposed in the Senate bill, or both the
VAT imposed on electricity generation, transmission and distribution
companies and the VAT imposed on sale of petroleum products
should not be passed on to consumers, as proposed in the House bill;
(3) in what manner input tax credits should be limited; (4) and
whether the NIRC provisions on corporate income taxes, percentage,
franchise and excise taxes should be amended.
There being differences and/or disagreements on the foregoing
provisions of the House and Senate bills, the Bicameral Conference
Committee was mandated by the rules of both houses of Congress to
act on the same by settling said differences and/or disagreements.

14

TAXATION 2
VAT

The Bicameral Conference Committee acted on the disagreeing


provisions by making the following changes:
1. With regard to the disagreement on the rate of VAT to be
imposed, it would appear from the Conference Committee
Report that the Bicameral Conference Committee tried to bridge
the gap in the difference between the 10% VAT rate proposed
by the Senate, and the various rates with 12% as the highest
VAT rate proposed by the House, by striking a compromise
whereby the present 10% VAT rate would be retained until
certain conditions arise, i.e., the value-added tax collection as a
percentage of gross domestic product (GDP) of the previous
year exceeds 2 4/5%, or National Government deficit as a
percentage of GDP of the previous year exceeds 1%, when
the President, upon recommendation of the Secretary of Finance
shall raise the rate of VAT to 12% effective January 1, 2006.
2. With regard to the disagreement on whether only the VAT
imposed on electricity generation, transmission and distribution
companies should not be passed on to consumers or whether
both the VAT imposed on electricity generation, transmission
and distribution companies and the VAT imposed on sale of
petroleum products may be passed on to consumers, the
Bicameral Conference Committee chose to settle such
disagreement by altogether deleting from its Report any no passon 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.
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. 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 because, as
explained by Sen. Ralph Recto, the thinking was just to keep the
VAT law or the VAT bill simple and that no sector should be a

beneficiary of legislative grace, neither should any sector be


discriminated on; the VAT is an indirect tax, a pass-on tax. Rep.
Locsin further made the manifestation that the no pass-on provision
never really enjoyed the support of either House.
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 by
introducing limitations on the claiming of tax credit, we are capping a
major leakage that has placed our collection efforts at an apparent
disadvantage.
As to the amendments to NIRC provisions on taxes other than the
value-added tax proposed in Senate Bill No. 1950, since said
provisions were among those referred to it, the conference committee
had to act on the same and it basically adopted the version of the
Senate.
Thus, all the changes or modifications made by the Bicameral
Conference Committee were germane to subjects of the provisions
referred to it for reconciliation. Such being the case, the Court does
not see any grave abuse of discretion amounting to lack or excess of
jurisdiction committed by the Bicameral Conference Committee.
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
(1)(a) RA 9337 does not violate Art. VI, Sec. 24 of the Constitution
on Exclusive Origination of Revenue Bills.
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.
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 Senates power
not only to concur with amendments but also to propose
amendments. It would be to violate the coequality of legislative

15

TAXATION 2
VAT

power of the two houses of Congress and in fact make the House
superior to the Senate.
Given, then, the power of the Senate to propose amendments, the
Senate can propose its own version even with respect to bills
which are required by the Constitution to originate in the House.

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

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 countrys fiscal deficit, among others. Thus, the Senate acted
within its power to propose those amendments.
(1)(b) RA 9337 does not violate Art. VI, Sec. 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.
There is no reason for requiring that the Committees 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.
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.
(2)(a) There is no undue delegation of legislative power.

The main purpose of the bills emanating from the House of


Representatives is to bring in sizeable revenues for the government to
supplement our countrys 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.
Also, 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. 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.

Section 28 (2), Article VI of the Constitution, which provides:


The Congress may, by law, authorize the President to fix within
specified limits, and may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts
within the framework of the national development program of the
government.
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.

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TAXATION 2
VAT

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.
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.
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. 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 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.
In this case, 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.
Also, 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.
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.
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 fourfifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half
percent (1%). 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

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TAXATION 2
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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.
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.
(2)(b) The 12% increase VAT rate does not impose an unfair and
unnecessary additional tax burden.
In the absence of any provision providing for a return to the 10% rate,
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.
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 1 %.
The philosophy behind these alternative conditions is:
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.

(3)(a) 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: Provided, 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.
The argument 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
businesss 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).

Natl Govt 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.
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 is a characteristic of a sound tax
system. 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. The sources
of revenues must be adequate to meet government expenditures and
their variations. The dire need for revenue cannot be ignored. Our
country is in a quagmire of financial woe. Congress passed the law
hoping for rescue from an inevitable catastrophe. Whether the law is
indeed sufficient to answer the states economic dilemma is not for
the Court to judge.

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:
1. 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;
2. 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); and
3. 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 taxpayers option.
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 laymans 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

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TAXATION 2
VAT

BIR. The party directly liable for the payment of the tax is the seller.
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.
The input tax is not a property or a property right within the
constitutional purview of the due process clause. A VAT-registered
persons 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.
Sec. 8 of RA 9337 amending Sec. 110(A) of the NIRC imposes a 60month 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. The taxpayer is
not permanently deprived of his privilege to credit the input tax.
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.
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.
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.
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.
As amended, the use of the word final and the deletion of the
word creditable exhibits Congresss 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.
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 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 States 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.
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 ones profit margin and valueadded, 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.

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TAXATION 2
VAT

(3)(b) 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.
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.
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. Also, basic marine and agricultural
food products in their original state are still not subject to the tax,
thus ensuring that prices at the grassroots level will remain
accessible.
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 and natural gas were reduced.
Percentage tax on domestic carriers was removed. Power producers
are now exempt from paying franchise tax.
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%. Intercorporate dividends of
non-resident foreign corporations are still subject to 15% final
withholding tax but the tax credit allowed on the corporations
domicile was increased to 20%.The Philippine Amusement and
Gaming Corporation (PAGCOR) is not exempt from income taxes
anymore. 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.
(3)(c) Progressive taxation is built on the principle of the taxpayers
ability to pay. The subjects of every state ought to contribute towards
the support of the government, as nearly as possible, in proportion to
their respective abilities; that is, in proportion to the revenue which
they respectively enjoy under the protection of the state. Taxation is

progressive when its rate goes up depending on the resources of the


person affected.
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.
THUS, 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. All things considered, there is no raison
d'tre 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.

20

TAXATION 2
VAT

(4) RENATO V. DIAZ and AURORA MA. F. TIMBOL,


Petitioners,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER
OF INTERNAL REVENUE, Respondents
GR NO 193007. JULY 19, 2011
ABAD
FACTS: Petitioners filed this petition for declaratory relief assailing
the validity of the impending imposition of VAT by the BIR on the
collections of tollway operators claiming that:

Since the VAT would result in increased toll fees, they have an
interest as regular users of tollways in stopping the BIR action.

Diaz sponsored the approval of the EVAT Law and the NIRC at
the HoR while Timbol served as Asst. Sec. to the DTI and
consultant to the Toll Regulatory Board (TRB) in the past
administration.
Petitioners allege that the BIR attempted during the administration of
President Gloria Macapagal-Arroyo to impose VAT on toll fees. The
imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon
President Benigno C. Aquino IIIs assumption of office in 2010, the
BIR revived the idea and would impose the challenged tax on toll
fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the
NIRC, intend to include toll fees within the meaning of sale of
services that are subject to VAT; that a toll fee is a users tax, not
a sale of services; that to impose VAT on toll fees would amount to a
tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the nonimpairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order
(TRO), enjoining the implementation of the VAT. The Court required
the government, represented by respondents Cesar V. Purisima,
Secretary of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition
within 10 days from notice. Later, the Court issued another resolution
treating the petition as one for prohibition.
On August 23, 2010, the government, through the OSGs comment,
avers that:

the NIRC imposes VAT on all kinds of services of franchise


grantees, including tollway operations, except where the law
provides otherwise; that the Court should seek the meaning and
intent of the law from the words used in the statute; and that the
imposition of VAT on tollway operations has been the subject as
early as 2003 of several BIR rulings and circulars;

petitioners have no right to invoke the non-impairment of


contracts clause since they clearly have no personal interest in
existing toll operating agreements (TOAs) between the
government and tollway operators - or at any rate, the nonimpairment clause cannot limit the States sovereign taxing
power which is generally read into contracts; and

the non-inclusion of VAT in the parametric formula for


computing toll rates cannot exempt tollway operators from VAT
in any event, it cannot be claimed that the rights of tollway
operators to a reasonable rate of return will be impaired by the
VAT since this is imposed on top of the toll rate and the
imposition of VAT on toll fees would have very minimal effect
on motorists using the tollways.
In their Reply, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold
legislative franchises. Further, the BIR intends to collect the VAT by

rounding off the toll rate and putting any excess collection in an
escrow account. But this would be illegal since only the Congress
can modify VAT rates and authorize its disbursement. Finally, BIR
Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010),
which directs toll companies to record an accumulated input VAT of
zero balance in their books as of August 16, 2010, contravenes
Section 111 of the NIRC which grants entities that first become liable
to VAT a transitional input tax credit of 2% on beginning
inventory. For this reason, the VAT on toll fees cannot be
implemented.
ISSUE: May toll fees collected by tollway operators be subjected to
VAT?
PROCEDURAL ISSUES:
1. WON the court may treat the petition for declaratory relief as
one for prohibition;
2. WON petitioners have legal standing to file the action.
SUBSTANTIVE ISSUES:
3. WON the government is unlawfully expanding VAT coverage
by including tollway operators and tollway operations in the
terms franchise grantees and sale of services under Sec. 108
of the Code; and
4. WON the imposition of VAT on tollway operators
a. Amounts to a tax on tax and not a tax on services;
b. Will impair the tollway operators right to a
reasonable return of investment under their TOAs; and
c. Is not administratively feasible and cannot be
implemented.
HELD: (1) YES. There are precedents for treating a petition for
declaratory relief as one for prohibition if the case has far-reaching
implications and raises questions that need to be resolved for the
public good. The Court has also held that a petition for prohibition is
a proper remedy to prohibit or nullify acts of executive officials that
amount to usurpation of legislative authority.
Here, the imposition of VAT on toll fees has far-reaching
implications. Its imposition would impact, not only on the more than
half a million motorists who use the tollways everyday, but more so
on the governments effort to raise revenue for funding various
projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the
challenged VAT has been imposed, could cause more mischief both
to the tax-paying public and the government. A belated declaration
of nullity of the BIR action would make any attempt to refund to the
motorists what they paid an administrative nightmare with no
solution. Consequently, it is not only the right, but the duty of the
Court to take cognizance of and resolve the issues that the petition
raises.
(2) Although the petition does not strictly comply with the
requirements of Rule 65, the Court has ample power to waive such
technical requirements when the legal questions to be resolved are of
great importance to the public. The same may be said of the
requirement of locus standi which is a mere procedural requisite.
(3) The law imposes VAT on all kinds of services rendered in the
Philippines for a fee, including those specified in the list. The
enumeration of affected services is not exclusive. By qualifying
services with the words all kinds, Congress has given the term
services an all-encompassing meaning. The listing of specific
services are intended to illustrate how pervasive and broad is the
VATs reach rather than establish concrete limits to its
application. Thus, every activity that can be imagined as a form of

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TAXATION 2
VAT

service rendered for a fee should be deemed included unless some


provision of law especially excludes it.
PD 1112 or the Toll Operation Decree establishes the legal basis for
the services that tollway operators render. Essentially, tollway
operators construct, maintain, and operate expressways, also called
tollways, at the operators expense. Tollways serve as alternatives to
regular public highways that meander through populated areas and
branch out to local roads. Traffic in the regular public highways is
for this reason slow-moving. In consideration for constructing
tollways at their expense, the operators are allowed to collect
government-approved fees from motorists using the tollways until
such operators could fully recover their expenses and earn reasonable
returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in
effect for the latters use of the tollway facilities over which the
operator enjoys private proprietary rights that its contract and the law
recognize. In this sense, the tollway operator is no different from the
following service providers under Section 108 who allow others to
use their properties or facilities for a fee.
It does not help petitioners cause that Section 108 subjects to VAT
all kinds of services rendered for a fee regardless of whether or
not the performance thereof calls for the exercise or use of the
physical or mental faculties. This means that services to be
subject to VAT need not fall under the traditional concept of services,
the personal or professional kinds that require the use of human
knowledge and skills.
And not only do tollway operators come under the broad term all
kinds of services, they also come under the specific class described
in Section 108 as all other franchise grantees who are subject to
VAT, except those under Section 119 of this Code.
Tollway operators are franchise grantees and they do not belong to
exceptions (the low-income radio and/or television broadcasting
companies with gross annual incomes of less than P10 million and
gas and water utilities) that Section 119spares from the payment of
VAT. The word franchise broadly covers government grants of a
special right to do an act or series of acts of public concern.
Nothing in Section 108 indicates that the franchise grantees it
speaks of are those who hold legislative franchises. Petitioners give
no reason, and the Court cannot surmise any, for making a distinction
between franchises granted by Congress and franchises granted by
some other government agency. The latter, properly constituted, may
grant franchises. Indeed, franchises conferred or granted by local
authorities, as agents of the state, constitute as much a legislative
franchise as though the grant had been made by Congress itself. The
term franchise has been broadly construed as referring, not only to
authorizations that Congress directly issues in the form of a special
law, but also to those granted by administrative agencies to which the
power to grant franchises has been delegated by Congress.
Tollway operators are, owing to the nature and object of their
business, franchise grantees. The construction, operation, and
maintenance of toll facilities on public improvements are activities of
public consequence that necessarily require a special grant of
authority from the state. Indeed, Congress granted special franchise
for the operation of tollways to the Philippine National Construction
Company, the former tollway concessionaire for the North and South
Luzon Expressways. Apart from Congress, tollway franchises may
also be granted by the TRB, pursuant to the exercise of its delegated
powers under P.D. 1112. The franchise in this case is evidenced by a
Toll Operation Certificate.

In specifically including by way of example electric utilities,


telephone, telegraph, and broadcasting companies in its list of VATcovered businesses, Section 108 opens other companies rendering
public service for a fee to the imposition of VAT. Businesses of a
public nature such as public utilities and the collection of tolls or
charges for its use or service is a franchise.
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. The congressional will is ultimately determined by the
language of the law that the lawmakers voted on. Consequently, the
meaning and intention of the law must first be sought 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.
(4)(a) Tollway fees are not taxes. Indeed, they are not assessed and
collected by the BIR and do not go to the general coffers of the
government.
It would of course be another matter if Congress enacts a law
imposing a users tax, collectible from motorists, for the construction
and maintenance of certain roadways. The tax in such a case goes
directly to the government for the replenishment of resources it
spends for the roadways. This is not the case here. What the
government seeks to tax here are fees collected from tollways that are
constructed, maintained, and operated by private tollway operators at
their own expense under the build, operate, and transfer scheme that
the government has adopted for expressways. Except for a fraction
given to the government, the toll fees essentially end up as earnings
of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the
tollways, are not taxes in any sense. A tax is imposed under the
taxing power of the government principally for the purpose of raising
revenues to fund public expenditures. Toll fees, on the other hand, are
collected by private tollway operators as reimbursement for the costs
and expenses incurred in the construction, maintenance and operation
of the tollways, as well as to assure them a reasonable margin of
income. Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly
treated as a tax. Taxes may be imposed only by the government
under its sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of
ownership.
Parenthetically, VAT on tollway operations cannot be deemed a tax
on tax due to the nature of VAT as an indirect tax. In indirect
taxation, a distinction is made between the liability for the tax and
burden of the tax. The seller who is liable for the VAT may shift or
pass on the amount of VAT it paid on goods, properties or services to
the buyer. In such a case, what is transferred is not the sellers
liability but merely the burden of the VAT.
Thus, the seller remains directly and legally liable for payment of the
VAT, but the buyer bears its burden since the amount of VAT paid
by the former is added to the selling price. Once shifted, the VAT
ceases to be a tax and simply becomes part of the cost that the buyer
must pay in order to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the
tollway user, but on the tollway operator. Under Section 105 of the
Code, VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller
of services, who in this case is the tollway operator, is the person

22

TAXATION 2
VAT

liable for VAT. The latter merely shifts the burden of VAT to the
tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax
even if toll fees were deemed as a users tax. VAT is assessed
against the tollway operators gross receipts and not necessarily on
the toll fees. Although the tollway operator may shift the VAT
burden to the tollway user, it will not make the latter directly liable
for the VAT. The shifted VAT burden simply becomes part of the toll
fees that one has to pay in order to use the tollways.
(4)(b) Petitioner Timbol has no personality to invoke the nonimpairment of contract clause on behalf of private investors in the
tollway projects. She will neither be prejudiced by nor be affected by
the alleged diminution in return of investments that may result from
the VAT imposition. She has no interest at all in the profits to be
earned under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will
be adversely affected by imposing VAT on tollway operations is
purely speculative. Equally presumptuous is her assertion that a
stipulation in the TOAs known as the Material Adverse Grantor
Action will be activated if VAT is thus imposed. The Court cannot
rule on matters that are manifestly conjectural. Neither can it prohibit
the State from exercising its sovereign taxing power based on
uncertain, prophetic grounds.
(4)(c) Administrative feasibility is one of the canons of a sound tax
system. It simply means that the tax system should be capable of
being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon,
however, will not render a tax imposition invalid except to the
extent that specific constitutional or statutory limitations are
impaired. Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not necessarily
invalid unless some aspect of it is shown to violate any law or the
Constitution.
Here, it remains to be seen how the taxing authority will actually
implement the VAT on tollway operations. Any declaration by the
Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the
August 12, 2010 Senate hearing provides some clue as to how the
BIR intends to go about it, the facts pertaining to the matter are not
sufficiently established for the Court to pass judgment on. Besides,
any concern about how the VAT on tollway operations will be
enforced must first be addressed to the BIR on whom the task of
implementing tax laws primarily and exclusively rests. The Court
cannot preempt the BIRs discretion on the matter, absent any clear
violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal,
BIR RMC 63-2010 which directs toll companies to record an
accumulated input VAT of zero balance in their books as of August
16, 2010, the date when the VAT imposition was supposed to take
effect. The issuance allegedly violates Section 111(A) of the Code
which grants first time VAT payers a transitional input VAT of 2%
on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is
actually the product of negotiations with tollway operators who have
been assessed VAT as early as 2005, but failed to charge VATinclusive toll fees which by now can no longer be collected. The
tollway operators agreed to waive the 2% transitional input VAT, in
exchange for cancellation of their past due VAT liabilities. Notably,
the right to claim the 2% transitional input VAT belongs to the

tollway operators who have not questioned the circulars validity.


They are thus the ones who have a right to challenge the circular in a
direct and proper action brought for the purpose.
IN FINE, the CIR did not usurp legislative prerogative or expand the
VAT laws coverage when she sought to impose VAT on tollway
operations. Section 108(A) of the Code clearly states that services of
all other franchise grantees are subject to VAT, except as may be
provided under Section 119 of the Code. Tollway operators are not
among the franchise grantees subject to franchise tax under the latter
provision. Neither are their services among the VAT-exempt
transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT,
as petitioners so strongly allege, then it would have been well for the
law to clearly say so. Tax exemptions must be justified by clear
statutory grant and based on language in the law too plain to be
mistaken. But as the law is written, no such exemption obtains for
tollway operators. The Court is thus duty-bound to simply apply the
law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that
is within the exclusive prerogative of Congress. The Courts role is
to merely uphold this legislative policy, as reflected first and
foremost in the language of the tax statute. Thus, any unwarranted
burden that may be perceived to result from enforcing such policy
must be properly referred to Congress. The Court has no discretion
on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since
1994 when R.A. 7716 or the Expanded Value-Added Tax law was
passed. It is only now, however, that the executive has earnestly
pursued the VAT imposition against tollway operators. The
executive exercises exclusive discretion in matters pertaining to the
implementation and execution of tax laws. Consequently, the
executive is more properly suited to deal with the immediate and
practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of
Finance and Commissioner of Internal Revenues motion for
reconsideration of its August 24, 2010 resolution, DISMISSES the
petitioners Renato V. Diaz and Aurora Ma. F. Timbols petition for
lack of merit, and SETS ASIDE the Courts temporary restraining
order dated August 13, 2010.

23

TAXATION 2
VAT

(5) FORT BONIFACIO DEVELOPMENT CORPORATION,


Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, REGIONAL
DIRECTOR, REVENUE REGION NO. 8, and CHIEF,
ASSESSMENT DIVISION, REVENUE REGION NO. 8, BIR,
Respondents
GR NO. 158885. APRIL 2, 2009
FORT BONIFACIO DEVELOPMENT CORPORATION,
Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE
DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG
AND PATEROS, BIR, Respondents
GR NO. 170680. APRIL 2, 2009
TINGA
FACTS: FBDC is engaged in the development and sale of real
property. On 8 February 1995, FBDC acquired by way of sale from
the national government, a vast tract of land that formerly formed
part of the Fort Bonifacio military reservation, located in what is now
the Fort Bonifacio Global City (Global City) in Taguig City. Since
the sale was consummated prior to the enactment of Rep. Act No.
7716, no VAT was paid thereon. FBDC then proceeded to develop
the tract of land, and from October, 1966 onwards it has been selling
lots located in the Global City to interested buyers.
Following the effectivity of Rep. Act No. 7716, real estate
transactions such as those regularly engaged in by FBDC have since
been made subject to VAT. As the vendor, FBDC from thereon has
become obliged to remit to the BIR output VAT payments it received
from the sale of its properties to the Bureau BIR. FBDC likewise
invoked its right to avail of the transitional input tax credit and
accordingly submitted an inventory list of real properties it owned,
with a total book value of P71,227,503,200.00.
On 14 October 1996, FBDC executed in favor of Metro Pacific
Corporation two (2) contracts to sell, separately conveying two (2)
parcels of land within the Global City in consideration of the
purchase prices at P1,526,298,949.00 and P785,009,018.00, both
payable in installments. For the fourth quarter of 1996, FBDC earned
a total of P3,498,888,713.60 from the sale of its lots, on which the
output VAT payable to the BIR was P318,080,792.14. In the context
of remitting its output VAT payments to the BIR, FBDC paid a total
of P269,340,469.45 and utilized (a)P28,413,783.00 representing a
portion of its then total transitional/presumptive input tax
credit ofP5,698,200,256.00, which petitioner allocated for the two
(2) lots sold to Metro Pacific; and (b) its regular input tax credit
of P20,326,539.69 on the purchase of goods and services.
Between July and October 1997, FBDC sent two (2) letters to the
BIR requesting appropriate action on whether its use of its
presumptive input VAT on its land inventory, to the extent
ofP28,413,783.00 in partial payment of its output VAT for the fourth
quarter of 1996, was in order. After investigating the matter, the BIR
recommended that the claimed presumptive input tax credit be
disallowed. Consequently, the BIR issued to FBDC a Pre-Assessment
Notice (PAN) dated23 December 1997 for deficiency VAT for the
4th quarter of 1996. This was followed by a letter of the CIR,
addressed to and received by FBDC on 5 March 1998, disallowing
the presumptive input tax credit arising from the land inventory on
the basis of Revenue Regulation 7-95 (RR 7-95) and Revenue
Memorandum Circular 3-96 (RMC 3-96). Section 4.105-1 of RR 795 provided the basis in main for the CIRs opinion, the section
reading, thus:

Sec. 4.105-1. Transitional input tax on beginning inventories.


Taxpayers who became VAT-registered persons upon effectivity of
RA No. 7716 who have exceeded the minimum turnover
ofP500,000.00 or who voluntarily register even if their turnover does
not exceed P500,000.00 shall be entitled to a presumptive input tax
on the inventory on hand as of December 31, 1995 on the following:
(a) goods purchased for resale in their present condition; (b)
materials purchased for further processing, but which have not yet
undergone processing; (c) goods which have been manufactured by
the taxpayer; (d) goods in process and supplies, all of which are for
sale or for use in the course of the taxpayers trade or business as a
VAT-registered person.
However, in the case of real estate dealers, the basis of the
presumptive input tax shall be the improvements, such as buildings,
roads, drainage systems, and other similar structures, constructed on
or after the effectivity of EO 273 (January 1, 1988).
The transitional input tax shall be 8% of the value of the inventory or
actual VAT paid, whichever is higher, which amount may be allowed
as tax credit against the output tax of the VAT-registered person.
The CIR also cited the Transitory Provisions of RR 7-95, particularly
the ff:
(a) Presumptive Input Tax Credits (iii) For real estate dealers, the presumptive input tax of 8% of the
book value of improvements on or after January 1, 1988 (the
effectivity of E.O. 273) shall be allowed.
For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory
as of December 31, 1995of such goods or properties and
improvements showing the quantity, description and amount filed
with the RDO not later than Janaury 31, 1996.
Consequently, FBDC received an Assessment Notice in the amount
of P45,188,708.08, representing deficiency VAT for the 4th quarter
of 1996, including surcharge, interest and penalty. After respondent
Regional Director denied FBDCs motion for reconsideration/protest,
FBDC filed a petition for review with the CTA. On 11 August 2000,
the CTA rendered a decision affirming the assessment made by the
respondents. FBDC assailed the CTA decision through a petition for
review filed with the Court of Appeals, docketed as CA-G.R. SP No.
60477. On 15 November 2002, the Court of Appeals rendered a
decision affirming the CTA decision, but removing the surcharge,
interests and penalties, thus reducing the amount due
to P28,413,783.00. From said decision, FBDC filed a petition for
review with this Court, the first of the two petitions now before us,
seeking the reversal of the CTA decision dated 11 August 2000 and a
pronouncement that FBDC is entitled to the transitional/presumptive
input tax credit of P28,413,783.00.
The second petition involves the same parties and legal issues, but
concerns the claim of FBDC that it is entitled to claim a similar
transitional/presumptive input tax credit, this time for the third
quarter of 1997. A brief recital of the anteceding facts underlying this
second claim is in order.
For the third quarter of 1997, FBDC derived the total amount
of P3,591,726,328.11 from its sales and lease of lots, on which the
output VAT payable to the BIR was P359,172,632.81. Accordingly,
FBDC made cash payments totaling P347,741,695.74 and utilized its
regular input tax credit of P19,743,565.73 on purchases of goods and
services. On 11 May 1999, FBDC filed with the BIR a claim for
refund of the amount of P347,741,695.74 which it had paid as VAT
for the third quarter of 1997. No action was taken on the refund

24

TAXATION 2
VAT

claim, leading FBDC to file a petition for review with the CTA,
docketed as CTA Case No. 5926. Utilizing the same valuation of 8%
of the total book value of its beginning inventory of real properties
(or P71,227,503,200.00) FBDC argued that its input tax credit was
more than enough to offset the VAT paid by it for the third quarter of
1997.
On 17 October 2000, the CTA promulgated its decision denying the
claim for refund. FBDC then filed a petition for review with the CA
which rendered a decision affirming the judgment of the CTA. As a
result, FBDC filed its second petition.
ISSUES: Whether Section 105 of the Old NIRC may be interpreted
in such a way as to restrict its application in the case of real estate
dealers only to the improvements on the real property belonging to
their beginning inventory, and not the entire real property itself.
There would be no controversy before us if the Old NIRC had itself
supplied that limitation, yet the law is tellingly silent in that regard.
RR 7-95, which imposes such restrictions on real estate dealers, is
discordant with the Old NIRC, so it is alleged.
HELD: On its face, there is nothing in Section 105 of the Old NIRC
that prohibits the inclusion of real properties, together with the
improvements thereon, in the beginning inventory of goods, materials
and supplies, based on which inventory the transitional input tax
credit is computed. It can be conceded that when it was drafted
Section 105 could not have possibly contemplated concerns specific
to real properties, as real estate transactions were not originally
subject to VAT. At the same time, when transactions on real
properties were finally made subject to VAT beginning with Rep. Act
No. 7716, no corresponding amendment was adopted as regards
Section 105 to provide for a differentiated treatment in the
application of the transitional input tax credit with respect to real
properties or real estate dealers.
It was Section 100 of the Old NIRC, as amended by Rep. Act No.
7716, which made real estate transactions subject to VAT for the first
time. Prior to the amendment, Section 100 had imposed the VAT on
every sale, barter or exchange of goods, without however specifying
the kind of properties that fall within or under the generic class
goods subject to the tax.
Rep. Act No. 7716, which significantly is also known as the
Expanded Value-Added Tax (EVAT) law, expanded the coverage of
the VAT by amending Section 100 of the Old NIRC in several
respects:
1. It made every sale, barter or exchange of goods or properties
subject to VAT.
2. It generally defined goods or properties as all tangible and
intangible objects which are capable of pecuniary estimation.
3. It included a non-exclusive enumeration of various objects that
fall under the class goods or properties subject to VAT,
including real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or business.
From these amendments to Section 100, is there any differentiated
VAT treatment on real properties or real estate dealers that would
justify the suggested limitations on the application of the transitional
input tax on them? There is none.
Rep. Act No. 7716 clarifies that it is the real properties held
primarily for sale to customers or held for lease in the ordinary course
of trade or business that are subject to the VAT, and not when the
real estate transactions are engaged in by persons who do not sell or
lease properties in the ordinary course of trade or business. It is clear
that those regularly engaged in the real estate business are accorded

the same treatment as the merchants of other goods or properties


available in the market. In the same way that a milliner considers hats
as his goods and a rancher considers cattle as his goods, a real estate
dealer holds real property, whether or not it contains improvements,
as his goods.
Had Section 100 itself supplied any differentiation between the
treatment of real properties or real estate dealers and the treatment of
the transactions involving other commercial goods, then such
differing treatment would have constituted the statutory basis for the
CIR to engage in such differentiation which said respondent did seek
to accomplish in this case through Section 4.105-1 of RR 7-95. Yet
the amendments introduced by Rep. Act No. 7716 to Section 100,
coupled with the fact that the said law left Section 105 intact, reveal
the lack of any legislative intention to make persons or entities in the
real estate business subject to a VAT treatment different from those
engaged in the sale of other goods or properties or in any other
commercial trade or business.
The fact alone that the denial of FBDCs claims is in accord with
Section 4.105-1 of RR 7-95 does not, of course, put this inquiry to
rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716, the
incongruence cannot by itself justify the denial of the claims.
Upon the shift from sales taxes to VAT in 1987 newly-VAT
registered people would have been prejudiced by the inability to
credit against the output VAT their payments by way of sales tax on
their existing stocks in trade. Yet that inequity was precisely
addressed by a transitory provision in E.O. No. 273 found in Section
25 thereof. The provision authorized VAT-registered persons to
invoke a presumptive input tax equivalent to 8% of the value of the
inventory as of December 31, 1987 of materials and supplies which
are not for sale, the tax on which was not taken up or claimed as
deferred sales tax credit, and a similar presumptive input tax
equivalent to 8% of the value of the inventory as of December 31,
1987 of goods for sale, the tax on which was not taken up or claimed
as deferred sales tax credit.
Section 25 of E.O. No. 273 perfectly remedies the problem assumed
by the CTA as the basis for the introduction of transitional input tax
credit in 1987. If the core purpose of the tax credit is only, as hinted
by the CTA, to allow for some mode of accreditation of previouslypaid sales taxes, then Section 25 alone would have sufficed. Yet E.O.
No. 273 amended the Old NIRC itself by providing for the
transitional input tax credit under Section 105, thereby assuring that
the tax credit would endure long after the last goods made subject to
sales tax have been consumed.
If indeed the transitional input tax credit is integrally related to
previously paid sales taxes, the purported causal link between those
two would have been nonetheless extinguished long ago. Yet
Congress has reenacted the transitional input tax credit several times;
that fact simply belies the absence of any relationship between such
tax credit and the long-abolished sales taxes. Obviously then, the
purpose behind the transitional input tax credit is not confined to the
transition from sales tax to VAT.
There is hardly any constricted definition of "transitional" that will
limit its possible meaning to the shift from the sales tax regime to the
VAT regime. Indeed, it could also allude to the transition one
undergoes from not being a VAT-registered person to becoming a
VAT-registered person. Such transition does not take place merely by
operation of law, E.O. No. 273 or Rep. Act No. 7716 in particular. It
could also occur when one decides to start a business. Section 105
states that the transitional input tax credits become available either to
(1) a person who becomes liable to VAT; or (2) any person who
elects to be VAT-registered. The clear language of the law entitles

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TAXATION 2
VAT

new trades or businesses to avail of the tax credit once they become
VAT-registered. The transitional input tax credit, whether under the
Old NIRC or the New NIRC, may be claimed by a newly-VAT
registered person such as when a business as it commences
operations. If we view the matter from the perspective of a starting
entrepreneur, greater clarity emerges on the continued utility of the
transitional input tax credit.
Following the theory of the CTA, the new enterprise should be able
to claim the transitional input tax credit because it has presumably
paid taxes, VAT in particular, in the purchase of the goods, materials
and supplies in its beginning inventory. Consequently, as the CTA
held, if the new enterprise has not paid VAT in its purchases of such
goods, materials and supplies, then it should not be able to claim the
tax credit. However, it is not always true that the acquisition of such
goods, materials and supplies entail the payment of taxes on the part
of the new business. In fact, this could occur as a matter of course by
virtue of the operation of various provisions of the NIRC, and not
only on account of a specially legislated exemption.
The interpretation proffered by the CTA would exclude goods and
properties which are acquired through sale not in the ordinary course
of trade or business, donation or through succession, from the
beginning inventory on which the transitional input tax credit is
based. This prospect all but highlights the ultimate absurdity of the
respondents' position. Again, nothing in the Old NIRC (or even the
New NIRC) speaks of such a possibility or qualifies the previous
payment of VAT or any other taxes on the goods, materials and
supplies as a pre-requisite for inclusion in the beginning inventory.
It is apparent that the transitional input tax credit operates to benefit
newly VAT-registered persons, whether or not they previously paid
taxes in the acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition from nonVAT to VAT status, the transitional input tax credit serves to
alleviate the impact of the VAT on the taxpayer. At the very
beginning, the VAT-registered taxpayer is obliged to remit a
significant portion of the income it derived from its sales as output
VAT. The transitional input tax credit mitigates this initial diminution
of the taxpayers income by affording the opportunity to offset the
losses incurred through the remittance of the output VAT at a stage
when the person is yet unable to credit input VAT payments.
Under Section 105 of the Old NIRC, the rate of the transitional input
tax credit is 8% of the value of such inventory or the actual valueadded tax paid on such goods, materials and supplies, whichever is
higher. If indeed the transitional input tax credit is premised on the
previous payment of VAT, then it does not make sense to afford the
taxpayer the benefit of such credit based on 8% of the value of such
inventory should the same prove higher than the actual VAT paid.
This intent that the CTA alluded to could have been implemented
with ease had the legislature shared such intent by providing the
actual VAT paid as the sole basis for the rate of the transitional input
tax credit.
The CTA harped on the circumstance that FBDC was excused from
paying any tax on the purchase of its properties from the national
government, even claiming that to allow the transitional input tax
credit is "tantamount to giving an undeserved bonus to real estate
dealers similarly situated as FBDC which the Government cannot
afford to provide." Yet the tax laws in question, and all tax laws in
general, are designed to enforce uniform tax treatment to persons or
classes of persons who share minimum legislated standards. The
common standard for the application of the transitional input tax
credit, as enacted by E.O. No. 273 and all subsequent tax laws which
reinforced or reintegrated the tax credit, is simply that the taxpayer in
question has become liable to VAT or has elected to be a VAT-

registered person. E.O. No. 273 and the subsequent tax laws are all
decidedly neutral and accommodating in ascertaining who should be
entitled to the tax credit, and it behooves the CIR and the CTA to
adopt a similarly judicious perspective.
There is no logic that coheres with either E.O. No. 273 or Rep.
Act No. 7716 which supports the restriction imposed on real
estate brokers and their ability to claim the transitional input tax
credit based on the value of their real properties. In addition, the
very idea of excluding the real properties itself from the
beginning inventory simply runs counter to what the transitional
input tax credit seeks to accomplish for persons engaged in the
sale of goods, whether or not such goods take the form of real
properties or more mundane commodities.
Under Section 105, the beginning inventory of goods forms
part of the valuation of the transitional input tax credit. Goods,
as commonly understood in the business sense, refers to the
product which the VAT-registered person offers for sale to the
public. With respect to real estate dealers, it is the real properties
themselves which constitute their goods. Such real properties
are the operating assets of the real estate dealer.
Section 4.100-1 of RR No. 7-95 itself includes in its enumeration
of goods or properties such real properties held primarily for
sale to customers or held for lease in the ordinary course of trade
or business. Said definition was taken from the very statutory
language of Section 100 of the Old NIRC. By limiting the
definition of goods to improvements in Section 4.105-1, the BIR
not only contravened the definition of goods as provided in the
Old NIRC, but also the definition which the same revenue
regulation itself has provided.
The Court of Tax Appeals claimed that under Section 105 of the
Old NIRC the basis for the inventory of goods, materials and
supplies upon which the transitional input VAT would be based
shall be left to regulation by the appropriate administrative
authority. This is based on the phrase filing of an inventory as
prescribed by regulations found in Section 105. Nonetheless,
Section 105 does include the particular properties to be included
in the inventory, namely goods, materials and supplies. It is
questionable whether the CIR has the power to actually redefine
the concept of goods, as she did when she excluded real
properties from the class of goods which real estate companies in
the business of selling real properties may include in their
inventory. The authority to prescribe regulations can pertain to
more technical matters, such as how to appraise the value of the
inventory or what papers need to be filed to properly itemize the
contents of such inventory. But such authority cannot go as far as
to amend Section 105 itself, which the Commissioner had
unfortunately accomplished in this case.
It is of course axiomatic that a rule or regulation must bear upon,
and be consistent with, the provisions of the enabling statute if
such rule or regulation is to be valid. In case of conflict between a
statute and an administrative order, the former must prevail.
Indeed, the CIR has no power to limit the meaning and coverage
of the term goods in Section 105 of the Old NIRC absent
statutory authority or basis to make and justify such limitation.
A contrary conclusion would mean the CIR could very well moot
the law or arrogate legislative authority unto himself by retaining
sole discretion to provide the definition and scope of the term
goods.
Justice Antonio T. Carpios dissent adopts the CTAs thesis that the
transitional input tax credit applies only when taxes were previously
paid on the properties in the beginning inventory. Had the dissenting

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TAXATION 2
VAT

view won, it would have introduced a new requisite to the application


of the transitional input tax credit and required the taxpayer to supply
proof that it had previously paid taxes on the acquisition of goods,
materials and supplies comprising its beginning inventory. We have
sufficiently rebutted this thesis, but the dissent adds a twist to the
argument by using the term presumptive input tax credit to imply
that the transitional input tax credit involves a presumption that there
was a previous payment of taxes.
There is a distinction between the presumptive input tax credit and
the transitional input tax credit. As with the transitional input tax
credit, the presumptive input tax credit is creditable against the output
VAT. It necessarily has come into existence in our tax structure only
after the introduction of the VAT. As quoted earlier, E.O. No. 273
provided for a presumptive input tax credit as one of the transitory
measures in the shift from sales taxes to VAT, but such presumptive
input tax credit was never integrated in the NIRC itself. It was only in
1997, or eleven years after the VAT was first introduced, that the
presumptive input tax credit was first incorporated in the NIRC, more
particularly in Section 111(B) of the New NIRC. As borne out by the
text of the provision, it is plain that the presumptive input tax credit is
highly limited in application as it may be claimed only by persons or
firms engaged in the processing of sardines, mackerel and milk, and
in manufacturing refined sugar and cooking oil; and public works
contractors.
Clearly, for more than a decade now, the term presumptive input tax
credit has contemplated a particularly idiosyncratic tax credit far
divorced from its original usage in the transitory provisions of E.O.
No. 273. There is utterly no sense then in latching on to the term as
having any significant meaning for the purpose of the cases at bar.
This chain of premises have already been debunked. It is apparent
that the dissent believes that only those goods, materials and
supplies on which input VAT was paid could form the basis of
valuation of the input tax credit. Thus, if the VAT-registered person
acquired all the goods, materials and supplies of the beginning
inventory through a sale not in the ordinary course of trade or
business, or through succession or donation, said person would be
unable to receive a transitional input tax credit. Yet even RR 7-95,
which imposes the restriction only on real estate dealers permits such
other persons who obtained their beginning inventory through taxfree means to claim the transitional input tax credit. The dissent thus
betrays a view that is even more radical and more misaligned with the
language of the law than that expressed by the CIR.
Section 4.105.1 of RR No. 7-95, insofar as it disallows real estate
dealers from including the value of their real properties in the
beginning inventory of goods, materials and supplies, has in fact
already been repealed. The offending provisions were deleted with
the enactment of Revenue Regulation No. 6-97 (RR 6-97) dated 2
January 1997, which amended RR 7-95. The repeal of the basis for
the present assessments by RR 6-97 only highlights the continuing
absurdity of the position of the BIR towards FBDC.
FBDC points out that while the transactions involved in G.R. No.
158885 took place during the effectivity of RR 7-95, the transactions
involved in G.R. No. 170680 in fact took place after RR No. 6-97 had
taken effect. Indeed, the assessments subject of G.R. No. 170680
were for the third quarter of 1997, or several months after the
effectivity of RR 6-97. That fact provides additional reason to sustain
FBDCs claim for refund of its 1997 Third Quarter VAT payments.
Nevertheless, since the assailed restrictions implemented by RR 7-95
were not sanctioned by law in the first place there is no longer need
to dwell on such fact.

WHEREFORE, the petitions are GRANTED. The assailed


decisions of the Court of Tax Appeals and the Court of Appeals
are REVERSED and SET ASIDE. Respondents are hereby (1)
restrained from collecting from petitioner the amount
of P28,413,783.00 representing the transitional input tax credit due it
for the fourth quarter of 1996; and (2) directed to refund to petitioner
the amount of P347,741,695.74 paid as output VAT for the third
quarter of 1997 in light of the persisting transitional input tax credit
available to petitioner for the said quarter, or to issue a tax credit
corresponding to such amount. No pronouncement as to costs.

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