TAX 1

Guevara produced his file copy and gave a photostat to BIR agent Ramon
Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara
was finally informed that the BIR was not taking any action on the protest and
it was only then that he accepted the warrant of distraint and levy earlier
sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a
petition for review of the decision of the Commissioner of Internal Revenue
with the Court of Tax Appeals. 6

1. A. 1.
G.R. No. L-28896February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:

The above chronology shows that the petition was filed seasonably.
According to Rep. Act No. 1125, the appeal may be made within thirty days
after receipt of the decision or ruling challenged. 7 It is true that as a rule the
warrant of distraint and levy is "proof of the finality of the assessment" 8 and
renders hopeless a request for reconsideration," 9 being "tantamount to an
outright denial thereof and makes the said request deemed rejected." 10 But
there is a special circumstance in the case at bar that prevents application of
this accepted doctrine.
The proven fact is that four days after the private respondent received the
petitioner's notice of assessment, it filed its letter of protest. This was
apparently not taken into account before the warrant of distraint and levy was
issued; indeed, such protest could not be located in the office of the
petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest
that it was, if at all, considered by the tax authorities. During the intervening
period, the warrant was premature and could therefore not be served.

Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance On the other hand, such collection should be made
in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be
achieved.
The main issue in this case is whether or not the Collector of Internal
Revenue correctly disallowed the P75,000.00 deduction claimed by private
respondent Algue as legitimate business expenses in its income tax returns.
The corollary issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was made on time and
in accordance with law.
We deal first with the procedural question.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private
respondent was not pro forma and was based on strong legal considerations.
It thus had the effect of suspending on January 18, 1965, when it was filed,
the reglementary period which started on the date the assessment was
received, viz., January 14, 1965. The period started running again only on
April 7, 1965, when the private respondent was definitely informed of the
implied rejection of the said protest and the warrant was finally served on it.
Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.
Now for the substantive question.

The record shows that on January 14, 1965, the private respondent, a
domestic corporation engaged in engineering, construction and other allied
activities, received a letter from the petitioner assessing it in the total amount
of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1
On January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same day in the
office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy
was presented to the private respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the ground of the pending protest. 3
A search of the protest in the dockets of the case proved fruitless. Atty.

TAX 1
short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent
when its President, Alberto Guevara, and the accountant, Cecilia V. de
Jesus, testified that the payments were not made in one lump sum but
periodically and in different amounts as each payee's need arose. 19 It
should be remembered that this was a family corporation where strict
business procedures were not applied and immediate issuance of receipts
was not required. Even so, at the end of the year, when the books were to be
closed, each payee made an accounting of all of the fees received by him or
her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to
be informal. This arrangement was understandable, however, in view of the
close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees
was not excessive. The total commission paid by the Philippine Sugar Estate
Development Co. to the private respondent was P125,000.00. 21 After
deducting the said fees, Algue still had a balance of P50,000.00 as clear
profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the
payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate
properties. This finding of the respondent court is in accord with the following
provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there
shall be allowed as deductions
(a) Expenses:
(1)
In general.--All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for
personal services actually rendered; ... 22

The petitioner contends that the claimed deduction of P75,000.00 was

properly disallowed because it was not an ordinary reasonable or necessary
business expense. The Court of Tax Appeals had seen it differently. Agreeing
with Algue, it held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment was in the
form of promotional fees. These were collected by the Payees for their work
in the creation of the Vegetable Oil Investment Corporation of the Philippines
and its subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed
these promotional fees to be personal holding company income 12 but later
conformed to the decision of the respondent court rejecting this assertion. 13
In fact, as the said court found, the amount was earned through the joint
efforts of the persons among whom it was distributed It has been established
that the Philippine Sugar Estate Development Company had earlier
appointed Algue as its agent, authorizing it to sell its land, factories and oil
manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez,
worked for the formation of the Vegetable Oil Investment Corporation,
inducing other persons to invest in it. 14 Ultimately, after its incorporation
largely through the promotion of the said persons, this new corporation
purchased the PSEDC properties. 15 For this sale, Algue received as agent
a commission of P126,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares of
the fees in their income tax returns and paid the corresponding taxes
thereon. 17 The Court of Tax Appeals also found, after examining the
evidence, that no distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the
payees are members of the same family in control of Algue. It is argued that
no indication was made as to how such payments were made, whether by
check or in cash, and there is not enough substantiation of such payments. In

TAX 1
It is said that taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's
hard earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government. The government
for its part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is
a requirement in all democratic regimes that it be exercised reasonably and
in accordance with the prescribed procedure. If it is not, then the taxpayer
has a right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate, as it has here, that the law has not been
observed.
We hold that the appeal of the private respondent from the decision of the
petitioner was filed on time with the respondent court in accordance with
Rep. Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should
therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is
AFFIRMED in toto, without costs.
SO ORDERED.
1. B. 2.
G.R. No. L-75697June 18, 1987
VALENTIN TIO doing business under the name and style of OMI
ENTERPRISES, petitioner,
vs.

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and
necessary expenses paid or incurred in carrying on any trade or business
may be included a reasonable allowance for salaries or other compensation
for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and deductibility in the case of
compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and its practical application may be
further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase
price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of a dividend on stock. This is likely to occur
in the case of a corporation having few stockholders, Practically all of whom
draw salaries. If in such a case the salaries are in excess of those ordinarily
paid for similar services, and the excessive payment correspond or bear a
close relationship to the stockholdings of the officers of employees, it would
seem likely that the salaries are not paid wholly for services rendered, but the
excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular
employ of Algue nor were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the
taxpayer to prove the validity of the claimed deduction. In the present case,
however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing
investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of
pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.

TAX 1
and very existence is threatened by the unregulated proliferation of film
piracy." The Intervenors were thereafter allowed to file their Comment in
Intervention.

VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO

MANILA COMMISSION, CITY MAYOR and CITY TREASURER OF
MANILA, respondents.

The rationale behind the enactment of the DECREE, is set out in its
preambular clauses as follows:

Nelson Y. Ng for petitioner.

The City Legal Officer for respondents City Mayor and City Treasurer.

1.
WHEREAS, the proliferation and unregulated circulation of
videograms including, among others, videotapes, discs, cassettes or any
technical improvement or variation thereof, have greatly prejudiced the
operations of moviehouses and theaters, and have caused a sharp decline in
theatrical attendance by at least forty percent (40%) and a tremendous drop
in the collection of sales, contractor's specific, amusement and other taxes,
thereby resulting in substantial losses estimated at P450 Million annually in
government revenues;
2.
WHEREAS, videogram(s) establishments collectively earn around
P600 Million per annum from rentals, sales and disposition of videograms,
and such earnings have not been subjected to tax, thereby depriving the
Government of approximately P180 Million in taxes each year;
3.
WHEREAS, the unregulated activities of videogram establishments
have also affected the viability of the movie industry, particularly the more
than 1,200 movie houses and theaters throughout the country, and
occasioned industry-wide displacement and unemployment due to the
shutdown of numerous moviehouses and theaters;
4.
"WHEREAS, in order to ensure national economic recovery, it is
imperative for the Government to create an environment conducive to growth
and development of all business industries, including the movie industry
which has an accumulated investment of about P3 Billion;
5.
WHEREAS, proper taxation of the activities of videogram
establishments will not only alleviate the dire financial condition of the movie
industry upon which more than 75,000 families and 500,000 workers depend
for their livelihood, but also provide an additional source of revenue for the

MELENCIO-HERRERA, J.:
This petition was filed on September 1, 1986 by petitioner on his own behalf
and purportedly on behalf of other videogram operators adversely affected. It
assails the constitutionality of Presidential Decree No. 1987 entitled "An Act
Creating the Videogram Regulatory Board" with broad powers to regulate
and supervise the videogram industry (hereinafter briefly referred to as the
BOARD). The Decree was promulgated on October 5, 1985 and took effect
on April 10, 1986, fifteen (15) days after completion of its publication in the
Official Gazette.
On November 5, 1985, a month after the promulgation of the
abovementioned decree, Presidential Decree No. 1994 amended the
National Internal Revenue Code providing, inter alia:
SEC. 134. Video Tapes. There shall be collected on each processed
video-tape cassette, ready for playback, regardless of length, an annual tax
of five pesos; Provided, That locally manufactured or imported blank video
tapes shall be subject to sales tax.
On October 23, 1986, the Greater Manila Theaters Association, Integrated
Movie Producers, Importers and Distributors Association of the Philippines,
and Philippine Motion Pictures Producers Association, hereinafter collectively
referred to as the Intervenors, were permitted by the Court to intervene in the
case, over petitioner's opposition, upon the allegations that intervention was
necessary for the complete protection of their rights and that their "survival

TAX 1

6.
There is over regulation of the video industry as if it were a
nuisance, which it is not.
We shall consider the foregoing objections in seriatim.
1.
The Constitutional requirement that "every bill shall embrace only
one subject which shall be expressed in the title thereof" 1 is sufficiently
complied with if the title be comprehensive enough to include the general
purpose which a statute seeks to achieve. It is not necessary that the title
express each and every end that the statute wishes to accomplish. The
requirement is satisfied if all the parts of the statute are related, and are
germane to the subject matter expressed in the title, or as long as they are
not inconsistent with or foreign to the general subject and title. 2 An act
having a single general subject, indicated in the title, may contain any
number of provisions, no matter how diverse they may be, so long as they
are not inconsistent with or foreign to the general subject, and may be
considered in furtherance of such subject by providing for the method and
means of carrying out the general object." 3 The rule also is that the
constitutional requirement as to the title of a bill should not be so narrowly
construed as to cripple or impede the power of legislation. 4 It should be
given practical rather than technical construction. 5
Tested by the foregoing criteria, petitioner's contention that the tax provision
of the DECREE is a rider is without merit. That section reads, inter alia:
Section 10. Tax on Sale, Lease or Disposition of Videograms.
Notwithstanding any provision of law to the contrary, the province shall collect
a tax of thirty percent (30%) of the purchase price or rental rate, as the case
may be, for every sale, lease or disposition of a videogram containing a
reproduction of any motion picture or audiovisual program. Fifty percent
(50%) of the proceeds of the tax collected shall accrue to the province, and
the other fifty percent (50%) shall acrrue to the municipality where the tax is
collected; PROVIDED, That in Metropolitan Manila, the tax shall be shared
equally by the City/Municipality and the Metropolitan Manila Commission.

Government, and at the same time rationalize the heretofore uncontrolled

distribution of videograms;
6.
WHEREAS, the rampant and unregulated showing of obscene
videogram features constitutes a clear and present danger to the moral and
spiritual well-being of the youth, and impairs the mandate of the Constitution
for the State to support the rearing of the youth for civic efficiency and the
development of moral character and promote their physical, intellectual, and
social well-being;
7.
WHEREAS, civic-minded citizens and groups have called for
remedial measures to curb these blatant malpractices which have flaunted
our censorship and copyright laws;
8.
WHEREAS, in the face of these grave emergencies corroding the
moral values of the people and betraying the national economic recovery
program, bold emergency measures must be adopted with dispatch; ...
(Numbering of paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on the
following grounds:
1.
Section 10 thereof, which imposes a tax of 30% on the gross
receipts payable to the local government is a RIDER and the same is not
germane to the subject matter thereof;
2.
The tax imposed is harsh, confiscatory, oppressive and/or in
unlawful restraint of trade in violation of the due process clause of the
Constitution;
3.
There is no factual nor legal basis for the exercise by the President
of the vast powers conferred upon him by Amendment No. 6;
4.

There is undue delegation of power and authority;

5.

The Decree is an ex-post facto law; and

TAX 1
government, but which is passed on to the entire cost of the admission ticket,
thus shifting the tax burden on the buying or the viewing public. It is a tax that
is imposed uniformly on all videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed primarily to
answer the need for regulating the video industry, particularly because of the
rampant film piracy, the flagrant violation of intellectual property rights, and
the proliferation of pornographic video tapes. And while it was also an
objective of the DECREE to protect the movie industry, the tax remains a
valid imposition.
The public purpose of a tax may legally exist even if the motive which
impelled the legislature to impose the tax was to favor one industry over
another. 11
It is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that "inequities which result from a
singling out of one particular class for taxation or exemption infringe no
constitutional limitation". 12 Taxation has been made the implement of the
state's police power. 13
At bottom, the rate of tax is a matter better addressed to the taxing
legislature.
3.
Petitioner argues that there was no legal nor factual basis for the
promulgation of the DECREE by the former President under Amendment No.
6 of the 1973 Constitution providing that "whenever in the judgment of the
President ... , there exists a grave emergency or a threat or imminence
thereof, or whenever the interim Batasang Pambansa or the regular National
Assembly fails or is unable to act adequately on any matter for any reason
that in his judgment requires immediate action, he may, in order to meet the
exigency, issue the necessary decrees, orders, or letters of instructions,
which shall form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office aver that the
8th "whereas" clause sufficiently summarizes the justification in that grave

xxx

xxx

xxx

The foregoing provision is allied and germane to, and is reasonably

necessary for the accomplishment of, the general object of the DECREE,
which is the regulation of the video industry through the Videogram
Regulatory Board as expressed in its title. The tax provision is not
inconsistent with, nor foreign to that general subject and title. As a tool for
regulation 6 it is simply one of the regulatory and control mechanisms
scattered throughout the DECREE. The express purpose of the DECREE to
include taxation of the video industry in order to regulate and rationalize the
heretofore uncontrolled distribution of videograms is evident from Preambles
2 and 5, supra. Those preambles explain the motives of the lawmaker in
presenting the measure. The title of the DECREE, which is the creation of the
Videogram Regulatory Board, is comprehensive enough to include the
purposes expressed in its Preamble and reasonably covers all its provisions.
It is unnecessary to express all those objectives in the title or that the latter
be an index to the body of the DECREE. 7
2.
Petitioner also submits that the thirty percent (30%) tax imposed is
harsh and oppressive, confiscatory, and in restraint of trade. However, it is
beyond serious question that a tax does not cease to be valid merely
because it regulates, discourages, or even definitely deters the activities
taxed. 8 The power to impose taxes is one so unlimited in force and so
searching in extent, that the courts scarcely venture to declare that it is
subject to any restrictions whatever, except such as rest in the discretion of
the authority which exercises it. 9 In imposing a tax, the legislature acts upon
its constituents. This is, in general, a sufficient security against erroneous
and oppressive taxation. 10
The tax imposed by the DECREE is not only a regulatory but also a revenue
measure prompted by the realization that earnings of videogram
establishments of around P600 million per annum have not been subjected to
tax, thereby depriving the Government of an additional source of revenue. It
is an end-user tax, imposed on retailers for every videogram they make
available for public viewing. It is similar to the 30% amusement tax imposed
or borne by the movie industry which the theater-owners pay to the

TAX 1
including videotapes, discs, cassettes or other technical improvements or
variations thereof, before they could be sold, leased, or otherwise disposed
of. Thereafter any videogram found in the possession of any person engaged
in the videogram business without the required proof of registration by the
BOARD, shall be prima facie evidence of violation of the Decree, whether the
possession of such videogram be for private showing and/or public exhibition.

emergencies corroding the moral values of the people and betraying the
national economic recovery program necessitated bold emergency measures
to be adopted with dispatch. Whatever the reasons "in the judgment" of the
then President, considering that the issue of the validity of the exercise of
legislative power under the said Amendment still pends resolution in several
other cases, we reserve resolution of the question raised at the proper time.

raises immediately a prima facie evidence of violation of the DECREE when

the required proof of registration of any videogram cannot be presented and
thus partakes of the nature of an ex post facto law.

4.
Neither can it be successfully argued that the DECREE contains an
undue delegation of legislative power. The grant in Section 11 of the
DECREE of authority to the BOARD to "solicit the direct assistance of other
agencies and units of the government and deputize, for a fixed and limited
period, the heads or personnel of such agencies and units to perform
enforcement functions for the Board" is not a delegation of the power to
legislate but merely a conferment of authority or discretion as to its execution,
enforcement, and implementation. "The true distinction is between the
delegation of power to make the law, which necessarily involves a discretion
as to what it shall be, and conferring authority or discretion as to its execution
to be exercised under and in pursuance of the law. The first cannot be done;
to the latter, no valid objection can be made." 14 Besides, in the very
language of the decree, the authority of the BOARD to solicit such assistance
is for a "fixed and limited period" with the deputized agencies concerned
being "subject to the direction and control of the BOARD." That the grant of
such authority might be the source of graft and corruption would not
stigmatize the DECREE as unconstitutional. Should the eventuality occur, the
aggrieved parties will not be without adequate remedy in law.

The argument is untenable. As this Court held in the recent case of Vallarta
vs. Court of Appeals, et al. 15
... it is now well settled that "there is no constitutional objection to the
passage of a law providing that the presumption of innocence may be
overcome by a contrary presumption founded upon the experience of human
conduct, and enacting what evidence shall be sufficient to overcome such
presumption of innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59,
citing 1 COOLEY, A TREATISE ON THE CONSTITUTIONAL LIMITATIONS,
639-641). And the "legislature may enact that when certain facts have been
proved that they shall be prima facie evidence of the existence of the guilt of
the accused and shift the burden of proof provided there be a rational
connection between the facts proved and the ultimate facts presumed so that
the inference of the one from proof of the others is not unreasonable and
arbitrary because of lack of connection between the two in common
experience". 16
Applied to the challenged provision, there is no question that there is a
rational connection between the fact proved, which is non-registration, and
the ultimate fact presumed which is violation of the DECREE, besides the
fact that the prima facie presumption of violation of the DECREE attaches
only after a forty-five-day period counted from its effectivity and is, therefore,
neither retrospective in character.

5.
The DECREE is not violative of the ex post facto principle. An ex
post facto law is, among other categories, one which "alters the legal rules of
evidence, and authorizes conviction upon less or different testimony than the
law required at the time of the commission of the offense." It is petitioner's
position that Section 15 of the DECREE in providing that:
All videogram establishments in the Philippines are hereby given a period of
forty-five (45) days after the effectivity of this Decree within which to register
with and secure a permit from the BOARD to engage in the videogram
business and to register with the BOARD all their inventories of videograms,

TAX 1
In fine, petitioner has not overcome the presumption of validity which
attaches to a challenged statute. We find no clear violation of the Constitution
which would justify us in pronouncing Presidential Decree No. 1987 as
unconstitutional and void.
WHEREFORE, the instant Petition is hereby dismissed.
No costs.
SO ORDERED.
Teehankee, (C.J.), Yap, Fernan, Narvasa, Gutierrez, Jr., Cruz, Paras,
Feliciano, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
G.R. No. 167330

September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION

6.
We do not share petitioner's fears that the video industry is being
over-regulated and being eased out of existence as if it were a nuisance.
Being a relatively new industry, the need for its regulation was apparent.
While the underlying objective of the DECREE is to protect the moribund
movie industry, there is no question that public welfare is at bottom of its
enactment, considering "the unfair competition posed by rampant film piracy;
the erosion of the moral fiber of the viewing public brought about by the
availability of unclassified and unreviewed video tapes containing
pornographic films and films with brutally violent sequences; and losses in
government revenues due to the drop in theatrical attendance, not to mention
the fact that the activities of video establishments are virtually untaxed since
mere payment of Mayor's permit and municipal license fees are required to
engage in business. 17
The enactment of the Decree since April 10, 1986 has not brought about the
"demise" of the video industry. On the contrary, video establishments are
seen to have proliferated in many places notwithstanding the 30% tax
imposed.
In the last analysis, what petitioner basically questions is the necessity,
wisdom and expediency of the DECREE. These considerations, however, are
primarily and exclusively a matter of legislative concern.

CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the
people and instill health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach
to health development which shall endeavor to make essential goods, health
and other social services available to all the people at affordable cost. There

Only congressional power or competence, not the wisdom of the action

taken, may be the basis for declaring a statute invalid. This is as it ought to
be. The principle of separation of powers has in the main wisely allocated the
respective authority of each department and confined its jurisdiction to such a
sphere. There would then be intrusion not allowable under the Constitution if
on a matter left to the discretion of a coordinate branch, the judiciary would
substitute its own. If there be adherence to the rule of law, as there ought to
be, the last offender should be courts of justice, to which rightly litigants
submit their controversy precisely to maintain unimpaired the supremacy of
legal norms and prescriptions. The attack on the validity of the challenged
provision likewise insofar as there may be objections, even if valid and cogent
on its wisdom cannot be sustained. 18

TAX 1
Petitioner protested the assessment in a letter dated February 23, 2000. As
respondent did not act on the protest, petitioner filed a petition for review in
the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency
VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of
which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is
PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the
deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus
20% interest from January 20, 1997 until fully paid for the 1996 VAT
deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest
from January 20, 1998 until fully paid for the 1997 VAT deficiency.
Accordingly, VAT Ruling No. [231]-88 is declared void and without force and
effect. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to
DESIST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar
as it cancelled the DST assessment. He claimed that petitioners health care
agreement was a contract of insurance subject to DST under Section 185 of
the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners
health care agreement was in the nature of a non-life insurance contract
subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the
Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and
1997 deficiency documentary stamp tax assessment and ordered petitioner
to desist from collecting the same is REVERSED and SET ASIDE.

shall be priority for the needs of the underprivileged sick, elderly, disabled,
women, and children. The State shall endeavor to provide free medical care
to paupers.1
For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by
petitioner Philippine Health Care Providers, Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish,
maintain, conduct and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care of the sick and
disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization."
Individuals enrolled in its health care programs pay an annual membership
fee and are entitled to various preventive, diagnostic and curative medical
services provided by its duly licensed physicians, specialists and other
professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.
xxx

xxx

xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR]

sent petitioner a formal demand letter and the corresponding assessment
notices demanding the payment of deficiency taxes, including surcharges
and interest, for the taxable years 1996 and 1997 in the total amount of
P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on
petitioners health care agreement with the members of its health care
program pursuant to Section 185 of the 1997 Tax Code xxxx
xxx

xxx

xxx

TAX 1
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank,
affirmed in effect the CAs disposition that health care services are not in the
nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to
DST is clear, especially in the light of the amendments made in the DST law
in 2002.
(e) Assuming arguendo that petitioners agreements are contracts of
indemnity, they are not those contemplated under Section 185.
(f) Assuming arguendo that petitioners agreements are akin to health
insurance, health insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance"
mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the
taxable year 2005 and all prior years. Therefore, the questioned assessments
on the DST are now rendered moot and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties
submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it
availed of a tax amnesty under RA 94807 (also known as the "Tax Amnesty
Act of 2007") by fully paying the amount of P5,127,149.08 representing 5% of
its net worth as of the year ending December 31, 2005.8

Respondent is ordered to pay the amounts of P55,746,352.19 and

P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax
Code, until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner
filed this case.
xxx

xxx

xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed
the CAs decision. We held that petitioners health care agreement during the
pertinent period was in the nature of non-life insurance which is a contract of
indemnity, citing Blue Cross Healthcare, Inc. v. Olivares3 and Philamcare
Health Systems, Inc. v. CA.4 We also ruled that petitioners contention that it
is a health maintenance organization (HMO) and not an insurance company
is irrelevant because contracts between companies like petitioner and the
beneficiaries under their plans are treated as insurance contracts. Moreover,
DST is not a tax on the business transacted but an excise on the privilege,
opportunity or facility offered at exchanges for the transaction of the
business.
Unable to accept our verdict, petitioner filed the present motion for
reconsideration and supplemental motion for reconsideration, asserting the
following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is
imposed only on a company engaged in the business of fidelity bonds and
other insurance policies. Petitioner, as an HMO, is a service provider, not an
insurance company.

We find merit in petitioners motion for reconsideration.

10

TAX 1
medical services. Except for the curative aspect of the medical service
offered, the enrolled member may actually make use of the health care
services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance
Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an
HMO and not an insurer because its agreements are treated as insurance
contracts and the DST is not a tax on the business but an excise on the
privilege, opportunity or facility used in the transaction of the business.15
Petitioner, however, submits that it is of critical importance to characterize the
business it is engaged in, that is, to determine whether it is an HMO or an
insurance company, as this distinction is indispensable in turn to the issue of
whether or not it is liable for DST on its health care agreements.16
A second hard look at the relevant law and jurisprudence convinces the
Court that the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997)
provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On
all policies of insurance or bonds or obligations of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association or
company or corporation transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance), and all bonds, undertakings, or recognizances, conditioned for
the performance of the duties of any office or position, for the doing or not
doing of anything therein specified, and on all obligations guaranteeing the
validity or legality of any bond or other obligations issued by any province,
city, municipality, or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any mercantile
credits, which may be made or renewed by any such person, company or

Petitioner was formally registered and incorporated with the Securities and
Exchange Commission on June 30, 1987.9 It is engaged in the dispensation
of the following medical services to individuals who enter into health care
agreements with it:
Preventive medical services such as periodic monitoring of health problems,
family planning counseling, consultation and advices on diet, exercise and
other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays,
urinalysis, fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial
and therapeutic processes in the event of an injury or sickness on the part of
the enrolled member.10
Individuals enrolled in its health care program pay an annual membership
fee. Membership is on a year-to-year basis. The medical services are
dispensed to enrolled members in a hospital or clinic owned, operated or
accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care practitioners
regarding payment schemes, financing and other procedures for the delivery
of health services. Except in cases of emergency, the professional services
are to be provided only by petitioner's physicians, i.e. those directly employed
by it11 or whose services are contracted by it.12 Petitioner also provides
hospital services such as room and board accommodation, laboratory
services, operating rooms, x-ray facilities and general nursing care.13 If and
when a member avails of the benefits under the agreement, petitioner pays
the participating physicians and other health care providers for the services
rendered, at pre-agreed rates.14
To avail of petitioners health care programs, the individual members are
required to sign and execute a standard health care agreement embodying
the terms and conditions for the provision of the health care services. The
same agreement contains the various health care services that can be
engaged by the enrolled member, i.e., preventive, diagnostic and curative

11

TAX 1
b) making or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or
activity of the surety;

corporation, there shall be collected a documentary stamp tax of fifty

centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the
premium charged. (Emphasis supplied)

c) doing any kind of business, including a reinsurance business, specifically

recognized as constituting the doing of an insurance business within the
meaning of this Code;

It is a cardinal rule in statutory construction that no word, clause, sentence,

provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes some words idle and
nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of
the statute its every word.18

d) doing or proposing to do any business in substance equivalent to any of

the foregoing in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is
derived from the making of insurance contracts, agreements or transactions
or that no separate or direct consideration is received therefore, shall not be
deemed conclusive to show that the making thereof does not constitute the
doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive
effect on our decisions,21 have determined that HMOs are not in the
insurance business. One test that they have applied is whether the
assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization
or whether they are merely incidental to its business. If these are the principal
objectives, the business is that of insurance. But if they are merely incidental
and service is the principal purpose, then the business is not insurance.
Applying the "principal object and purpose test,"22 there is significant
American case law supporting the argument that a corporation (such as an
HMO, whether or not organized for profit), whose main object is to provide
the members of a group with health services, is not engaged in the insurance
business.
The rule was enunciated in Jordan v. Group Health Association23 wherein
the Court of Appeals of the District of Columbia Circuit held that Group
Health Association should not be considered as engaged in insurance

From the language of Section 185, it is evident that two requisites must
concur before the DST can apply, namely: (1) the document must be a policy
of insurance or an obligation in the nature of indemnity and (2) the maker
should be transacting the business of accident, fidelity, employers liability,
plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health
Insurance Act of 1995"), an HMO is "an entity that provides, offers or
arranges for coverage of designated health services needed by plan
members for a fixed prepaid premium."19 The payments do not vary with the
extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of
insurance during the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code)
enumerates what constitutes "doing an insurance business" or "transacting
an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;

12

TAX 1
arrangement and economic function becomes faint, if not extinct. This is
especially true when the contract is for the sale of goods or services on
contingency. But obviously it was not the purpose of the insurance statutes to
regulate all arrangements for assumption or distribution of risk. That view
would cause them to engulf practically all contracts, particularly conditional
sales and contingent service agreements. The fallacy is in looking only at the
risk element, to the exclusion of all others present or their subordination to it.
The question turns, not on whether risk is involved or assumed, but on
whether that or something else to which it is related in the particular plan is
its principal object purpose.24 (Emphasis supplied)
In California Physicians Service v. Garrison,25 the California court felt that,
after scrutinizing the plan of operation as a whole of the corporation, it was
service rather than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the service is
not engaged in the insurance business. Absence or presence of assumption
of risk or peril is not the sole test to be applied in determining its status. The
question, more broadly, is whether, looking at the plan of operation as a
whole, service rather than indemnity is its principal object and purpose.
Certainly the objects and purposes of the corporation organized and
maintained by the California physicians have a wide scope in the field of
social service. Probably there is no more impelling need than that of
adequate medical care on a voluntary, low-cost basis for persons of small
income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is service of a high order and not indemnity.26
(Emphasis supplied)
American courts have pointed out that the main difference between an HMO
and an insurance company is that HMOs undertake to provide or arrange for
the provision of medical services through participating physicians while
insurance companies simply undertake to indemnify the insured for medical
expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates,
P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this
point:

activities since it was created primarily for the distribution of health care
services rather than the assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect as
creating security against loss from illness or accident more truly they
constitute the quantity purchase of well-rounded, continuous medical service
by its members. xxx The functions of such an organization are not identical
with those of insurance or indemnity companies. The latter are concerned
primarily, if not exclusively, with risk and the consequences of its descent, not
with service, or its extension in kind, quantity or distribution; with the unusual
occurrence, not the daily routine of living. Hazard is predominant. On the
other hand, the cooperative is concerned principally with getting service
rendered to its members and doing so at lower prices made possible by
quantity purchasing and economies in operation. Its primary purpose is to
reduce the cost rather than the risk of medical care; to broaden the service to
the individual in kind and quantity; to enlarge the number receiving it; to
regularize it as an everyday incident of living, like purchasing food and
clothing or oil and gas, rather than merely protecting against the financial loss
caused by extraordinary and unusual occurrences, such as death, disaster at
sea, fire and tornado. It is, in this instance, to take care of colds, ordinary
aches and pains, minor ills and all the temporary bodily discomforts as well
as the more serious and unusual illness. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension, the
bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost
by quantity purchasing in short, getting the medical job done and paid for;
not, except incidentally to these features, the indemnification for cost after the
services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial
difference between contracting in this way for the rendering of service, even
on the contingency that it be needed, and contracting merely to stand its cost
when or after it is rendered.
That an incidental element of risk distribution or assumption may be present
should not outweigh all other factors. If attention is focused only on that
feature, the line between insurance or indemnity and other types of legal

13

TAX 1
obligations to its members under the agreements, petitioner is required to set
up a system and the facilities for the delivery of such medical services. This
indubitably shows that indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers preventive and
diagnostic medical services intended to keep members from developing
medical conditions or diseases.30 As an HMO, it is its obligation to maintain
the good health of its members. Accordingly, its health care programs are
designed to prevent or to minimize the possibility of any assumption of risk on
its part. Thus, its undertaking under its agreements is not to indemnify its
members against any loss or damage arising from a medical condition but,
on the contrary, to provide the health and medical services needed to prevent
such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its members
(with respect to its curative medical services), but these are incidental to the
principal activity of providing them medical care. The "insurance-like" aspect
of petitioners business is miniscule compared to its noninsurance activities.
Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance
business.
It is important to emphasize that, in adopting the "principal purpose test"
used in the above-quoted U.S. cases, we are not saying that petitioners
operations are identical in every respect to those of the HMOs or health
providers which were parties to those cases. What we are stating is that, for
the purpose of determining what "doing an insurance business" means, we
have to scrutinize the operations of the business as a whole and not its mere
components. This is of course only prudent and appropriate, taking into
account the burdensome and strict laws, rules and regulations applicable to
insurers and other entities engaged in the insurance business. Moreover, we
are also not unmindful that there are other American authorities who have
found particular HMOs to be actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance
industry. This is evident from the fact that it is not supervised by the

The basic distinction between medical service corporations and ordinary

health and accident insurers is that the former undertake to provide prepaid
medical services through participating physicians, thus relieving subscribers
of any further financial burden, while the latter only undertake to indemnify an
insured for medical expenses up to, but not beyond, the schedule of rates
contained in the policy.
xxx

xxx

xxx

The primary purpose of a medical service corporation, however, is an

undertaking to provide physicians who will render services to subscribers on
a prepaid basis. Hence, if there are no physicians participating in the medical
service corporations plan, not only will the subscribers be deprived of the
protection which they might reasonably have expected would be provided, but
the corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and rendering
itself subject to the more stringent financial requirements of the General
Insurance Laws.
A participating provider of health care services is one who agrees in writing
to render health care services to or for persons covered by a contract issued
by health service corporation in return for which the health service
corporation agrees to make payment directly to the participating provider.28
(Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the
primary purpose of the business to provide medical services as needed, with
payment made directly to the provider of these services.29 In short, even if
petitioner assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it nevertheless cannot
be considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for
services rendered in case of emergency by non-participating health providers
would still be incidental to petitioners purpose of providing and arranging for
health care services and does not transform it into an insurer. To fulfill its

14

TAX 1
enough to cover the monetary expense or liability a member will incur in case
of illness or injury.
Under the health care agreement, the rendition of hospital, medical and
professional services to the member in case of sickness, injury or emergency
or his availment of so-called "out-patient services" (including physical
examination, x-ray and laboratory tests, medical consultations, vaccine
administration and family planning counseling) is the contingent event which
gives rise to liability on the part of the member. In case of exposure of the
member to liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by
paying for expenses arising from the stipulated contingencies belies its claim
that its services are prepaid. The expenses to be incurred by each member
cannot be predicted beforehand, if they can be predicted at all. Petitioner
assumes the risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has "prepaid."
Petitioner does not bear the costs alone but distributes or spreads them out
among a large group of persons bearing a similar risk, that is, among all the
other members of the health care program. This is insurance.37
We reconsider. We shall quote once again the pertinent portion of Section
185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On
all policies of insurance or bonds or obligations of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association or
company or corporation transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax
statutes are strictly construed against the taxing authority.38 This is because
taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their property

Insurance Commission but by the Department of Health.33 In fact, in a letter

dated September 3, 2000, the Insurance Commissioner confirmed that
petitioner is not engaged in the insurance business. This determination of the
commissioner must be accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked to implement a
statute is accorded great respect and ordinarily controls the interpretation of
laws by the courts. The reason behind this rule was explained in Nestle
Philippines, Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of the
multifarious needs of a modern or modernizing society and the establishment
of diverse administrative agencies for addressing and satisfying those needs;
it also relates to the accumulation of experience and growth of specialized
capabilities by the administrative agency charged with implementing a
particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of
Customs,35 the Court stressed that executive officials are presumed to have
familiarized themselves with all the considerations pertinent to the meaning
and purpose of the law, and to have formed an independent, conscientious
and competent expert opinion thereon. The courts give much weight to the
government agency officials charged with the implementation of the law, their
competence, expertness, experience and informed judgment, and the fact
that they frequently are the drafters of the law they interpret.36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under
Section 185 Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance or
obligations of the nature of indemnity for loss, damage, or liability." In our
decision dated June 12, 2008, we ruled that petitioners health care
agreements are contracts of indemnity and are therefore insurance contracts:
It is incorrect to say that the health care agreement is not based on loss or
damage because, under the said agreement, petitioner assumes the liability
and indemnifies its member for hospital, medical and related expenses (such
as professional fees of physicians). The term "loss or damage" is broad

15

TAX 1
its primary purpose is the rendering of service, it is not a contract of
insurance:
It does not necessarily follow however, that a contract containing all the four
elements mentioned above would be an insurance contract. The primary
purpose of the parties in making the contract may negate the existence of an
insurance contract. For example, a law firm which enters into contracts with
clients whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged in the
insurance business. Its contracts are simply for the purpose of rendering
personal services. On the other hand, a contract by which a corporation, in
consideration of a stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is one of insurance,
and the corporation will be deemed as engaged in the business of insurance.
Unlike the lawyers retainer contract, the essential purpose of such a contract
is not to render personal services, but to indemnify against loss and damage
resulting from the defense of actions for malpractice.42 (Emphasis supplied)

for the support of the government.39 Hence, tax laws may not be extended
by implication beyond the clear import of their language, nor their operation
enlarged so as to embrace matters not specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that
a health care agreement is in the nature of non-life insurance, which is
primarily a contract of indemnity. However, those cases did not involve the
interpretation of a tax provision. Instead, they dealt with the liability of a
health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally interpreted
in favor of the member and strictly against the HMO. For this reason, we
reconsider our ruling that Blue Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.
An insurance contract exists where the following elements concur:

Second. Not all the necessary elements of a contract of insurance are

present in petitioners agreements. To begin with, there is no loss, damage or
liability on the part of the member that should be indemnified by petitioner as
an HMO. Under the agreement, the member pays petitioner a predetermined
consideration in exchange for the hospital, medical and professional services
rendered by the petitioners physician or affiliated physician to him. In case of
availment by a member of the benefits under the agreement, petitioner does
not reimburse or indemnify the member as the latter does not pay any third
party. Instead, it is the petitioner who pays the participating physicians and
other health care providers for the services rendered at pre-agreed rates. The
member does not make any such payment.

1. The insured has an insurable interest;

In other words, there is nothing in petitioner's agreements that gives rise to a

monetary liability on the part of the member to any third party-provider of
medical services which might in turn necessitate indemnification from
petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or
claim has already been incurred. There is no indemnity precisely because the

Do the agreements between petitioner and its members possess all these
elements? They do not.

2. The insured is subject to a risk of loss by the happening of the designed

peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a premium.41

First. In our jurisdiction, a commentator of our insurance laws has pointed out
that, even if a contract contains all the elements of an insurance contract, if

16

TAX 1
amount of premium is calculated on the basis of assumptions made relative
to the insured.45

member merely avails of medical services to be paid or already paid in

advance at a pre-agreed price under the agreements.

However, assuming that petitioners commitment to provide medical services

to its members can be construed as an acceptance of the risk that it will shell
out more than the prepaid fees, it still will not qualify as an insurance contract
because petitioners objective is to provide medical services at reduced cost,
not to distribute risk like an insurer.

Third. According to the agreement, a member can take advantage of the bulk
of the benefits anytime, e.g. laboratory services, x-ray, routine annual
physical examination and consultations, vaccine administration as well as
family planning counseling, even in the absence of any peril, loss or damage
on his or her part.

In sum, an examination of petitioners agreements with its members leads us

to conclude that it is not an insurance contract within the context of our
Insurance Code.

Fourth. In case of emergency, petitioner is obliged to reimburse the member

who receives care from a non-participating physician or hospital. However,
this is only a very minor part of the list of services available. The assumption
of the expense by petitioner is not confined to the happening of a contingency
but includes incidents even in the absence of illness or injury.

There Was No Legislative Intent To Impose DST On Health Care Agreements

Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST on
petitioners health care agreements under Section 185 of the NIRC of 1997 is
the provisions legislative history. The text of Section 185 came into U.S. law
as early as 1904 when HMOs and health care agreements were not even in
existence in this jurisdiction. It was imposed under Section 116, Article XI of
Act No. 1189 (otherwise known as the "Internal Revenue Law of 1904")46
enacted on July 2, 1904 and became effective on August 1, 1904. Except for
the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of
the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to
the several bonds, debentures, or certificates of stock and indebtedness, and
other documents, instruments, matters, and things mentioned and described
in this section, or for or in respect to the vellum, parchment, or paper upon
which such instrument, matters, or things or any of them shall be written or
printed by any person or persons who shall make, sign, or issue the same,

In Michigan Podiatric Medical Association v. National Foot Care Program,

Inc.,43 although the health care contracts called for the defendant to partially
reimburse a subscriber for treatment received from a non-designated doctor,
this did not make defendant an insurer. Citing Jordan, the Court determined
that "the primary activity of the defendant (was) the provision of podiatric
services to subscribers in consideration of prepayment for such services."44
Since indemnity of the insured was not the focal point of the agreement but
the extension of medical services to the member at an affordable cost, it did
not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not
necessarily true that risk alone is sufficient to establish it. Almost anyone who
undertakes a contractual obligation always bears a certain degree of financial
risk. Consequently, there is a need to distinguish prepaid service contracts
(like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to
provide health services: the risk that it might fail to earn a reasonable return
on its investment. But it is not the risk of the type peculiar only to insurance
companies. Insurance risk, also known as actuarial risk, is the risk that the
cost of insurance claims might be higher than the premiums paid. The

17

TAX 1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of
the NIRC of 1977 was renumbered as Section 198. And under Section 23 of
EO47 273 dated July 25, 1987, it was again renumbered and became
Section 185.

on and after January first, nineteen hundred and five, the several taxes
following:

On December 23, 1993, under RA 7660, Section 185 was amended but,
again, only with respect to the rate of tax.

Third xxx (c) on all policies of insurance or bond or obligation of the nature of
indemnity for loss, damage, or liability made or renewed by any person,
association, company, or corporation transacting the business of accident,
fidelity, employers liability, plate glass, steam boiler, burglar, elevator,
automatic sprinkle, or other branch of insurance (except life, marine, inland,
and fire insurance) xxxx (Emphasis supplied)

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA

8424 (or the NIRC of 1997), the subject legal provision was retained as the
present Section 185. In 2004, amendments to the DST provisions were
introduced by RA 924348 but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines
with the formation of Bancom Health Care Corporation in 1974. The same
pioneer HMO was later reorganized and renamed Integrated Health Care
Services, Inc. (or Intercare). However, there are those who claim that Health
Maintenance, Inc. is the HMO industry pioneer, having set foot in the
Philippines as early as 1965 and having been formally incorporated in 1991.
Afterwards, HMOs proliferated quickly and currently, there are 36 registered
HMOs with a total enrollment of more than 2 million.49
We can clearly see from these two histories (of the DST on the one hand and
HMOs on the other) that when the law imposing the DST was first passed,
HMOs were yet unknown in the Philippines. However, when the various
amendments to the DST law were enacted, they were already in existence in
the Philippines and the term had in fact already been defined by RA 7875. If
it had been the intent of the legislature to impose DST on health care
agreements, it could have done so in clear and categorical terms. It had
many opportunities to do so. But it did not. The fact that the NIRC contained
no specific provision on the DST liability of health care agreements of HMOs
at a time they were already known as such, belies any legislative intent to
impose it on them. As a matter of fact, petitioner was assessed its DST
liability only on January 27, 2000, after more than a decade in the business
as an HMO.50

xxx

xxx

xxx

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was
enacted revising and consolidating the laws relating to internal revenue. The
aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was
completely reproduced as Section 30 (l), Article III of Act No. 2339. The very
detailed and exclusive enumeration of items subject to DST was thus
retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again
reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative
Code). Upon its amendment on March 10, 1917, the pertinent DST provision
became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466
(the NIRC of 1939), which codified all the internal revenue laws of the
Philippines. In an amendment introduced by RA 40 on October 1, 1946, the
DST rate was increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was
reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and
1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST
rate was again increased.1avvphi1

18

TAX 1

Petitioner asserts that, regardless of the arguments, the DST assessment for
taxable years 1996 and 1997 became moot and academic60 when it availed
of the tax amnesty under RA 9480 on December 10, 2007. It paid
P5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty.
Under Section 6(a) of RA 9480, it is entitled to immunity from payment of
taxes as well as additions thereto, and the appurtenant civil, criminal or
administrative penalties under the 1997 NIRC, as amended, arising from the
failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years.61
Far from disagreeing with petitioner, respondent manifested in its
memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a
taxpayer to immunity from payment of the tax involved, including the civil,
criminal, or administrative penalties provided under the 1997 [NIRC], for tax
liabilities arising in 2005 and the preceding years.
In view of petitioners availment of the benefits of [RA 9840], and without
conceding the merits of this case as discussed above, respondent concedes
that such tax amnesty extinguishes the tax liabilities of petitioner. This
admission, however, is not meant to preclude a revocation of the amnesty
granted in case it is found to have been granted under circumstances
amounting to tax fraud under Section 10 of said amnesty law.62 (Emphasis
supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered
by the tax amnesty program under RA 9480.63 There is no other conclusion
to draw than that petitioners liability for DST for the taxable years 1996 and
1997 was totally extinguished by its availment of the tax amnesty under RA
9480.

Considering that Section 185 did not change since 1904 (except for the rate
of tax), it would be safe to say that health care agreements were never, at
any time, recognized as insurance contracts or deemed engaged in the
business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who is to pay it.51 So
potent indeed is the power that it was once opined that "the power to tax
involves the power to destroy."52
Petitioner claims that the assessed DST to date which amounts to P376
million53 is way beyond its net worth of P259 million.54 Respondent never
disputed these assertions. Given the realities on the ground, imposing the
DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government
ought to encourage private enterprise.55 Petitioner, just like any concern
organized for a lawful economic activity, has a right to maintain a legitimate
business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg."58
Legitimate enterprises enjoy the constitutional protection not to be taxed out
of existence. Incurring losses because of a tax imposition may be an
acceptable consequence but killing the business of an entity is another
matter and should not be allowed. It is counter-productive and ultimately
subversive of the nations thrust towards a better economy which will
ultimately benefit the majority of our people.59

Is The Court Bound By A Minute Resolution In Another Case?

Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840

19

TAX 1
the law on which the judgment is based must be expressed clearly and
distinctly applies only to decisions, not to minute resolutions. A minute
resolution is signed only by the clerk of court by authority of the justices,
unlike a decision. It does not require the certification of the Chief Justice.
Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks
of a decision.73 Indeed, as a rule, this Court lays down doctrines or
principles of law which constitute binding precedent in a decision duly signed
by the members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since
petitioners liability for DST on its health care agreement was not the subject
matter of G.R. No. 148680, petitioner cannot successfully invoke the minute
resolution in that case (which is not even binding precedent) in its favor.
Nonetheless, in view of the reasons already discussed, this does not detract
in any way from the fact that petitioners health care agreements are not
subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the
ambit of Section 185 of the NIRC and there was never any legislative intent to
impose the same on HMOs like petitioner, the same should not be arbitrarily
and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for
adequate medical services at a cost which the average wage earner can
afford. HMOs arrange, organize and manage health care treatment in the
furtherance of the goal of providing a more efficient and inexpensive health
care system made possible by quantity purchasing of services and
economies of scale. They offer advantages over the pay-for-service system
(wherein individuals are charged a fee each time they receive medical
services), including the ability to control costs. They protect their members
from exposure to the high cost of hospitalization and other medical expenses
brought about by a fluctuating economy. Accordingly, they play an important

Petitioner raises another interesting issue in its motion for reconsideration:

whether this Court is bound by the ruling of the CA64 in CIR v. Philippine
National Bank65 that a health care agreement of Philamcare Health Systems
is not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute
resolution of this Court dismissing the appeal in Philippine National Bank
(G.R. No. 148680).66 Petitioner argues that the dismissal of G.R. No.
148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an
insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the
petition was a disposition of the merits of the case. When we dismissed the
petition, we effectively affirmed the CA ruling being questioned. As a result,
our ruling in that case has already become final.67 When a minute resolution
denies or dismisses a petition for failure to comply with formal and
substantive requirements, the challenged decision, together with its findings
of fact and legal conclusions, are deemed sustained.68 But what is its effect
on other cases?
With respect to the same subject matter and the same issues concerning the
same parties, it constitutes res judicata.69 However, if other parties or
another subject matter (even with the same parties and issues) is involved,
the minute resolution is not binding precedent. Thus, in CIR v. BaierNickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71
involving the same parties and the same issues, was previously disposed of
by the Court thru a minute resolution dated February 17, 2003 sustaining the
ruling of the CA. Nonetheless, the Court ruled that the previous case "ha(d)
no bearing" on the latter case because the two cases involved different
subject matters as they were concerned with the taxable income of different
taxable years.72
Besides, there are substantial, not simply formal, distinctions between a
minute resolution and a decision. The constitutional requirement under the
first paragraph of Section 14, Article VIII of the Constitution that the facts and

20

TAX 1

We resolved to give due course to this petition for it raises issues dwelling on
the scope of the taxing power of local government units and the limits of tax
exemption privileges of government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant
petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created
by virtue of Republic Act No. 6958, mandated to principally undertake the
economical, efficient and effective control, management and supervision of
the Mactan International Airport in the Province of Cebu and the Lahug
Airport in Cebu City, x x x and such other airports as may be established in
the Province of Cebu x x x (Sec. 3, RA 6958). It is also mandated to:
a) encourage, promote and develop international and domestic air traffic in
the Central Visayas and Mindanao regions as a means of making the regions
centers of international trade and tourism, and accelerating the development
of the means of transportation and communication in the country; and,
b) upgrade the services and facilities of the airports and to formulate
internationally acceptable standards of airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of
exemption from payment of realty taxes in accordance with Section 14 of its
Charter:

role in society as partners of the State in achieving its constitutional mandate

of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium
charged.74 Its imposition will elevate the cost of health care services. This
will in turn necessitate an increase in the membership fees, resulting in either
placing health services beyond the reach of the ordinary wage earner or
driving the industry to the ground. At the end of the day, neither side wins,
considering the indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16,
2004 decision of the Court of Appeals in CA-G.R. SP No. 70479 is
REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST
assessment against petitioner is hereby CANCELLED and SET ASIDE.
Respondent is ordered to desist from collecting the said tax.
No costs.
SO ORDERED.
1. D. 2.
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge
of the Regional Trial Court, Branch 20, Cebu City, THE CITY OF CEBU,
represented by its Mayor, HON. TOMAS R. OSMEA, and EUSTAQUIO B.
CESA, respondents.
DECISION

Sec. 14. Tax Exemptions. -- The Authority shall be exempt from realty taxes
imposed by the National Government or any of its political subdivisions,
agencies and instrumentalities x x x.

DAVIDE, JR., J.:

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge,

Office of the Treasurer of the City of Cebu, demanded payment for realty
taxes on several parcels of land belonging to the petitioner (Lot Nos. 913-G,
743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942,

For review under Rule 45 of the Rules of Court on a pure question of law are
the decision of 22 March 1995[1] of the Regional Trial Court (RTC) of Cebu
City, Branch 20, dismissing the petition for declaratory relief in Civil Case No.
CEB-16900, entitled Mactan Cebu International Airport Authority vs. City of
Cebu, and its order of 4 May 1995[2]denying the motion to reconsider the
decision.

21

TAX 1
xxx

947, 77 Psd., 746 and 991-A), located at Barrio Apas and Barrio
Kasambagan, Lahug, Cebu City, in the total amount of P2,229,078.79.

Section 234. Exemptions from Real Property Taxes. x x x

(e) x x x

Petitioner objected to such demand for payment as baseless and unjustified,

claiming in its favor the aforecited Section 14 of RA 6958 which exempts it
from payment of realty taxes. It was also asserted that it is an instrumentality
of the government performing governmental functions, citing Section 133 of
the Local Government Code of 1991 which puts limitations on the taxing
powers of local government units:

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.

Section 133. Common Limitations on the Taxing Powers of Local

Government Units. -- Unless otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:

As the City of Cebu was about to issue a warrant of levy against the
properties of petitioner, the latter was compelled to pay its tax account under
protest and thereafter filed a Petition for Declaratory Relief with the Regional
Trial Court of Cebu, Branch 20, on December 29, 1994. MCIAA basically
contended that the taxing powers of local government units do not extend to
the levy of taxes or fees of any kind on an instrumentality of the national
government. Petitioner insisted that while it is indeed a government-owned
corporation, it nonetheless stands on the same footing as an agency or
instrumentality of the national government by the very nature of its powers
and functions.

a) x x x

(a) x x x
xxx

Respondent City, however, asserted that MCIAA is not an instrumentality of

the government but merely a government-owned corporation performing
proprietary functions. As such, all exemptions previously granted to it were
deemed withdrawn by operation of law, as provided under Sections 193 and
234 of the Local Government Code when it took effect on January 1, 1992.[3]
The petition for declaratory relief was docketed as Civil Case No. CEB16900.

xxx
o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities, and local government units. (underscoring
supplied)
Respondent City refused to cancel and set aside petitioners realty tax
account, insisting that the MCIAA is a government-controlled corporation
whose tax exemption privilege has been withdrawn by virtue of Sections 193
and 234 of the Local Government Code that took effect on January 1, 1992:
Section 193. Withdrawal of Tax Exemption Privilege. Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons whether natural or juridical, including governmentowned or controlled corporations, except local water districts, cooperatives
duly registered under RA No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this
Code. (underscoring supplied)

22

TAX 1
authority, responsibilities, and resources. The process of decentralization
shall proceed from the national government to the local government units. x x
x[5]
Its motion for reconsideration having been denied by the trial court in its 4
May 1995 order, the petitioner filed the instant petition based on the following
assignment of errors:
I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.
II. RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS
LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although it is a
government-owned or controlled corporation, it is mandated to perform
functions in the same category as an instrumentality of Government. An
instrumentality of Government is one created to perform governmental
functions primarily to promote certain aspects of the economic life of the
people.[6] Considering its task not merely to efficiently operate and manage
the Mactan-Cebu International Airport, but more importantly, to carry out the
Government policies of promoting and developing the Central Visayas and
Mindanao regions as centers of international trade and tourism, and
accelerating the development of the means of transportation and
communication in the country,[7] and that it is an attached agency of the
Department of Transportation and Communication (DOTC),[8] the petitioner
may stand in [sic] the same footing as an agency or instrumentality of the
national government. Hence, its tax exemption privilege under Section 14 of
its Charter cannot be considered withdrawn with the passage of the Local
Government Code of 1991 (hereinafter LGC) because Section 133 thereof
specifically states that the `taxing powers of local government units shall not
extend to the levy of taxes or fees or charges of any kind on the national
government, its agencies and instrumentalities.

In its decision of 22 March 1995,[4] the trial court dismissed the petition in
light of its findings, to wit:
A close reading of the New Local Government Code of 1991 or RA 7160
provides the express cancellation and withdrawal of exemption of taxes by
government-owned and controlled corporation per Sections after the
effectivity of said Code on January 1, 1992, to wit: [proceeds to quote
Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent City
Government of Cebu are exempted from paying realty taxes in view of the
exemption granted under RA 6958 to pay the same (citing Section 14 of RA
6958).
However, RA 7160 expressly provides that All general and special laws, acts,
city charters, decrees [sic], executive orders, proclamations and
administrative regulations, or part of parts thereof which are inconsistent with
any of the provisions of this Code are hereby repealed or modified
accordingly. (/f/, Section 534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly
repealed by the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its
properties effective after January 1, 1992 until the present.
This Courts ruling finds expression to give impetus and meaning to the
overall objectives of the New Local Government Code of 1991, RA 7160. It is
hereby declared the policy of the State that the territorial and political
subdivisions of the State shall enjoy genuine and meaningful local autonomy
to enable them to attain their fullest development as self-reliant communities
and make them more effective partners in the attainment of national goals.
Toward this end, the State shall provide for a more responsive and
accountable local government structure instituted through a system of
decentralization whereby local government units shall be given more powers,

23

TAX 1
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable
activities or enterprise using the power to tax as a tool for regulation (U.S. v.
Sanchez, 340 US 42). The power to tax which was called by Justice Marshall
as the power to destroy (Mc Culloch v. Maryland, supra) cannot be allowed to
defeat an instrumentality or creation of the very entity which has the inherent
power to wield it. (underscoring supplied)
It then concludes that the respondent Judge cannot therefore correctly say
that the questioned provisions of the Code do not contain any distinction
between a government corporation performing governmental functions as
against one performing merely proprietary ones such that the exemption
privilege withdrawn under the said Code would apply to all government
corporations. For it is clear from Section 133, in relation to Section 234, of the
LGC that the legislature meant to exclude instrumentalities of the national
government from the taxing powers of the local government units.
In its comment, respondent City of Cebu alleges that as a local government
unit and a political subdivision, it has the power to impose, levy, assess, and
collect taxes within its jurisdiction. Such power is guaranteed by the
Constitution[10] and enhanced further by the LGC. While it may be true that
under its Charter the petitioner was exempt from the payment of realty taxes,
[11] this exemption was withdrawn by Section 234 of the LGC. In response to
the petitioners claim that such exemption was not repealed because being an
instrumentality of the National Government, Section 133 of the LGC prohibits
local government units from imposing taxes, fees, or charges of any kind on
it, respondent City of Cebu points out that the petitioner is likewise a
government-owned corporation, and Section 234 thereof does not distinguish
between government-owned or controlled corporations performing
governmental and purely proprietary functions. Respondent City of Cebu
urges this Court to apply by analogy its ruling that the Manila International
Airport Authority is a government-owned corporation,[12] and to reject the
application of Basco because it was promulgated . . . before the enactment
and the signing into law of R.A. No. 7160, and was not, therefore, decided in
the light of the spirit and intention of the framers of the said law.

As to the second assigned error, the petitioner contends that being an

instrumentality of the National Government, respondent City of Cebu has no
power nor authority to impose realty taxes upon it in accordance with the
aforesaid Section 133 of the LGC, as explained in Basco vs. Philippine
Amusement and Gaming Corporation:[9]
Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with
an original charter, PD 1869. All of its shares of stock are owned by the
National Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The
latter role is governmental, which places it in the category of an agency or
instrumentality of the Government. Being an instrumentality of the
Government, PAGCOR should be and actually is exempt from local taxes.
Otherwise, its operation might be burdened, impeded or subjected to control
by a mere Local government.
The states have no power by taxation or otherwise, to retard, impede, burden
or in any manner control the operation of constitutional laws enacted by
Congress to carry into execution the powers vested in the federal
government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the supremacy of the National Government over
local governments.
Justice Holmes, speaking for the Supreme Court, made reference to the
entire absence of power on the part of the States to touch, in that way
(taxation) at least, the instrumentalities of the United States (Johnson v.
Maryland, 254 US 51) and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in such a way as to prevent
it from consummating its federal responsibilities, or even to seriously burden
it in the accomplishment of them. (Antieau, Modern Constitutional Law, Vol.
2, p. 140)

24

TAX 1
instrumentalities. Nevertheless, since taxation is the rule and exemption
therefrom the exception, the exemption may thus be withdrawn at the
pleasure of the taxing authority. The only exception to this rule is where the
exemption was granted to private parties based on material consideration of
a mutual nature, which then becomes contractual and is thus covered by the
non-impairment clause of the Constitution.[23]
The LGC, enacted pursuant to Section 3, Article X of the Constitution,
provides for the exercise by local government units of their power to tax, the
scope thereof or its limitations, and the exemptions from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing
powers of local government units as follows:
SEC. 133. Common Limitations on the Taxing Power of Local Government
Units. Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of
the following:
(a) Income tax, except when levied on banks and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis
causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on wharves,
tonnage dues, and all other kinds of customs fees, charges and dues except
wharfage on wharves constructed and maintained by the local government
unit concerned;
(e) Taxes, fees and charges and other impositions upon goods carried into or
out of, or passing through, the territorial jurisdictions of local government
units in the guise of charges for wharfage, tolls for bridges or otherwise, or
other taxes, fees or charges in any form whatsoever upon such goods or
merchandise;

As a general rule, the power to tax is an incident of sovereignty and is

unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who are to pay it.
Nevertheless, effective limitations thereon may be imposed by the people
through their Constitutions.[13] Our Constitution, for instance, provides that
the rule of taxation shall be uniform and equitable and Congress shall evolve
a progressive system of taxation.[14] So potent indeed is the power that it
was once opined that the power to tax involves the power to destroy.[15]
Verily, taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their property
for the support of the government. Accordingly, tax statutes must be
construed strictly against the government and liberally in favor of the
taxpayer.[16] But since taxes are what we pay for civilized society,[17] or are
the lifeblood of the nation, the law frowns against exemptions from taxation
and statutes granting tax exemptions are thus construed strictissimi juris
against the taxpayer and liberally in favor of the taxing authority.[18] A claim
of exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken.[19] Elsewise stated, taxation is
the rule, exemption therefrom is the exception.[20] However, if the grantee of
the exemption is a political subdivision or instrumentality, the rigid rule of
construction does not apply because the practical effect of the exemption is
merely to reduce the amount of money that has to be handled by the
government in the course of its operations.[21]
The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer merely
by virtue of a valid delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution.[22] Under the latter, the
exercise of the power may be subject to such guidelines and limitations as
the Congress may provide which, however, must be consistent with the basic
policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the
petitioner is exempt from the payment of realty taxes imposed by the National
Government or any of its political subdivisions, agencies, and

25

TAX 1
(o) TAXES, FEES OR CHARGES OF ANY KIND ON THE NATIONAL
GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL
GOVERNMENT UNITS. (emphasis supplied)
Needless to say, the last item (item o) is pertinent to this case. The taxes,
fees or charges referred to are of any kind; hence, they include all of these,
unless otherwise provided by the LGC. The term taxes is well understood so
as to need no further elaboration, especially in light of the above
enumeration. The term fees means charges fixed by law or ordinance for the
regulation or inspection of business or activity,[24] while charges are
pecuniary liabilities such as rents or fees against persons or property.[25]
Among the taxes enumerated in the LGC is real property tax, which is
governed by Section 232. It reads as follows:
SEC. 232. Power to Levy Real Property Tax. A province or city or a
municipality within the Metropolitan Manila Area may levy an annual ad
valorem tax on real property such as land, building, machinery, and other
improvements not hereafter specifically exempted.

(f) Taxes, fees or charges on agricultural and aquatic products when sold by
marginal farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of Investments as
pioneer or non-pioneer for a period of six (6) and four (4) years, respectively
from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal Revenue
Code, as amended, and taxes, fees or charges on petroleum products;
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or
similar transactions on goods or services except as otherwise provided
herein;
(j) Taxes on the gross receipts of transportation contractors and persons
engaged in the transportation of passengers or freight by hire and common
carriers by air, land or water, except as provided in this Code;
(k) Taxes on premiums paid by way of reinsurance or retrocession;

Section 234 of the LGC provides for the exemptions from payment of real
property taxes and withdraws previous exemptions therefrom granted to
natural and juridical persons, including government-owned and controlled
corporations, except as provided therein. It provides:

(l) Taxes, fees or charges for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof, except,
tricycles;

SEC. 234. Exemptions from Real Property Tax. The following are exempted
from payment of the real property tax:

(m) Taxes, fees, or other charges on Philippine products actually exported,

except as otherwise provided herein;

(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof had been
granted, for consideration or otherwise, to a taxable person;

(n) Taxes, fees, or charges, on Countryside and Barangay Business

Enterprises and cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the Cooperatives Code of the Philippines respectively;
and

(b) Charitable institutions, churches, parsonages or convents appurtenant

thereto, mosques, nonprofit or religious cemeteries and all lands, buildings
and improvements actually, directly, and exclusively used for religious,
charitable or educational purposes;

26

TAX 1
and (iii) all machinery and equipment used for pollution control and
environmental protection.
To help provide a healthy environment in the midst of the modernization of
the country, all machinery and equipment for pollution control and
environmental protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously granted to
natural or juridical persons including government-owned or controlled
corporations are withdrawn upon the effectivity of the Code.[26]
Section 193 of the LGC is the general provision on withdrawal of tax
exemption privileges. It provides:
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including governmentowned or controlled corporations, except local water districts, cooperatives
duly registered under R.A. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this
Code.
On the other hand, the LGC authorizes local government units to grant tax
exemption privileges. Thus, Section 192 thereof provides:
SEC. 192. Authority to Grant Tax Exemption Privileges.-- Local government
units may, through ordinances duly approved, grant tax exemptions,
incentives or reliefs under such terms and conditions as they may deem
necessary.
The foregoing sections of the LGC speak of: (a) the limitations on the taxing
powers of local government units and the exceptions to such limitations; and
(b) the rule on tax exemptions and the exceptions thereto. The use of
exceptions or provisos in these sections, as shown by the following clauses:

(c) All machineries and equipment that are actually, directly and exclusively
used by local water districts and government-owned or controlled
corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for
under R.A. No. 6938; and
(e) Machinery and equipment used for pollution control and environmental
protection.
Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are
hereby withdrawn upon the effectivity of this Code.
These exemptions are based on the ownership, character, and use of the
property. Thus:
(a) Ownership Exemptions. Exemptions from real property taxes on the basis
of ownership are real properties owned by: (i) the Republic, (ii) a province,
(iii) a city, (iv) a municipality, (v) a barangay, and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the basis of
their character are: (i) charitable institutions, (ii) houses and temples of prayer
like churches, parsonages or convents appurtenant thereto, mosques, and
(iii) non-profit or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the basis of the
actual, direct and exclusive use to which they are devoted are: (i) all lands,
buildings and improvements which are actually directly and exclusively used
for religious, charitable or educational purposes; (ii) all machineries and
equipment actually, directly and exclusively used by local water districts or by
government-owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power;

27

TAX 1
charges of any kind on the National Government, its agencies and
instrumentalities, and local government units; however, pursuant to Section
232, provinces, cities, and municipalities in the Metropolitan Manila Area may
impose the real property tax except on, inter alia, real property owned by the
Republic of the Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person, as provided in item (a) of the first paragraph of Section 234.

(1) unless otherwise provided herein in the opening paragraph of Section

133;
(2) Unless otherwise provided in this Code in Section 193;
(3) not hereafter specifically exempted in Section 232; and
(4) Except as provided herein in the last paragraph of Section 234

As to tax exemptions or incentives granted to or presently enjoyed by natural

or juridical persons, including government-owned and controlled
corporations, Section 193 of the LGC prescribes the general rule, viz., they
are withdrawn upon the effectivity of the LGC, except those granted to local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions, and unless otherwise
provided in the LGC. The latter proviso could refer to Section 234 which
enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption
insofar as real property taxes are concerned by limiting the retention only to
those enumerated therein; all others not included in the enumeration lost the
privilege upon the effectivity of the LGC. Moreover, even as to real property
owned by the Republic of the Philippines or any of its political subdivisions
covered by item (a) of the first paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such property has been granted to a
taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the
effectivity of the LGC, exemptions from payment of real property taxes
granted to natural or juridical persons, including government-owned or
controlled corporations, except as provided in the said section, and the
petitioner is, undoubtedly, a government-owned corporation, it necessarily
follows that its exemption from such tax granted it in Section 14 of its Charter,
R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be
justified if the petitioner can seek refuge under any of the exceptions provided
in Section 234, but not under Section 133, as it now asserts, since, as shown
above, the said section is qualified by Sections 232 and 234.

initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in Section 133 seems to be inaccurately worded.
Instead of the clause unless otherwise provided herein, with the herein to
mean, of course, the section, it should have used the clause unless
otherwise provided in this Code. The former results in absurdity since the
section itself enumerates what are beyond the taxing powers of local
government units and, where exceptions were intended, the exceptions are
explicitly indicated in the next. For instance, in item (a) which excepts income
taxes when levied on banks and other financial institutions; item (d) which
excepts wharfage on wharves constructed and maintained by the local
government unit concerned; and item (1) which excepts taxes, fees and
charges for the registration and issuance of licenses or permits for the driving
of tricycles. It may also be observed that within the body itself of the section,
there are exceptions which can be found only in other parts of the LGC, but
the section interchangeably uses therein the clause except as otherwise
provided herein as in items (c) and (i), or the clause except as provided in this
Code in item (j). These clauses would be obviously unnecessary or mere
surplusages if the opening clause of the section were Unless otherwise
provided in this Code instead of Unless otherwise provided herein. In any
event, even if the latter is used, since under Section 232 local government
units have the power to levy real property tax, except those exempted
therefrom under Section 234, then Section 232 must be deemed to qualify
Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude
that as a general rule, as laid down in Section 133, the taxing powers of local
government units cannot extend to the levy of, inter alia, taxes, fees and

28

TAX 1
or other forms of local government.[27] These autonomous regions,
provincial, city, municipal or barangay subdivisions are the political
subdivisions.[28]

In short, the petitioner can no longer invoke the general rule in Section 133
that the taxing powers of the local government units cannot extend to the levy
of:

On the other hand, National Government refers to the entire machinery of the
central government, as distinguished from the different forms of local
governments.[29] The National Government then is composed of the three
great departments: the executive, the legislative and the judicial.[30]

(o) taxes, fees or charges of any kind on the National Government, its
agencies or instrumentalities, and local government units.

An agency of the Government refers to any of the various units of the

Government, including a department, bureau, office, instrumentality, or
government-owned or controlled corporation, or a local government or a
distinct unit therein;[31] while an instrumentality refers to any agency of the
National Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned and controlled corporations.
[32]
If Section 234(a) intended to extend the exception therein to the withdrawal of
the exemption from payment of real property taxes under the last sentence of
the said section to the agencies and instrumentalities of the National
Government mentioned in Section 133(o), then it should have restated the
wording of the latter. Yet, it did not. Moreover, that Congress did not wish to
expand the scope of the exemption in Section 234(a) to include real property
owned by other instrumentalities or agencies of the government including
government-owned and controlled corporations is further borne out by the
fact that the source of this exemption is Section 40(a) of P.D. No. 464,
otherwise known as The Real Property Tax Code, which reads:
SEC. 40. Exemptions from Real Property Tax. The exemption shall be as
follows:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions and any government-owned or controlled corporation so

It must show that the parcels of land in question, which are real property, are
any one of those enumerated in Section 234, either by virtue of ownership,
character, or use of the property. Most likely, it could only be the first, but not
under any explicit provision of the said section, for none exists. In light of the
petitioners theory that it is an instrumentality of the Government, it could only
be within the first item of the first paragraph of the section by expanding the
scope of the term Republic of the Philippines to embrace its instrumentalities
and agencies. For expediency, we quote:
(a) real property owned by the Republic of the Philippines, or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person.
This view does not persuade us. In the first place, the petitioners claim that it
is an instrumentality of the Government is based on Section 133(o), which
expressly mentions the word instrumentalities; and, in the second place, it
fails to consider the fact that the legislature used the phrase National
Government, its agencies and instrumentalities in Section 133(o), but only
the phrase Republic of the Philippines or any of its political subdivisions in
Section 234(a).
The terms Republic of the Philippines and National Government are not
interchangeable. The former is broader and synonymous with Government of
the Republic of the Philippines which the Administrative Code of 1987
defines as the corporate governmental entity through which the functions of
government are exercised throughout the Philippines, including, save as the
contrary appears from the context, the various arms through which political
authority is made affective in the Philippines, whether pertaining to the
autonomous regions, the provincial, city, municipal or barangay subdivisions

29

TAX 1
movable or immovable, belonging to or presently administered by the
airports, and all assets, powers, rights, interests and privileges relating on
airport works or air operations, including all equipment which are necessary
for the operations of air navigation, aerodrome control towers, crash, fire, and
rescue facilities are hereby transferred to the Authority: Provided, however,
that the operations control of all equipment necessary for the operation of
radio aids to air navigation, airways communication, the approach control
office, and the area control center shall be retained by the Air Transportation
Office. No equipment, however, shall be removed by the Air Transportation
Office from Mactan without the concurrence of the Authority. The Authority
may assist in the maintenance of the Air Transportation Office equipment.
The airports referred to are the Lahug Air Port in Cebu City and the Mactan
International Airport in the Province of Cebu,[36] which belonged to the
Republic of the Philippines, then under the Air Transportation Office (ATO).
[37]
It may be reasonable to assume that the term lands refer to lands in Cebu
City then administered by the Lahug Air Port and includes the parcels of land
the respondent City of Cebu seeks to levy on for real property taxes. This
section involves a transfer of the lands, among other things, to the petitioner
and not just the transfer of the beneficial use thereof, with the ownership
being retained by the Republic of the Philippines.
This transfer is actually an absolute conveyance of the ownership thereof
because the petitioners authorized capital stock consists of, inter alia, the
value of such real estate owned and/or administered by the airports.[38]
Hence, the petitioner is now the owner of the land in question and the
exception in Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a taxable person
under its Charter. It was only exempted from the payment of real property
taxes. The grant of the privilege only in respect of this tax is conclusive proof
of the legislative intent to make it a taxable person subject to all taxes, except
real property tax.

exempt by its charter: Provided, however, That this exemption shall not apply
to real property of the above-mentioned entities the beneficial use of which
has been granted, for consideration or otherwise, to a taxable person.
Note that as reproduced in Section 234(a), the phrase and any governmentowned or controlled corporation so exempt by its charter was excluded. The
justification for this restricted exemption in Section 234(a) seems obvious: to
limit further tax exemption privileges, especially in light of the general
provision on withdrawal of tax exemption privileges in Section 193 and the
special provision on withdrawal of exemption from payment of real property
taxes in the last paragraph of Section 234. These policy considerations are
consistent with the State policy to ensure autonomy to local governments[33]
and the objective of the LGC that they enjoy genuine and meaningful local
autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national
goals.[34] The power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of local government units
for the delivery of basic services essential to the promotion of the general
welfare and the enhancement of peace, progress, and prosperity of the
people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and
controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, and there was a need for these
entities to share in the requirements of development, fiscal or otherwise, by
paying the taxes and other charges due from them.[35]
The crucial issues then to be addressed are: (a) whether the parcels of land
in question belong to the Republic of the Philippines whose beneficial use
has been granted to the petitioner, and (b) whether the petitioner is a taxable
person.
Section 15 of the petitioners Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing
public airport facilities, runways, lands, buildings and other properties,

30

TAX 1
Petitioner is a government-owned and controlled corporation created under
Commonwealth Act No. 120, as amended.4 It is tasked to undertake the
"development of hydroelectric generations of power and the production of
electricity from nuclear, geothermal and other sources, as well as, the
transmission of electric power on a nationwide basis."5 Concomitant to its
mandated duty, petitioner has, among others, the power to construct, operate
and maintain power plants, auxiliary plants, power stations and substations
for the purpose of developing hydraulic power and supplying such power to
the inhabitants.6
For many years now, petitioner sells electric power to the residents of
Cabanatuan City, posting a gross income of P107,814,187.96 in 1992.7
Pursuant to section 37 of Ordinance No. 165-92,8 the respondent assessed
the petitioner a franchise tax amounting to P808,606.41, representing 75% of
1% of the latter's gross receipts for the preceding year.9
Petitioner, whose capital stock was subscribed and paid wholly by the
Philippine Government,10 refused to pay the tax assessment. It argued that
the respondent has no authority to impose tax on government entities.
Petitioner also contended that as a non-profit organization, it is exempted
from the payment of all forms of taxes, charges, duties or fees11 in
accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:

Finally, even if the petitioner was originally not a taxable person for purposes
of real property tax, in light of the foregoing disquisitions, it had already
become, even if it be conceded to be an agency or instrumentality of the
Government, a taxable person for such purpose in view of the withdrawal in
the last paragraph of Section 234 of exemptions from the payment of real
property taxes, which, as earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance on
Basco vs. Philippine Amusement and Gaming Corporation[39] is unavailing
since it was decided before the effectivity of the LGC. Besides, nothing can
prevent Congress from decreeing that even instrumentalities or agencies of
the Government performing governmental functions may be subject to tax.
Where it is done precisely to fulfill a constitutional mandate and national
policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and
order of the Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB16900 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes,

Duties, Fees, Imposts and Other Charges by Government and Governmental
Instrumentalities.- The Corporation shall be non-profit and shall devote all its
return from its capital investment, as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its indebtedness
and obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation is hereby exempt:

G.R. No. 149110

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and
service fees in any court or administrative proceedings in which it may be a
party, restrictions and duties to the Republic of the Philippines, its provinces,
cities, municipalities and other government agencies and instrumentalities;

This is a petition for review1 of the Decision2 and the Resolution3 of the
Court of Appeals dated March 12, 2001 and July 10, 2001, respectively,
finding petitioner National Power Corporation (NPC) liable to pay franchise
tax to respondent City of Cabanatuan.

April 9, 2003

NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:

31

TAX 1
power to tax instrumentalities of the national government. Pertinent portion of
the Order reads:
"The question of whether a particular law has been repealed or not by a
subsequent law is a matter of legislative intent. The lawmakers may
expressly repeal a law by incorporating therein repealing provisions which
expressly and specifically cite(s) the particular law or laws, and portions
thereof, that are intended to be repealed. A declaration in a statute, usually in
its repealing clause, that a particular and specific law, identified by its number
or title is repealed is an express repeal; all others are implied repeal. Sec.
193 of R.A. No. 7160 is an implied repealing clause because it fails to identify
the act or acts that are intended to be repealed. It is a well-settled rule of
statutory construction that repeals of statutes by implication are not favored.
The presumption is against inconsistency and repugnancy for the legislative
is presumed to know the existing laws on the subject and not to have enacted
inconsistent or conflicting statutes. It is also a well-settled rule that, generally,
general law does not repeal a special law unless it clearly appears that the
legislative has intended by the latter general act to modify or repeal the
earlier special law. Thus, despite the passage of R.A. No. 7160 from which
the questioned Ordinance No. 165-92 was based, the tax exemption
privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme
Court in the case of Basco vs. Philippine Amusement and Gaming
Corporation, 197 SCRA 52, where it was held that:
'Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with
an original charter, PD 1869. All of its shares of stocks are owned by the
National Government. xxx Being an instrumentality of the government,
PAGCOR should be and actually is exempt from local taxes. Otherwise, its
operation might be burdened, impeded or subjected to control by mere local
government.'
Like PAGCOR, NPC, being a government owned and controlled corporation
with an original charter and its shares of stocks owned by the National

(b) From all income taxes, franchise taxes and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and
wharfage fees on import of foreign goods required for its operations and
projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by
the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum products used
by the Corporation in the generation, transmission, utilization, and sale of
electric power."12
The respondent filed a collection suit in the Regional Trial Court of
Cabanatuan City, demanding that petitioner pay the assessed tax due, plus a
surcharge equivalent to 25% of the amount of tax, and 2% monthly
interest.13 Respondent alleged that petitioner's exemption from local taxes
has been repealed by section 193 of Rep. Act No. 7160,14 which reads as
follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government
owned or controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this
Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case.
It ruled that the tax exemption privileges granted to petitioner subsist despite
the passage of Rep. Act No. 7160 for the following reasons: (1) Rep. Act No.
6395 is a particular law and it may not be repealed by Rep. Act No. 7160
which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature
of an implied repeal which is not favored; and (3) local governments have no

32

TAX 1
special lawfinds the answer in Section 193 of the LGC to the effect that 'tax
exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled
corporations except local water districts xxx are hereby withdrawn.' The
repeal is direct and unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED."20

Government, is beyond the taxing power of the Local Government. Corollary

to this, it should be noted here that in the NPC Charter's declaration of Policy,
Congress declared that: 'xxx (2) the total electrification of the Philippines
through the development of power from all services to meet the needs of
industrial development and dispersal and needs of rural electrification are
primary objectives of the nations which shall be pursued coordinately and
supported by all instrumentalities and agencies of the government, including
its financial institutions.' (underscoring supplied). To allow plaintiff to subject
defendant to its tax-ordinance would be to impede the avowed goal of this
government instrumentality.

In this petition for review, petitioner raises the following issues:

"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC,
A PUBLIC NON-PROFIT CORPORATION, IS LIABLE TO PAY A
FRANCHISE TAX AS IT FAILED TO CONSIDER THAT SECTION 137 OF
THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131
APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING
A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
NPC'S EXEMPTION FROM ALL FORMS OF TAXES HAS BEEN
REPEALED BY THE PROVISION OF THE LOCAL GOVERNMENT CODE
AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A GENERAL
LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING
THAT AN EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION
SHOULD PREVAIL OVER THE LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the authority to
issue Ordinance No. 165-92 and impose an annual tax on "businesses
enjoying a franchise," pursuant to section 151 in relation to section 137 of the
LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any
law or other special law, the province may impose a tax on businesses

Unlike the State, a city or municipality has no inherent power of taxation. Its
taxing power is limited to that which is provided for in its charter or other
statute. Any grant of taxing power is to be construed strictly, with doubts
resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very
clear that the plaintiff could not impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the
ground that section 193, in relation to sections 137 and 151 of the LGC,
expressly withdrew the exemptions granted to the petitioner.18 It ordered the
petitioner to pay the respondent city government the following: (a) the sum of
P808,606.41 representing the franchise tax due based on gross receipts for
the year 1992, (b) the tax due every year thereafter based in the gross
receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax
due and unpaid, and (d) the sum of P 10,000.00 as litigation expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the
Court of Appeal's Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments
reiterated therein that the taxing power of the province under Art. 137 (sic) of
the Local Government Code refers merely to private persons or corporations
in which category it (NPC) does not belong, and that the LGC (RA 7160)
which is a general law may not impliedly repeal the NPC Charter which is a

33

TAX 1
when the LGC uses the term "franchise," petitioner submits that it should
refer specifically to franchises granted to private natural persons and to
private corporations.23 Ergo, its charter should not be considered a
"franchise" for the purpose of imposing the franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or
commercial activity regularly engaged in as means of livelihood or with a
view to profit." Petitioner claims that it is not engaged in an activity for profit,
in as much as its charter specifically provides that it is a "non-profit
organization." In any case, petitioner argues that the accumulation of profit is
merely incidental to its operation; all these profits are required by law to be
channeled for expansion and improvement of its facilities and services.24
Petitioner also alleges that it is an instrumentality of the National
Government,25 and as such, may not be taxed by the respondent city
government. It cites the doctrine in Basco vs. Philippine Amusement and
Gaming Corporation26 where this Court held that local governments have no
power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National
Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The
latter role is governmental, which places it in the category of an agency or
instrumentality of the Government. Being an instrumentality of the
Government, PAGCOR should be and actually is exempt from local taxes.
Otherwise, its operation might be burdened, impeded or subjected to control
by a mere local government.
'The states have no power by taxation or otherwise, to retard, impede, burden
or in any manner control the operation of constitutional laws enacted by
Congress to carry into execution the powers vested in the federal
government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government
over local governments.

enjoying a franchise, at a rate not exceeding fifty percent (50%) of one

percent (1%) of the gross annual receipts for the preceding calendar year
based on the incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed onetwentieth (1/20) of one percent (1%) of the capital investment. In the
succeeding calendar year, regardless of when the business started to
operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereof, as provided herein." (emphasis
supplied)
x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this

Code, the city, may levy the taxes, fees, and charges which the province or
municipality may impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with the
provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates
allowed for the province or municipality by not more than fifty percent (50%)
except the rates of professional and amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise tax
to the respondent city government. It contends that sections 137 and 151 of
the LGC in relation to section 131, limit the taxing power of the respondent
city government to private entities that are engaged in trade or occupation for
profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege,
affected with public interest which is conferred upon private persons or
corporations, under such terms and conditions as the government and its
political subdivisions may impose in the interest of the public welfare, security
and safety." From the phraseology of this provision, the petitioner claims that
the word "private" modifies the terms "persons" and "corporations." Hence,

34

TAX 1

Finally, petitioner submits that the charter of the NPC, being a valid exercise
of police power, should prevail over the LGC. It alleges that the power of the
local government to impose franchise tax is subordinate to petitioner's
exemption from taxation; "police power being the most pervasive, the least
limitable and most demanding of all powers, including the power of
taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the
government can neither exist nor endure. A principal attribute of
sovereignty,31 the exercise of taxing power derives its source from the very
existence of the state whose social contract with its citizens obliges it to
promote public interest and common good. The theory behind the exercise of
the power to tax emanates from necessity;32 without taxes, government
cannot fulfill its mandate of promoting the general welfare and well-being of
the people.
In recent years, the increasing social challenges of the times expanded the
scope of state activity, and taxation has become a tool to realize social justice
and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar
objectives.33 Taxation assumes even greater significance with the ratification
of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges34 pursuant to Article X,
section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its
own sources of revenue, to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the
basic policy of local autonomy. Such taxes, fees and charges shall accrue
exclusively to the Local Governments."

'Justice Holmes, speaking for the Supreme Court, made reference to the
entire absence of power on the part of the States to touch, in that way
(taxation) at least, the instrumentalities of the United States (Johnson v.
Maryland, 254 US 51) and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in such a way as to prevent
it from consummating its federal responsibilities, or even seriously burden it
from accomplishment of them.' (Antieau, Modern Constitutional Law, Vol. 2,
p. 140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable
activities or enterprise using the power to tax as ' a tool regulation' (U.S. v.
Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to
destroy' (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power to
wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the
tax privileges of government-owned or controlled corporations, is in the
nature of an implied repeal. A special law, its charter cannot be amended or
modified impliedly by the local government code which is a general law.
Consequently, petitioner claims that its exemption from all taxes, fees or
charges under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by
implication are not favored and as much as possible, effect must be given to
all enactments of the legislature. Moreover, it has to be conceded that the
charter of the NPC constitutes a special law. Republic Act No. 7160, is a
general law. It is a basic rule in statutory construction that the enactment of a
later legislation which is a general law cannot be construed to have repealed
a special law. Where there is a conflict between a general law and a special
statute, the special statute should prevail since it evinces the legislative intent
more clearly than the general statute."28

35

TAX 1

Considered as the most revolutionary piece of legislation on local

autonomy,42 the LGC effectively deals with the fiscal constraints faced by
LGUs. It widens the tax base of LGUs to include taxes which were prohibited
by previous laws such as the imposition of taxes on forest products, forest
concessionaires, mineral products, mining operations, and the like. The LGC
likewise provides enough flexibility to impose tax rates in accordance with
their needs and capabilities. It does not prescribe graduated fixed rates but
merely specifies the minimum and maximum tax rates and leaves the
determination of the actual rates to the respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the
blanket exclusion of instrumentalities and agencies of the national
government from the coverage of local taxation. Although as a general rule,
LGUs cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now admits an
exception, i.e., when specific provisions of the LGC authorize the LGUs to
impose taxes, fees or charges on the aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the Local
Government Units.- Unless otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:
x

(o) Taxes, fees, or charges of any kind on the National Government, its
agencies and instrumentalities, and local government units." (emphasis
supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation44 relied upon by the
petitioner to support its claim no longer applies. To emphasize, the Basco
case was decided prior to the effectivity of the LGC, when no law
empowering the local government units to tax instrumentalities of the
National Government was in effect. However, as this Court ruled in the case

This paradigm shift results from the realization that genuine development can
be achieved only by strengthening local autonomy and promoting
decentralization of governance. For a long time, the country's highly
centralized government structure has bred a culture of dependence among
local government leaders upon the national leadership. It has also
"dampened the spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government leaders."35 The
only way to shatter this culture of dependence is to give the LGUs a wider
role in the delivery of basic services, and confer them sufficient powers to
generate their own sources for the purpose. To achieve this goal, section 3 of
Article X of the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of local autonomy,
set the guidelines and limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall
provide for a more responsive and accountable local government structure
instituted through a system of decentralization with effective mechanisms of
recall, initiative, and referendum, allocate among the different local
government units their powers, responsibilities, and resources, and provide
for the qualifications, election, appointment and removal, term, salaries,
powers and functions and duties of local officials, and all other matters
relating to the organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as
the Local Government Code of 1991 (LGC), various measures have been
enacted to promote local autonomy. These include the Barrio Charter of
1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of
196739 and the Local Government Code of 1983.40 Despite these initiatives,
however, the shackles of dependence on the national government remained.
Local government units were faced with the same problems that hamper their
capabilities to participate effectively in the national development efforts,
among which are: (a) inadequate tax base, (b) lack of fiscal control over
external sources of income, (c) limited authority to prioritize and approve
development projects, (d) heavy dependence on external sources of income,
and (e) limited supervisory control over personnel of national line
agencies.41

36

TAX 1
ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or secondary
franchises as are charged with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in
the sense of a secondary or special franchise. This is to avoid any confusion
when the word franchise is used in the context of taxation. As commonly
used, a franchise tax is "a tax on the privilege of transacting business in the
state and exercising corporate franchises granted by the state."53 It is not
levied on the corporation simply for existing as a corporation, upon its
property54 or its income,55 but on its exercise of the rights or privileges
granted to it by the government. Hence, a corporation need not pay franchise
tax from the time it ceased to do business and exercise its franchise.56 It is
within this context that the phrase "tax on businesses enjoying a franchise" in
section 137 of the LGC should be interpreted and understood. Verily, to
determine whether the petitioner is covered by the franchise tax in question,
the following requisites should concur: (1) that petitioner has a "franchise" in
the sense of a secondary or special franchise; and (2) that it is exercising its
rights or privileges under this franchise within the territory of the respondent
city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended
by Rep. Act No. 7395, constitutes petitioner's primary and secondary
franchises. It serves as the petitioner's charter, defining its composition,
capitalization, the appointment and the specific duties of its corporate
officers, and its corporate life span.57 As its secondary franchise,
Commonwealth Act No. 120, as amended, vests the petitioner the following
powers which are not available to ordinary corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of water power
in any part of the Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall
in the Philippines, for the purposes specified in this Act; to intercept and

of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos,45

nothing prevents Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions may be
subject to tax.46 In enacting the LGC, Congress exercised its prerogative to
tax instrumentalities and agencies of government as it sees fit. Thus, after
reviewing the specific provisions of the LGC, this Court held that MCIAA,
although an instrumentality of the national government, was subject to real
property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude
that as a general rule, as laid down in section 133, the taxing power of local
governments cannot extend to the levy of inter alia, 'taxes, fees and charges
of any kind on the national government, its agencies and instrumentalities,
and local government units'; however, pursuant to section 232, provinces,
cities and municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, 'real property owned by the Republic of the
Philippines or any of its political subdivisions except when the beneficial use
thereof has been granted for consideration or otherwise, to a taxable person
as provided in the item (a) of the first paragraph of section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC clearly
authorizes the respondent city government to impose on the petitioner the
franchise tax in question.
In its general signification, a franchise is a privilege conferred by government
authority, which does not belong to citizens of the country generally as a
matter of common right.48 In its specific sense, a franchise may refer to a
general or primary franchise, or to a special or secondary franchise. The
former relates to the right to exist as a corporation, by virtue of duly approved
articles of incorporation, or a charter pursuant to a special law creating the
corporation.49 The right under a primary or general franchise is vested in the
individuals who compose the corporation and not in the corporation itself.50
On the other hand, the latter refers to the right or privileges conferred upon
an existing corporation such as the right to use the streets of a municipality to
lay pipes of tracks, erect poles or string wires.51 The rights under a
secondary or special franchise are vested in the corporation and may

37

TAX 1
(j) To exercise the right of eminent domain for the purpose of this Act in the
manner provided by law for instituting condemnation proceedings by the
national, provincial and municipal governments;
x

(m) To cooperate with, and to coordinate its operations with those of the
National Electrification Administration and public service entities;
(n) To exercise complete jurisdiction and control over watersheds surrounding
the reservoirs of plants and/or projects constructed or proposed to be
constructed by the Corporation. Upon determination by the Corporation of the
areas required for watersheds for a specific project, the Bureau of Forestry,
the Reforestation Administration and the Bureau of Lands shall, upon written
advice by the Corporation, forthwith surrender jurisdiction to the Corporation
of all areas embraced within the watersheds, subject to existing private rights,
the needs of waterworks systems, and the requirements of domestic water
supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall
adopt measures to prevent environmental pollution and promote the
conservation, development and maximum utilization of natural resources xxx
"58
With these powers, petitioner eventually had the monopoly in the generation
and distribution of electricity. This monopoly was strengthened with the
issuance of Pres. Decree No. 40,59 nationalizing the electric power industry.
Although Exec. Order No. 21560 thereafter allowed private sector
participation in the generation of electricity, the transmission of electricity
remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the
respondent city government's territorial jurisdiction pursuant to the powers
granted to it by Commonwealth Act No. 120, as amended. From its
operations in the City of Cabanatuan, petitioner realized a gross income of

divert the flow of waters from lands of riparian owners and from persons
owning or interested in waters which are or may be necessary for said
purposes, upon payment of just compensation therefor; to alter, straighten,
obstruct or increase the flow of water in streams or water channels
intersecting or connecting therewith or contiguous to its works or any part
thereof: Provided, That just compensation shall be paid to any person or
persons whose property is, directly or indirectly, adversely affected or
damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams,
reservoirs, pipes, mains, transmission lines, power stations and substations,
and other works for the purpose of developing hydraulic power from any river,
creek, lake, spring and waterfall in the Philippines and supplying such power
to the inhabitants thereof; to acquire, construct, install, maintain, operate, and
improve gas, oil, or steam engines, and/or other prime movers, generators
and machinery in plants and/or auxiliary plants for the production of electric
power; to establish, develop, operate, maintain and administer power and
lighting systems for the transmission and utilization of its power generation; to
sell electric power in bulk to (1) industrial enterprises, (2) city, municipal or
provincial systems and other government institutions, (3) electric
cooperatives, (4) franchise holders, and (5) real estate subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber
and otherwise dispose of property incident to, or necessary, convenient or
proper to carry out the purposes for which the Corporation was created:
Provided, That in case a right of way is necessary for its transmission lines,
easement of right of way shall only be sought: Provided, however, That in
case the property itself shall be acquired by purchase, the cost thereof shall
be the fair market value at the time of the taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse, canal,
ditch, flume, street, avenue, highway or railway of private and public
ownership, as the location of said works may require xxx;

38

TAX 1
proprietary functions are "business-like" entities such as the National Steel
Corporation (NSC), the National Development Corporation (NDC), the Social
Security System (SSS), the Government Service Insurance System (GSIS),
and the National Water Sewerage Authority (NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric
generation of power and the production of electricity from nuclear,
geothermal and other sources, as well as the transmission of electric power
on a nationwide basis."66 Pursuant to this mandate, petitioner generates
power and sells electricity in bulk. Certainly, these activities do not partake of
the sovereign functions of the government. They are purely private and
commercial undertakings, albeit imbued with public interest. The public
interest involved in its activities, however, does not distract from the true
nature of the petitioner as a commercial enterprise, in the same league with
similar public utilities like telephone and telegraph companies, railroad
companies, water supply and irrigation companies, gas, coal or light
companies, power plants, ice plant among others; all of which are declared
by this Court as ministrant or proprietary functions of government aimed at
advancing the general interest of society.67
A closer reading of its charter reveals that even the legislature treats the
character of the petitioner's enterprise as a "business," although it limits
petitioner's profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or
necessary for the proper transaction of its business or to carry out the
purposes for which it was organized, to contract indebtedness and issue
bonds subject to approval of the President upon recommendation of the
Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably
necessary to carry out the business and purposes for which it was organized,
or which, from time to time, may be declared by the Board to be necessary,
useful, incidental or auxiliary to accomplish the said purpose xxx."(emphases
supplied)

P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to

be, subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the
franchise tax simply because its stocks are wholly owned by the National
Government, and its charter characterized it as a "non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the
exercise by the corporation of a privilege to do business. The taxable entity is
the corporation which exercises the franchise, and not the individual
stockholders. By virtue of its charter, petitioner was created as a separate
and distinct entity from the National Government. It can sue and be sued
under its own name,61 and can exercise all the powers of a corporation
under the Corporation Code.62
To be sure, the ownership by the National Government of its entire capital
stock does not necessarily imply that petitioner is not engaged in business.
Section 2 of Pres. Decree No. 202963 classifies government-owned or
controlled corporations (GOCCs) into those performing governmental
functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock
corporation, whether performing governmental or proprietary functions, which
is directly chartered by special law or if organized under the general
corporation law is owned or controlled by the government directly, or
indirectly through a parent corporation or subsidiary corporation, to the extent
of at least a majority of its outstanding voting capital stock x x x." (emphases
supplied)
Governmental functions are those pertaining to the administration of
government, and as such, are treated as absolute obligation on the part of
the state to perform while proprietary functions are those that are undertaken
only by way of advancing the general interest of society, and are merely
optional on the government.64 Included in the class of GOCCs performing

39

TAX 1
familiar maxim expressio unius est exclusio alterius.73 Not being a local
water district, a cooperative registered under R.A. No. 6938, or a non-stock
and non-profit hospital or educational institution, petitioner clearly does not
belong to the exception. It is therefore incumbent upon the petitioner to point
to some provisions of the LGC that expressly grant it exemption from local
taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states
that the LGUs can impose franchise tax "notwithstanding any exemption
granted by any law or other special law." This particular provision of the LGC
does not admit any exception. In City Government of San Pablo, Laguna v.
Reyes,74 MERALCO's exemption from the payment of franchise taxes was
brought as an issue before this Court. The same issue was involved in the
subsequent case of Manila Electric Company v. Province of Laguna.75
Ruling in favor of the local government in both instances, we ruled that the
franchise tax in question is imposable despite any exemption enjoyed by
MERALCO under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and
193 of the LGC to support their position that MERALCO's tax exemption has
been withdrawn. The explicit language of section 137 which authorizes the
province to impose franchise tax 'notwithstanding any exemption granted by
any law or other special law' is all-encompassing and clear. The franchise tax
is imposable despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By
stating that unless otherwise provided in this Code, tax exemptions or
incentives granted to or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations except (1)
local water districts, (2) cooperatives duly registered under R.A. 6938, (3)
non-stock and non-profit hospitals and educational institutions, are withdrawn
upon the effectivity of this code, the obvious import is to limit the exemptions
to the three enumerated entities. It is a basic precept of statutory construction
that the express mention of one person, thing, act, or consequence excludes
all others as expressed in the familiar maxim expressio unius est exclusio
alterius. In the absence of any provision of the Code to the contrary, and we

It is worthy to note that all other private franchise holders receiving at least
sixty percent (60%) of its electricity requirement from the petitioner are
likewise imposed the cap of twelve percent (12%) on profits.69 The main
difference is that the petitioner is mandated to devote "all its returns from its
capital investment, as well as excess revenues from its operation, for
expansion"70 while other franchise holders have the option to distribute their
profits to its stockholders by declaring dividends. We do not see why this fact
can be a source of difference in tax treatment. In both instances, the taxable
entity is the corporation, which exercises the franchise, and not the individual
stockholders.
We also do not find merit in the petitioner's contention that its tax exemptions
under its charter subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant.
Exemptions must be shown to exist clearly and categorically, and supported
by clear legal provisions.71 In the case at bar, the petitioner's sole refuge is
section 13 of Rep. Act No. 6395 exempting from, among others, "all income
taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government
agencies and instrumentalities." However, section 193 of the LGC withdrew,
subject to limited exceptions, the sweeping tax privileges previously enjoyed
by private and public corporations. Contrary to the contention of petitioner,
section 193 of the LGC is an express, albeit general, repeal of all statutes
granting tax exemptions from local taxes.72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including governmentowned or controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this
Code." (emphases supplied)
It is a basic precept of statutory construction that the express mention of one
person, thing, act, or consequence excludes all others as expressed in the

40

TAX 1

IN VIEW WHEREOF, the instant petition is DENIED and the assailed

Decision and Resolution of the Court of Appeals dated March 12, 2001 and
July 10, 2001, respectively, are hereby AFFIRMED.
SO ORDERED.
1. D. 5. 1.
G.R. No. 168056
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON
S. ALCANTARA and ED VINCENT S. ALBANO,
Petitioners,
- versus 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.
Promulgated:
September 1, 2005
x----------------------------------------------------------x

DECISION

AUSTRIA-MARTINEZ, J.:

find no other provision in point, any existing tax exemption or incentive

enjoyed by MERALCO under existing law was clearly intended to be
withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under
the LGC the local government unit may now impose a local tax at a rate not
exceeding 50% of 1% of the gross annual receipts for the preceding calendar
based on the incoming receipts realized within its territorial jurisdiction. The
legislative purpose to withdraw tax privileges enjoyed under existing law or
charter is clearly manifested by the language used on (sic) Sections 137 and
193 categorically withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical to attempt to
enumerate all the existing statutes providing for special tax exemptions or
privileges, the LGC provided for an express, albeit general, withdrawal of
such exemptions or privileges. No more unequivocal language could have
been used."76 (emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs,
through ordinances duly approved, to grant tax exemptions, initiatives or
reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which imposes
an annual franchise tax "notwithstanding any exemption granted by law or
other special law," the respondent city government clearly did not intend to
exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of the local government
units for the delivery of basic services essential to the promotion of the
general welfare and the enhancement of peace, progress, and prosperity of
the people. As this Court observed in the Mactan case, "the original reasons
for the withdrawal of tax exemption privileges granted to government-owned
or controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises."78 With the added burden of
devolution, it is even more imperative for government entities to share in the
requirements of development, fiscal or otherwise, by paying taxes or other
charges due from them.

41

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Committee on Ways and Means approved the bill on February 2, 2005. The
President also certified it as urgent on February 8, 2005. The House of
Representatives approved the bill on second and third reading on February
28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill
No. 1950[4] on March 7, 2005, in substitution of Senate Bill Nos. 1337, 1838
and 1873, taking into consideration House Bill Nos. 3555 and 3705. Senator
Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838
and 1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier
and Francis N. Pangilinan. The President certified the bill on March 11, 2005,
and was approved by the Senate on second and third reading on April 13,
2005.
On the same date, April 13, 2005, the Senate agreed to the request of the
House of Representatives for a committee conference on the disagreeing
provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions of
House Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950, after
having met and discussed in full free and conference, recommended the
approval of its report, which the Senate did on May 10, 2005, and with the
House of Representatives agreeing thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate
version was transmitted to the President, who signed the same into law on
May 24, 2005. Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.[5] When said date came,
the Court issued a temporary restraining order, effective immediately and
continuing until further orders, enjoining respondents from enforcing and
implementing the law.

The expenses of government, having for their object the interest of all, should
be borne by everyone, and the more man enjoys the advantages of society,
the more he ought to hold himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for
education, increased emoluments for health workers, and wider coverage for
full value-added tax benefits these are the reasons why Republic Act No.
9337 (R.A. No. 9337)[1] was enacted. Reasons, the wisdom of which, the
Court even with its extensive constitutional power of review, cannot probe.
The petitioners in these cases, however, question not only the wisdom of the
law, but also perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their
arguments notwithstanding, petitioners failed to justify their call for the
invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill
Nos. 3555 and 3705, and Senate Bill No. 1950.
House Bill No. 3555[2] was introduced on first reading on January 7, 2005.
The House Committee on Ways and Means approved the bill, in substitution
of House Bill No. 1468, which Representative (Rep.) Eric D. Singson
introduced on August 8, 2004. The President certified the bill on January 7,
2005 for immediate enactment. On January 27, 2005, the House of
Representatives approved the bill on second and third reading.
House Bill No. 3705[3] on the other hand, substituted House Bill No. 3105
introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced
by Rep. Jacinto V. Paras. Its mother bill is House Bill No. 3555. The House

42

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J. PANGANIBAN : As a matter of fact a part of the mitigating measures would
be the elimination of the Excise Tax and the import duties. That is why, it is
not correct to say that the VAT as to petroleum dealers increased prices by
10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the
retail price by 10% to cover the E-Vat tax. If you consider the excise tax and
the import duties, the Net Tax would probably be in the neighborhood of 7%?
We are not going into exact figures I am just trying to deliver a point that
different industries, different products, different services are hit differently. So
its not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr.

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

Oral arguments were held on July 14, 2005. Significantly, during the hearing,
the Court speaking through Mr. Justice Artemio V. Panganiban, voiced the
rationale for its issuance of the temporary restraining order on July 1, 2005,
to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let
me just tell you a little background. You know when the law took effect on
July 1, 2005, the Court issued a TRO at about 5 oclock in the afternoon. But
before that, there was a lot of complaints aired on television and on radio.
Some people in a gas station were complaining that the gas prices went up
by 10%. Some people were complaining that their electric bill will go up by
10%. Other times people riding in domestic air carrier were complaining that
the prices that theyll have to pay would have to go up by 10%. While all that
was being aired, per your presentation and per our own understanding of the
law, thats not true. Its not true that the e-vat law necessarily increased prices
by 10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order
that granted the Petroleum companies some subsidy . . . interrupted

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

J. PANGANIBAN : There are other products that the people were
complaining on that first day, were being increased arbitrarily by 10%. And
thats one reason among many others this Court had to issue TRO because
of the confusion in the implementation. Thats why we added as an issue in
this case, even if its tangentially taken up by the pleadings of the parties, the
confusion in the implementation of the E-vat. Our people were subjected to
the mercy of that confusion of an across the board increase of 10%, which
you yourself now admit and I think even the Government will admit is
incorrect. In some cases, it should be 3% only, in some cases it should be

J. PANGANIBAN : Thats correct . . .

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

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

ATTY. BANIQUED : Yes, Your Honor.

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

6% depending on these mitigating measures and the location and situation of

each product, of each service, of each company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.

Petitioners argue that the law is unconstitutional, as it constitutes

abandonment by Congress of its exclusive authority to fix the rate of taxes
under Article VI, Section 28(2) of the 1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for
certiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A.
No. 9337.
Aside from questioning the so-called stand-by authority of the President to
increase the VAT rate to 12%, on the ground that it amounts to an undue
delegation of legislative power, petitioners also contend that the increase in
the VAT rate to 12% contingent on any of the two conditions being satisfied
violates the due process clause embodied in Article III, Section 1 of the
Constitution, as it imposes an unfair and additional tax burden on the people,
in that: (1) the 12% increase is ambiguous because it does not state if the
rate would be returned to the original 10% if the conditions are no longer
satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of
the applicable VAT rate from year to year; and (3) the increase in the VAT
rate, which is supposed to be an incentive to the President to raise the VAT
collection to at least 2 4/5 of the GDP of the previous year, should only be
based on fiscal adequacy.

J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO

pending the clarification of all these and we wish the government will take
time to clarify all these by means of a more detailed implementing rules, in
case the law is upheld by this Court. . . .[6]

The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et
al., filed a petition for prohibition on May 27, 2005. They question the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108, respectively, of the National Internal Revenue Code
(NIRC). Section 4 imposes a 10% VAT on sale of goods and properties,
Section 5 imposes a 10% VAT on importation of goods, and Section 6
imposes a 10% VAT on sale of services and use or lease of properties.
These questioned provisions contain a uniform proviso authorizing the
President, upon recommendation of the Secretary of Finance, to raise the
VAT rate to 12%, effective January 1, 2006, after any of the following
conditions have been satisfied, to wit:

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.

. . . That the President, upon the recommendation of the Secretary of

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

G.R. No. 168461

(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

44

TAX 1
Petitioners also believe that these provisions violate the constitutional
guarantee of equal protection of the law under Article III, Section 1 of the
Constitution, as the limitation on the creditable input tax if: (1) the entity has a
high ratio of input tax; or (2) invests in capital equipment; or (3) has several
transactions with the government, is not based on real and substantial
differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but progressive,
violative of Article VI, Section 28(1) of the Constitution, and that it is the
smaller businesses with higher input tax to output tax ratio that will suffer the
consequences thereof for it wipes out whatever meager margins the
petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis
Joseph G. Escudero filed this petition for certiorari on June 30, 2005. They
question the constitutionality of R.A. No. 9337 on the following grounds:

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.

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;

Petitioners contend that these provisions are unconstitutional for being

arbitrary, oppressive, excessive, and confiscatory.

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

Petitioners argument is premised on the constitutional right of non-deprivation

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

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34,

116, 117, 119, 121, 125,[7] 148, 151, 236, 237 and 288, which were present
in Senate Bill No. 1950, violates Article VI, Section 24(1) of the Constitution,
which provides that all appropriation, revenue or tariff bills shall originate
exclusively in the House of Representatives
G.R. No. 168730

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TAX 1
taxation is the core revenue measure that will tilt the balance towards a
sustainable macroeconomic environment necessary for economic growth.

PROCEDURAL ISSUE

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari
and prohibition on July 20, 2005, alleging unconstitutionality of the law on the
ground that the limitation on the creditable input tax in effect allows VATregistered 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.

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

RESPONDENTS COMMENT

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

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.

ISSUES
The Court defined the issues, as follows:

SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,
107 and 108 of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and
110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section
114(C) of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1

RULING OF THE COURT

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

630 (1994), respondents argue that the procedural issues raised by
petitioners, i.e., legality of the bicameral proceedings, exclusive origination of
revenue measures and the power of the Senate concomitant thereto, have
already been settled. With regard to the issue of undue delegation of
legislative power to the President, respondents contend that the law is
complete and leaves no discretion to the President but to increase the rate to
12% once any of the two conditions provided therein arise.
Respondents also refute petitioners argument that the increase to 12%, as
well as the 70% limitation on the creditable input tax, the 60-month
amortization on the purchase or importation of capital goods exceeding
P1,000,000.00, and the 5% final withholding tax by government agencies, is
arbitrary, oppressive, and confiscatory, and that it violates the constitutional
principle on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the
governments fiscal reform agenda. A reform in the value-added system of

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TAX 1

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral
Conference Committee exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in Sections 4, 5,
and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and
Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to
be credited against the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950
regarding other kinds of taxes in addition to the value-added tax.

Petitioners now beseech the Court to define the powers of the Bicameral
Conference Committee.
It should be borne in mind that the power of internal regulation and discipline
are intrinsic in any legislative body for, as unerringly elucidated by Justice

As a prelude, the Court deems it apt to restate the general principles and
concepts of value-added tax (VAT), as the confusion and inevitably, litigation,
breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter,
exchange or lease of goods or properties and services.[8] Being an indirect
tax on expenditure, the seller of goods or services may pass on the amount
of tax paid to the buyer,[9] with the seller acting merely as a tax collector.[10]
The burden of VAT is intended to fall on the immediate buyers and ultimately,
the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the
transaction or business it engages in, without transferring the burden to
someone else.[11] Examples are individual and corporate income taxes,
transfer taxes, and residence taxes.[12]
In the Philippines, the value-added system of sales taxation has long been in
existence, albeit in a different mode. Prior to 1978, the system was a singlestage tax computed under the cost deduction method and was payable only
by the original sellers. The single-stage system was subsequently modified,
and a mixture of the cost deduction method and tax credit method was used
to determine the value-added tax payable.[13] Under the tax credit method,
an entity can credit against or subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs and imports.[14]
It was only in 1987, when President Corazon C. Aquino issued Executive
Order No. 273, that the VAT system was rationalized by imposing a multistage tax rate of 0% or 10% on all sales using the tax credit method.[15]

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

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TAX 1
Sec. 35. In the event that the Senate does not agree with the House of
Representatives on the provision of any bill or joint resolution, the differences
shall be settled by a conference committee of both Houses which shall meet
within ten (10) days after their composition. The President shall designate the
members of the Senate Panel in the conference committee with the approval
of the Senate.
Each Conference Committee Report shall contain a detailed and sufficiently
explicit statement of the changes in, or amendments to the subject measure,
and shall be signed by a majority of the members of each House panel,
voting separately.
A comparative presentation of the conflicting House and Senate provisions
and a reconciled version thereof with the explanatory statement of the
conference committee shall be attached to the report.
...

The creation of such conference committee was apparently in response to a

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

Story, [i]f the power did not exist, it would be utterly impracticable to transact
the business of the nation, either at all, or at least with decency, deliberation,
and order.[19] Thus, Article VI, Section 16 (3) of the Constitution provides
that each House may determine the rules of its proceedings. Pursuant to this
inherent constitutional power to promulgate and implement its own rules of
procedure, the respective rules of each house of Congress provided for the
creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives
provides as follows:
Sec. 88. Conference Committee. In the event that the House does not agree
with the Senate on the amendment to any bill or joint resolution, the
differences may be settled by the conference committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much
as possible, adhere to and support the House Bill. If the differences with the
Senate are so substantial that they materially impair the House Bill, the panel
shall report such fact to the House for the 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.

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

48

TAX 1
And it has been said that Parliamentary rules are merely procedural, and with
their observance, the courts have no concern. They may be waived or
disregarded by the legislative body. Consequently, mere failure to conform to
parliamentary usage will not invalidate the action (taken by a deliberative
body) when the requisite number of members have agreed to a particular
measure.[21] (Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where
petitioners allege irregularities committed by the conference committee in
introducing changes or deleting provisions in the House and Senate bills.
Akin to the Farias case,[22] the present petitions also raise an issue
regarding the actions taken by the conference committee on matters
regarding Congress compliance with its own internal rules. As stated earlier,
one of the most basic and inherent power of the legislature is the power to
formulate rules for its proceedings and the discipline of its members.
Congress is the best judge of how it should conduct its own business
expeditiously and in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its
conference committee if it believes that said members violated any of its rules
of proceedings. Even the expanded jurisdiction of this Court cannot apply to
questions regarding only the internal operation of Congress, thus, the Court
is wont to deny a review of the internal proceedings of a co-equal branch of
government.
Moreover, as far back as 1994 or more than ten years ago, in the case of
Tolentino vs. Secretary of Finance,[23] the Court already made the
pronouncement that [i]f a change is desired in the practice [of the Bicameral
Conference Committee] it must be sought in Congress since this question is
not covered by any constitutional provision but is only an internal rule of each
house. [24] To date, Congress has not seen it fit to make such changes
adverted to by the Court. It seems, therefore, that Congress finds the
practices of the bicameral conference committee to be very useful for
purposes of prompt and efficient legislative action.

In the recent case of Farias vs. The Executive Secretary,[20] the Court En
Banc, unanimously reiterated and emphasized its adherence to the enrolled
bill doctrine, thus, declining therein petitioners plea for the Court to go behind
the enrolled copy of the bill. Assailed in said case was Congresss creation of
two sets of bicameral conference committees, the lack of records of said
committees proceedings, the alleged violation of said committees of the rules
of both houses, and the disappearance or deletion of one of the provisions in
the compromise bill submitted by the bicameral conference committee. It was
argued that such irregularities in the passage of the law nullified R.A. No.
9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
Under the enrolled bill doctrine, the signing of a bill by the Speaker of the
House and the Senate President and the certification of the Secretaries of
both Houses of Congress that it was passed are conclusive of its due
enactment. A review of cases reveals the Courts consistent adherence to the
rule. The Court finds no reason to deviate from the salutary rule in this case
where the irregularities alleged by the petitioners mostly involved the internal
rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference
Committee by the House. This Court is not the proper forum for the
enforcement of these internal rules of Congress, whether House or Senate.
Parliamentary rules are merely procedural and with their observance the
courts have no concern. Whatever doubts there may be as to the formal
validity of Rep. Act No. 9006 must be resolved in its favor. The Court
reiterates its ruling in Arroyo vs. De Venecia, viz.:

But the cases, both here and abroad, in varying forms of expression, all deny
to the courts the power to inquire into allegations that, in enacting a law, a
House of Congress failed to comply with its own rules, in the absence of
showing that there was a violation of a constitutional provision or the rights of
private individuals. In Osmea v. Pendatun, it was held: At any rate, courts
have declared that the rules adopted by deliberative bodies are subject to
revocation, modification or waiver at the pleasure of the body adopting them.

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TAX 1
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)

Nevertheless, just to put minds at ease that no blatant irregularities tainted

the proceedings of the bicameral conference committees, the Court deems it
necessary to dwell on the issue. The Court observes that there was a
necessity for a conference committee because a comparison of the
provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill
No. 1950 on the other, reveals that there were indeed disagreements. As
pointed out in the petitions, said disagreements were as follows:
House Bill No. 3555

With regard to the no pass-on provision

House Bill No.3705

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

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

Senate Bill No. 1950

With regard to Stand-By Authority in favor of President

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

50

TAX 1
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.

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.

There being differences and/or disagreements on the foregoing provisions of

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

No similar provision

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 pass-on provision.

3. With regard to the disagreement on whether input tax credits should be

limited or not, the Bicameral Conference Committee decided to adopt the

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

No similar provision
No similar provision
Provided for amendments to several NIRC provisions regarding corporate
income, percentage, franchise and excise taxes

The disagreements between the provisions in the House bills and the Senate
bill were with regard to (1) what rate of VAT is to be imposed; (2) whether
only the VAT imposed on electricity generation, transmission and distribution
companies should not be passed on to consumers, as proposed in the
Senate bill, or both the VAT imposed on electricity generation, transmission
and distribution companies and the VAT imposed on sale of petroleum
products should not be passed on to consumers, as proposed in the House

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Under the provisions of both the Rules of the House of Representatives and
Senate Rules, the Bicameral Conference Committee is mandated to settle
the differences between the disagreeing provisions in the House bill and the
Senate bill. The term settle is synonymous to reconcile and harmonize.[25]
To reconcile or harmonize disagreeing provisions, the Bicameral Conference
Committee may then (a) adopt the specific provisions of either the House bill
or Senate bill, (b) decide that neither provisions in the House bill or the
provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at a
compromise between the disagreeing provisions.

In the present case, the changes introduced by the Bicameral Conference

Committee on disagreeing provisions were meant only to reconcile and
harmonize the disagreeing provisions for it did not inject any idea or intent
that is wholly foreign to the subject embraced by the original provisions.
The so-called stand-by authority in favor of the President, whereby the rate of
10% VAT wanted by the Senate is retained until such time that certain
conditions arise when the 12% VAT wanted by the House shall be imposed,
appears to be a compromise to try to bridge the difference in the rate of VAT
proposed by the two houses of Congress. Nevertheless, such compromise is
still totally within the subject of what rate of VAT should be imposed on
taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the
proceedings of the Bicameral Conference Committee held on May 10, 2005,
Sen. Ralph Recto, Chairman of the Senate Panel, explained the reason for
deleting the no pass-on provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we
were thinking that no sector should be a beneficiary of legislative grace,

position of the House by putting a limitation on the amount of input tax that
may be credited against the output tax, although it crafted its own language
as to the amount of the limitation on input tax credits and the manner of
computing the same by providing thus:
(A) Creditable Input Tax. . . .
...
Provided, The input tax on goods purchased or imported in a calendar month
for use in trade or business for which deduction for depreciation is allowed
under this Code, shall be spread evenly over the month of acquisition and the
fifty-nine (59) succeeding months if the aggregate acquisition cost for such
goods, excluding the VAT component thereof, exceeds one million Pesos
(P1,000,000.00): PROVIDED, however, that if the estimated useful life of the
capital good is less than five (5) years, as used for depreciation purposes,
then the input VAT shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output
tax exceeds the input tax, the excess shall be paid by the VAT-registered
person. If the input tax exceeds the output tax, the excess shall be carried
over to the succeeding quarter or quarters: PROVIDED that the input tax
inclusive of input VAT carried over from the previous quarter that may be
credited in every quarter shall not exceed seventy percent (70%) of the
output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zerorated sales by a VAT-registered person may at his option be refunded or
credited against other internal revenue taxes, . . .

4. With regard to the amendments to other provisions of the NIRC on

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

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

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

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

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

Petitioners argument that the practice where a bicameral conference

committee is allowed to add or delete provisions in the House bill and the
Senate bill after these had passed three readings is in effect a circumvention

neither should any sector be discriminated on. The VAT is an indirect tax. It is
a pass on-tax. And lets keep it plain and simple. Lets not confuse the bill and
put a no pass-on provision. Two-thirds of the world have a VAT system and in
this two-thirds of the globe, I have yet to see a VAT with a no pass-though
provision. So, the thinking of the Senate is basically simple, lets keep the VAT
simple.[26] (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on
provision never really enjoyed the support of either House.[27]
With regard to the amount of input tax to be credited against output tax, the
Bicameral Conference Committee came to a compromise on the percentage
rate of the limitation or cap on such input tax credit, but again, the change
introduced by the Bicameral Conference Committee was totally within the
intent of both houses to put a cap on input tax that may be
credited against the output tax. From the inception of the subject revenue bill
in the House of Representatives, one of the major objectives was to plug a
glaring loophole in the tax policy and administration by creating vital
restrictions on the claiming of input VAT tax credits . . . and [b]y introducing
limitations on the claiming of tax credit, we are capping a major leakage that
has placed our collection efforts at an apparent disadvantage.[28]
As to the amendments to NIRC provisions on taxes other than the valueadded tax proposed in Senate Bill No. 1950, since said provisions were
among those referred to it, the conference committee had to act on the same
and it basically adopted the version of the Senate.
Thus, all the changes or modifications made by the Bicameral Conference
Committee were germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave
abuse of discretion amounting to lack or excess of jurisdiction committed by
the Bicameral Conference Committee. In the earlier cases of Philippine
Judges Association vs. Prado[29] and Tolentino vs. Secretary of Finance,[30]
the Court recognized the long-standing legislative practice of giving said

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TAX 1
Section 27

Rates of Income Tax on Domestic Corporation

28(A)(1)
Tax on Resident Foreign Corporation
28(B)(1)

of the no amendment rule (Sec. 26 (2), Art. VI of the 1987 Constitution), fails
to convince the Court to deviate from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the 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.[32] (Emphasis supplied)

Inter-corporate Dividends
34(B)(1)
Inter-corporate Dividends
116
Tax on Persons Exempt from VAT
117
Percentage Tax on domestic carriers and keepers of Garage
119
Tax on franchises

The Court reiterates here that the no-amendment rule refers only to the
procedure to be followed by each house of Congress with regard to bills
initiated in each of said respective houses, before said bill is transmitted to
the other house for its concurrence or amendment. Verily, to construe said
provision in a way as to proscribe any further changes to a bill after one
house has voted on it would lead to absurdity as this would mean that the
other house of Congress would be deprived of its constitutional power to
amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the
Constitution cannot be taken to mean that the introduction by the Bicameral
Conference Committee of amendments and modifications to disagreeing
provisions in bills that have been acted upon by both houses of Congress is
prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution
on Exclusive Origination of Revenue Bills

121
Tax on banks and Non-Bank Financial Intermediaries
148

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

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TAX 1
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.

Excise Tax on manufactured oils and other fuels

151
Excise Tax on mineral products

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

236
Registration requirements
237
Issuance of receipts or sales or commercial invoices
288
Disposition of Incremental Revenue

The foregoing question had been squarely answered in the Tolentino case,
wherein the Court held, thus:
. . . To begin with, it is not the law but the revenue bill which is required by the
Constitution to originate exclusively in the House of Representatives. It is
important to emphasize this, because a bill originating in the House may
undergo such extensive changes in the Senate that the result may be a
rewriting of the whole. . . . At this point, what is important to note is that, as a
result of the Senate action, a distinct bill may be produced. To insist that a
revenue statute and not only the bill which initiated the legislative process
culminating in the enactment of the law must substantially be the same as
the House bill would be to deny the 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.

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

55

TAX 1
but our fiscal authorities are still optimistic the government will be operating
on a balanced budget by the year 2009. In fact, several measures that will
result to significant expenditure savings have been identified by the
administration. It is supported with a credible package of revenue measures
that include measures to improve tax administration and control the leakages
in revenues from income taxes and the value-added tax (VAT). (Emphasis
supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555,
declared that:
In the budget message of our President in the year 2005, she reiterated that
we all acknowledged that on top of our agenda must be the restoration of the
health of our fiscal system.
In order to considerably lower the consolidated public sector deficit and
eventually achieve a balanced budget by the year 2009, we need to seize
windows of opportunities which might seem poignant in the beginning, but in
the long run prove effective and beneficial to the overall status of our
economy. One such opportunity is a review of existing tax rates, evaluating
the relevance given our present conditions.[34] (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of
Representatives is to bring in sizeable revenues for the government
to supplement our 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. The sponsorship speech of Sen. Ralph

Given, then, the power of the Senate to propose amendments, the Senate
can propose its own version even with respect to bills which are required by
the Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for filing
revenue, tariff or tax bills, bills authorizing an increase of the public debt,
private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the districts, the
members of the House can be expected to be more sensitive to the local
needs and problems. On the other hand, the senators, who are elected at
large, are expected to approach the same problems from the national
perspective. Both views are thereby made to bear on the enactment of such
laws.[33] (Emphasis supplied)

Since there is no question that the revenue bill exclusively originated in the
House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it
included provisions in Senate Bill No. 1950 amending corporate income
taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of
the Constitution does not contain any prohibition or limitation on the extent of
the amendments that may be introduced by the Senate to the House revenue
bill.
Furthermore, the amendments introduced by the Senate to the NIRC
provisions that had not been touched in the House bills are still in furtherance
of the intent of the House in initiating the subject revenue bills. The
Explanatory Note of House Bill No. 1468, the very first House bill introduced
on the floor, which was later substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is the urgent and
daunting task of solving the 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,

56

TAX 1
As the Court has said, the Senate can propose amendments and in fact, the
amendments made on provisions in the tax on income of corporations are
germane to the purpose of the house bills which is to raise revenues for the
government.

Likewise, the Court finds the sections referring to other percentage and
excise taxes germane to the reforms to the VAT system, as these sections
would cushion the effects of VAT on consumers. Considering that certain
goods and services which were subject to percentage tax and excise tax
would no longer be VAT-exempt, the consumer would be burdened more as
they would be paying the VAT in addition to these taxes. Thus, there is a
need to amend these sections to soften the impact of VAT. Again, in his
sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present
excise tax on bunker fuel, to lessen the effect of a VAT on this product.

For electric utilities like Meralco, we will wipe out the franchise tax in
exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so
as not to destroy the VAT chain, we will however bring down the excise tax on
socially sensitive products such as diesel, bunker, fuel and kerosene.
...
What do all these exercises point to? These are not contortions of giving to
the left hand what was taken from the right. Rather, these sprang from our
concern of softening the impact of VAT, so that the people can cushion the
blow of higher prices they will have to pay as a result of VAT.[36]

Recto on why the provisions on income tax on corporation were included is

worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will
raise P64.3 billion in additional revenues annually even while by mitigating
prices of power, services and petroleum products.
However, not all of this will be wrung out of VAT. In fact, only P48.7 billion
amount is from the VAT on twelve goods and services. The rest of the tab
P10.5 billion- will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate
Philippines and the consumer. Why should the latter bear all the pain? Why
should the fiscal salvation be only on the burden of the consumer?
The corporate worlds equity is in form of the increase in the corporate income
tax from 32 to 35 percent, but up to 2008 only. This will raise P10.5 billion a
year. After that, the rate will slide back, not to its old rate of 32 percent, but
two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear
with this emergency provision that will be in effect for 1,200 days, while we
put our fiscal house in order. This fiscal medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to
keep the length of their sacrifice brief. We would like to assure them that not
because there is a light at the end of the tunnel, this government will keep on
making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small
man. Big business will be there to share the burden.[35]

57

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

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.

(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

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

(ii) national government deficit as a percentage of GDP of the previous year

exceeds one and one-half percent (1 %).
SEC. 5. Section 107 of the same Code, as amended, is hereby further
amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and collected on every
importation of goods a value-added tax equivalent to ten percent (10%)
based on the total value used by the Bureau of Customs in determining tariff
and customs duties, plus customs duties, excise taxes, if any, and other
charges, such tax to be paid by the importer prior to the release of such
goods from customs custody: Provided, That where the customs duties are
determined on the basis of the quantity or volume of the goods, the valueadded tax shall be based on the landed cost plus excise taxes, if any:
provided, further, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%) after any of the following conditions has
been satisfied.

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.

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

b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and
Escudero, et al. contend in common that Sections 4, 5 and 6 of R.A. No.
9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving
the President the stand-by authority to raise the VAT rate from 10% to 12%
when a certain condition is met, constitutes undue delegation of the
legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended
to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.

(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

58

TAX 1

They argue that the VAT is a tax levied on the sale, barter or exchange of
goods and properties as well as on the sale or exchange of services, which
cannot be included within the purview of tariffs under the exempted
delegation as the latter refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on goods or
merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating
to the President the legislative power to tax is contrary to republicanism. They
insist that accountability, responsibility and transparency should dictate the
actions of Congress and they should not pass to the President the decision to
impose taxes. They also argue that the law also effectively nullified the
Presidents power of control, which includes the authority to set aside and
nullify the acts of her subordinates like the Secretary of Finance, by
mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to
cause, influence or create the conditions provided by the law to bring about
either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the
situation that the imposition of the 12% rate would be subject to the whim of
the Secretary of Finance, an unelected bureaucrat, contrary to the principle
of no taxation without representation. They submit that the Secretary of
Finance is not mandated to give a favorable recommendation and he may not
even give his recommendation. Moreover, they allege that no guiding
standards are provided in the law on what basis and as to how he will make
his recommendation. They claim, nonetheless, that any recommendation of
the Secretary of Finance can easily be brushed aside by the President since
the former is a mere alter ego of the latter, such that, ultimately, it is the
President who decides whether to impose the increased tax rate or not.

(ii) national government deficit as a percentage of GDP of the previous year

exceeds one and one-half percent (1 %).
SEC. 6. Section 108 of the same Code, as amended, is hereby further
amended to read as follows:

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

Properties

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of gross receipts derived
from the sale or exchange of services: provided, that the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to
increase the VAT rate is a virtual abdication by Congress of its exclusive
power to tax because such delegation is not within the purview of Section 28
(2), Article VI of the Constitution, which provides:
The Congress may, by law, authorize the President to fix within specified
limits, and may impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the framework of the
national development program of the government.

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

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(3) Delegation to the people at large;

(4) Delegation to local governments; and
(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the

delegation itself is valid. It is valid only if the law (a) is complete in itself,
setting forth therein the policy to be executed, carried out, or implemented by
the delegate;[41] and (b) fixes a standard the limits of which are sufficiently
determinate and determinable to which the delegate must conform in the
performance of his functions.[42] A sufficient standard is one which defines
legislative policy, marks its limits, maps out its boundaries and specifies the
public agency to apply it. It indicates the circumstances under which the
legislative command is to be effected.[43] Both tests are intended to prevent
a total transference of legislative authority to the delegate, who is not allowed
to step into the shoes of the legislature and exercise a power essentially
legislative.[44]
In People vs. Vera,[45] the Court, through eminent Justice Jose P. Laurel,
expounded on the concept and extent of delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative
power or not, it is usual to inquire whether the statute was complete in all its
terms and provisions when it left the hands of the legislature so that nothing
was left to the judgment of any other appointee or delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the delegation of power
to make the law, which necessarily involves a discretion as to what it shall be,

The principle of separation of powers ordains that each of the three great
branches of government has exclusive cognizance of and is supreme in
matters falling within its own constitutionally allocated sphere.[37] A logical
corollary to the doctrine of separation of powers is the principle of nondelegation of powers, as expressed in the Latin maxim: potestas delegata
non delegari potest which means what has been delegated, cannot be
delegated.[38] This doctrine is based on the ethical principle that such as
delegated power constitutes not only a right but a duty to be performed by the
delegate through the instrumentality of his own judgment and not through the
intervening mind of another.[39]
With respect to the Legislature, Section 1 of Article VI of the Constitution
provides that the Legislative power shall be vested in the Congress of the
Philippines which shall consist of a Senate and a House of Representatives.
The powers which Congress is prohibited from delegating are those which
are strictly, or inherently and exclusively, legislative. Purely legislative power,
which can never be delegated, has been described as the authority to make
a complete law complete as to the time when it shall take effect and as to
whom it shall be applicable and to determine the expediency of its
enactment.[40] Thus, the rule is that in order that a court may be justified in
holding a statute unconstitutional as a delegation of legislative power, it must
appear that the power involved is purely legislative in nature that is, one
appertaining exclusively to the legislative department. It is the nature of the
power, and not the liability of its use or the manner of its exercise, which
determines the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is
subject to the following recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article
VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of
Article VI of the Constitution;

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of the contingency upon which the Act shall take effect may be left to such
agencies as it may designate. The legislature, then, may provide that a law
shall take effect upon the happening of future specified contingencies leaving
to some other person or body the power to determine when the specified
contingency has arisen. (Emphasis supplied).[46]

In Edu vs. Ericta,[47] the Court reiterated:

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

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

and conferring an authority or discretion as to its execution, to be exercised

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

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contingent upon a specified fact or condition. It leaves the entire operation or
non-operation of the 12% rate upon factual matters outside of the control of
the executive.
No discretion would be exercised by the President. Highlighting the absence
of discretion is the fact that the word shall is used in the common proviso.
The use of the word shall connotes a mandatory order. Its use in a statute
denotes an imperative obligation and is inconsistent with the idea of
discretion.[53] Where the law is clear and unambiguous, it must be taken to
mean exactly what it says, and courts have no choice but to see to it that the
mandate is obeyed.[54]
Thus, it is the ministerial duty of the President to immediately impose the
12% rate upon the existence of any of the conditions specified by Congress.
This is a duty which cannot be evaded by the President. Inasmuch as the law
specifically uses the word shall, the exercise of discretion by the President
does not come into play. It is a clear directive to impose the 12% VAT rate
when the specified conditions are present. The time of taking into effect of
the 12% VAT rate is based on the happening of a certain specified
contingency, or upon the ascertainment of certain facts or conditions by a
person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO
Party List, et al. that the law effectively nullified the Presidents power of
control over the Secretary of Finance by mandating the fixing of the tax rate
by the President upon the recommendation of the Secretary of Finance. The
Court cannot also subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view
of the phrase upon the recommendation of the Secretary of Finance. Neither
does the Court find persuasive the submission of petitioners Escudero, et al.
that any recommendation by the Secretary of Finance can easily be brushed
aside by the President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the
President, it simply means that as head of the Department of Finance he is

The rationale for this is that the preliminary ascertainment of facts as basis
for the enactment of legislation is not of itself a legislative function, but is
simply ancillary to legislation. Thus, the duty of correlating information and
making recommendations is the kind of subsidiary activity which the
legislature may perform through its members, or which it may delegate to
others to perform. Intelligent legislation on the complicated problems of
modern society is impossible in the absence of accurate information on the
part of the legislators, and any reasonable method of securing such
information is proper.[51] The Constitution as a continuously operative
charter of government does not require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for
itself detailed determinations which it has declared to be prerequisite to
application of legislative policy to particular facts and circumstances
impossible for Congress itself properly to investigate.[52]
In the present case, the challenged section of R.A. No. 9337 is the common
proviso in Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).

The case before the Court is not a delegation of legislative power. It is simply
a delegation of ascertainment of facts upon which enforcement and
administration of the increase rate under the law is contingent. The
legislature has made the operation of the 12% rate effective January 1, 2006,

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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 undue delegation of legislative power
but only of the discretion as to the execution of a law. This is constitutionally
permissible.[57] Congress does not abdicate its functions or unduly delegate
power when it describes what job must be done, who must do it, and what is
the scope of his authority; in our complex economy that is frequently the only
way in which the legislative process can go forward.[58]
As to the argument of petitioners ABAKADA GURO Party List, et al. that
delegating to the President the legislative power to tax is contrary to the
principle of republicanism, the same deserves scant consideration. Congress
did not delegate the power to tax but the mere implementation of the law. The
intent and will to increase the VAT rate to 12% came from Congress and the
task of the President is to simply execute the legislative policy. That Congress
chose to do so in such a manner is not within the province of the Court to
inquire into, its task being to interpret the law.[59]
The insinuation by petitioners Pimentel, et al. that the President has ample
powers to cause, influence or create the conditions to bring about either or
both the conditions precedent does not deserve any merit as this argument is
highly speculative. The Court does not rule on allegations which are
manifestly conjectural, as these may not exist at all. The Court deals with
facts, not fancies; on realities, not appearances. When the Court acts on
appearances instead of realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary
Additional Tax Burden

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate
imposes an unfair and additional tax burden on the people. Petitioners also
argue that the 12% increase, dependent on any of the 2 conditions set forth
in the contested provisions, is ambiguous because it does not state if the VAT

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

In the present case, in making his recommendation to the President on the

existence of either of the two conditions, the Secretary of Finance is not
acting as the alter ego of the President or even her subordinate. In such
instance, he is not subject to the power of control and direction of the
President. He is acting as the agent of the legislative department, to
determine and declare the event upon which its expressed will is to take
effect.[56] The Secretary of Finance becomes the means or tool by which
legislative policy is determined and implemented, considering that he
possesses all the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is to gather and
collate statistical data and other pertinent information and verify if any of the
two conditions laid out by Congress is present. His personality in such
instance is in reality but a projection of that of Congress. Thus, being the
agent of Congress and not of the President, the President cannot alter or
modify or nullify, or set aside the findings of the Secretary of Finance and to
substitute the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain
the existence of a fact, namely, whether by December 31, 2005, the valueadded tax collection as a percentage of Gross Domestic Product (GDP) of
the previous year exceeds two and four-fifth percent (24/5%) or the national
government deficit as a percentage of GDP of the previous year exceeds one

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TAX 1
Respondents explained the philosophy behind these alternative conditions:
1.

VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal
meaning. If VAT/GDP is less than 2.8%, it means that government has weak
or no capability of implementing the VAT or that VAT is not effective in the
function of the tax collection. Therefore, there is no value to increase it to
12% because such action will also be ineffectual.
2.

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.[62]

That the first condition amounts to an incentive to the President to increase

the VAT collection does not render it unconstitutional so long as there is a
public purpose for which the law was passed, which in this case, is mainly to
raise revenue. In fact, fiscal adequacy dictated the need for a raise in
revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system
was originally stated by Adam Smith in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of
the pockets of the people as little as possible over and above what it brings
into the public treasury of the state.[63]

rate would be returned to the original 10% if the rates are no longer satisfied.
Petitioners also argue that such rate is unfair and unreasonable, as the
people are unsure of the applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of
the two conditions set forth therein are satisfied, the President shall increase
the VAT rate to 12%. The provisions of the law are clear. It does not provide
for a return to the 10% rate nor does it empower the President to so revert if,
after the rate is increased to 12%, the VAT collection goes below the 24/5 of
the GDP of the previous year or that the national government deficit as a
percentage of GDP of the previous year does not exceed 1%.
Therefore, no statutory construction or interpretation is needed. Neither can
conditions or limitations be introduced where none is provided for. Rewriting
the law is a forbidden ground that only Congress may tread upon.[60]
Thus, in the absence of any provision providing for a return to the 10% rate,
which in this case the Court finds none, petitioners argument is, at best,
purely speculative. There is no basis for petitioners fear of a fluctuating VAT
rate because the law itself does not provide that the rate should go back to
10% if the conditions provided in Sections 4, 5 and 6 are no longer present.
The rule is that where the provision of the law is clear and unambiguous, so
that there is no occasion for the court's seeking the legislative intent, the law
must be taken as it is, devoid of judicial addition or subtraction.[61]
Petitioners also contend that the increase in the VAT rate, which was
allegedly an incentive to the President to raise the VAT collection to at least 2
4/5 of the GDP of the previous year, should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only
condition. There is another condition, i.e., the national government deficit as
a percentage of GDP of the previous year exceeds one and one-half percent
(1 %).

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TAX 1
institutions. So, we were assuming that raising 80 billion would put us in a
position where we can then convince them to improve our ability to borrow at
lower rates. But conditions have changed on us because the interest rates
have gone up. In fact, just within this room, we tried to access the market for
a billion dollars because for this year alone, the Philippines will have to
borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We
issued last January a 25-year bond at 9.7 percent cost. We were trying to
access last week and the market was not as favorable and up to now we
have not accessed and we might pull back because the conditions are not
very good.
So given this situation, we at the Department of Finance believe that we
really need to front-end our deficit reduction. Because it is deficit that is
causing the increase of the debt and we are in what we call a debt spiral. The
more debt you have, the more deficit you have because interest and debt
service eats and eats more of your revenue. We need to get out of this debt
spiral. And the only way, I think, we can get out of this debt spiral is really
have a front-end adjustment in our revenue base.[65]

The image portrayed is chilling. Congress passed the law hoping for rescue
from an inevitable catastrophe. Whether the law is indeed sufficient to answer
the states economic dilemma is not for the Court to judge. In the Farias case,
the Court refused to consider the various arguments raised therein that dwelt
on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act),
pronouncing that:
. . . policy matters are not the concern of the Court. Government policy is
within the exclusive dominion of the political branches of the government. It is
not for this Court to look into the wisdom or propriety of legislative
determination. Indeed, whether an enactment is wise or unwise, whether it is
based on sound economic theory, whether it is the best means to achieve the
desired results, whether, in short, the legislative discretion within its
prescribed limits should be exercised in a particular manner are matters for

It simply means that sources of revenues must be adequate to meet

government expenditures and their variations.[64]
The dire need for revenue cannot be ignored. Our country is in a quagmire of
financial woe. During the Bicameral Conference Committee hearing, then
Finance Secretary Purisima bluntly depicted the countrys gloomy state of
economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now.
We are in a position where 90 percent of our revenue is used for debt
service. So, for every peso of revenue that we currently raise, 90 goes to
debt service. Thats interest plus amortization of our debt. So clearly, this is
not a sustainable situation. Thats the first fact.
The second fact is that our debt to GDP level is way out of line compared to
other peer countries that borrow money from that international financial
markets. Our debt to GDP is approximately equal to our GDP. Again, that
shows you that this is not a sustainable situation.
The third thing that Id like to point out is the environment that we are
presently operating in is not as benign as what it used to be the past five
years.
What do I mean by that?
In the past five years, weve been lucky because we were operating in a
period of basically global growth and low interest rates. The past few months,
we have seen an inching up, in fact, a rapid increase in the interest rates in
the leading economies of the world. And, therefore, our ability to borrow at
reasonable prices is going to be challenged. In fact, ultimately, the question is
our ability to access the financial markets.
When the President made her speech in July last year, the environment was
not as bad as it is now, at least based on the forecast of most financial

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TAX 1

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a
limitation on the amount of input tax that may be credited against the output
tax. It states, in part: [P]rovided, that the input tax inclusive of the input VAT
carried over from the previous quarter that may be credited in every quarter
shall not exceed seventy percent (70%) of the output VAT:
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the
value-added tax due from or paid by a VAT-registered person on the
importation of goods or local purchase of good and services, including lease
or use of property, in the course of trade or business, from a VAT-registered
person, and Output Tax is the value-added tax due on the sale or lease of
taxable goods or properties or services by any person registered or required
to register under the law.

Petitioners claim that the contested sections impose limitations on the

amount of input tax that may be claimed. In effect, a portion of the input tax
that has already been paid cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds
70% of the output tax, and therefore, the input tax in excess of 70% remains
uncredited. However, to the extent that the input tax is less than 70% of the
output tax, then 100% of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a 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 judgment of the legislature, and the serious conflict of opinions does not
suffice to bring them within the range of judicial cognizance.[66]

In the same vein, the Court in this case will not dawdle on the purpose of
Congress or the executive policy, given that it is not for the judiciary to "pass
upon questions of wisdom, justice or expediency of legislation.[67]
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and
110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section
114(C) of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that

Section 8 of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and
Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are
arbitrary, oppressive, excessive and confiscatory. Their argument is premised
on the constitutional right against deprivation of life, liberty of property without
due process of law, as embodied in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the constitutional
guarantee of equal protection of the law.
The doctrine is that where the due process and equal protection clauses are
invoked, considering that they are not fixed rules but rather broad standards,
there is a need for proof of such persuasive character as would lead to such
a conclusion. Absent such a showing, the presumption of validity must
prevail.[68]

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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.[70]
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input
tax. Thus, a person can credit his input tax only up to the extent of 70% of the
output tax. In 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 BIR. The party directly liable for the payment of the tax
is the seller.[71] What only needs to be done is for the person/taxpayer to
apply or credit these input taxes, as evidenced by receipts, against his output
taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that
the input tax partakes the nature of a property that may not be confiscated,
appropriated, or limited without due process of law.
The input tax is not a property or a property right within the constitutional
purview of the due process clause. A VAT-registered 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.[72]
Under the previous system of single-stage taxation, taxes paid at every level
of distribution are not recoverable from the taxes payable, although it
becomes part of the cost, which is deductible from the gross revenue. When
Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all
sales, it was then that the crediting of the input tax paid on purchase or

The non-application of the unutilized input tax in a given quarter is not ad

infinitum, as petitioners exaggeratedly contend. Their analysis of the effect of
the 70% limitation is incomplete and one-sided. It ends at the net effect that
there will be unapplied/unutilized inputs VAT for a given quarter. It does not
proceed further to the fact that such unapplied/unutilized input tax may be
credited in the subsequent periods as allowed by the carry-over provision of
Section 110(B) or that it may later on be refunded through a tax credit
certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the
operation of the 70% limitation on the input tax. According to petitioner, the
limitation on the creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they collect, which violates the
principle that tax collection and revenue should be for public purposes and
expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him
by the seller, when he buys goods. Output tax meanwhile is the tax due to
the person when he sells goods. In computing the VAT payable, three
possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller
are equal to the input taxes that he paid and passed on by the suppliers, then
no payment is required;
Second, when the output taxes exceed the input taxes, the person shall be
liable for the excess, which has to be paid to the Bureau of Internal Revenue
(BIR);[69] and
Third, if the input taxes exceed the output taxes, the excess shall be carried
over to the succeeding quarter or quarters. Should the input taxes result

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TAX 1
It is worth mentioning that Congress admitted that the spread-out of the
creditable input tax in this case amounts to a 4-year interest-free loan to the
government.[76] In the same breath, Congress also justified its move by
saying that the provision was designed to raise an annual revenue of 22.6
billion.[77] The legislature also dispelled the fear that the provision will fend
off foreign investments, saying that foreign investors have other tax incentives
provided by law, and citing the case of China, where despite a 17.5% noncreditable VAT, foreign investments were not deterred.[78] Again, for
whatever is the purpose of the 60-month amortization, this involves executive
economic policy and legislative wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made
by the government for taxable transactions, Section 12 of R.A. No. 9337,
which amended Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making payment on account of
each purchase of goods and services which are subject to the value-added
tax imposed in Sections 106 and 108 of this Code, deduct and withhold a
final value-added tax at the rate of five percent (5%) of the gross payment
thereof: Provided, That the payment for lease or use of properties or property
rights to nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For purposes of this Section, the
payor or person in control of the payment shall be considered as the
withholding agent.
The value-added tax withheld under this Section shall be remitted within ten
(10) days following the end of the month the withholding was made.

importation of goods and services by VAT-registered persons against the

output tax was introduced.[73] This was adopted by the Expanded VAT Law
(R.A. No. 7716),[74] and The Tax Reform Act of 1997 (R.A. No. 8424).[75]
The right to credit input tax as against the output tax is clearly a privilege
created by law, a privilege that also the law can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory,
Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC, which
provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
Provided, That the input tax on goods purchased or imported in a calendar
month for use in trade or business for which deduction for depreciation is
allowed under this Code, shall be spread evenly over the month of acquisition
and the fifty-nine (59) succeeding months if the aggregate acquisition cost for
such goods, excluding the VAT component thereof, exceeds One million
pesos (P1,000,000.00): Provided, however, That if the estimated useful life of
the capital goods is less than five (5) years, as used for depreciation
purposes, then the input VAT shall be spread over such a shorter period:
Provided, finally, That in the case of purchase of services, lease or use of
properties, the input tax shall be creditable to the purchaser, lessee or license
upon payment of the compensation, rental, royalty or fee.

The foregoing section imposes a 60-month period within which to amortize

the creditable input tax on purchase or importation of capital goods with
acquisition cost of P1 Million pesos, exclusive of the VAT component. Such
spread out only poses a delay in the crediting of the input tax. Petitioners
argument is without basis because the taxpayer is not permanently deprived
of his privilege to credit the input tax.

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TAX 1
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.

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.

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

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

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

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

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

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:

(C) Withholding of Creditable Value-added Tax. The Government or any of its

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

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

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Whats more, petitioners contention assumes the proposition that there is no
profit or value-added. It need not take an astute businessman to know that it
is a matter of exception that a business will sell goods or services without
profit or value-added. It cannot be overstressed that a business is created
precisely for profit.
The equal protection clause under the Constitution means that no person or
class of persons shall be deprived of the same protection of laws which is
enjoyed by other persons or other classes in the same place and in like
circumstances.[83]
The power of the State to make reasonable and natural classifications for the
purposes of taxation has long been established. Whether it relates to the
subject of taxation, the kind of property, the rates to be levied, or the amounts
to be raised, the methods of assessment, valuation and collection, the 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.[84]
Petitioners point out that the limitation on the creditable input tax if the entity
has a high ratio of input tax, or invests in capital equipment, or has several
transactions with the government, is not based on real and substantial
differences to meet a valid classification.
The argument is pedantic, if not outright baseless. The law does not make
any classification in the subject of taxation, the kind of property, the rates to
be levied or the amounts to be raised, the methods of assessment, valuation
and collection. Petitioners alleged distinctions are based on variables that
bear different consequences. While the implementation of the law may yield
varying end results depending on ones profit margin and value-added, the
Court cannot go beyond what the legislature has laid down and interfere with
the affairs of business.
The equal protection clause does not require the universal application of the
laws on all persons or things without distinction. This might in fact sometimes
result in unequal protection. What the clause requires is equality among

purpose, the payor or person in control of the payment shall be considered as

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

As amended, the use of the word final and the deletion of the word creditable
exhibits 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.[81]
Petitioners also argue that by imposing a limitation on the creditable input
tax, the government gets to tax a profit or value-added even if there is no
profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and again, onesided. The Court will not engage in a legal joust where premises are what ifs,
arguments, theoretical and facts, uncertain. Any disquisition by the Court on
this point will only be, as Shakespeare describes life in Macbeth,[82] full of
sound and fury, signifying nothing.

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Neither does the law make any distinction as to the type of industry or trade
that will bear the 70% limitation on the creditable input tax, 5-year
amortization of input tax paid on purchase of capital goods or the 5% final
withholding tax by the government. It must be stressed that the rule of
uniform taxation does not deprive Congress of the power to classify subjects
of taxation, and only demands uniformity within the particular class.[87]
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin.
The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or
services with gross annual sales or receipts not exceeding P1,500,000.00.
[88] Also, basic marine and agricultural food products in their original state
are still not subject to the tax,[89] thus ensuring that prices at the grassroots
level will remain accessible. As was stated in Kapatiran ng mga Naglilingkod
sa Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]
The disputed sales tax is also equitable. It is imposed only on sales of goods
or services by persons engaged in business with an aggregate gross annual
sales exceeding P200,000.00. Small corner sari-sari stores are consequently
exempt from its application. Likewise exempt from the tax are sales of farm
and marine products, so that the costs of basic food and other necessities,
spared as they are from the incidence of the VAT, are expected to be
relatively lower and within the reach of the general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low
profit margins, and unduly favors those with high profit margins. Congress
was not oblivious to this. Thus, to equalize the weighty burden the law
entails, the law, under Section 116, imposed a 3% percentage tax on VATexempt 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 VATexempt taxpayers stand on equal-footing.

equals as determined according to a valid classification. By classification is

meant the grouping of persons or things similar to each other in certain
particulars and different from all others in these same particulars.[85]
Petitioners brought to the Courts attention the introduction of Senate Bill No.
2038 by Sens. S.R. Osmea III and Ma. Ana Consuelo A.S. Madrigal on June
6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed
legislation seeks to amend the 70% limitation by increasing the same to 90%.
This, according to petitioners, supports their stance that the 70% limitation is
arbitrary and confiscatory. On this score, suffice it to say that these are still
proposed legislations. Until Congress amends the law, and absent any
unequivocal basis for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation

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

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

Uniformity in taxation means that all taxable articles or kinds of property of

the same class shall be taxed at the same rate. Different articles may be
taxed at different amounts provided that the rate is uniform on the same class
everywhere with all people at all times.[86]
In this case, the tax law is uniform as it provides a standard rate of 0% or
10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A. No.
9337, amending Sections 106, 107 and 108, respectively, of the NIRC,
provide for a rate of 10% (or 12%) on sale of goods and properties,
importation of goods, and sale of services and use or lease of properties.
These same sections also provide for a 0% rate on certain sales and
transaction.

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TAX 1
that is, in proportion to the revenue which they respectively enjoy under the
protection of the state.
Taxation is progressive when its rate goes up depending on the resources of
the person affected.[98]
The VAT is an antithesis of progressive taxation. By its very nature, it is
regressive. The principle of progressive taxation has no relation with the VAT
system inasmuch as the VAT paid by the consumer or business for every
goods bought or services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or
small. The disparity lies in the income earned by a person or profit margin
marked by a business, such that the higher the income or profit margin, the
smaller the portion of the income or profit that is eaten by VAT. A converso,
the lower the income or profit margin, the bigger the part that the VAT eats
away. At the end of the day, it is really the lower income group or businesses
with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of
indirect taxes, like the VAT. What it simply provides is that Congress shall
"evolve a progressive system of taxation." The Court stated in the Tolentino
case, thus:
The Constitution does not really prohibit the imposition of indirect taxes
which, like the VAT, are regressive. What it simply provides is that Congress
shall evolve a progressive system of taxation. The constitutional provision
has been interpreted to mean simply that direct taxes are . . . to be preferred
[and] as much as possible, indirect taxes should be minimized. (E.
FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed.
1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a
progressive tax system. Otherwise, sales taxes, which perhaps are the oldest
form of indirect taxes, would have been prohibited with the proclamation of
Art. VIII, 17 (1) of the 1973 Constitution from which the present Art. VI, 28 (1)
was taken. Sales taxes are also regressive.

Moreover, Congress provided mitigating measures to cushion the impact of

the imposition of the tax on those previously exempt. Excise taxes on
petroleum products[91] and natural gas[92] were reduced. Percentage tax on
domestic carriers was removed.[93] Power producers are now exempt from
paying franchise tax.[94]
Aside from these, Congress also increased the income tax rates of
corporations, in order to distribute the burden of taxation. Domestic, foreign,
and non-resident corporations are now subject to a 35% income tax rate,
from a previous 32%.[95] Intercorporate dividends of non-resident foreign
corporations are still subject to 15% final withholding tax but the tax credit
allowed on the corporations domicile was increased to 20%.[96] The
Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt
from income taxes anymore.[97] Even the sale by an artist of his works or
services performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of
taxation, which would otherwise rest largely on the consumers. It cannot
therefore be gainsaid that R.A. No. 9337 is equitable.
C.

Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is
anything but regressive. It is the smaller business with higher input tax-output
tax ratio that will suffer the consequences.
Progressive taxation is built on the principle of the taxpayers ability to pay.
This principle was also lifted from Adam Smiths Canons of Taxation, and it
states:
I. The subjects of every state ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective abilities;

72

TAX 1
The words of the Court in Vera vs. Avelino[101] holds true then, as it still
holds true now. All things considered, there is no raison d'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.
SO ORDERED.
G.R. No. 115455 October 30, 1995
ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 115525 October 30, 1995
JUAN T. DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE
OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as
Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR
REPRESENTATIVES, respondents.
G.R. No. 115543 October 30, 1995

Resort to indirect taxes should be minimized but not avoided entirely because
it is difficult, if not impossible, to avoid them by imposing such taxes
according to the taxpayers' ability to pay. In the case of the VAT, the law
minimizes the regressive effects of this imposition by providing for zero rating
of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC),
while granting exemptions to other transactions. (R.A. No. 7716, 4 amending
103 of the NIRC)[99]

CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it
is just an enema, a first-aid measure to resuscitate an economy in distress.
The Court is neither blind nor is it turning a deaf ear on the plight of the
masses. But it does not have the panacea for the malady that the law seeks
to remedy. As in other cases, the Court cannot strike down a law as
unconstitutional simply because of its yokes.
Let us not be overly influenced by the plea that for every wrong there is a
remedy, and that the judiciary should stand ready to afford relief. There are
undoubtedly many wrongs the judicature may not correct, for instance, those
involving political questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary is the
repository of remedies for all political or social ills; We should not forget that
the Constitution has judiciously allocated the powers of government to three
distinct and separate compartments; and that judicial interpretation has
tended to the preservation of the independence of the three, and a zealous
regard of the prerogatives of each, knowing full well that one is not the
guardian of the others and that, for official wrong-doing, each may be brought
to account, either by impeachment, trial or by the ballot box.[100]

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

petitioners,
vs.

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G.R. No. 115852 October 30, 1995

PHILIPPINE AIRLINES, INC., petitioner,
vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 115873 October 30, 1995
COOPERATIVE UNION OF THE PHILIPPINES, petitioner,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal
Revenue, HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive
Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as
Secretary of Finance, respondents.
G.R. No. 115931 October 30, 1995
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and
ASSOCIATION OF PHILIPPINE BOOK SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON.
LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue; and HON.
GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of
Customs, respondents.
RESOLUTION

MENDOZA, J.:
These are motions seeking reconsideration of our decision dismissing the
petitions filed in these cases for the declaration of unconstitutionality of R.A.
No. 7716, otherwise known as the Expanded Value-Added Tax Law. The

THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE

COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE AND
BUREAU OF CUSTOMS, respondents.
G.R. No. 115544 October 30, 1995
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.;
KAMAHALAN PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS,
INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal
Revenue; HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive
Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as
Secretary of Finance, respondents.
G.R. No. 115754 October 30, 1995
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC.,
(CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 115781 October 30, 1995
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME
CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM
TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN,
FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO, JOSE
CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR
BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"),
FREEDOM FROM DEBT COALITION, INC., and PHILIPPINE BIBLE
SOCIETY, INC. and WIGBERTO TAADA, petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER OF
CUSTOMS, respondents.

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TAX 1
Senate passed its own version of revenue bills, which, in consolidation with
House bills earlier passed, became the enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE
OF 1987 BY EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE
PERIOD FOR TAX AND DUTY EXEMPTION AND TAX CREDIT ON
CAPITAL EQUIPMENT) which was approved by the President on April 10,
1992. This Act is actually a consolidation of H. No. 34254, which was
approved by the House on January 29, 1992, and S. No. 1920, which was
approved by the Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER
SHALL GIVE REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL
IN OLYMPIC GAMES) which was approved by the President on May 22,
1992. This Act is a consolidation of H. No. 22232, which was approved by the
House of Representatives on August 2, 1989, and S. No. 807, which was
approved by the Senate on October 21, 1991.

motions, of which there are 10 in all, have been filed by the several
petitioners in these cases, with the exception of the Philippine Educational
Publishers Association, Inc. and the Association of Philippine Booksellers,
petitioners in G.R. No. 115931.
The Solicitor General, representing the respondents, filed a consolidated
comment, to which the Philippine Airlines, Inc., petitioner in G.R. No. 115852,
and the Philippine Press Institute, Inc., petitioner in G.R. No. 115544, and
Juan T. David, petitioner in G.R. No. 115525, each filed a reply. In turn the
Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply.
On June 27, 1995 the matter was submitted for resolution.

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING

FOR THIS PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL
INTERNAL REVENUE CODE (December 28, 1992).

I.
Power of the Senate to propose amendments to revenue bills. Some
of the petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco,
and Chamber of Real Estate and Builders Association (CREBA)) reiterate
previous claims made by them that R.A. No. 7716 did not "originate
exclusively" in the House of Representatives as required by Art. VI, 24 of
the Constitution. Although they admit that H. No. 11197 was filed in the
House of Representatives where it passed three readings and that afterward
it was sent to the Senate where after first reading it was referred to the
Senate Ways and Means Committee, they complain that the Senate did not
pass it on second and third readings. Instead what the Senate did was to
pass its own version (S. No. 1630) which it approved on May 24, 1994.
Petitioner Tolentino adds that what the Senate committee should have done
was to amend H. No. 11197 by striking out the text of the bill and substituting
it with the text of S. No. 1630. That way, it is said, "the bill remains a House
bill and the Senate version just becomes the text (only the text) of the House
bill."

House Bill No. 2165, October 5, 1992

The contention has no merit.

Senate Bill No. 32, December 7, 1992

The enactment of S. No. 1630 is not the only instance in which the Senate
proposed an amendment to a House revenue bill by enacting its own version
of a revenue bill. On at least two occasions during the Eighth Congress, the

On the other hand, the Ninth Congress passed revenue laws which were also
the result of the consolidation of House and Senate bills. These are the
following, with indications of the dates on which the laws were approved by
the President and dates the separate bills of the two chambers of Congress
were respectively passed:
1.

2.

R.A. NO. 7642

R.A. NO. 7643

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5.

R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED

CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN
CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHER
PURPOSES (November 9, 1993)

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE

TO REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERY
MONTH AND TO ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN
VAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONS
OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992)
House Bill No. 1503, September 3, 1992

House Bill No. 11024, November 3, 1993

Senate Bill No. 968, December 7, 1992
Senate Bill No. 1168, November 3, 1993
3.
6.

R.A. NO. 7646

R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND

ADMINISTRATION OF THE DOCUMENTARY STAMP TAX, AMENDING
FOR THE PURPOSE CERTAIN PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FOR
SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES (December 23,
1993)

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE

TO PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUE
TAXES BY LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE
CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED (February 24, 1993)
House Bill No. 1470, October 20, 1992

House Bill No. 7789, May 31, 1993

Senate Bill No. 35, November 19, 1992

Senate Bill No. 1330, November 18, 1993

4.

7.

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL

SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS)
TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE
RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE
PURCHASE OF GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS
FOR SERVICES RENDERED BY CONTRACTORS (April 6, 1993)

R.A. NO. 7717

AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF

SHARES OF STOCK LISTED AND TRADED THROUGH THE LOCAL
STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING,
AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, BY INSERTING A NEW SECTION AND
REPEALING CERTAIN SUBSECTIONS THEREOF (May 5, 1994)

R.A. NO. 7649

House Bill No. 5260, January 26, 1993

House Bill No. 9187, November 3, 1993
Senate Bill No. 1141, March 30, 1993
Senate Bill No. 1127, March 23, 1994

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70-A. A bill or resolution shall not be amended by substituting it with
another which covers a subject distinct from that proposed in the original bill
or resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue bills,
the Philippine Senate possesses less power than the U.S. Senate because of
textual differences between constitutional provisions giving them the power to
propose or concur with amendments.

Thus, the enactment of S. No. 1630 is not the only instance in which the
Senate, in the exercise of its power to propose amendments to bills required
to originate in the House, passed its own version of a House revenue
measure. It is noteworthy that, in the particular case of S. No. 1630,
petitioners Tolentino and Roco, as members of the Senate, voted to approve
it on second and third readings.

All Bills for raising Revenue shall originate in the House of Representatives;
but the Senate may propose or concur with amendments as on other Bills.

On the other hand, amendment by substitution, in the manner urged by

petitioner Tolentino, concerns a mere matter of form. Petitioner has not
shown what substantial difference it would make if, as the Senate actually did
in this case, a separate bill like S. No. 1630 is instead enacted as a substitute
measure, "taking into Consideration . . . H.B. 11197."

Art. VI, 24 of our Constitution reads:

Indeed, so far as pertinent, the Rules of the Senate only provide:

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.

RULE XXIX

Art. I, 7, cl. 1 of the U.S. Constitution reads:

AMENDMENTS
xxx

The addition of the word "exclusively" in the Philippine Constitution and the
decision to drop the phrase "as on other Bills" in the American version,
according to petitioners, shows the intention of the framers of our
Constitution to restrict the Senate's power to propose amendments to
revenue bills. Petitioner Tolentino contends that the word "exclusively" was
inserted to modify "originate" and "the words 'as in any other bills' (sic) were
eliminated so as to show that these bills were not to be like other bills but
must be treated as a special kind."
The history of this provision does not support this contention. The supposed
indicia of constitutional intent are nothing but the relics of an unsuccessful
attempt to limit the power of the Senate. It will be recalled that the 1935
Constitution originally provided for a unicameral National Assembly. When it
was decided in 1939 to change to a bicameral legislature, it became
necessary to provide for the procedure for lawmaking by the Senate and the

xxx

xxx

68.
Not more than one amendment to the original amendment shall be
considered.
No amendment by substitution shall be entertained unless the text thereof is
submitted in writing.
Any of said amendments may be withdrawn before a vote is taken thereon.
69.
No amendment which seeks the inclusion of a legislative provision
foreign to the subject matter of a bill (rider) shall be entertained.
xxx

xxx

xxx

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TAX 1
and sent over to it by the House, however, the Senate certainly can pass its
own version on the same subject matter. This follows from the coequality of
the two chambers of Congress.
That this is also the understanding of book authors of the scope of the
Senate's power to concur is clear from the following commentaries:
The power of the Senate to propose or concur with amendments is
apparently without restriction. It would seem that by virtue of this power, the
Senate can practically re-write a bill required to come from the House and
leave only a trace of the original bill. For example, a general revenue bill
passed by the lower house of the United States Congress contained
provisions for the imposition of an inheritance tax . This was changed by the
Senate into a corporation tax. The amending authority of the Senate was
declared by the United States Supreme Court to be sufficiently broad to
enable it to make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107,
55 L. ed. 389].
(L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES
247 (1961))
The above-mentioned bills are supposed to be initiated by the House of
Representatives because it is more numerous in membership and therefore
also more representative of the people. Moreover, its members are presumed
to be more familiar with the needs of the country in regard to the enactment
of the legislation involved.
The Senate is, however, allowed much leeway in the exercise of its power to
propose or concur with amendments to the bills initiated by the House of
Representatives. Thus, in one case, a bill introduced in the U.S. House of
Representatives was changed by the Senate to make a proposed inheritance
tax a corporation tax. It is also accepted practice for the Senate to introduce
what is known as an amendment by substitution, which may entirely replace
the bill initiated in the House of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

House of Representatives. The work of proposing amendments to the

Constitution was done by the National Assembly, acting as a constituent
assembly, some of whose members, jealous of preserving the Assembly's
lawmaking powers, sought to curtail the powers of the proposed Senate.
Accordingly they proposed the following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local
application, and private bills shall originate exclusively in the Assembly, but
the Senate may propose or concur with amendments. In case of disapproval
by the Senate of any such bills, the Assembly may repass the same by a twothirds vote of all its members, and thereupon, the bill so repassed shall be
deemed enacted and may be submitted to the President for corresponding
action. In the event that the Senate should fail to finally act on any such bills,
the Assembly may, after thirty days from the opening of the next regular
session of the same legislative term, reapprove the same with a vote of twothirds of all the members of the Assembly. And upon such reapproval, the bill
shall be deemed enacted and may be submitted to the President for
corresponding action.
The special committee on the revision of laws of the Second National
Assembly vetoed the proposal. It deleted everything after the first sentence.
As rewritten, the proposal was approved by the National Assembly and
embodied in Resolution No. 38, as amended by Resolution No. 73. (J.
ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed
amendment was submitted to the people and ratified by them in the elections
held on June 18, 1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art.
VI, 24 of the present Constitution was derived. It explains why the word
"exclusively" was added to the American text from which the framers of the
Philippine Constitution borrowed and why the phrase "as on other Bills" was
not copied. Considering the defeat of the proposal, the power of the Senate
to propose amendments must be understood to be full, plenary and complete
"as on other Bills." Thus, because revenue bills are required to originate
exclusively in the House of Representatives, the Senate cannot enact
revenue measures of its own without such bills. After a revenue bill is passed

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In point of fact, in several instances the provisions of S. No. 1630, clearly
appear to be mere amendments of the corresponding provisions of H. No.
11197. The very tabular comparison of the provisions of H. No. 11197 and S.
No. 1630 attached as Supplement A to the basic petition of petitioner
Tolentino, while showing differences between the two bills, at the same time
indicates that the provisions of the Senate bill were precisely intended to be
amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630.
Because the Senate bill was a mere amendment of the House bill, H. No.
11197 in its original form did not have to pass the Senate on second and
three readings. It was enough that after it was passed on first reading it was
referred to the Senate Committee on Ways and Means. Neither was it
required that S. No. 1630 be passed by the House of Representatives before
the two bills could be referred to the Conference Committee.
There is legislative precedent for what was done in the case of H. No. 11197
and S. No. 1630. When the House bill and Senate bill, which became R.A.
No. 1405 (Act prohibiting the disclosure of bank deposits), were referred to a
conference committee, the question was raised whether the two bills could be
the subject of such conference, considering that the bill from one house had
not been passed by the other and vice versa. As Congressman Duran put the
question:
MR. DURAN.
Therefore, I raise this question of order as to procedure: If
a House bill is passed by the House but not passed by the Senate, and a
Senate bill of a similar nature is passed in the Senate but never passed in the
House, can the two bills be the subject of a conference, and can a law be
enacted from these two bills? I understand that the Senate bill in this
particular instance does not refer to investments in government securities,
whereas the bill in the House, which was introduced by the Speaker, covers
two subject matters: not only investigation of deposits in banks but also
investigation of investments in government securities. Now, since the two bills
differ in their subject matter, I believe that no law can be enacted.

In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff
bills, bills authorizing increase of the public debt, bills of local application, and
private bills must "originate exclusively in the House of Representatives," it
also adds, "but the Senate may propose or concur with amendments." In the
exercise of this power, the Senate may propose an entirely new bill as a
substitute measure. As petitioner Tolentino states in a high school text, a
committee to which a bill is referred may do any of the following:
(1)
to endorse the bill without changes; (2) to make changes in the bill
omitting or adding sections or altering its language; (3) to make and endorse
an entirely new bill as a substitute, in which case it will be known as a
committee bill; or (4) to make no report at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))
To except from this procedure the amendment of bills which are required to
originate in the House by prescribing that the number of the House bill and its
other parts up to the enacting clause must be preserved although the text of
the Senate amendment may be incorporated in place of the original body of
the bill is to insist on a mere technicality. At any rate there is no rule
prescribing this form. S. No. 1630, as a substitute measure, is therefore as
much an amendment of H. No. 11197 as any which the Senate could have
made.
II.
S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic
error is that they assume that S. No. 1630 is an independent and distinct bill.
Hence their repeated references to its certification that it was passed by the
Senate "in substitution of S.B. No. 1129, taking into consideration P.S. Res.
No. 734 and H.B. No. 11197," implying that there is something substantially
different between the reference to S. No. 1129 and the reference to H. No.
11197. From this premise, they conclude that R.A. No. 7716 originated both
in the House and in the Senate and that it is the product of two "half-baked
bills because neither H. No. 11197 nor S. No. 1630 was passed by both
houses of Congress."

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"three readings on separate days." There is not only textual support for such
construction but historical basis as well.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.)
said:

Art. VI, 21 (2) of the 1935 Constitution originally provided:

THE SPEAKER. The report of the conference committee is in order. It is

precisely in cases like this where a conference should be had. If the House
bill had been approved by the Senate, there would have been no need of a
conference; but precisely because the Senate passed another bill on the
same subject matter, the conference committee had to be created, and we
are now considering the report of that committee.

(2)
No bill shall be passed by either House unless it shall have been
printed and copies thereof in its final form furnished its Members at least
three calendar days prior to its passage, except when the President shall
have certified to the necessity of its immediate enactment. Upon the last
reading of a bill, no amendment thereof shall be allowed and the question
upon its passage shall be taken immediately thereafter, and the yeas and
nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):
(2)
No bill 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 the Members three days before its passage, except when the
Prime Minister 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.
This provision of the 1973 document, with slight modification, was adopted in
Art. VI, 26 (2) of the present Constitution, thus:
(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.

(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))
III.
The President's certification. The fallacy in thinking that H. No.
11197 and S. No. 1630 are distinct and unrelated measures also accounts
for the petitioners' (Kilosbayan's and PAL's) contention that because the
President separately certified to the need for the immediate enactment of
these measures, his certification was ineffectual and void. The certification
had to be made of the version of the same revenue bill which at the moment
was being considered. Otherwise, to follow petitioners' theory, it would be
necessary for the President to certify as many bills as are presented in a
house of Congress even though the bills are merely versions of the bill he
has already certified. It is enough that he certifies the bill which, at the time
he makes the certification, is under consideration. Since on March 22, 1994
the Senate was considering S. No. 1630, it was that bill which had to be
certified. For that matter on June 1, 1993 the President had earlier certified
H. No. 9210 for immediate enactment because it was the one which at that
time was being considered by the House. This bill was later substituted,
together with other bills, by H. No. 11197.
As to what Presidential certification can accomplish, we have already
explained in the main decision that the phrase "except when the President
certifies to the necessity of its immediate enactment, etc." in Art. VI, 26 (2)
qualifies not only the requirement that "printed copies [of a bill] in its final form
[must be] distributed to the members three days before its passage" but also
the requirement that before a bill can become a law it must have passed

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IV.
Power of Conference Committee. It is contended (principally by
Kilosbayan, Inc. and the Movement of Attorneys for Brotherhood, Integrity
and Nationalism, Inc. (MABINI)) that in violation of the constitutional policy of
full public disclosure and the people's right to know (Art. II, 28 and Art. III,
7) the Conference Committee met for two days in executive session with
only the conferees present.
As pointed out in our main decision, even in the United States it was
customary to hold such sessions with only the conferees and their staffs in
attendance and it was only in 1975 when a new rule was adopted requiring
open sessions. Unlike its American counterpart, the Philippine Congress has
not adopted a rule prescribing open hearings for conference committees.
It is nevertheless claimed that in the United States, before the adoption of the
rule in 1975, at least staff members were present. These were staff members
of the Senators and Congressmen, however, who may be presumed to be
their confidential men, not stenographers as in this case who on the last two
days of the conference were excluded. There is no showing that the
conferees themselves did not take notes of their proceedings so as to give
petitioner Kilosbayan basis for claiming that even in secret diplomatic
negotiations involving state interests, conferees keep notes of their meetings.
Above all, the public's right to know was fully served because the Conference
Committee in this case submitted a report showing the changes made on the
differing versions of the House and the Senate.
Petitioners cite the rules of both houses which provide that conference
committee reports must contain "a detailed, sufficiently explicit statement of
the changes in or other amendments." These changes are shown in the bill
attached to the Conference Committee Report. The members of both houses
could thus ascertain what changes had been made in the original bills
without the need of a statement detailing the changes.
The same question now presented was raised when the bill which became
R.A. No. 1400 (Land Reform Act of 1955) was reported by the Conference
Committee. Congressman Bengzon raised a point of order. He said:

The exception is based on the prudential consideration that if in all cases

three readings on separate days are required and a bill has to be printed in
final form before it can be passed, the need for a law may be rendered
academic by the occurrence of the very emergency or public calamity which
it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an
emergency, especially in a country like the Philippines where budget deficit is
a chronic condition. Even if this were the case, an enormous budget deficit
does not make the need for R.A. No. 7716 any less urgent or the situation
calling for its enactment any less an emergency.
Apparently, the members of the Senate (including some of the petitioners in
these cases) believed that there was an urgent need for consideration of S.
No. 1630, because they responded to the call of the President by voting on
the bill on second and third readings on the same day. While the judicial
department is not bound by the Senate's acceptance of the President's
certification, the respect due coequal departments of the government in
matters committed to them by the Constitution and the absence of a clear
showing of grave abuse of discretion caution a stay of the judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough
consideration in the Senate where it was discussed for six days. Only its
distribution in advance in its final printed form was actually dispensed with by
holding the voting on second and third readings on the same day (March 24,
1994). Otherwise, sufficient time between the submission of the bill on
February 8, 1994 on second reading and its approval on March 24, 1994
elapsed before it was finally voted on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to
be two-fold: (1) to inform the members of Congress of what they must vote on
and (2) to give them notice that a measure is progressing through the
enacting process, thus enabling them and others interested in the measure to
prepare their positions with reference to it. (1 J. G. SUTHERLAND,
STATUTES AND STATUTORY CONSTRUCTION 10.04, p. 282 (1972)).
These purposes were substantially achieved in the case of R.A. No. 7716.

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Congressman Tolentino was sustained by the chair. The record shows that
when the ruling was appealed, it was upheld by viva voce and when a
division of the House was called, it was sustained by a vote of 48 to 5. (Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to insert
new provisions as long as these are germane to the subject of the
conference. As this Court held in Philippine Judges Association v. Prado, 227
SCRA 703 (1993), in an opinion written by then Justice Cruz, the jurisdiction
of the conference committee is not limited to resolving differences between
the Senate and the House. It may propose an entirely new provision. What is
important is that its report is subsequently approved by the respective houses
of Congress. This Court ruled that it would not entertain allegations that,
because new provisions had been added by the conference committee, there
was thereby a violation of the constitutional injunction that "upon the last
reading of a bill, no amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the petitioners'
charges that an amendment was made upon the last reading of the bill that
eventually became R.A. No. 7354 and that copies thereof in its final form
were not distributed among the members of each House. Both the enrolled
bill and the legislative journals certify that the measure was duly enacted i.e.,
in accordance with Article VI, Sec. 26 (2) of the Constitution. We are bound
by such official assurances from a coordinate department of the government,
to which we owe, at the very least, a becoming courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference committees in
the Philippines in a 1979 study:
Conference committees may be of two types: free or instructed. These
committees may be given instructions by their parent bodies or they may be
left without instructions. Normally the conference committees are without
instructions, and this is why they are often critically referred to as "the little
legislatures." Once bills have been sent to them, the conferees have almost

MR. BENGZON. My point of order is that it is out of order to consider the

report of the conference committee regarding House Bill No. 2557 by reason
of the provision of Section 11, Article XII, of the Rules of this House which
provides specifically that the conference report must be accompanied by a
detailed statement of the effects of the amendment on the bill of the House.
This conference committee report is not accompanied by that detailed
statement, Mr. Speaker. Therefore it is out of order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO.
Mr. Speaker, I should just like to say a few words
in connection with the point of order raised by the gentleman from
Pangasinan.
There is no question about the provision of the Rule cited by the gentleman
from Pangasinan, but this provision applies to those cases where only
portions of the bill have been amended. In this case before us an entire bill is
presented; therefore, it can be easily seen from the reading of the bill what
the provisions are. Besides, this procedure has been an established practice.
After some interruption, he continued:
MR. TOLENTINO.
As I was saying, Mr. Speaker, we have to look into
the reason for the provisions of the Rules, and the reason for the requirement
in the provision cited by the gentleman from Pangasinan is when there are
only certain words or phrases inserted in or deleted from the provisions of the
bill included in the conference report, and we cannot understand what those
words and phrases mean and their relation to the bill. In that case, it is
necessary to make a detailed statement on how those words and phrases
will affect the bill as a whole; but when the entire bill itself is copied verbatim
in the conference report, that is not necessary. So when the reason for the
Rule does not exist, the Rule does not exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

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PAL was exempted from the payment of the VAT along with other entities by
103 of the National Internal Revenue Code, which provides as follows:
103. Exempt transactions. The following shall be exempt from the
value-added tax:
xxx

xxx

xxx

(q)
Transactions which are exempt under special laws or international
agreements to which the Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted
to PAL, by amending 103, as follows:
103. Exempt transactions. The following shall be exempt from the
value-added tax:
xxx

xxx

xxx

(q)
Transactions which are exempt under special laws, except those
granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .
The amendment of 103 is expressed in the title of R.A. No. 7716 which
reads:
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.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUEADDED TAX (VAT) SYSTEM [BY] 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

unlimited authority to change the clauses of the bills and in fact sometimes
introduce new measures that were not in the original legislation. No minutes
are kept, and members' activities on conference committees are difficult to
determine. One congressman known for his idealism put it this way: "I killed a
bill on export incentives for my interest group [copra] in the conference
committee but I could not have done so anywhere else." The conference
committee submits a report to both houses, and usually it is accepted. If the
report is not accepted, then the committee is discharged and new members
are appointed.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND
LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M.
SHAW, eds.)).
In citing this study, we pass no judgment on the methods of conference
committees. We cite it only to say that conference committees here are no
different from their counterparts in the United States whose vast powers we
noted in Philippine Judges Association v. Prado, supra. At all events, under
Art. VI, 16(3) each house has the power "to determine the rules of its
proceedings," including those of its committees. Any meaningful change in
the method and procedures of Congress or its committees must therefore be
sought in that body itself.
V.
The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A.
No. 7716 violates Art. VI, 26 (1) of the Constitution which provides that
"Every bill passed by Congress shall embrace only one subject which shall
be expressed in the title thereof." PAL contends that the amendment of its
franchise by the withdrawal of its exemption from the VAT is not expressed in
the title of the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its
gross revenue "in lieu of all other taxes, duties, royalties, registration, license
and other fees and charges of any kind, nature, or description, imposed,
levied, established, assessed or collected by any municipal, city, provincial or
national authority or government agency, now or in the future."

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Thus, it is proper to create in the same act the machinery by which the act is
to be enforced, to prescribe the penalties for its infraction, and to remove
obstacles in the way of its execution. If such matters are properly connected
with the subject as expressed in the title, it is unnecessary that they should
also have special mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed.
725)
(227 SCRA at 707-708)
VI.
Claims of press freedom and religious liberty. We have held that, as
a general proposition, the press is not exempt from the taxing power of the
State and that what the constitutional guarantee of free press prohibits are
laws which single out the press or target a group belonging to the press for
special treatment or which in any way discriminate against the press on the
basis of the content of the publication, and R.A. No. 7716 is none of these.
Now it is contended by the PPI that by removing the exemption of the press
from the VAT while maintaining those granted to others, the law discriminates
against the press. At any rate, it is averred, "even nondiscriminatory taxation
of constitutionally guaranteed freedom is unconstitutional."
With respect to the first contention, it would suffice to say that since the law
granted the press a privilege, the law could take back the privilege anytime
without offense to the Constitution. The reason is simple: by granting
exemptions, the State does not forever waive the exercise of its sovereign
prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to
the same tax burden to which other businesses have long ago been subject.
It is thus different from the tax involved in the cases invoked by the PPI. The
license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L. Ed. 660
(1936) was found to be discriminatory because it was laid on the gross
advertising receipts only of newspapers whose weekly circulation was over
20,000, with the result that the tax applied only to 13 out of 124 publishers in
Louisiana. These large papers were critical of Senator Huey Long who

PURPOSES," Congress thereby clearly expresses its intention to amend any

provision of the NIRC which stands in the way of accomplishing the purpose
of the law.
PAL asserts that the amendment of its franchise must be reflected in the title
of the law by specific reference to P.D. No. 1590. It is unnecessary to do this
in order to comply with the constitutional requirement, since it is already
stated in the title that the law seeks to amend the pertinent provisions of the
NIRC, among which is 103(q), in order to widen the base of the VAT.
Actually, it is the bill which becomes a law that is required to express in its
title the subject of legislation. The titles of H. No. 11197 and S. No. 1630 in
fact specifically referred to 103 of the NIRC as among the provisions sought
to be amended. We are satisfied that sufficient notice had been given of the
pendency of these bills in Congress before they were enacted into what is
now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that
now made by PAL was rejected. R.A. No. 7354 is entitled AN ACT
CREATING THE PHILIPPINE POSTAL CORPORATION, DEFINING ITS
POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR
REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES
CONNECTED THEREWITH. It contained a provision repealing all franking
privileges. It was contended that the withdrawal of franking privileges was not
expressed in the title of the law. In holding that there was sufficient
description of the subject of the law in its title, including the repeal of franking
privileges, this Court held:
To require every end and means necessary for the accomplishment of the
general objectives of the statute to be expressed in its title would not only be
unreasonable but would actually render legislation impossible. [Cooley,
Constitutional Limitations, 8th Ed., p. 297] As has been correctly explained:
The details of a legislative act need not be specifically stated in its title, but
matter germane to the subject as expressed in the title, and adopted to the
accomplishment of the object in view, may properly be included in the act.

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fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and poultry
feeds) and goods or services to enhance agriculture (milling of palay, corn,
sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used
for the manufacture of feeds).
(b)
Goods used for personal consumption or use (household and
personal effects of citizens returning to the Philippines) or for professional
use, like professional instruments and implements, by persons coming to the
Philippines to settle here.
(c)
Goods subject to excise tax such as petroleum products or to be
used for manufacture of petroleum products subject to excise tax and
services subject to percentage tax.
(d)
Educational services, medical, dental, hospital and veterinary
services, and services rendered under employer-employee relationship.
(e)

Works of art and similar creations sold by the artist himself.

(f)
Transactions exempted under special laws, or international
agreements.
(g)

Export-sales by persons not VAT-registered.

(h)
Goods or services with gross annual sale or receipt not exceeding
P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration,
pp. 58-60)
The PPI asserts that it does not really matter that the law does not
discriminate against the press because "even nondiscriminatory taxation on
constitutionally guaranteed freedom is unconstitutional." PPI cites in support
of this assertion the following statement in Murdock v. Pennsylvania, 319
U.S. 105, 87 L. Ed. 1292 (1943):

controlled the state legislature which enacted the license tax. The censorial
motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of
Revenue, 460 U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be
discriminatory because although it could have been made liable for the sales
tax or, in lieu thereof, for the use tax on the privilege of using, storing or
consuming tangible goods, the press was not. Instead, the press was
exempted from both taxes. It was, however, later made to pay a special use
tax on the cost of paper and ink which made these items "the only items
subject to the use tax that were component of goods to be sold at retail." The
U.S. Supreme Court held that the differential treatment of the press
"suggests that the goal of regulation is not related to suppression of
expression, and such goal is presumptively unconstitutional." It would
therefore appear that even a law that favors the press is constitutionally
suspect. (See the dissent of Rehnquist, J. in that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are
withdrawn "absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions
from the VAT, such as those previously granted to PAL, petroleum
concessionaires, enterprises registered with the Export Processing Zone
Authority, and many more are likewise totally withdrawn, in addition to
exemptions which are partially withdrawn, in an effort to broaden the base of
the tax.
The PPI says that the discriminatory treatment of the press is highlighted by
the fact that transactions, which are profit oriented, continue to enjoy
exemption under R.A. No. 7716. An enumeration of some of these
transactions will suffice to show that by and large this is not so and that the
exemptions are granted for a purpose. As the Solicitor General says, such
exemptions are granted, in some cases, to encourage agricultural production
and, in other cases, for the personal benefit of the end-user rather than for
profit. The exempt transactions are:
(a)
Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their original state,

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to tax the sales would be to increase the price, while reducing the volume of
sale. Granting that to be the case, the resulting burden on the exercise of
religious freedom is so incidental as to make it difficult to differentiate it from
any other economic imposition that might make the right to disseminate
religious doctrines costly. Otherwise, to follow the petitioner's argument, to
increase the tax on the sale of vestments would be to lay an impermissible
burden on the right of the preacher to make a sermon.

The fact that the ordinance is "nondiscriminatory" is immaterial. The

protection afforded by the First Amendment is not so restricted. A license tax
certainly does not acquire constitutional validity because it classifies the
privileges protected by the First Amendment along with the wares and
merchandise of hucksters and peddlers and treats them all alike. Such
equality in treatment does not save the ordinance. Freedom of press,
freedom of speech, freedom of religion are in preferred position.

On the other hand the registration fee of P1,000.00 imposed by 107 of the
NIRC, as amended by 7 of R.A. No. 7716, although fixed in amount, is really
just to pay for the expenses of registration and enforcement of provisions
such as those relating to accounting in 108 of the NIRC. That the PBS
distributes free bibles and therefore is not liable to pay the VAT does not
excuse it from the payment of this fee because it also sells some copies. At
any rate whether the PBS is liable for the VAT must be decided in concrete
cases, in the event it is assessed this tax by the Commissioner of Internal
Revenue.

The Court was speaking in that case of a license tax, which, unlike an
ordinary tax, is mainly for regulation. Its imposition on the press is
unconstitutional because it lays a prior restraint on the exercise of its right.
Hence, although its application to others, such those selling goods, is valid,
its application to the press or to religious groups, such as the Jehovah's
Witnesses, in connection with the latter's sale of religious books and
pamphlets, is unconstitutional. As the U.S. Supreme Court put it, "it is one
thing to impose a tax on income or property of a preacher. It is quite another
thing to exact a tax on him for delivering a sermon."

VII.
Alleged violations of the due process, equal protection and contract
clauses and the rule on taxation. CREBA asserts that R.A. No. 7716 (1)
impairs the obligations of contracts, (2) classifies transactions as covered or
exempt without reasonable basis and (3) violates the rule that taxes should
be uniform and equitable and that Congress shall "evolve a progressive
system of taxation."

A similar ruling was made by this Court in American Bible Society v. City of
Manila, 101 Phil. 386 (1957) which invalidated a city ordinance requiring a
business license fee on those engaged in the sale of general merchandise. It
was held that the tax could not be imposed on the sale of bibles by the
American Bible Society without restraining the free exercise of its right to
propagate.

With respect to the first contention, it is claimed that the application of the tax
to existing contracts of the sale of real property by installment or on deferred
payment basis would result in substantial increases in the monthly
amortizations to be paid because of the 10% VAT. The additional amount, it is
pointed out, is something that the buyer did not anticipate at the time he
entered into the contract.

The VAT is, however, different. It is not a license tax. It is not a tax on the
exercise of a privilege, much less a constitutional right. It is imposed on the
sale, barter, lease or exchange of goods or properties or the sale or
exchange of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to burden the exercise of
its right any more than to make the press pay income tax or subject it to
general regulation is not to violate its freedom under the Constitution.

The short answer to this is the one given by this Court in an early case:
"Authorities from numerous sources are cited by the plaintiffs, but none of
them show that a lawful tax on a new subject, or an increased tax on an old
one, interferes with a contract or impairs its obligation, within the meaning of

Additionally, the Philippine Bible Society, Inc. claims that although it sells
bibles, the proceeds derived from the sales are used to subsidize the cost of
printing copies which are given free to those who cannot afford to pay so that

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(1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga
Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also
violates Art. VI, 28(1) which provides that "The rule of taxation shall be
uniform and equitable. The Congress shall evolve a progressive system of
taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of
property of the same class be taxed at the same rate. The taxing power has
the authority to make reasonable and natural classifications for purposes of
taxation. To satisfy this requirement it is enough that the statute or ordinance
applies equally to all persons, forms and corporations placed in similar
situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No.
7716 was enacted. R.A. No. 7716 merely expands the base of the tax. The
validity of the original VAT Law was questioned in Kapatiran ng Naglilingkod
sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on grounds
similar to those made in these cases, namely, that the law was "oppressive,
discriminatory, unjust and regressive in violation of Art. VI, 28(1) of the
Constitution." (At 382) Rejecting the challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is
uniform. . . .
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%.
The disputed sales tax is also equitable. It is imposed only on sales of goods
or services by persons engaged in business with an aggregate gross annual
sales exceeding P200,000.00. Small corner sari-sari stores are consequently
exempt from its application. Likewise exempt from the tax are sales of farm
and marine products, so that the costs of basic food and other necessities,

the Constitution. Even though such taxation may affect particular contracts,
as it may increase the debt of one person and lessen the security of another,
or may impose additional burdens upon one class and release the burdens of
another, still the tax must be paid unless prohibited by the Constitution, nor
can it be said that it impairs the obligation of any existing contract in its true
legal sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil.
567, 574 (1919)). Indeed not only existing laws but also "the reservation of
the essential attributes of sovereignty, is . . . read into contracts as a
postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor
General, 22 SCRA 135, 147 (1968)) Contracts must be understood as having
been made in reference to the possible exercise of the rightful authority of the
government and no obligation of contract can extend to the defeat of that
authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).
It is next pointed out that while 4 of R.A. No. 7716 exempts such
transactions as the sale of agricultural products, food items, petroleum, and
medical and veterinary services, it grants no exemption on the sale of real
property which is equally essential. The sale of real property for socialized
and low-cost housing is exempted from the tax, but CREBA claims that real
estate transactions of "the less poor," i.e., the middle class, who are equally
homeless, should likewise be exempted.
The sale of food items, petroleum, medical and veterinary services, etc.,
which are essential goods and services was already exempt under 103,
pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716.
Petitioner is in error in claiming that R.A. No. 7716 granted exemption to
these transactions, while subjecting those of petitioner to the payment of the
VAT. Moreover, there is a difference between the "homeless poor" and the
"homeless less poor" in the example given by petitioner, because the second
group or middle class can afford to rent houses in the meantime that they
cannot yet buy their own homes. The two social classes are thus differently
situated in life. "It is inherent in the power to tax that the State be free to
select the subjects of taxation, and it has been repeatedly held that
'inequalities which result from a singling out of one particular class for
taxation, or exemption infringe no constitutional limitation.'" (Lutz v. Araneta,
98 Phil. 148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912

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(a)
Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their original state,
fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and poultry
feeds) and goods or services to enhance agriculture (milling of palay, corn
sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used
for the manufacture of feeds).
(b)
Goods used for personal consumption or use (household and
personal effects of citizens returning to the Philippines) and or professional
use, like professional instruments and implements, by persons coming to the
Philippines to settle here.
(c)
Goods subject to excise tax such as petroleum products or to be
used for manufacture of petroleum products subject to excise tax and
services subject to percentage tax.
(d)
Educational services, medical, dental, hospital and veterinary
services, and services rendered under employer-employee relationship.
(e)

Works of art and similar creations sold by the artist himself.

(f)
Transactions exempted under special laws, or international
agreements.
(g)

Export-sales by persons not VAT-registered.

(h)
Goods or services with gross annual sale or receipt not exceeding
P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration,
pp. 58-60)
On the other hand, the transactions which are subject to the VAT are those
which involve goods and services which are used or availed of mainly by
higher income groups. These include real properties held primarily for sale to
customers or for lease in the ordinary course of trade or business, the right or

spared as they are from the incidence of the VAT, are expected to be
relatively lower and within the reach of the general public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by the
Cooperative Union of the Philippines, Inc. (CUP), while petitioner Juan T.
David argues that the law contravenes the mandate of Congress to provide
for a progressive system of taxation because the law imposes a flat rate of
10% and thus places the tax burden on all taxpayers without regard to their
ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes
which, like the VAT, are regressive. What it simply provides is that Congress
shall "evolve a progressive system of taxation." The constitutional provision
has been interpreted to mean simply that "direct taxes are . . . to be preferred
[and] as much as possible, indirect taxes should be minimized." (E.
FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed.
(1977)). Indeed, the mandate to Congress is not to prescribe, but to evolve, a
progressive tax system. Otherwise, sales taxes, which perhaps are the oldest
form of indirect taxes, would have been prohibited with the proclamation of
Art. VIII, 17(1) of the 1973 Constitution from which the present Art. VI,
28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because
it is difficult, if not impossible, to avoid them by imposing such taxes
according to the taxpayers' ability to pay. In the case of the VAT, the law
minimizes the regressive effects of this imposition by providing for zero rating
of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC),
while granting exemptions to other transactions. (R.A. No. 7716, 4,
amending 103 of the NIRC).
Thus, the following transactions involving basic and essential goods and
services are exempted from the VAT:

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Nor is hardship to taxpayers alone an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving
of advisory opinion that does not really settle legal issues.
We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a
claim is made that "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." This duty can only arise if an actual case or controversy is
before us. Under Art . VIII, 5 our jurisdiction is defined in terms of "cases"
and all that Art. VIII, 1, 2 can plausibly mean is that in the exercise of that
jurisdiction we have the judicial power to determine questions of grave abuse
of discretion by any branch or instrumentality of the government.
Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power,"
which is "the power of a court to hear and decide cases pending between
parties who have the right to sue and be sued in the courts of law and equity"
(Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from legislative
and executive power. This power cannot be directly appropriated until it is
apportioned among several courts either by the Constitution, as in the case
of Art. VIII, 5, or by statute, as in the case of the Judiciary Act of 1948 (R.A.
No. 296) and the Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The
power thus apportioned constitutes the court's "jurisdiction," defined as "the
power conferred by law upon a court or judge to take cognizance of a case,
to the exclusion of all others." (United States v. Arceo, 6 Phil. 29 (1906))
Without an actual case coming within its jurisdiction, this Court cannot inquire
into any allegation of grave abuse of discretion by the other departments of
the government.

privilege to use patent, copyright, and other similar property or right, the right
or privilege to use industrial, commercial or scientific equipment, motion
picture films, tapes and discs, radio, television, satellite transmission and
cable television time, hotels, restaurants and similar places, securities,
lending investments, taxicabs, utility cars for rent, tourist buses, and other
common carriers, services of franchise grantees of telephone and telegraph.
The problem with CREBA's petition is that it presents broad claims of
constitutional violations by tendering issues not at retail but at wholesale and
in the abstract. There is no fully developed record which can impart to
adjudication the impact of actuality. There is no factual foundation to show in
the concrete the application of the law to actual contracts and exemplify its
effect on property rights. For the fact is that petitioner's members have not
even been assessed the VAT. Petitioner's case is not made concrete by a
series of hypothetical questions asked which are no different from those dealt
with in advisory opinions.
The difficulty confronting petitioner is thus apparent. He alleges arbitrariness.
A mere allegation, as here, does not suffice. There must be a factual
foundation of such unconstitutional taint. Considering that petitioner here
would condemn such a provision as void on its face, he has not made out a
case. This is merely to adhere to the authoritative doctrine that where the due
process and equal protection clauses are invoked, considering that they are
not fixed rules but rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)

VIII.
Alleged violation of policy towards cooperatives. On the other hand,
the Cooperative Union of the Philippines (CUP), after briefly surveying the
course of legislation, argues that it was to adopt a definite policy of granting
tax exemption to cooperatives that the present Constitution embodies
provisions on cooperatives. To subject cooperatives to the VAT would
therefore be to infringe a constitutional policy. Petitioner claims that in 1973,
P.D. No. 175 was promulgated exempting cooperatives from the payment of
income taxes and sales taxes but in 1984, because of the crisis which

Adjudication of these broad claims must await the development of a concrete

case. It may be that postponement of adjudication would result in a
multiplicity of suits. This need not be the case, however. Enforcement of the
law may give rise to such a case. A test case, provided it is an actual case
and not an abstract or hypothetical one, may thus be presented.

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granted to private business enterprises in general, in view of the economic
crisis which then beset the nation. It is true that after P.D. No. 2008, 2 had
restored the tax exemptions of cooperatives in 1986, the exemption was
again repealed by E.O. No. 93, 1, but then again cooperatives were not the
only ones whose exemptions were withdrawn. The withdrawal of tax
incentives applied to all, including government and private entities. In the
second place, the Constitution does not really require that cooperatives be
granted tax exemptions in order to promote their growth and viability. Hence,
there is no basis for petitioner's assertion that the government's policy toward
cooperatives had been one of vacillation, as far as the grant of tax privileges
was concerned, and that it was to put an end to this indecision that the
constitutional provisions cited were adopted. Perhaps as a matter of policy
cooperatives should be granted tax exemptions, but that is left to the
discretion of Congress. If Congress does not grant exemption and there is no
discrimination to cooperatives, no violation of any constitutional policy can be
charged.
Indeed, petitioner's theory amounts to saying that under the Constitution
cooperatives are exempt from taxation. Such theory is contrary to the
Constitution under which only the following are exempt from taxation:
charitable institutions, churches and parsonages, by reason of Art. VI, 28
(3), and non-stock, non-profit educational institutions by reason of Art. XIV,
4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it
denies cooperatives the equal protection of the law because electric
cooperatives are exempted from the VAT. The classification between electric
and other cooperatives (farmers cooperatives, producers cooperatives,
marketing cooperatives, etc.) apparently rests on a congressional
determination that there is greater need to provide cheaper electric power to
as many people as possible, especially those living in the rural areas, than
there is to provide them with other necessities in life. We cannot say that
such classification is unreasonable.
We have carefully read the various arguments raised against the
constitutional validity of R.A. No. 7716. We have in fact taken the

menaced the national economy, this exemption was withdrawn by P.D. No.
1955; that in 1986, P.D. No. 2008 again granted cooperatives exemption from
income and sales taxes until December 31, 1991, but, in the same year, E.O.
No. 93 revoked the exemption; and that finally in 1987 the framers of the
Constitution "repudiated the previous actions of the government adverse to
the interests of the cooperatives, that is, the repeated revocation of the tax
exemption to cooperatives and instead upheld the policy of strengthening the
cooperatives by way of the grant of tax exemptions," by providing the
following in Art. XII:
1.
The goals of the national economy are a more equitable distribution
of opportunities, income, and wealth; a sustained increase in the amount of
goods and services produced by the nation for the benefit of the people; and
an expanding productivity as the key to raising the quality of life for all,
especially the underprivileged.
The State shall promote industrialization and full employment based on
sound agricultural development and agrarian reform, through industries that
make full and efficient use of human and natural resources, and which are
competitive in both domestic and foreign markets. However, the State shall
protect Filipino enterprises against unfair foreign competition and trade
practices.
In the pursuit of these goals, all sectors of the economy and all regions of the
country shall be given optimum opportunity to develop. Private enterprises,
including corporations, cooperatives, and similar collective organizations,
shall be encouraged to broaden the base of their ownership.
15.
The Congress shall create an agency to promote the viability and
growth of cooperatives as instruments for social justice and economic
development.
Petitioner's contention has no merit. In the first place, it is not true that P.D.
No. 1955 singled out cooperatives by withdrawing their exemption from
income and sales taxes under P.D. No. 175, 5. What P.D. No. 1955, 1 did
was to withdraw the exemptions and preferential treatments theretofore

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The petitioner Lung Center of the Philippines is a non-stock and non-profit

entity established on January 16, 1981 by virtue of Presidential Decree No.
1823.[2] It is the registered owner of a parcel of land, particularly described
as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue
corner Elliptical Road, Central District, Quezon City. The lot has an area of
121,463 square meters and is covered by Transfer Certificate of Title (TCT)
No. 261320 of the Registry of Deeds of Quezon City. Erected in the middle of
the aforesaid lot is a hospital known as the Lung Center of the Philippines. A
big space at the ground floor is being leased to private parties, for canteen
and small store spaces, and to medical or professional practitioners who use
the same as their private clinics for their patients whom they charge for their
professional services. Almost one-half of the entire area on the left side of
the building along Quezon Avenue is vacant and idle, while a big portion on
the right side, at the corner of Quezon Avenue and Elliptical Road, is being
leased for commercial purposes to a private enterprise known as the Elliptical
Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders
medical services to out-patients, both paying and non-paying. Aside from its
income from paying patients, the petitioner receives annual subsidies from
the government.
On June 7, 1993, both the land and the hospital building of the petitioner
were assessed for real property taxes in the amount of P4,554,860 by the
City Assessor of Quezon City.[3] Accordingly, Tax Declaration Nos. C-02101226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land and
the hospital building, respectively.[4] On August 25, 1993, the petitioner filed
a Claim for Exemption[5] from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution. The petitioners
request was denied, and a petition was, thereafter, filed before the Local
Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the
reversal of the resolution of the City Assessor. The petitioner alleged that
under Section 28, paragraph 3 of the 1987 Constitution, the property is
exempt from real property taxes. It averred that a minimum of 60% of its
hospital beds are exclusively used for charity patients and that the major

extraordinary step of enjoining its enforcement pending resolution of these

cases. We have now come to the conclusion that the law suffers from none of
the infirmities attributed to it by petitioners and that its enactment by the other
branches of the government does not constitute a grave abuse of discretion.
Any question as to its necessity, desirability or expediency must be
addressed to Congress as the body which is electorally responsible,
remembering that, as Justice Holmes has said, "legislators are the ultimate
guardians of the liberties and welfare of the people in quite as great a degree
as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S. 267,
270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No.
115543 does in arguing that we should enforce the public accountability of
legislators, that those who took part in passing the law in question by voting
for it in Congress should later thrust to the courts the burden of reviewing
measures in the flush of enactment. This Court does not sit as a third branch
of the legislature, much less exercise a veto power over legislation.
WHEREFORE, the motions for reconsideration are denied with finality and
the temporary restraining order previously issued is hereby lifted.
SO ORDERED.
1.D.5.3.
LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and
CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court,
as amended, of the Decision[1] dated July 17, 2000 of the Court of Appeals
in CA-G.R. SP No. 57014 which affirmed the decision of the Central Board of
Assessment Appeals holding that the lot owned by the petitioner and its
hospital building constructed thereon are subject to assessment for purposes
of real property tax.
The Antecedents

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Constitution does not necessarily mean solely. Hence, even if a portion of its
real estate is leased out to private individuals from whom it derives income, it
does not lose its character as a charitable institution, and its exemption from
the payment of real estate taxes on its real property. The petitioner cited our
ruling in Herrera v. QC-BAA[9] to bolster its pose. The petitioner further
contends that even if P.D. No. 1823 does not exempt it from the payment of
real estate taxes, it is not precluded from seeking tax exemption under the
1987 Constitution.
In their comment on the petition, the respondents aver that the petitioner is
not a charitable entity. The petitioners real property is not exempt from the
payment of real estate taxes under P.D. No. 1823 and even under the 1987
Constitution because it failed to prove that it is a charitable institution and that
the said property is actually, directly and exclusively used for charitable
purposes. The respondents noted that in a newspaper report, it appears that
graft charges were filed with the Sandiganbayan against the director of the
petitioner, its administrative officer, and Zenaida Rivera, the proprietress of
the Elliptical Orchids and Garden Center, for entering into a lease contract
over 7,663.13 square meters of the property in 1990 for only P20,000 a
month, when the monthly rental should be P357,000 a month as determined
by the Commission on Audit; and that instead of complying with the directive
of the COA for the cancellation of the contract for being grossly prejudicial to
the government, the petitioner renewed the same on March 13, 1995 for a
monthly rental of only P24,000. They assert that the petitioner uses the
subsidies granted by the government for charity patients and uses the rest of
its income from the property for the benefit of paying patients, among other
purposes. They aver that the petitioner failed to adduce substantial evidence
that 100% of its out-patients and 170 beds in the hospital are reserved for
indigent patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its
record of service. That before a patient is admitted for treatment in the
Center, first impression is that it is pay-patient and required to pay a certain
amount as deposit. That even if a patient is living below the poverty line, he is
charged with high hospital bills. And, without these bills being first settled, the
poor patient cannot be allowed to leave the hospital or be discharged without

thrust of its hospital operation is to serve charity patients. The petitioner

contends that it is a charitable institution and, as such, is exempt from real
property taxes. The QC-LBAA rendered judgment dismissing the petition and
holding the petitioner liable for real property taxes.[6]
The QC-LBAAs decision was, likewise, affirmed on appeal by the Central
Board of Assessment Appeals of Quezon City (CBAA, for brevity)[7] which
ruled that the petitioner was not a charitable institution and that its real
properties were not actually, directly and exclusively used for charitable
purposes; hence, it was not entitled to real property tax exemption under the
constitution and the law. The petitioner sought relief from the Court of
Appeals, which rendered judgment affirming the decision of the CBAA.[8]
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT
ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS
LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT,
ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR
CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX
EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of
Section 28(3), Article VI of the 1987 Constitution. It asserts that its character
as a charitable institution is not altered by the fact that it admits paying
patients and renders medical services to them, leases portions of the land to
private parties, and rents out portions of the hospital to private medical
practitioners from which it derives income to be used for operational
expenses. The petitioner points out that for the years 1995 to 1999, 100% of
its out-patients were charity patients and of the hospitals 282-bed capacity,
60% thereof, or 170 beds, is allotted to charity patients. It asserts that the fact
that it receives subsidies from the government attests to its character as a
charitable institution. It contends that the exclusivity required in the

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persons, either by bringing their minds and hearts under the influence of
education or religion, by assisting them to establish themselves in life or
otherwise lessening the burden of government.[12] It may be applied to
almost anything that tend to promote the well-doing and well-being of social
man. It embraces the improvement and promotion of the happiness of man.
[13] The word charitable is not restricted to relief of the poor or sick.[14] The
test of a charity and a charitable organization are in law the same. The test
whether an enterprise is charitable or not is whether it exists to carry out a
purpose reorganized in law as charitable or whether it is maintained for gain,
profit, or private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be administered by the
Office of the President of the Philippines with the Ministry of Health and the
Ministry of Human Settlements. It was organized for the welfare and benefit
of the Filipino people principally to help combat the high incidence of lung
and pulmonary diseases in the Philippines. The raison detre for the creation
of the petitioner is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern,
having been the leading cause of illness and death in the Philippines,
comprising more than 45% of the total annual deaths from all causes, thus,
exacting a tremendous toll on human resources, which ailments are likely to
increase and degenerate into serious lung diseases on account of unabated
pollution, industrialization and unchecked cigarette smoking in the country;
Whereas, the more common lung diseases are, to a great extent,
preventable, and curable with early and adequate medical care, immunization
and through prompt and intensive prevention and health education programs;
Whereas, there is an urgent need to consolidate and reinforce existing
programs, strategies and efforts at preventing, treating and rehabilitating
people affected by lung diseases, and to undertake research and training on
the cure and prevention of lung diseases, through a Lung Center which will
house and nurture the above and related activities and provide tertiary-level
care for more difficult and problematical cases;

first paying the hospital bills or issue a promissory note guaranteed and
indorsed by an influential agency or person known only to the Center; that
even the remains of deceased poor patients suffered the same fate.
Moreover, before a patient is admitted for treatment as free or charity patient,
one must undergo a series of interviews and must submit all the
requirements needed by the Center, usually accompanied by endorsement
by an influential agency or person known only to the Center. These facts
were heard and admitted by the Petitioner LCP during the hearings before
the Honorable QC-BAA and Honorable CBAA. These are the reasons of
indigent patients, instead of seeking treatment with the Center, they prefer to
be treated at the Quezon Institute. Can such practice by the Center be called
charitable?[10]
The Issues
The issues for resolution are the following: (a) whether the petitioner is a
charitable institution within the context of Presidential Decree No. 1823 and
the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No.
7160; and (b) whether the real properties of the petitioner are exempt from
real property taxes.
The Courts Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within
the context of the 1973 and 1987 Constitutions. To determine whether an
enterprise is a charitable institution/entity or not, the elements which should
be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by-laws, the methods of administration, the
nature of the actual work performed, the character of the services rendered,
the indefiniteness of the beneficiaries, and the use and occupation of the
properties.[11]
In the legal sense, a charity may be fully defined as a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of

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5. To encourage the training of physicians, nurses, health officers, social

workers and medical and technical personnel in the practical and scientific
implementation of services to lung patients;

Whereas, to achieve this purpose, the Government intends to provide

material and financial support towards the establishment and maintenance of
a Lung Center for the welfare and benefit of the Filipino people.[15]

6. To assist universities and research institutions in their studies about lung

diseases, to encourage advanced training in matters of the lung and related
fields and to support educational programs of value to general health;

The purposes for which the petitioner was created are spelled out in its
Articles of Incorporation, thus:

7. To encourage the formation of other organizations on the national,

provincial and/or city and local levels; and to coordinate their various efforts
and activities for the purpose of achieving a more effective programmatic
approach on the common problems relative to the objectives enumerated
herein;
8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may
be given to the organization;
9. To extend, whenever possible and expedient, medical services to the
public and, in general, to promote and protect the health of the masses of our
people, which has long been recognized as an economic asset and a social
blessing;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
maladies of the people in any and all walks of life, including those who are
poor and needy, all without regard to or discrimination, because of race,
creed, color or political belief of the persons helped; and to enable them to
obtain treatment when such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed
and carried on to promote the general health of the community;
12. To acquire and/or borrow funds and to own all funds or equipment,
educational materials and supplies by purchase, donation, or otherwise and
to dispose of and distribute the same in such manner, and, on such basis as

SECOND: That the purposes for which such corporation is formed are as
follows:
1. To construct, establish, equip, maintain, administer and conduct an
integrated medical institution which shall specialize in the treatment, care,
rehabilitation and/or relief of lung and allied diseases in line with the concern
of the government to assist and provide material and financial support in the
establishment and maintenance of a lung center primarily to benefit the
people of the Philippines and in pursuance of the policy of the State to secure
the well-being of the people by providing them specialized health and
medical services and by minimizing the incidence of lung diseases in the
country and elsewhere.
2. To promote the noble undertaking of scientific research related to the
prevention of lung or pulmonary ailments and the care of lung patients,
including the holding of a series of relevant congresses, conventions,
seminars and conferences;
3. To stimulate and, whenever possible, underwrite scientific researches on
the biological, demographic, social, economic, eugenic and physiological
aspects of lung or pulmonary diseases and their control; and to collect and
publish the findings of such research for public consumption;
4. To facilitate the dissemination of ideas and public acceptance of
information on lung consciousness or awareness, and the development of
fact-finding, information and reporting facilities for and in aid of the general
purposes or objects aforesaid, especially in human lung requirements,
general health and physical fitness, and other relevant or related fields;

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As aptly stated by the State Supreme Court of South Dakota in Lutheran

Hospital Association of South Dakota v. Baker:[21]
[T]he fact that paying patients are taken, the profits derived from attendance
upon these patients being exclusively devoted to the maintenance of the
charity, seems rather to enhance the usefulness of the institution to the poor;
for it is a matter of common observation amongst those who have gone about
at all amongst the suffering classes, that the deserving poor can with difficulty
be persuaded to enter an asylum of any kind confined to the reception of
objects of charity; and that their honest pride is much less wounded by being
placed in an institution in which paying patients are also received. The fact of
receiving money from some of the patients does not, we think, at all impair
the character of the charity, so long as the money thus received is devoted
altogether to the charitable object which the institution is intended to further.
[22]
The money received by the petitioner becomes a part of the trust fund and
must be devoted to public trust purposes and cannot be diverted to private
profit or benefit.[23]
Under P.D. No. 1823, the petitioner is entitled to receive donations. The
petitioner does not lose its character as a charitable institution simply
because the gift or donation is in the form of subsidies granted by the
government. As held by the State Supreme Court of Utah in Yorgason v.
County Board of Equalization of Salt Lake County:[24]
Second, the government subsidy payments are provided to the project. Thus,
those payments are like a gift or donation of any other kind except they come
from the government. In both Intermountain Health Care and the present
case, the crux is the presence or absence of material reciprocity. It is entirely
irrelevant to this analysis that the government, rather than a private
benefactor, chose to make up the deficit resulting from the exchange between
St. Marks Tower and the tenants by making a contribution to the landlord, just
as it would have been irrelevant in Intermountain Health Care if the patients

the Center shall, from time to time, deem proper and best, under the
particular circumstances, to serve its general and non-profit purposes and
objectives;
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and
dispose of properties, whether real or personal, for purposes herein
mentioned; and
14. To do everything necessary, proper, advisable or convenient for the
accomplishment of any of the powers herein set forth and to do every other
act and thing incidental thereto or connected therewith.[16]
Hence, the medical services of the petitioner are to be rendered to the public
in general in any and all walks of life including those who are poor and the
needy without discrimination. After all, any person, the rich as well as the
poor, may fall sick or be injured or wounded and become a subject of charity.
[17]
As a general principle, a charitable institution does not lose its character as
such and its exemption from taxes simply because it derives income from
paying patients, whether out-patient, or confined in the hospital, or receives
subsidies from the government, so long as the money received is devoted or
used altogether to the charitable object which it is intended to achieve; and
no money inures to the private benefit of the persons managing or operating
the institution.[18] In Congregational Sunday School, etc. v. Board of Review,
[19] the State Supreme Court of Illinois held, thus:
[A]n institution does not lose its charitable character, and consequent
exemption from taxation, by reason of the fact that those recipients of its
benefits who are able to pay are required to do so, where no profit is made by
the institution and the amounts so received are applied in furthering its
charitable purposes, and those benefits are refused to none on account of
inability to pay therefor. The fundamental ground upon which all exemptions
in favor of charitable institutions are based is the benefit conferred upon the
public by them, and a consequent relief, to some extent, of the burden upon
the state to care for and advance the interests of its citizens.[20]

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Section 2 of Presidential Decree No. 1823, relied upon by the petitioner,
specifically provides that the petitioner shall enjoy the tax exemptions and
privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, nonstock corporation organized primarily to help combat the high incidence of
lung and pulmonary diseases in the Philippines, all donations, contributions,
endowments and equipment and supplies to be imported by authorized
entities or persons and by the Board of Trustees of the Lung Center of the
Philippines, Inc., for the actual use and benefit of the Lung Center, shall be
exempt from income and gift taxes, the same further deductible in full for the
purpose of determining the maximum deductible amount under Section 30,
paragraph (h), of the National Internal Revenue Code, as amended.
The Lung Center of the Philippines shall be exempt from the payment of
taxes, charges and fees imposed by the Government or any political
subdivision or instrumentality thereof with respect to equipment purchases
made by, or for the Lung Center.[29]
It is plain as day that under the decree, the petitioner does not enjoy any
property tax exemption privileges for its real properties as well as the building
constructed thereon. If the intentions were otherwise, the same should have
been among the enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the express mention of one
person, thing, or consequence implies the exclusion of all others. The rule is
expressed in the familiar maxim, expressio unius est exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated in a number of
ways. One variation of the rule is principle that what is expressed puts an end
to that which is implied. Expressium facit cessare tacitum. Thus, where a
statute, by its terms, is expressly limited to certain matters, it may not, by
interpretation or construction, be extended to other matters.
...

income supplements had come from private individuals rather than the
government.
Therefore, the fact that subsidization of part of the cost of furnishing such
housing is by the government rather than private charitable contributions
does not dictate the denial of a charitable exemption if the facts otherwise
support such an exemption, as they do here.[25]
In this case, the petitioner adduced substantial evidence that it spent its
income, including the subsidies from the government for 1991 and 1992 for
its patients and for the operation of the hospital. It even incurred a net loss in
1991 and 1992 from its operations.
Even as we find that the petitioner is a charitable institution, we hold, anent
the second issue, that those portions of its real property that are leased to
private entities are not exempt from real property taxes as these are not
actually, directly and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax
are construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is the exception. The effect
of an exemption is equivalent to an appropriation. Hence, a claim for
exemption from tax payments must be clearly shown and based on language
in the law too plain to be mistaken.[26] As held in Salvation Army v. Hoehn:
[27]
An intention on the part of the legislature to grant an exemption from the
taxing power of the state will never be implied from language which will admit
of any other reasonable construction. Such an intention must be expressed in
clear and unmistakable terms, or must appear by necessary implication from
the language used, for it is a well settled principle that, when a special
privilege or exemption is claimed under a statute, charter or act of
incorporation, it is to be construed strictly against the property owner and in
favor of the public. This principle applies with peculiar force to a claim of
exemption from taxation . [28]

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TAX 1
(b) Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, non-profit or religious cemeteries and all lands, buildings,
and improvements actually, directly, and exclusively used for religious,
charitable or educational purposes.[35]
We note that under the 1935 Constitution, ... all lands, buildings, and
improvements used exclusively for charitable purposes shall be exempt from
taxation.[36] However, under the 1973 and the present Constitutions, for
lands, buildings, and improvements of the charitable institution to be
considered exempt, the same should not only be exclusively used for
charitable purposes; it is required that such property be used actually and
directly for such purposes.[37]
In light of the foregoing substantial changes in the Constitution, the petitioner
cannot rely on our ruling in Herrera v. Quezon City Board of Assessment
Appeals which was promulgated on September 30, 1961 before the 1973 and
1987 Constitutions took effect.[38] As this Court held in Province of Abra v.
Hernando:[39]
Under the 1935 Constitution: Cemeteries, churches, and parsonages or
convents appurtenant thereto, and all lands, buildings, and improvements
used exclusively for religious, charitable, or educational purposes shall be
exempt from taxation. The present Constitution added charitable institutions,
mosques, and non-profit cemeteries and required that for the exemption of
lands, buildings, and improvements, they should not only be exclusively but
also actually and directly used for religious or charitable purposes. The
Constitution is worded differently. The change should not be ignored. It must
be duly taken into consideration. Reliance on past decisions would have
sufficed were the words actually as well as directly not added. There must be
proof therefore of the actual and direct use of the lands, buildings, and
improvements for religious or charitable purposes to be exempt from taxation.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real
properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable

The rule of expressio unius est exclusio alterius and its variations are canons
of restrictive interpretation. They are based on the rules of logic and the
natural workings of the human mind. They are predicated upon ones own
voluntary act and not upon that of others. They proceed from the premise
that the legislature would not have made specified enumeration in a statute
had the intention been not to restrict its meaning and confine its terms to
those expressly mentioned.[30]
The exemption must not be so enlarged by construction since the reasonable
presumption is that the State has granted in express terms all it intended to
grant at all, and that unless the privilege is limited to the very terms of the
statute the favor would be intended beyond what was meant.[31]
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable
or educational purposes shall be exempt from taxation.[32]
The tax exemption under this constitutional provision covers property taxes
only.[33] As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: . . . what is exempted is not the
institution itself . . .; those exempted from real estate taxes are lands,
buildings and improvements actually, directly and exclusively used for
religious, charitable or educational purposes.[34]
Consequently, the constitutional provision is implemented by Section 234(b)
of Republic Act No. 7160 (otherwise known as the Local Government Code
of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. The following are
exempted from payment of the real property tax:
...

97

TAX 1
are leased to private persons, and to compute the real property taxes due
thereon as provided for by law.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. HON. COURT
OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE
TOBACCO CORPORATION, respondents.
DECISION
VITUG, J.:
The Commissioner of Internal Revenue ("CIR") disputes the decision, dated
31 March 1995, of respondent Court of Appeals[1] affirming the 10th August
1994 decision and the 11th October 1994 resolution of the Court of Tax
Appeals[2] ("CTA") in C.T.A. Case No. 5015, entitled "Fortune Tobacco
Corporation vs. Liwayway Vinzons-Chato in her capacity as Commissioner of
Internal Revenue."
The facts, by and large, are not in dispute.
Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the
manufacture of different brands of cigarettes.
On various dates, the Philippine Patent Office issued to the corporation
separate certificates of trademark registration over "Champion," "Hope," and
"More" cigarettes. In a letter, dated 06 January 1987, of then Commissioner
of Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of
the Presidential Commission on Good Government, "the initial position of the
Commission was to classify 'Champion,' 'Hope,' and 'More' as foreign brands
since they were listed in the World Tobacco Directory as belonging to foreign
companies. However, Fortune Tobacco changed the names of 'Hope' to
Hope Luxury' and 'More' to 'Premium More,' thereby removing the said
brands from the foreign brand category. Proof was also submitted to the
Bureau (of Internal Revenue ['BIR']) that 'Champion' was an original Fortune
Tobacco Corporation register and therefore a local brand."[3] Ad Valorem
taxes were imposed on these brands,[4] at the following rates:

purposes. Exclusive is defined as possessed and enjoyed to the exclusion of

others; debarred from participation or enjoyment; and exclusively is defined,
in a manner to exclude; as enjoying a privilege exclusively.[40] If real property
is used for one or more commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation.[41] The words dominant
use or principal use cannot be substituted for the words used exclusively
without doing violence to the Constitutions and the law.[42] Solely is
synonymous with exclusively.[43]
What is meant by actual, direct and exclusive use of the property for
charitable purposes is the direct and immediate and actual application of the
property itself to the purposes for which the charitable institution is organized.
It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.[44]
The petitioner failed to discharge its burden to prove that the entirety of its
real property is actually, directly and exclusively used for charitable purposes.
While portions of the hospital are used for the treatment of patients and the
dispensation of medical services to them, whether paying or non-paying,
other portions thereof are being leased to private individuals for their clinics
and a canteen. Further, a portion of the land is being leased to a private
individual for her business enterprise under the business name Elliptical
Orchids and Garden Center. Indeed, the petitioners evidence shows that it
collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from
the said lessees.
Accordingly, we hold that the portions of the land leased to private entities as
well as those parts of the hospital leased to private individuals are not exempt
from such taxes.[45] On the other hand, the portions of the land occupied by
the hospital and portions of the hospital used for its patients, whether paying
or non-paying, are exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED.
The respondent Quezon City Assessor is hereby DIRECTED to determine,
after due hearing, the precise portions of the land and the area thereof which

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TAX 1
Sec. 142, (c), (2) 40% 45%
Champion Int'l. M. 100's
Sec. 142, (c), (2) 40% 45%
Champion M. 100's
Sec. 142, (c), (2) 40% 45%
Champion M. King
Sec. 142, (c), last par. 15% 20%
Champion Lights
Sec. 142, (c), last par. 15% 20%"[5]
A bill, which later became Republic Act ("RA") No. 7654, [6] was enacted, on
10 June 1993, by the legislature and signed into law, on 14 June 1993, by the
President of the Philippines. The new law became effective on 03 July 1993.
It amended Section 142(c)(1) of the National Internal Revenue Code
("NIRC") to read; as follows:
"SEC. 142. Cigars and Cigarettes. "x x x x x x x x x.
"(c) Cigarettes packed by machine. - There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below based on the constructive manufacturer's wholesale price or the actual
manufacturer's wholesale price, whichever is higher:
"(1) On locally manufactured cigarettes which are currently classified and
taxed at fifty-five percent (55%) or the exportation of which is not authorized

"BRAND AD VALOREM TAX RATE

E.O. 22
06-23-86
07-01-86 and E.O. 273
07-25-87
01-01-88 RA 6956
06-18-90
07-05-90

Hope Luxury M. 100's

Sec. 142, (c), (2) 40% 45%
Hope Luxury M. King
Sec. 142, (c), (2) 40% 45%
More Premium M. 100's
Sec. 142, (c), (2) 40% 45%
More Premium International

99

TAX 1
"Section 142(c)(1) National Internal Revenue Code, as amended by R.A. No.
6956, provides:

by contract or otherwise, fifty-five (55%) provided that the minimum tax shall
not be less than Five Pesos (P5.00) per pack.

"'On locally manufactured cigarettes bearing a foreign brand, fifty-five percent

(55%) Provided, That this rate shall apply regardless of whether or not the
right to use or title to the foreign brand was sold or transferred by its owner to
the local manufacturer. Whenever it has to be determined whether or not a
cigarette bears a foreign brand, the listing of brands manufactured in foreign
countries appearing in the current World Tobacco Directory shall govern."

"(2). On other locally manufactured cigarettes, forty-five percent (45%)

provided that the minimum tax shall not be less than Three Pesos (P3.00) per
pack.

"Under the foregoing, the test for imposition of the 55% ad valorem tax on
cigarettes is that the locally manufactured cigarettes bear a foreign brand
regardless of whether or not the right to use or title to the foreign brand was
sold or transferred by its owner to the local manufacturer. The brand must be
originally owned by a foreign manufacturer or producer. If ownership of the
cigarette brand is, however, not definitely determinable, 'x x x the listing of
brands manufactured in foreign countries appearing in the current World
Tobacco Directory shall govern. x x x'

"x x x x x x x x x.
"When the registered manufacturer's wholesale price or the actual
manufacturer's wholesale price whichever is higher of existing brands of
cigarettes, including the amounts intended to cover the taxes, of cigarettes
packed in twenties does not exceed Four Pesos and eighty centavos (P4.80)
per pack, the rate shall be twenty percent (20%)."[7] (Italics supplied.)
About a month after the enactment and two (2) days before the effectivity of
RA 7654, Revenue Memorandum Circular No. 37-93 ("RMC 37-93"), was
issued by the BIR the full text of which expressed:

"'HOPE' is listed in the World Tobacco Directory as being manufactured by

(a) Japan Tobacco, Japan and (b) Fortune Tobacco, Philippines. 'MORE' is
listed in the said directory as being manufactured by: (a) Fills de Julia Reig,
Andorra; (b) Rothmans, Australia; (c) RJR-Macdonald, Canada; (d) RettigStrenberg, Finland; (e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g)
Rothmans, New Zealand; (h) Fortune Tobacco, Philippines; (i) R.J. Reynolds,
Puerto Rico; (j) R.J. Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J.
Reynolds, Switzerland; and (m) R.J. Reynolds, USA. 'Champion' is registered
in the said directory as being manufactured by (a) Commonwealth
Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d) Fortune
Tobacco, Philippines; (e) Haggar, Sudan; and (f) Tabac Reunies, Switzerland.

"REPUBLIKA NG PILIPINAS
KAGAWARAN NG PANANALAPI
KAWANIHAN NG RENTAS INTERNAS

"Since there is no showing who among the above-listed manufacturers of the

cigarettes bearing the said brands are the real owner/s thereof, then it follows
that the same shall be considered foreign brand for purposes of determining
the ad valorem tax pursuant to Section 142 of the National Internal Revenue
Code. As held in BIR Ruling No. 410-88, dated August 24, 1988, 'in cases

"In view of the issues raised on whether 'HOPE,' 'MORE' and 'CHAMPION'
cigarettes which are locally manufactured are appropriately considered as
locally manufactured cigarettes bearing a foreign brand, this Office is
compelled to review the previous rulings on the matter.

July 1, 1993
REVENUE MEMORANDUM CIRCULAR NO. 37-93
SUBJECT : Reclassification of Cigarettes Subject to Excise Tax
TO : All Internal Revenue Officers and Others Concerned.

100

TAX 1
R.A. No. 7654 took effect on July 3, 1993, the brands in question were not
CURRENTLY CLASSIFIED AND TAXED at 55% pursuant to Section 1142(c)
(1) of the Tax Code, as amended by R.A. No. 7654 and were therefore still
classified as other locally manufactured cigarettes and taxed at 45% or 20%
as the case may be.
"Accordingly, the deficiency ad valorem tax assessment issued on petitioner
Fortune Tobacco Corporation in the amount of P9,598,334.00, exclusive of
surcharge and interest, is hereby canceled for lack of legal basis.

where it cannot be established or there is dearth of evidence as to whether a

brand is foreign or not, resort to the World Tobacco Directory should be
made.'
"In view of the foregoing, the aforesaid brands of cigarettes, viz: 'HOPE,'
'MORE' and 'CHAMPION' being manufactured by Fortune Tobacco
Corporation are hereby considered locally manufactured cigarettes bearing a
foreign brand subject to the 55% ad valorem tax on cigarettes.
"Any ruling inconsistent herewith is revoked or modified accordingly.

"Respondent Commissioner of Internal Revenue is hereby enjoined from

collecting the deficiency tax assessment made and issued on petitioner in
relation to the implementation of RMC No. 37-93.
"SO ORDERED." [9]
In its resolution, dated 11 October 1994, the CTA dismissed for lack of merit
the motion for reconsideration.
The CIR forthwith filed a petition for review with the Court of Appeals,
questioning the CTA's 10th August 1994 decision and 11th October 1994
resolution. On 31 March 1993, the appellate court's Special Thirteenth
Division affirmed in all respects the assailed decision and resolution.

(SGD) LIWAYWAY VINZONS-CHATO

Commissioner"
On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner Victor A.
Deoferio, Jr., sent via telefax a copy of RMC 37-93 to Fortune Tobacco but it
was addressed to no one in particular. On 15 July 1993, Fortune Tobacco
received, by ordinary mail, a certified xerox copy of RMC 37-93.
In a letter, dated 19 July 1993, addressed to the appellate division of the BIR,
Fortune Tobacco, requested for a review, reconsideration and recall of RMC
37-93. The request was denied on 29 July 1993. The following day, or on 30
July 1993, the CIR assessed Fortune Tobacco for ad valorem tax deficiency
amounting to P9,598,334.00.

In the instant petition, the Solicitor General argues: That "I. RMC 37-93 IS A RULING OR OPINION OF THE COMMISSIONER OF
INTERNAL REVENUE INTERPRETING THE PROVISIONS OF THE TAX
CODE.
"II. BEING AN INTERPRETATIVE RULING OR OPINION, THE
PUBLICATION OF RMC 37-93, FILING OF COPIES THEREOF WITH THE
UP LAW CENTER AND PRIOR HEARING ARE NOT NECESSARY TO ITS
VALIDITY, EFFECTIVITY AND ENFORCEABILITY.

On 03 August 1993, Fortune Tobacco filed a petition for review with the CTA.
[8]
On 10 August 1994, the CTA upheld the position of Fortune Tobacco and
adjudged:
"WHEREFORE, Revenue Memorandum Circular No. 37-93 reclassifying the
brands of cigarettes, viz: `HOPE,' `MORE' and `CHAMPION' being
manufactured by Fortune Tobacco Corporation as locally manufactured
cigarettes bearing a foreign brand subject to the 55% ad valorem tax on
cigarettes is found to be defective, invalid and unenforceable, such that when

101

TAX 1
"x x x a legislative rule is in the nature of subordinate legislation, designed to
implement a primary legislation by providing the details thereof. In the same
way that laws must have the benefit of public hearing, it is generally required
that before a legislative rule is adopted there must be hearing. In this
connection, the Administrative Code of 1987 provides:

"III. PRIVATE RESPONDENT IS DEEMED TO HAVE BEEN NOTIFIED OR

RMC 37-93 ON JULY 2, 1993.
IV. RMC 37-93 IS NOT DISCRIMINATORY SINCE IT APPLIES TO ALL
LOCALLY MANUFACTURED CIGARETTES SIMILARLY SITUATED AS
'HOPE,' 'MORE' AND 'CHAMPION' CIGARETTES.

"Public Participation. - If not otherwise required by law, an agency shall, as

far as practicable, publish or circulate notices of proposed rules and afford
interested parties the opportunity to submit their views prior to the adoption of
any rule.

"V. PETITIONER WAS NOT LEGALLY PROSCRIBED FROM

RECLASSIFYING HOPE, MORE AND CHAMPION CIGARETTES BEFORE
THE EFFECTIVITY OF R.A. NO. 7654.

"(2) In the fixing of rates, no rule or final order shall be valid unless the
proposed rates shall have been published in a newspaper of general
circulation at least two (2) weeks before the first hearing thereon.

VI. SINCE RMC 37-93 IS AN INTERPRETATIVE RULE, THE INQUIRY IS

NOT INTO ITS VALIDITY, EFFECTIVITY OR ENFORCEABILITY BUT INTO
ITS CORRECTNESS OR PROPRIETY; RMC 37-93 IS CORRECT." [10]

"(3) In case of opposition, the rules on contested cases shall be observed.

In fine, petitioner opines that RMC 37-93 is merely an interpretative ruling of

the BIR which can thus become effective without any prior need for notice
and hearing, nor publication, and that its issuance is not discriminatory since
it would apply under similar circumstances to all locally manufactured
cigarettes.

"In addition such rule must be published. On the other hand, interpretative
rules are designed to provide guidelines to the law which the administrative
agency is in charge of enforcing." [12]
It should be understandable that when an administrative rule is merely
interpretative in nature, its applicability needs nothing further than its bare
issuance for it gives no real consequence more than what the law itself has
already prescribed. When, upon the other hand, the administrative rule goes
beyond merely providing for the means that can facilitate or render least
cumbersome the implementation of the law but substantially adds to or
increases the burden of those governed, it behooves the agency to accord at
least to those directly affected a chance to be heard, and thereafter to be duly
informed, before that new issuance is given the force and effect of law.
A reading of RMC 37-93, particularly considering the circumstances under
which it has been issued, convinces us that the circular cannot be viewed
simply as a corrective measure (revoking in the process the previous
holdings of past Commissioners) or merely as construing Section 142(c)(1) of
the NIRC, as amended, but has, in fact and most importantly, been made in

The Court must sustain both the appellate court and the tax court.
Petitioner stresses on the wide and ample authority of the BIR in the
issuance of rulings for the effective implementation of the provisions of the
National Internal Revenue Code. Let it be made clear that such authority of
the Commissioner is not here doubted. Like any other government agency,
however, the CIR may not disregard legal requirements or applicable
principles in the exercise of its quasi-legislative powers.
Let us first distinguish between two kinds of administrative issuances - a
legislative rule and an interpretative rule.
In Misamis Oriental Association of Coco Traders, Inc., vs. Department of
Finance Secretary, [11] the Court expressed:

102

TAX 1

"(1). This Circular shall apply only to (a) Revenue Regulations; (b) Revenue
Audit Memorandum Orders; and (c) Revenue Memorandum Circulars and
Revenue Memorandum Orders bearing on internal revenue tax rules and
regulations.
"(2). Except when the law otherwise expressly provides, the aforesaid internal
revenue tax issuances shall not begin to be operative until after due notice
thereof may be fairly presumed.
"Due notice of the said issuances may be fairly presumed only after the
following procedures have been taken:
"xxx xxx xxx
"(5). Strict compliance with the foregoing procedures is enjoined." [13]

order to place "Hope Luxury," "Premium More" and "Champion" within the
classification of locally manufactured cigarettes bearing foreign brands and to
thereby have them covered by RA 7654. Specifically, the new law would have
its amendatory provisions applied to locally manufactured cigarettes which at
the time of its effectivity were not so classified as bearing foreign brands.
Prior to the issuance of the questioned circular, "Hope Luxury," "Premium
More," and "Champion" cigarettes were in the category of locally
manufactured cigarettes not bearing foreign brand subject to 45% ad valorem
tax. Hence, without RMC 37-93, the enactment of RA 7654, would have had
no new tax rate consequence on private respondent's products. Evidently, in
order to place "Hope Luxury," "Premium More," and "Champion" cigarettes
within the scope of the amendatory law and subject them to an increased tax
rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR not
simply interpreted the law; verily, it legislated under its quasi-legislative
authority. The due observance of the requirements of notice, of hearing, and
of publication should not have been then ignored.

Nothing on record could tell us that it was either impossible or impracticable

for the BIR to observe and comply with the above requirements before giving
effect to its questioned circular.

Indeed, the BIR itself, in its RMC 10-86, has observed and provided:

Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of

taxation.

Effectivity of Internal Revenue Rules and Regulations

"RMC NO. 10-86

Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates

taxation to be uniform and equitable. Uniformity requires that all subjects or
objects of taxation, similarly situated, are to be treated alike or put on equal
footing both in privileges and liabilities.[14] Thus, all taxable articles or kinds
of property of the same class must be taxed at the same rate[15] and the tax
must operate with the same force and effect in every place where the subject
may be found.

"It has been observed that one of the problem areas bearing on compliance
with Internal Revenue Tax rules and regulations is lack or insufficiency of due
notice to the tax paying public. Unless there is due notice, due compliance
therewith may not be reasonably expected. And most importantly, their strict
enforcement could possibly suffer from legal infirmity in the light of the
constitutional provision on `due process of law' and the essence of the Civil
Code provision concerning effectivity of laws, whereby due notice is a basic
requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil Code).

Apparently, RMC 37-93 would only apply to "Hope Luxury," Premium More"
and "Champion" cigarettes and, unless petitioner would be willing to concede
to the submission of private respondent that the circular should, as in fact my
esteemed colleague Mr. Justice Bellosillo so expresses in his separate

"In order that there shall be a just enforcement of rules and regulations, in
conformity with the basic element of due process, the following procedures
are hereby prescribed for the drafting, issuance and implementation of the
said Revenue Tax Issuances:

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TAX 1
(a) UNION' is listed as being manufactured by Sumatra Tobacco, Indonesia
and Brown and Williamson, USA (Exhibit 'U-3')
(b) WINNER' is listed as being manufactured by Alpha Tobacco, Bangladesh;
Nanyang, Hongkong; Joo Lan, Malaysia; Pakistan Tobacco Co., Pakistan;
Premier Tobacco, Pakistan and Haggar, Sudan (Exhibit 'U-4')." [17]

opinion, be considered adjudicatory in nature and thus violative of due

process following the Ang Tibay[16] doctrine, the measure suffers from lack
of uniformity of taxation. In its decision, the CTA has keenly noted that other
cigarettes bearing foreign brands have not been similarly included within the
scope of the circular, such as "1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.

The court quoted at length from the transcript of the hearing conducted on 10
August 1993 by the Committee on Ways and Means of the House of
Representatives; viz:
"THE CHAIRMAN. So you have specific information on Fortune Tobacco
alone. You don't have specific information on other tobacco manufacturers.
Now, there are other brands which are similarly situated. They are locally
manufactured bearing foreign brands. And may I enumerate to you all these
brands, which are also listed in the World Tobacco Directory x x x. Why were
these brands not reclassified at 55 if your want to give a level playing field to
foreign manufacturers?
"MS. CHATO. Mr. Chairman, in fact, we have already prepared a Revenue
Memorandum Circular that was supposed to come after RMC No. 37-93
which have really named specifically the list of locally manufactured
cigarettes bearing a foreign brand for excise tax purposes and includes all
these brands that you mentioned at 55 percent except that at that time, when
we had to come up with this, we were forced to study the brands of Hope,
More and Champion because we were given documents that would indicate
the that these brands were actually being claimed or patented in other
countries because we went by Revenue Memorandum Circular 1488 and we
wanted to give some rationality to how it came about but we couldn't find the
rationale there. And we really found based on our own interpretation that the
only test that is given by that existing law would be registration in the World
Tobacco Directory. So we came out with this proposed revenue
memorandum circular which we forwarded to the Secretary of Finance except
that at that point in time, we went by the Republic Act 7654 in Section 1
which amended Section 142, C-1, it said, that on locally manufactured
cigarettes which are currently classified and taxed at 55 percent. So we were

(a) `PALM TREE' is listed as manufactured by office of Monopoly, Korea

(Exhibit `R')
"2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE
COMPANY
(a) `GOLDEN KEY' is listed being manufactured by United Tobacco, Pakistan
(Exhibit `S')
(b) `CANNON' is listed as being manufactured by Alpha Tobacco,
Bangladesh (Exhibit `T')
"3. Locally manufactured by LA PERLA INDUSTRIES, INC.
(a) `WHITE HORSE' is listed as being manufactured by Rothman's, Malaysia
(Exhibit `U')
(b) `RIGHT' is listed as being manufactured by SVENSKA, Tobaks, Sweden
(Exhibit `V-1')
"4. Locally manufactured by MIGHTY CORPORATION
(a) 'WHITE HORSE' is listed as being manufactured by Rothman's, Malaysia
(Exhibit 'U-1')
"5. Locally manufactured by STERLING TOBACCO CORPORATION

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TAX 1
revenue memorandum circular clarifying with the other . . . does not yet,
would have been a list of locally manufactured cigarettes bearing a foreign
brand for excise tax purposes which would include all the other brands that
were mentioned by the Honorable Chairman. (Italics supplied) (Exhibit 'FF-2d,' par. IX-4)."18
All taken, the Court is convinced that the hastily promulgated RMC 37-93 has
fallen short of a valid and effective administrative issuance.
WHEREFORE, the decision of the Court of Appeals, sustaining that of the
Court of Tax Appeals, is AFFIRMED. No costs.

saying that when this law took effect in July 3 and if we are going to come up
with this revenue circular thereafter, then I think our action would really be
subject to question but we feel that . . . Memorandum Circular Number 37-93
would really cover even similarly situated brands. And in fact, it was really
because of the study, the short time that we were given to study the matter
that we could not include all the rest of the other brands that would have
been really classified as foreign brand if we went by the law itself. I am sure
that by the reading of the law, you would without that ruling by Commissioner
Tan they would really have been included in the definition or in the
classification of foregoing brands. These brands that you referred to or just
read to us and in fact just for your information, we really came out with a
proposed revenue memorandum circular for those brands. (Italics supplied)

SO ORDERED.
"Exhibit 'FF-2-C', pp. V-5 TO V-6, VI-1 to VI-3).
1.D.5.11
G.R. No. L-31156February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC.,
plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL.,
defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R
Matol and Assistant Solicitor General Conrado T. Limcaoco & Solicitor
Enrique M. Reyes for appellees.

"x x x x x x x x x.
"MS. CHATO. x x x But I do agree with you now that it cannot and in fact that
is why I felt that we . . . I wanted to come up with a more extensive coverage
and precisely why I asked that revenue memorandum circular that would
cover all those similarly situated would be prepared but because of the lack
of time and I came out with a study of RA 7654, it would not have been
possible to really come up with the reclassification or the proper classification
of all brands that are listed there. x x x' (italics supplied) (Exhibit 'FF-2d', page
IX-1)
"x x x x x x x x x.
"HON. DIAZ. But did you not consider that there are similarly situated?

MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in
its Civil Case No. 3294, which was certified to Us by the Court of Appeals on
October 6, 1969, as involving only pure questions of law, challenging the

"MS. CHATO. That is precisely why, Sir, after we have come up with this
Revenue Memorandum Circular No. 37-93, the other brands came about the
would have also clarified RMC 37-93 by I was saying really because of the
fact that I was just recently appointed and the lack of time, the period that
was allotted to us to come up with the right actions on the matter, we were
really caught by the July 3 deadline. But in fact, We have already prepared a

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TAX 1

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as

"municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment
"dismissing the complaint and upholding the constitutionality of [Section 2,
Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and
constitutional; ordering the plaintiff to pay the taxes due under the oft the said
Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to
the Court of Appeals, which, in turn, elevated the case to Us pursuant to
Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power,
confiscatory and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose
percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1.
The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent government,
without being expressly conferred by the people. 6 It is a power that is purely
legislative and which the central legislative body cannot delegate either to the
executive or judicial department of the government without infringing upon
the theory of separation of powers. The exception, however, lies in the case
of municipal corporations, to which, said theory does not apply. Legislative
powers may be delegated to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By necessary
implication, the legislative power to create political corporations for purposes
of local self-government carries with it the power to confer on such local
governmental agencies the power to tax. 9 Under the New Constitution, local

power of taxation delegated to municipalities under the Local Autonomy Act

(Republic Act No. 2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of
the Philippines, Inc., commenced a complaint with preliminary injunction
before the Court of First Instance of Leyte for that court to declare Section 2
of Republic Act No. 2264. 1 otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as well as to
declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of
Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material
portions of which state that, first, both Ordinances Nos. 23 and 27 embrace
or cover the same subject matter and the production tax rates imposed
therein are practically the same, and second, that on January 17, 1963, the
acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to
the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to
enforce compliance by the latter of the provisions of said Ordinance No. 27,
series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on
September 25, 1962, levies and collects "from soft drinks producers and
manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of
soft drink corked." 2 For the purpose of computing the taxes due, the person,
firm, company or corporation producing soft drinks shall submit to the
Municipal Treasurer a monthly report, of the total number of bottles produced
and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on
October 28, 1962, levies and collects "on soft drinks produced or
manufactured within the territorial jurisdiction of this municipality a tax of ONE
CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity." 4 For the purpose of computing the taxes due, the person, fun
company, partnership, corporation or plant producing soft drinks shall submit
to the Municipal Treasurer a monthly report of the total number of gallons
produced or manufactured during the month. 5

106

TAX 1
There is no validity to the assertion that the delegated authority can be
declared unconstitutional on the theory of double taxation. It must be
observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be exercised. 13 The
reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the injunction
against double taxation found in the Constitution of the United States and
some states of the Union. 14 Double taxation becomes obnoxious only where
the taxpayer is taxed twice for the benefit of the same governmental entity 15
or by the same jurisdiction for the same purpose, 16 but not in a case where
one tax is imposed by the State and the other by the city or municipality. 17
2.
The plaintiff-appellant submits that Ordinance No. 23 and 27
constitute double taxation, because these two ordinances cover the same
subject matter and impose practically the same tax rate. The thesis proceeds
from its assumption that both ordinances are valid and legally enforceable.
This is not so. As earlier quoted, Ordinance No. 23, which was approved on
September 25, 1962, levies or collects from soft drinks producers or
manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle
corked, irrespective of the volume contents of the bottle used. When it was
discovered that the producer or manufacturer could increase the volume
contents of the bottle and still pay the same tax rate, the Municipality of
Tanauan enacted Ordinance No. 27, approved on October 28, 1962,
imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces,
U.S.) of volume capacity. The difference between the two ordinances clearly
lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was
1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity.
The intention of the Municipal Council of Tanauan in enacting Ordinance No.
27 is thus clear: it was intended as a plain substitute for the prior Ordinance
No. 23, and operates as a repeal of the latter, even without words to that
effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are
only seeking to enforce Ordinance No. 27, series of 1962. Even the
stipulation of facts confirms the fact that the Acting Municipal Treasurer of
Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant of the

governments are granted the autonomous authority to create their own

sources of revenue and to levy taxes. Section 5, Article XI provides: "Each
local government unit shall have the power to create its sources of revenue
and to levy taxes, subject to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated
from beyond the sphere of the legislative power to enact and vest in local
governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiffappellant's pretense, would not suffice to invalidate the said law as
confiscatory and oppressive. In delegating the authority, the State is not
limited 6 the exact measure of that which is exercised by itself. When it is
said that the taxing power may be delegated to municipalities and the like, it
is meant that there may be delegated such measure of power to impose and
collect taxes as the legislature may deem expedient. Thus, municipalities
may be permitted to tax subjects which for reasons of public policy the State
has not deemed wise to tax for more general purposes. 10 This is not to say
though that the constitutional injunction against deprivation of property
without due process of law may be passed over under the guise of the taxing
power, except when the taking of the property is in the lawful exercise of the
taxing power, as when (1) the tax is for a public purpose; (2) the rule on
uniformity of taxation is observed; (3) either the person or property taxed is
within the jurisdiction of the government levying the tax; and (4) in the
assessment and collection of certain kinds of taxes notice and opportunity for
hearing are provided. 11 Due process is usually violated where the tax
imposed is for a private as distinguished from a public purpose; a tax is
imposed on property outside the State, i.e., extraterritorial taxation; and
arbitrary or oppressive methods are used in assessing and collecting taxes.
But, a tax does not violate the due process clause, as applied to a particular
taxpayer, although the purpose of the tax will result in an injury rather than a
benefit to such taxpayer. Due process does not require that the property
subject to the tax or the amount of tax to be raised should be determined by
judicial inquiry, and a notice and hearing as to the amount of the tax and the
manner in which it shall be apportioned are generally not necessary to due
process of law. 12

107

TAX 1
fuel oil, cinematographic films, playing cards, saccharine, opium and other
habit-forming drugs. 22 Soft drink is not one of those specified.
3.
The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity on all softdrinks, produced or manufactured, or an
equivalent of 1- centavos per case, 23 cannot be considered unjust and
unfair. 24 an increase in the tax alone would not support the claim that the
tax is oppressive, unjust and confiscatory. Municipal corporations are allowed
much discretion in determining the reates of imposable taxes. 25 This is in
line with the constutional policy of according the widest possible autonomy to
local governments in matters of local taxation, an aspect that is given
expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the
amount is so excessive as to be prohibitive, courts will go slow in writing off
an ordinance as unreasonable. 27 Reluctance should not deter compliance
with an ordinance such as Ordinance No. 27 if the purpose of the law to
further strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five
but not more than ten crowners or P2,000.00 with ten but not more than
twenty crowners imposed on manufacturers, producers, importers and
dealers of soft drinks and/or mineral waters under Ordinance No. 54, series
of 1964, as amended by Ordinance No. 41, series of 1968, of defendant
Municipality, 29 appears not to affect the resolution of the validity of
Ordinance No. 27. Municipalities are empowered to impose, not only
municipal license taxes upon persons engaged in any business or occupation
but also to levy for public purposes, just and uniform taxes. The ordinance in
question (Ordinance No. 27) comes within the second power of a
municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264,
otherwise known as the Local Autonomy Act, as amended, is hereby upheld
and Municipal Ordinance No. 27 of the Municipality of Tanauan, Leyte, series
of 1962, re-pealing Municipal Ordinance No. 23, same series, is hereby
declared of valid and legal effect. Costs against petitioner-appellant.
SO ORDERED.

provisions of said Ordinance No. 27, series of 1962. The aforementioned

admission shows that only Ordinance No. 27, series of 1962 is being
enforced by defendants-appellees. Even the Provincial Fiscal, counsel for
defendants-appellees admits in his brief "that Section 7 of Ordinance No. 27,
series of 1962 clearly repeals Ordinance No. 23 as the provisions of the latter
are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27
imposes a percentage or a specific tax. Undoubtedly, the taxing authority
conferred on local governments under Section 2, Republic Act No. 2264, is
broad enough as to extend to almost "everything, accepting those which are
mentioned therein." As long as the text levied under the authority of a city or
municipal ordinance is not within the exceptions and limitations in the law, the
same comes within the ambit of the general rule, pursuant to the rules of
exclucion attehus and exceptio firmat regulum in cabisus non excepti 19 The
limitation applies, particularly, to the prohibition against municipalities and
municipal districts to impose "any percentage tax or other taxes in any form
based thereon nor impose taxes on articles subject to specific tax except
gasoline, under the provisions of the National Internal Revenue Code." For
purposes of this particular limitation, a municipal ordinance which prescribes
a set ratio between the amount of the tax and the volume of sale of the
taxpayer imposes a sales tax and is null and void for being outside the power
of the municipality to enact. 20 But, the imposition of "a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all
soft drinks produced or manufactured under Ordinance No. 27 does not
partake of the nature of a percentage tax on sales, or other taxes in any form
based thereon. The tax is levied on the produce (whether sold or not) and not
on the sales. The volume capacity of the taxpayer's production of soft drinks
is considered solely for purposes of determining the tax rate on the products,
but there is not set ratio between the volume of sales and the amount of the
tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are those
imposed on specified articles, such as distilled spirits, wines, fermented
liquors, products of tobacco other than cigars and cigarettes, matches
firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel

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It may be recalled that on March 13, 1992, Republic Act No. 7227,[3]cralaw
otherwise known as the "Bases Conversion and Development Act of 1992,"
was enacted with the declared policy of accelerating "the sound and
balanced conversion into alternative productive uses of the Clark and Subic
military reservations and their extensions" -including the John Hay Station.
[4]cralaw

1.D.5.12
[G.R. No. 119775. March 29, 2005]

To this end, R.A. No. 7227 created public respondent BCDA,[5]cralaw the
Subic SEZ[6]cralaw and the Subic Bay Metropolitan Authority.[7]cralaw

Sirs/Mesdames:

R.A. No. 7227 likewise authorized the President, subject to the concurrence
of the local government units directly affected, to create through executive
proclamation other SEZs in the areas covered respectively by the Clark
military reservation, the Wallace Air Station in San Fernando, La Union, and
the Camp John Hay in Baguio. And upon recommendation by the BCDA, the
law also authorized the President to create SEZs in the municipalities of
Morong, Hermosa, Dinalupihan, Castillejos, and San Marcelino.[8]cralaw

JOHN HAY vs. LIM

EN BANC

Quoted hereunder, for your information, is a resolution of this Court dated

MAR 29 2005.

CREATING AND DESIGNATING A PORTION OF THE AREA COVERED BY

THE FORMER CAMP JOHN [HAY] AS THE JOHN HAY SPECIAL
ECONOMIC ZONE PURSUANT TO REPUBLIC ACT NO. 7227

G.R. No. 119775 (JOHN HAY PEOPLES ALTERNATIVE COALITION,

MATEO CARIO FOUNDATION INC., CENTER FOR ALTERNATIVE
SYSTEMS FOUNDATION INC., REGINA VICTORIA A. BENAFIN
REPRESENTED AND JOINED BY HER MOTHER MRS. ELISA BENAFIN,
IZABEL M. LUYK REPRESENTED AND JOINED BY HER MOTHER MRS.
REBECCA MOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED
BY HER MOTHER ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C.
PACALSO ALIAS "KEVAB," BETTY I. STRASSER, RUBY C. GIRON,
URSULA C. PEREZ ALIAS "BA-YAY," EDILBERTO T. CLARAVALL,
CARMEN CAROMINA, LILIA G. YARANON,DIANE MONDOC vs. VICTOR
LIM, PRESIDENT, BASES CONVERSION DEVELOPMENT AUTHORITY;
JOHN HAY PORO POINT DEVELOPMENT CORPORATION, CITY OF
BAGUIO, TUNTEX (B.V.I.) CO. LTD., ASIAWORLD INTERNATIONALE
GROUP, INC., DEPARTMENT OF ENVIRONMENT AND NATURAL
RESOURCES.)

Pursuant to the powers vested in me by the law and the resolution of

concurrence by the City Council of Baguio, I, FIDEL V. RAMOS, President of
the Philippines, do hereby create and designate a portion of the area covered
by the former John Hay reservation as embraced, covered, and defined by
the 1947 Military Bases Agreement between the Philippines and the United
States of America, as amended, as the John Hay Special Economic Zone,
and accordingly order:

By their separate motions for reconsideration, public respondents Bases

Conversion Development Authority (BCDA) John Hay Management
Corporation (JHMC)[1]cralaw and Victor Lim, and respondent-in-intervention
CJH Development Corporation (CJHDC) seek the reconsideration of this
Court's Decision of October 24, 2003[2]cralaw` which invalidated the second
sentence of Section 3 of Proclamation No. 420 insofar as it granted tax
exemptions and incentives to the John Hay Special Economic Zone (SEZ).

On July 5, 1994, then President Ramos, on the request of the Sangguniang

Panlungsod of Baguio City,[9]cralaw issued Proclamation No. 420
establishing the John Hay SEZ:
PROCLAMATION NO. 420

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TAX 1
if any, and in consultation and coordination with the City Government of
Baguio after consultation with its inhabitants, and to promulgate the
necessary policies, rules, and regulations to govern and regulate the zone
thru the John Hay Poro Point Development Corporation, which is its
implementing arm for its economic development and optimum utilization.
Sec. 3. Investment Climate in John Hay Special Economic Zone. - Pursuant
to Section 5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro
Point Development Corporation shall implement all necessary policies, rules,
and regulations governing the zone, including investment incentives, in
consultation with pertinent government departments. Among others, the zone
shall have all the applicable incentives of the Special Economic Zone under
Section 12 of Republic Act No. 7227 and those applicable incentives granted
in the Export Processing Zones, the Omnibus Investment Code of 1987, the
Foreign Investment Act of 1991, and new investment laws that may
hereinafter be enacted.
Sec. 4. Role of Departments, Bureaus, Offices, Agencies and
Instrumentalities. - All Heads of departments, bureaus, offices, agencies, and
instrumentalities of the government are hereby directed to give full support to
Bases Conversion and Development Authority and/or its implementing
subsidiary or joint venture to facilitate the necessary approvals to expedite
the implementation of various projects of the conversion program.
Sec. 5. Local Authority. - Except as herein provided, the affected local
government units shall retain their basic autonomy and identity.
Sec. 6. Repealing Clause. - All orders, rules, and regulations, or parts
thereof, which are inconsistent with the provisions of this Proclamation, are
hereby repealed, amended, or modified accordingly.
Sec. 7. Effectivity. This proclamation shall take effect immediately.
Done in the City of Manila, this 5th day of July, in the year of Our Lord,
nineteen hundred and ninety-four.

SECTION 1. Coverage of John Hay Special Economic Zone. - The John Hay
Special Economic Zone shall cover the area consisting of Two Hundred
Eighty Eight and one/tenth (288.1) hectares, more or less, of the total of Six
Hundred Seventy-Seven (677) hectares of the John Hay Reservation, more
or less, which have been surveyed and verified by the Department of
Environment and Natural Resources (DENR) as defined by the following
technical description:
A parcel of land, situated in the City of Baguio, Province of Benguet, Island of
Luzon, and particularly described in survey plans Psd-131102-002639 and
Ccs-131102-000030 as approved on 16 August 1993 and 26 August 1993,
respectively, by the Department of Environment and Natural Resources, in
detail containing :
Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20
of Ccs-131102-000030
- andLot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot
16, Lot 17, and Lot 18 of Psd-131102-002639 being portions of TCT No. T3812, LRC Rec. No. 87.
With a combined area of TWO HUNDRED EIGHTY EIGHT AND
ONE/TENTH HECTARES (288.1 hectares); Provided that the area consisting
of approximately Six and two/tenth (6.2) hectares, more or less, presently
occupied by the VOA and the residence of the Ambassador of the United
States, shall be considered as part of the SEZ only upon turnover of the
properties to the government of the Republic of the Philippines.
Sec. 2. Governing Body of the John Hay Special Economic Zone. - Pursuant
to Section 15 of Republic Act No. 7227, the Bases Conversion and
Development Authority is hereby established as the governing body of the
John Hay Special Economic Zone and, as such, authorized to determine the
utilization and disposition of the lands comprising it, subject to private rights,

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TAX 1

A. THE LAW, CONSIDERED IN ITS ENTIRETY SUPPORTS THE

CONCLUSION THAT THE JOHN HAY SPECIAL ECONOMIC ZONE
ENJOYS THE SAME PRIVILEGES AS THE SUBIC SPECIAL ECONOMIC
ZONE.
B. THE GRANT OF TAX EXEMPTION AND OTHER FINANCIAL
INCENTIVES IS INHERENT IN "SPECIAL ECONOMIC ZONES."
II
ASSUMING ARGUENDO THAT REPUBLIC ACT NO. 7227 DOES NOT
GRANT TAX EXEMPTIONS TO SPECIAL ECONOMIC ZONES, THE
SECOND SENTENCE OF SECTION THREE OF PROCLAMATION NO. 420
IS SUSCEPTIBLE OF OTHER PLAUSIBLE INTERPRETATIONS WHICH
WOULD ADDRESS THE ALLEGED CONSTITUTIONAL INFIRMITY.
Ill

On April 25, 1995, petitioners filed their Petition for prohibition, mandamus
and declaratory relief assailing (1) the constitutionality of Proclamation No.
420 and (2) the legality of the Memorandum of Agreement and Joint Venture
Agreement previously entered into[10]cralaw between public respondent
BCDA and private respondents Tuntex (B.V.I.) Co., Ltd. (TUNTEX) and
Asiaworld Internationale Group, Inc. (ASIAWORLD).
The questions regarding the validity of the agreements between BCDA and
TUNTEX and ASIAWORLD were rendered moot and academic[11]cralawby
BCDA's revocation of these agreements by letter of November 21, 1995.
[12]cralaw
On October 24, 2003, this Court promulgated its Decision, which disposed as
follows:
WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is
hereby declared NULL AND VOID and is accordingly declared of no legal
force and effect. Public respondents are hereby enjoined from implementing
the aforesaid void provision.

THE JOHN HAY SPECIAL ECONOMIC ZONE MAY BE GRANTED

FINANCIAL INCENTIVES UNDER OTHER LAWS, AS IMPLEMENTED BY
THE EXECUTIVE.

Proclamation No. 420, without the invalidated portion, remains valid and
effective.

IV

SO ORDERED.

THE HONORABLE COURT ERRED IN RULING THAT PETITIONERS HAVE

LEGAL STANDING TO SUE.

In their Motion for Reconsideration with Manifestation filed on December 29,

2003, public respondents, through the Office of the Government Corporate
Counsel, submit the following grounds for reconsideration:

Intervenor CJHDC filed on March 5, 2004 a Motion for Leave to Intervene

alleging that it, together with its consortium partners Fil-Estate Management
Inc. and Penta Capital Investment Corporation, entered into a Lease
Agreement dated October 19, 1996[13]cralaw with respondent BCDA for the
development of the John Hay SEZ; and that it "stands to be most affected" by
this Court's Decision "invalidating the grant of tax exemption and other
financial incentives" in the John Hay SEZ since "[i]ts financial obligations and

I
THE HONORABLE COURT ERRED IN RULING THAT SECTION 3 OF
PROCLAMATION NO. 420 IS NULL AND VOID AS THE JOHN HAY
SPECIAL ECONOMIC ZONE ENJOYS EXEMPTION FOR (sic) TAXES, AS
WELL AS OTHER FINANCIAL INCENTIVES GRANTED TO THE SUBIC
SPECIAL ECONOMIC ZONE, IN THAT:

111

TAX 1
The abovementioned zone shall be subject to the following policies:
(a) Within the framework and subject to the mandate and limitations of the
Constitution and the pertinent provisions of the Local Government Code, the
Subic Special Economic Zone shall be developed into a self-sustaining,
industrial, commercial, financial and investment center to generate
employment opportunities in and around the zone and to attract and promote
productive foreign investments;
b) The Subic Special Economic Zone shall be operated and managed as a
separate customs territory ensuring free flow or movement of goods and
capital within, into and exported out of the Subic Special Economic Zone, as
well as provide incentives such as tax and duty free importations of raw
materials, capital and equipment. However, exportation or removal of goods
from the territory of the Subic Special Economic Zone to the other parts of
the Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of the Philippines;
(c) The provisions of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within the
Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of
the gross income earned by all businesses and enterprises within the Subic
Special Economic Zone shall be remitted to the National Government, one
percent (1%) each to the local government units affected by the declaration
of the zone in proportion to their population area, and other factors. In
addition, there is hereby established a development fund of one percent (1%)
of the gross income earned by all businesses and enterprises within the
Subic Special Economic Zone to be utilized for the Municipality of Subic, and
other municipalities contiguous to [the] base areas. In case of conflict
between national and local laws with respect to tax exemption privileges in
the Subic Special Economic Zone, the same shall be resolved in favor of the
latter;
(d) No exchange control policy shall be applied and free markets for foreign
exchange, gold, securities and futures shall be allowed and maintained in the
Subic Special Economic Zone;

development and investment commitments under the Lease Agreement were

entered into upon the premise that these incentives are valid and subsisting."
CJHDC, proffering grounds parallel to those of public respondents,[14]cralaw
thus prays that: (1) it be granted leave to intervene in this case; (2) its
attached Motion for Reconsideration in Intervention be admitted; and (3) this
Court's Decision of October 24, 2003 be reconsidered and petitioners'
petition dismissed.
By Order of May 25, 2004, this Court granted CJHDC's Motion for leave to
Intervene and noted its Motion for Reconsideration in Intervention.[15]cralaw
At bottom, the controversy centers on whether the tax exemptions and other
financial incentives granted to the Subic SEZ under Section 12 of R.A. No.
7227 are applicable to the John Hay SEZ.
Section 12 of R.A. No. 7227, which provides for the "policies" to govern and
regulate the Subic SEZ, reads as follows:
SECTION 12. Subic Special Economic Zone. - Subject to the concurrence by
resolution of the sangguniang panlungsod of the City of Olongapo and the
sangguniang bayan of the Municipalities of Subic, Morong and Hermosa,
there is hereby created a Special Economic and Free-port Zone consisting of
the City of Olongapo and the Municipality of Subic, Province of Zambales,
the lands occupied by the Subic Naval Base and its contiguous extensions as
embraced, covered, and defined by the 1947 Military Bases Agreement
between the Philippines and the United States of America as amended, and
within the territorial jurisdiction of the Municipalities of Morong and Hermosa,
Province of Bataan, hereinafter referred to as the Subic Special Economic
Zone whose metes and bounds shall be delineated in a proclamation to be
issued by the President of the Philippines. Within thirty (30) days after the
approval of this Act, each local government unit shall submit its resolution of
concurrence to join the Subic Special Economic Zone to the office of the
President. Thereafter, the President of the Philippines shall issue a
proclamation defining the metes and bounds of the Zone as provided herein.

112

TAX 1

In their first line of argument, respondents allege that the foregoing "policies"
or incentives, while enumerated in reference to the Subic SEZ, are
nonetheless expressly made applicable to the other SEZs subsequently
created by presidential proclamation, including the John Hay SEZ, by Section
15 of R.A. No. 7227. Thus, public respondents argue:
That the privileges of tax exemption and other financial incentives were
expressly provided under Section 12, constituting the SSEZ, is merely a
result of the then reality that it is (sic) was only in Subic Bay where the
precise metes and bounds of the SSEZ, as well as other relevant information,
were then available to the Senate. But the intention of the Senate was clearly
to empower the President, who would then have the luxury of time and
further studies, to constitute special economic zones in the former Clark Air
Base and its extensions, including Camp John Hay. This power to proclaim
the other base areas as special economic zones, including all privileged
appurtenant thereto, was instead delegated to the President in Section 15 of
the law.
xxx
Republic Act No. 7227 authorizes the President to delineate Special
Economic Zones in the former base areas. True, section 12 of the said law
enumerating the tax exemptions and the financial incentives of the Subic
Special Economic Zone, is expressly made applicable to the former Subic
Bay Naval Base. However, there is no showing that the term "special
economic zones", used to denote what the President can establish in John
Hay, does not have the same definition and characteristics as the SSEZ.
(Emphasis supplied; underscoring in the original)
A reading of Section 15 of R.A. No. 7227 does not, however, support this
proposition. There is no doubt that under Section 15 (as in Section 12) the
President has the power to delineate, by proclamation, the metes and bounds
of SEZs which may be created in the other former base lands. However,
there is neither an express reference to Section 12 nor to the incentives
granted to the Subic SEZ:

(e) The Central Bank, through the Monetary Board, shall supervise and
regulate the operations of banks and other financial institutions within the
Subic Special Economic Zone;
(f) Banking and Finance shall be liberalized with the establishment of foreign
currency depository units of local commercial banks and offshore banking
units of foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing
investment shall not be less than Two Hundred fifty thousand dollars
($250,000), his/her spouse and dependent children under twenty-one (21)
years of age, shall be granted permanent resident status within the Subic
Special Economic Zone. They shall have freedom of ingress and egress to
and from the Subic Special Economic Zone without any need of special
authorization from the Bureau of Immigration and Deportation. The Subic Bay
Metropolitan Authority referred to in Section 13 of this Act may also issue
working visas renewable every two (2) years to foreign executives and other
aliens possessing highly-technical skills which no Filipino within the Subic
Special Economic Zone possesses, as certified by the Department of Labor
and Employment. The names of aliens granted permanent residence status
and working visas by the Subic Bay Metropolitan Authority shall be reported
to the Bureau of Immigration and Deportation within thirty (30) days after
issuance thereof;
(h) The defense of the zone and the security of its perimeters shall be the
responsibility of the National Government in coordination with the Subic Bay
Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide
and establish its own internal security and firefighting forces; and
(i) Except as herein provided, the local government units comprising the
Subic Special Economic Zone shall retain their basic autonomy and identity.
The cities shall be governed by their respective charters and the
municipalities shall operate and function in accordance with Republic Act No.
7160, otherwise known as the Local Government Code of 1991. (Emphasis
supplied)

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TAX 1
Respondent-in-intervention CJHDC submits that by authorizing the President
to create SEZs "in accordance with the policies as herein provided insofar as
applicable," the first paragraph of Section 15 refers to the policies
enumerated in Section 12, including exemption from local and national taxes.
This allusion to "the policies as herein provided" can by no means be
considered an explicit or unequivocal conferment of the tax exemptions and
other incentives set forth in Section 12 on other SEZs. Notably, the preceding
portions of R.A. No. 7227 make mention of two sets of "policies:" (1) the
general "policies" that the law is intended to further, viz:
Sec. 2. Declaration of Policies. - It is hereby declared the policy of the
Government to accelerate the sound and balanced conversion into alternative
productive uses of the Clark and Subic military reservations and their
extensions (John Hay Station, Wallace Air Station, O'Donnell Transmitter
Station, San Miguel Naval Communications Station and Capas Relay
Station), to raise funds by the sale of portions of Metro Manila military camps,
and to apply said funds as provided herein for the development and
conversion to productive civilian use of the lands covered under the 1947
Military Bases Agreement between the Philippines and the United States of
America, as amended.
It is likewise the declared policy of the Government to enhance the benefits to
be derived from said properties in order to promote the economic and social
development of Central Luzon in particular and the country in general.,
and (2) the above-quoted "policies" governing the Subic SEZ.
Considering that the subject matter of the first paragraph of Section 15 is the
authority of the President to create other SEZs in the former base lands, it
stands to reason that the same should be exercised "in accordance with the
policies" which provide the rationale for the law as laid down in Section 2 of
R.A. No. 7227.

SECTION 15. Clark and Other Special Economic Zones. -Subject to the
concurrence by resolution of the local government units directly affected, the
President is hereby authorized to create by executive proclamation a Special
Economic Zone covering the lands occupied by the Clark military
reservations and its contiguous extensions as embraced, covered and
defined by the 1947 Military Bases Agreement between the Philippines and
the United States of America, as amended, located within the territorial
jurisdiction of Angeles City, Municipalities of Mabalacat and Porac, Province
of Pampanga, and the Municipality of Capas, Province of Tarlac, in
accordance with the policies as hereinprovided insofar as applicable to the
Clark military reservations.
The governing body of the Clark Special Economic Zone shall likewise be
established by executive proclamation with such powers and functions
exercised by the Export Processing Zone Authority pursuant to Presidential
Decree No. 66 as amended.
The policies to govern and regulate the Clark Special Economic Zone shall
be determined upon consultation with the inhabitants of the local government
units directly affected which shall be conducted within six (6) months upon
approval of this Act.
Similarly, subject to the concurrence by resolution of the local government
units directly affected, the President shall create other Special Economic
Zones, in the base areas of Wallace Air Station in San Fernando, La Union
(excluding areas designated for communications, advance warning and radar
requirements of the Philippine Air Force to be determined by the Conversion
Authority) and Camp John Hay in the City of Baguio.
Upon recommendation of the Conversion Authority, the President is likewise
authorized to create Special Economic Zones covering the Municipalities of
Morong, Hermosa, Dinalupihan, Castillejos, and San Marcelino. (Emphasis
supplied)

In contradistinction, a provision authorizing the President to define the metes

and bounds of other SEZs "in accordance with" the tax and financial

114

TAX 1
existence of such a grant pursuant to what they claim to be the legislative
intent of the law. To this end, they posit that the Court should not apply the
deeply-entrenched rule that tax exemptions cannot be implied but must be
categorically and unmistakably expressed[20]cralaw in a language too clear
to be mistaken.[21]cralaw
In this vein, respondent-in-intervention CJHDC, although acknowledging that
"the law frowns against exemptions from taxation,"[22]cralaw nevertheless
argues that "[t]he grant of tax exemption privileges to the [John Hay SEZ]
was addressed primarily to public respondent BCDA" in order "to achieve its
mandate for an accelerated conversion of the former baselands into
economically productive uses, at the least cost and exposure to the
government." Thus, it contends that the Court should "apply, at least by
analogy, the principle that strict construction is not applicable where the
grantee of the exemption is a political subdivision or instrumentality."

incentives of the Subic SEZ would be nonsensical. These tax and financial
incentives provide neither direction nor guidance to the President in his
determination (subject to the concurrence of the affected local government
units) of the geographic composition of the SEZs.
Moreover, the third and fourth paragraphs of Section 15 explicitly provide that
the "policies to govern and regulate" the John Hay SEZ "shall be determined
upon consultation with the inhabitants of the local government units directly
affected," thereby implying that the governing policies of the John Hay SEZ,
unlike that of the Subic SEZ, were yet to be specified and, thus, not provided
for by R.A. No. 7227 itself.
In any event, whether it is Section 12 or Section 15 of R.A. No. 7227 which is
scrutinized, the result is the same. There is no express extension of the
incentives or benefits granted to the Subic SEZ to the other SEZs still to be
created via presidential proclamation.

The Court is not persuaded.

True, it is a recognized principle that the rule on strictissimi juris does not
apply in the case of exemptions in favor of a government political subdivision
or instrumentality,[23]cralaw the rationale for which has been identified as
follows:
"The basis for applying the rule of strict construction to statutory provisions
granting tax exemptions or deductions, even more obvious than with
reference to the affirmative or levying provisions of tax statutes, is to minimize
differential treatment and foster impartiality, fairness, and equality of
treatment among tax payers.
The reason for the rule does not apply in the case of exemptions running to
the benefit of the government itself or its agencies. In such case the practical
effect of an exemption is merely to reduce the amount of money that has to
be handled by government in the course of its operations. For these reasons,
provisions granting exemptions to government agencies may be construed
liberally, in favor of non tax liability of such agencies."[24] (Emphasis
supplied; italics in the original)

As for respondent-in-intervention CJHDC's argument that the President's

"power to create Special Economic Zones carries with it the power to provide
for tax and financial incentives," it does not lie. It is the legislative branch
which has the inherent power not only to select the subjects of taxation but to
grant exemptions.[16]Paragraph 4, Section 28 of Article VI of the Constitution
is crystal clear: "[n]o law granting any tax exemption shall be passed without
the concurrence of a majority of all the Members of the Congress."
Hence, it is only the legislature, as limited by the provisions of the
Constitution, which has full power to exempt any person or corporation or
class of property from taxation. The Constitution itself may provide for
specific tax exemptions[17]cralaw or local governments may pass ordinances
providing for exemption from local taxes,[18]cralaw but, otherwise, it is only
the legislative branch which has the power to grant tax exemptions, its power
to exempt being as broad as its power to tax.[19]cralaw
Perhaps realizing that R.A. No. 7227 does not contain an express grant of tax
exemptions and financial incentives covering the John Hay SEZ,
respondents, as a second line of argument, implore the Court to construe the

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TAX 1

Public respondents' argument that tax exemptions are "inherent" in the term
"special economic zone" stands the concept on its head and cannot be
accepted. The tax exempt character of an SEZ proceeds from the statutory
provisions expressly conferring such exemptions, not vice-versa. The tail
does not wag the dog.
Moreover, a careful scrutiny of the Senate deliberations does not disclose a
clear intention on the part of the law making power to make the tax
exemptions and financial incentives in Section 12 applicable in the other
SEZs.
The adoption of a single uniform set of tax exemptions and financial
incentives for all SEZs in the former base lands was indeed suggested by
Senator Paterno when Section 12 was under consideration in the Senate:
xxx
Senator Paterno:

Thank you Mr. President.

Now, with respect to "B," Mr. President, on items 1 to 6,[27]cralaw what are
they supposed to be?Are these policies? Because in my reading,
subparagraph, subparagraph "1" and subparagraph "6" refer to activities;
namely, shipping and tourism-related; while sub-paragraphs "2, 3, 4, and 5"
represent policies which shall apply within the zone.
Senator Shahani: think the intention here really was to specify the activities
which should take place within this economic zone. But, on second reading,
yes, I think there is a mix-up here of activities and policies.
Senator Paterno:

Yes.

Senator Shahani: Maybe some of these could be transferred to Section 13.

However, the foregoing finds no application to the present case.

First, there is absolutely nothing in R.A. No. 7227 which can be considered a
grant of tax exemption in favor of public respondent BCDA. Rather, the
beneficiaries of the tax exemptions and other incentives in Section 12 (the
only provision in R.A. No. 7227 which expressly grants tax exemptions) are
clearly the business enterprises located within the Subic SEZ.
To be sure, nowhere in any of respondents' pleadings is it pretended that the
legislature exempted the BCDA from taxation in order to accomplish its
mandate. On the contrary, the alleged tax exemptions and financial
incentives are plainly asserted to be in favor of private enterprises doing
business in the John Hay SEZ.
Second, as noted above, the liberal construction of tax exemptions in favor of
the government is premised on their resulting only in a reduction in infragovernmental fund transfers, but not government revenue. Evidently, this
rationale does not apply, whether by analogy or otherwise, in favor of private
business enterprises, such as respondent-in-intervention CJHDC.
Consequently, respondents' arguments for a liberal construction of R.A. 7227
in favor of tax exemptions and incentives to business enterprises in the John
Hay SEZ must necessarily fail. As the Court, speaking through Mr. Justice
Vicente V. Mendoza, in the recent case of Philippine Long Distance
Telephone Company, Inc. v. City of Davao,[25]cralaw had occasion to stress:
. . . Along with the police power and eminent domain, taxation is one of the
three necessary attributes of sovereignty. Consequently, statutes in
derogation of sovereignty, such as those containing exemption from taxation,
should be strictly construed in favor of the sate. A state cannot be stripped of
this most essential power by doubtful words and of this highest attribute of
sovereignty by ambiguous language.[26] (Emphasis supplied)
Necessarily, respondents' other arguments, dependent as they are on a
liberal construction of tax exemptions, also fail.

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TAX 1
Senator Shahani: So, to show that we are still interested in Clark and its
development, and to avoid this very long process of legislating every detail of
what a special economic zone should be, I thought it was agreed last night
that we should authorize the President to create special economic zones with
specific reference to Clark. This is why this appears in this form, Mr.
President.
Senator Paterno: Yes. Without going into the crafting of the text, Mr.
President, it was my thought that, perhaps, there could be a section which
specifies the policies which shall apply to all special economic zones. Then
there would be another section which, in effect, will create the Subic
economic zone which would refer to those unique activities in Subic. Then
there would be another section which would authorize the President to create
other special economic zones, with particular reference to Clark, in which
special economic zones, the standards set up in the first section would apply.
Senator Shahani:
section.

Senator Paterno: Now, No. "1" and No. "6", are these authorizations to
engage in these activities, or are they mandates for the special economic
zone to engage in these activities?
Senator Shahani: Yes, this is an attempt to specify the features, the kind of
specific activities which would be unique to the special economic zone of
Subic. This is why shipping is given.
Senator Paterno: Yes. Then I would propose, Mr. President, that these two
activities, namely "1" and "6," be segregated as being applicable to the Subic
economic zone, because they will not be applicable, for example, in the Clark
economic zone because there would be no shipping in Clark.
Senator Shahani: Mr. President, Section 12, refers exclusively to Subic.
There is no attempt now in this BCDA to do anything for Clark. I think there is
no time.

I take it that, that is just a matter of reordering this

Senator Paterno: Yes. In other words, I would like to suggest that the bill
contain the features of any special economic zone, and then another section
would contain the features unique to Subic as a special economic zone.[28]
(Emphasis supplied)
However, as respondent CJHDC itself admits, "Senator Paterno's proposal
that 'the policies applicable to all special economic zones be specified here
(in what would eventually be Section 15) and those which relate only to Subic
be put in a standard for the Subic economic zone' was not carried out, as
Section 15 as finally passed does not contain an enumeration of policies
specific only to non-Subic SEZs." (Underscoring supplied)
Instead, as previously noted, Section 15 of R.A. No. 7227 provides that the
"policies to govern and regulate" the John Hay SEZ "shall be determined
upon consultation with the inhabitants of the local government units directly
affected."

Senator Paterno: Yes. Yet, Mr. President, paragraph "C" authorizes the
President of the Philippines to proclaim, delineate and specify the metes and
bounds of other special economic zones with particular reference to Clark.
We need to set up certain standards which the President would observe in
setting up those zones.
So I would propose that the policies applicable to all economic zones be
specified here, and those which relate only to Subic be put in a standard for
the Subic economic zone.
Senator Shahani: Mr. President, I thought that this was the special concern
of our Colleague from Cavite. I remember quite clearly that last night, some
concern was expressed, including from this Representation, that there was
no special attention being given to Clark. It think it was also Senator Enrile
who said that Clark has specific features; it is landlocked, et cetera.
Senator Paterno:

Yes.

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TAX 1
in his capacity as Commissioner of
the Bureau of Internal Revenue,
Respondents.
PHILIP MORRIS PHILIPPINES
MANUFACTURING, INC.,
FORTUNE TOBACCO, CORP., Promulgated:
MIGHTY CORPORATION, and
JT INTERNATIONAL, S.A.,
Respondents-in-Intervention. August 20, 2008
x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:
This petition for review assails the validity of: (1) Section 145 of the National
Internal Revenue Code (NIRC), as recodified by Republic Act (RA) 8424; (2)
RA 9334, which further amended Section 145 of the NIRC on January 1,
2005; (3) Revenue Regulations Nos. 1-97, 9-2003, and 22-2003; and (4)
Revenue Memorandum Order No. 6-2003. Petitioner argues that the said
provisions are violative of the equal protection and uniformity clauses of the
Constitution.
RA 8240, entitled An Act Amending Sections 138, 139, 140, and 142 of the
NIRC, as Amended and For Other Purposes, took effect on January 1, 1997.
In the same year, Congress passed RA 8424 or The Tax Reform Act of 1997,
re-codifying the NIRC. Section 142 was renumbered as Section 145 of the
NIRC.

Significantly, these policies need not be identical to those implemented in the

Subic SEZ since there may be real and substantial differences in
development priorities, local conditions and other relevant matters, as the
consultations may reveal. However, insofar as these policies may include tax
exemptions, paragraph 4, Section 28 of Article VI of the Constitution requires
that any such exemptions must be in the form of legislation passed with the
concurrence of a majority of all the Members of the Congress.
Finally, contrary to public respondents' interpretation, the Decision of October
24, 2003 does not "tie the hands" of executive or administrative agencies
from implementing any present or future legislation which affords tax or other
financial incentives to qualified persons doing business in the John Hay SEZ
or elsewhere.The second sentence of Section 3 of Proclamation No. 420 was
declared null and void only insofar as it purported to grant, by executive
proclamation and without statutory basis, tax exemptions and other financial
incentives to business enterprises located in John Hay SEZ. However, where
there is statutory basis for exemptions or incentives, there is nothing to
prevent qualified persons from applying for and availing thereof. As stated in
the dispositive portion of the decision, Proclamation No. 420, without the
invalidated portion, remains valid and effective.
WHEREFORE, the motions for reconsideration are hereby DENIED with
FINALITY.
Very truly yours.
(Sgd.) LUZVIMINDA D. PUNO
Clerk of Court
G.R. No. 163583
BRITISH AMERICAN TOBACCO, Petitioner,
vs
JOSE ISIDRO N. CAMACHO,
in his capacity as Secretary of
the Department of Finance and
GUILLERMO L. PARAYNO, JR.,

118

TAX 1
Variants of existing brands of cigarettes which are introduced in the domestic
market after the effectivity of this Act shall be taxed under the highest
classification of any variant of that brand.
xxxx
New brands shall be classified according to their current net retail price.
For the above purpose, net retail price shall mean the price at which the
cigarette is sold on retail in 20 major supermarkets in Metro Manila (for
brands of cigarettes marketed nationally), excluding the amount intended to
cover the applicable excise tax and the value-added tax. For brands which
are marketed only outside Metro Manila, the net retail price shall mean the
price at which the cigarette is sold in five major supermarkets in the region
excluding the amount intended to cover the applicable excise tax and the
value-added tax.
The classification of each brand of cigarettes based on its average net retail
price as of October 1, 1996, as set forth in Annex D of this Act, shall remain
in force until revised by Congress. (Emphasis supplied)

As such, new brands of cigarettes shall be taxed according to their current

net retail price while existing or old brands shall be taxed based on their net
retail price as of October 1, 1996.
To implement RA 8240, the Bureau of Internal Revenue (BIR) issued
Revenue Regulations No. 1-97,[2] which classified the existing brands of
cigarettes as those duly registered or active brands prior to January 1, 1997.
New brands, or those registered after January 1, 1997, shall be initially
assessed at their suggested retail price until such time that the appropriate
survey to determine their current net retail price is conducted. Pertinent
portion of the regulations reads

Paragraph (c) of Section 145 provides for four tiers of tax rates based on the
net retail price per pack of cigarettes. To determine the applicable tax rates of
existing cigarette brands, a survey of the net retail prices per pack of
cigarettes was conducted as of October 1, 1996, the results of which were
embodied in Annex D of the NIRC as the duly registered, existing or active
brands of cigarettes.
Paragraph (c) of Section 145, [1] states
SEC. 145. Cigars and cigarettes.
xxxx
(c) Cigarettes packed by machine. There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax shall be Thirteen pesos and
forty-four centavos (P13.44) per pack;
(2) If the net retail price (excluding the excise tax and the value-added tax)
exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten pesos
(10.00) per pack, the tax shall be Eight pesos and ninety-six centavos
(P8.96) per pack;
(3) If the net retail price (excluding the excise tax and the value-added tax) is
Five pesos (P5.00) but does not exceed Six pesos and fifty centavos (P6.50)
per pack, the tax shall be Five pesos and sixty centavos (P5.60) per pack;
(4) If the net retail price (excluding the excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax shall be One peso and twelve
centavos (P1.12) per pack.

119

TAX 1
SECTION 2. Definition of Terms.
In June 2001, petitioner British American Tobacco introduced into the market
Lucky Strike Filter, Lucky Strike Lights and Lucky Strike Menthol Lights
cigarettes, with a suggested retail price of P9.90 per pack.[3] Pursuant to
Sec. 145 (c) quoted above, the Lucky Strike brands were initially assessed
the excise tax at P8.96 per pack.

xxxx
3. Duly registered or existing brand of cigarettes shall include duly registered,
existing or active brands of cigarettes, prior to January 1, 1997.

On February 17, 2003, Revenue Regulations No. 9-2003,[4] amended

Revenue Regulations No. 1-97 by providing, among others, a periodic review
every two years or earlier of the current net retail price of new brands and
variants thereof for the purpose of establishing and updating their tax
classification, thus:

6. New Brands shall mean brands duly registered after January 1, 1997 and
shall include duly registered, inactive brands of cigarette not sold in
commercial quantity before January 1, 1997.

For the purpose of establishing or updating the tax classification of new

brands and variant(s) thereof, their current net retail price shall be reviewed
periodically through the conduct of survey or any other appropriate activity, as
mentioned above, every two (2) years unless earlier ordered by the
Commissioner. However, notwithstanding any increase in the current net
retail price, the tax classification of such new brands shall remain in force
until the same is altered or changed through the issuance of an appropriate
Revenue Regulations.
Pursuant thereto, Revenue Memorandum Order No. 6-2003[5] was issued on
March 11, 2003, prescribing the guidelines and procedures in establishing
current net retail prices of new brands of cigarettes and alcohol products.
Subsequently, Revenue Regulations No. 22-2003[6] was issued on August 8,
2003 to implement the revised tax classification of certain new brands
introduced in the market after January 1, 1997, based on the survey of their
current net retail price. The survey revealed that Lucky Strike Filter, Lucky
Strike Lights, and Lucky Strike Menthol Lights, are sold at the current net
retail price of P22.54, P22.61 and P21.23, per pack, respectively.[7]
Respondent Commissioner of the Bureau of Internal Revenue thus
recommended the applicable tax rate of P13.44 per pack inasmuch as Lucky
Strikes average net retail price is above P10.00 per pack.

xxxx

SECTION 4. Classification and Manner of Taxation of Existing Brands, New

Brands and Variant of Existing Brands.
xxxx
B. New Brand
New brands shall be classified according to their current net retail price. In
the meantime that the current net retail price has not yet been established,
the suggested net retail price shall be used to determine the specific tax
classification. Thereafter, a survey shall be conducted in 20 major
supermarkets or retail outlets in Metro Manila (for brands of cigarette
marketed nationally) or in five (5) major supermarkets or retail outlets in the
region (for brands which are marketed only outside Metro Manila) at which
the cigarette is sold on retail in reams/cartons, three (3) months after the
initial removal of the new brand to determine the actual net retail price
excluding the excise tax and value added tax which shall then be the basis in
determining the specific tax classification. In case the current net retail price
is higher than the suggested net retail price, the former shall prevail. Any
difference in specific tax due shall be assessed and collected inclusive of
increments as provided for by the National Internal Revenue Code, as
amended.

120

TAX 1

SO ORDERED.[16]

Petitioner brought the instant petition for review directly with this Court on a
pure question of law.
While the petition was pending, RA 9334 (An Act Increasing The Excise Tax
Rates Imposed on Alcohol And Tobacco Products, Amending For The
Purpose Sections 131, 141, 143, 144, 145 and 288 of the NIRC of 1997, As
Amended), took effect on January 1, 2005. The statute, among others,
(1) increased the excise tax rates provided in paragraph (c) of Section 145;
(2) mandated that new brands of cigarettes shall initially be classified
according to their suggested net retail price, until such time that their correct
tax bracket is finally determined under a specified period and, after which,
their classification shall remain in force until revised by Congress;
(3) retained Annex D as tax base of those surveyed as of October 1, 1996
including the classification of brands for the same products which, although
not set forth in said Annex D, were registered on or before January 1, 1997
and were being commercially produced and marketed on or after October 1,
1996, and which continue to be commercially produced and marketed after
the effectivity of this Act. Said classification shall remain in force until revised
by Congress; and
(4) provided a legislative freeze on brands of cigarettes introduced between
the period January 2, 1997[17] to December 31, 2003, such that said
cigarettes shall remain in the classification under which the BIR has
determined them to belong as of December 31, 2003, until revised by
Congress.
Pertinent portions, of RA 9334, provides:

Thus, on September 1, 2003, petitioner filed before the Regional Trial Court
(RTC) of Makati, Branch 61, a petition for injunction with prayer for the
issuance of a temporary restraining order (TRO) and/or writ of preliminary
injunction, docketed as Civil Case No. 03-1032. Said petition sought to enjoin
the implementation of Section 145 of the NIRC, Revenue Regulations Nos. 197, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003 on the
ground that they discriminate against new brands of cigarettes, in violation of
the equal protection and uniformity provisions of the Constitution.
Respondent Commissioner of Internal Revenue filed an Opposition[8] to the
application for the issuance of a TRO. On September 4, 2003, the trial court
denied the application for TRO, holding that the courts have no authority to
restrain the collection of taxes.[9] Meanwhile, respondent Secretary of
Finance filed a Motion to Dismiss,[10] contending that the petition is
premature for lack of an actual controversy or urgent necessity to justify
judicial intervention.
In an Order dated March 4, 2004, the trial court denied the motion to dismiss
and issued a writ of preliminary injunction to enjoin the implementation of
Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue
Memorandum Order No. 6-2003.[11] Respondents filed a Motion for
Reconsideration[12] and Supplemental Motion for Reconsideration.[13] At
the hearing on the said motions, petitioner and respondent Commissioner of
Internal Revenue stipulated that the only issue in this case is the
constitutionality of the assailed law, order, and regulations.[14]
On May 12, 2004, the trial court rendered a decision[15] upholding the
constitutionality of Section 145 of the NIRC, Revenue Regulations Nos. 1-97,
9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003. The trial
court also lifted the writ of preliminary injunction. The dispositive portion of
the decision reads:
WHEREFORE, premises considered, the instant Petition is hereby
DISMISSED for lack of merit. The Writ of Preliminary Injunction previously
issued is hereby lifted and dissolved.

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Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14)
per pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56) per
pack.
(3) If the net retail price (excluding the excise tax and the value-added tax)
exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten pesos
(P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35) per
pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos (P10.88)
per pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos
(P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06)
per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos
(P27.16) per pack; and

SEC. 145. Cigars and Cigarettes.

xxxx
(C) Cigarettes Packed by Machine. There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos (P2.23)
per pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47)
per pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos (P2.72)
per pack.
(2) If the net retail price (excluding the excise tax and the value-added tax) is
Five pesos (P5.00) but does not exceed Six pesos and fifty centavos (P6.50)
per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35) per
pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74)
per pack;

122

TAX 1
Internal Revenue, shall mean the price at which the cigarette is sold in retail
in at least twenty (20) major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount intended to cover the
applicable excise tax and the value-added tax. For brands which are
marketed only outside Metro Manila, the net retail price shall mean the price
at which the cigarette is sold in at least five (5) major supermarkets in the
region excluding the amount intended to cover the applicable excise tax and
value-added tax.
The classification of each brand of cigarettes based on its average net retail
price as of October 1, 1996, as set forth in Annex D, including the
classification of brands for the same products which, although not set forth in
said Annex D, were registered and were being commercially produced and
marketed on or after October 1, 1996, and which continue to be commercially
produced and marketed after the effectivity of this Act, shall remain in force
until revised by Congress. (Emphasis added)
Under RA 9334, the excise tax due on petitioners products was increased to
P25.00 per pack. In the implementation thereof, respondent Commissioner
assessed petitioners importation of 911,000 packs of Lucky Strike cigarettes
at the increased tax rate of P25.00 per pack, rendering it liable for taxes in
the total sum of P22,775,000.00.[18]
Hence, petitioner filed a Motion to Admit Attached Supplement[19] and a
Supplement[20] to the petition for review, assailing the constitutionality of RA
9334 insofar as it retained Annex D and praying for a downward classification
of Lucky Strike products at the bracket taxable at P8.96 per pack. Petitioner
contended that the continued use of Annex D as the tax base of existing
brands of cigarettes gives undue protection to said brands which are still
taxed based on their price as of October 1996 notwithstanding that they are
now sold at the same or even at a higher price than new brands like Lucky
Strike. Thus, old brands of cigarettes such as Marlboro and Philip Morris
which, like Lucky Strike, are sold at or more than P22.00 per pack, are taxed
at the rate of P10.88 per pack, while Lucky Strike products are taxed at
P26.06 per pack.

Effective on January 1, 2011, Twenty-eight pesos and thirty centavos

(P28.30) per pack.
xxxx
New brands, as defined in the immediately following paragraph, shall initially
be classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of R.A.
No. 8240.
Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported cigarettes are
intended by the manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed nationwide,
and in other regions, for those with regional markets. At the end of three (3)
months from the product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand against the net retail
price as defined herein and determine the correct tax bracket under which a
particular new brand of cigarette, as defined above, shall be classified. After
the end of eighteen (18) months from such validation, the Bureau of Internal
Revenue shall revalidate the initially validated net retail price against the net
retail price as of the time of revalidation in order to finally determine the
correct tax bracket under which a particular new brand of cigarettes shall be
classified; Provided however, That brands of cigarettes introduced in the
domestic market between January 1, 1997 [should be January 2, 1997] and
December 31, 2003 shall remain in the classification under which the Bureau
of Internal Revenue has determined them to belong as of December 31,
2003. Such classification of new brands and brands introduced between
January 1, 1997 and December 31, 2003 shall not be revised except by an
act of Congress.
Net retail price, as determined by the Bureau of Internal Revenue through a
price survey to be conducted by the Bureau of Internal Revenue itself, or the
National Statistics Office when deputized for the purpose by the Bureau of

123

TAX 1
Intervenor Fortune Tobacco further contends that petitioner is estopped from
questioning the constitutionality of Section 145 and its implementing rules
and regulations because it entered into the cigarette industry fully aware of
the existing tax system and its consequences. Petitioner imported cigarettes
into the country knowing that its suggested retail price, which will be the initial
basis of its tax classification, will be confirmed and validated through a survey
by the BIR to determine the correct tax that would be levied on its cigarettes.
Moreover, Fortune Tobacco claims that the challenge to the validity of the BIR
issuances should have been brought by petitioner before the Court of Tax
Appeals (CTA) and not the RTC because it is the CTA which has exclusive
appellate jurisdiction over decisions of the BIR in tax disputes.
On August 7, 2006, the OSG manifested that it interposes no objection to the
motions for intervention.[24] Therefore, considering the substantial interest of
the intervenors, and in the higher interest of justice, the Court admits their
intervention.
Before going into the substantive issues of this case, we must first address
the matter of jurisdiction, in light of Fortune Tobaccos contention that
petitioner should have brought its petition before the Court of Tax Appeals
rather than the regional trial court.
The jurisdiction of the Court of Tax Appeals is defined in Republic Act No.
1125, as amended by Republic Act No. 9282. Section 7 thereof states, in
pertinent part:
Sec. 7. Jurisdiction. The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the

In its Comment to the supplemental petition, respondents, through the Office

of the Solicitor General (OSG), argued that the passage of RA 9334,
specifically the provision imposing a legislative freeze on the classification of
cigarettes introduced into the market between January 2, 1997 and
December 31, 2003, rendered the instant petition academic. The OSG claims
that the provision in Section 145, as amended by RA 9334, prohibiting the
reclassification of cigarettes introduced during said period, cured the
perceived defect of Section 145 considering that, like the cigarettes under
Annex D, petitioners brands and other brands introduced between January 2,
1997 and December 31, 2003, shall remain in the classification under which
the BIR has placed them and only Congress has the power to reclassify
them.
On March 20, 2006, Philip Morris Philippines Manufacturing Incorporated
filed a Motion for Leave to Intervene with attached Comment-in-Intervention.
[21] This was followed by the Motions for Leave to Intervene of Fortune
Tobacco Corporation,[22] Mighty Corporation, [23] and JT International, S.A.,
with their respective Comments-in-Intervention. The Intervenors claim that
they are parties-in-interest who stand to be affected by the ruling of the Court
on the constitutionality of Section 145 of the NIRC and its Annex D because
they are manufacturers of cigarette brands which are included in the said
Annex. Hence, their intervention is proper since the protection of their interest
cannot be addressed in a separate proceeding.
According to the Intervenors, no inequality exists because cigarettes
classified by the BIR based on their net retail price as of December 31, 2003
now enjoy the same status quo provision that prevents the BIR from
reclassifying cigarettes included in Annex D. It added that the Court has no
power to pass upon the wisdom of the legislature in retaining Annex D in RA
9334; and that the nullification of said Annex would bring about tremendous
loss of revenue to the government, chaos in the collection of taxes, illicit trade
of cigarettes, and cause decline in cigarette demand to the detriment of the
farmers who depend on the tobacco industry.

124

TAX 1
We stress at the outset that the lower court had jurisdiction to consider the
constitutionality of Section 187, this authority being embraced in the general
definition of the judicial power to determine what are the valid and binding
laws by the criterion of their conformity to the fundamental law. Specifically,
B.P. 129 vests in the regional trial courts jurisdiction over all civil cases in
which the subject of the litigation is incapable of pecuniary estimation, even
as the accused in a criminal action has the right to question in his defense
the constitutionality of a law he is charged with violating and of the
proceedings taken against him, particularly as they contravene the Bill of
Rights. Moreover, Article X, Section 5(2), of the Constitution vests in the
Supreme Court appellate jurisdiction over final judgments and orders of lower
courts in all cases in which the constitutionality or validity of any treaty,
international or executive agreement, law, presidential decree, proclamation,
order, instruction, ordinance, or regulation is in question.

The petition for injunction filed by petitioner before the RTC is a direct attack
on the constitutionality of Section 145(C) of the NIRC, as amended, and the
validity of its implementing rules and regulations. In fact, the RTC limited the
resolution of the subject case to the issue of the constitutionality of the
assailed provisions. The determination of whether the assailed law and its
implementing rules and regulations contravene the Constitution is within the
jurisdiction of regular courts. The Constitution vests the power of judicial
review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation in
the courts, including the regional trial courts.[28] Petitioner, therefore,
properly filed the subject case before the RTC.
We come now to the issue of whether petitioner is estopped from assailing
the authority of the Commissioner of Internal Revenue. Fortune Tobacco
raises this objection by pointing out that when petitioner requested the
Commissioner for a ruling that its Lucky Strike Soft Pack cigarettes was a
new brand rather than a variant of an existing brand, and thus subject to a
lower specific tax rate, petitioner executed an undertaking to comply with the

National Internal Revenue or other laws administered by the Bureau of

Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a denial;
xxx.[25]

While the above statute confers on the CTA jurisdiction to resolve tax
disputes in general, this does not include cases where the constitutionality of
a law or rule is challenged. Where what is assailed is the validity or
constitutionality of a law, or a rule or regulation issued by the administrative
agency in the performance of its quasi-legislative function, the regular courts
have jurisdiction to pass upon the same. The determination of whether a
specific rule or set of rules issued by an administrative agency contravenes
the law or the constitution is within the jurisdiction of the regular courts.
Indeed, the Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential
decree, order, instruction, ordinance, or regulation in the courts, including the
regional trial courts. This is within the scope of judicial power, which includes
the authority of the courts to determine in an appropriate action the validity of
the acts of the political departments. 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.
[26]
In Drilon v. Lim,[27] it was held:

125

TAX 1
fourth, the actor knows, expects or foresees that the other would act upon the
information given or that a reasonable person in the actor's position would
expect or foresee such action.[30]
In the early case of Kalalo v. Luz,[31] the elements of estoppel, as related to
the party to be estopped, are: (1) conduct amounting to false representation
or concealment of material facts; or at least calculated to convey the
impression that the facts are other than, and inconsistent with, those which
the party subsequently attempts to assert; (2) intent, or at least expectation
that this conduct shall be acted upon by, or at least influence, the other party;
and (3) knowledge, actual or constructive, of the real facts.
We find that petitioner was not guilty of estoppel. When it made the
undertaking to comply with all issuances of the BIR, which at that time it
considered as valid, petitioner did not commit any false misrepresentation or
misleading act. Indeed, petitioner cannot be faulted for initially undertaking to
comply with, and subjecting itself to the operation of Section 145(C), and only
later on filing the subject case praying for the declaration of its
unconstitutionality when the circumstances change and the law results in
what it perceives to be unlawful discrimination. The mere fact that a law has
been relied upon in the past and all that time has not been attacked as
unconstitutional is not a ground for considering petitioner estopped from
assailing its validity. For courts will pass upon a constitutional question only
when presented before it in bona fide cases for determination, and the fact
that the question has not been raised before is not a valid reason for refusing
to allow it to be raised later.[32]

procedures under existing regulations for the assessment of deficiency

internal revenue taxes.
Fortune Tobacco argues that petitioner, after invoking the authority of the
Commissioner of Internal Revenue, cannot later on turn around when the
ruling is adverse to it.
Estoppel, an equitable principle rooted in natural justice, prevents persons
from going back on their own acts and representations, to the prejudice of
others who have relied on them.[29] The principle is codified in Article 1431
of the Civil Code, which provides:
Through estoppel, an admission or representation is rendered conclusive
upon the person making it and cannot be denied or disproved as against the
person relying thereon.
Estoppel can also be found in Rule 131, Section 2 (a) of the Rules of Court,
viz:
Sec. 2. Conclusive presumptions. The following are instances of conclusive
presumptions:
(a) Whenever a party has by his own declaration, act or omission,
intentionally and deliberately led another to believe a particular thing true,
and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act or omission be permitted to falsify it.

Now to the substantive issues.

To place this case in its proper context, we deem it necessary to first discuss
how the assailed law operates in order to identify, with precision, the specific
provisions which, according to petitioner, have created a grossly
discriminatory classification scheme between old and new brands. The
pertinent portions of RA 8240, as amended by RA 9334, are reproduced
below for ready reference:

The elements of estoppel are: first, the actor who usually must have
knowledge, notice or suspicion of the true facts, communicates something to
another in a misleading way, either by words, conduct or silence; second, the
other in fact relies, and relies reasonably or justifiably, upon that
communication; third, the other would be harmed materially if the actor is
later permitted to assert any claim inconsistent with his earlier conduct; and

126

TAX 1
Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14)
per pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56) per
pack.
(3) If the net retail price (excluding the excise tax and the value-added tax)
exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten pesos
(P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35) per
pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos (P10.88)
per pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos
(P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06)
per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos
(P27.16) per pack; and

SEC. 145. Cigars and Cigarettes.

xxxx
(C) Cigarettes Packed by Machine. There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos (P2.23)
per pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47)
per pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos (P2.72)
per pack.
(2) If the net retail price (excluding the excise tax and the value-added tax) is
Five pesos (P5.00) but does not exceed Six pesos and fifty centavos (P6.50)
per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35) per
pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74)
per pack;

127

TAX 1
Internal Revenue, shall mean the price at which the cigarette is sold in retail
in at least twenty (20) major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount intended to cover the
applicable excise tax and the value-added tax. For brands which are
marketed only outside Metro Manila, the net retail price shall mean the price
at which the cigarette is sold in at least five (5) major supermarkets in the
region excluding the amount intended to cover the applicable excise tax and
value-added tax.
The classification of each brand of cigarettes based on its average net retail
price as of October 1, 1996, as set forth in Annex D, including the
classification of brands for the same products which, although not set forth in
said Annex D, were registered and were being commercially produced and
marketed on or after October 1, 1996, and which continue to be commercially
produced and marketed after the effectivity of this Act, shall remain in force
until revised by Congress.
As can be seen, the law creates a four-tiered system which we may refer to
as the low-priced,[33] medium-priced,[34] high-priced,[35] and premiumpriced[36] tax brackets. When a brand is introduced in the market, the current
net retail price is determined through the aforequoted specified procedure.
The current net retail price is then used to classify under which tax bracket
the brand belongs in order to finally determine the corresponding excise tax
rate on a per pack basis. The assailed feature of this law pertains to the
mechanism where, after a brand is classified based on its current net retail
price, the classification is frozen and only Congress can thereafter reclassify
the same. From a practical point of view, Annex D is merely a by-product of
the whole mechanism and philosophy of the assailed law. That is, the brands
under Annex D were also classified based on their current net retail price, the
only difference being that they were the first ones so classified since they
were the only brands surveyed as of October 1, 1996, or prior to the
effectivity of RA 8240 on January 1, 1997.[37]
Due to this legislative classification scheme, it is possible that over time the
net retail price of a previously classified brand, whether it be a brand under

Effective on January 1, 2011, Twenty-eight pesos and thirty centavos

(P28.30) per pack.
xxxx
New brands, as defined in the immediately following paragraph, shall initially
be classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of R.A.
No. 8240.
Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported cigarettes are
intended by the manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed nationwide,
and in other regions, for those with regional markets. At the end of three (3)
months from the product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand against the net retail
price as defined herein and determine the correct tax bracket under which a
particular new brand of cigarette, as defined above, shall be classified. After
the end of eighteen (18) months from such validation, the Bureau of Internal
Revenue shall revalidate the initially validated net retail price against the net
retail price as of the time of revalidation in order to finally determine the
correct tax bracket under which a particular new brand of cigarettes shall be
classified; Provided however, That brands of cigarettes introduced in the
domestic market between January 1, 1997 [should be January 2, 1997] and
December 31, 2003 shall remain in the classification under which the Bureau
of Internal Revenue has determined them to belong as of December 31,
2003. Such classification of new brands and brands introduced between
January 1, 1997 and December 31, 2003 shall not be revised except by an
act of Congress.
Net retail price, as determined by the Bureau of Internal Revenue through a
price survey to be conducted by the Bureau of Internal Revenue itself, or the
National Statistics Office when deputized for the purpose by the Bureau of

128

TAX 1
It is apparent that, contrary to its assertions, petitioner is not only questioning
the undue favoritism accorded to brands under Annex D, but the entire
mechanism and philosophy of the law which freezes the tax classification of a
cigarette brand based on its current net retail price. Stated differently, the
alleged discrimination arising from the legislative classification freeze
between the brands under Annex D and petitioners newly introduced brands
arose only because the former were classified based on their current net
retail price as of October 1, 1996 and petitioners newly introduced brands
were classified based on their current net retail price as of 2003. Without this
corresponding freezing of the classification of petitioners newly introduced
brands based on their current net retail price, it would be impossible to
establish that a disparate tax treatment occurred between the Annex D
brands and petitioners newly introduced brands.
This clarification is significant because, under these circumstances, a
declaration of unconstitutionality would necessarily entail nullifying the whole
mechanism of the law and not just Annex D. Consequently, if the assailed law
is declared unconstitutional on equal protection grounds, the entire method
by which a brand of cigarette is classified would have to be invalidated. As a
result, no method to classify brands under Annex D as well as new brands
would be left behind and the whole Section 145 of the NIRC, as amended,
would become inoperative.[43]
To simplify the succeeding discussions, we shall refer to the whole
mechanism and philosophy of the assailed law which freezes the tax
classification of a cigarette brand based on its current net retail price and
which, thus, produced different classes of brands based on the time of their
introduction in the market (starting with the brands in Annex D since they
were the first brands so classified as of October 1, 1996) as the classification
freeze provision.[44]
As thus formulated, the central issue is whether or not the classification
freeze provision violates the equal protection and uniformity of taxation
clauses of the Constitution.

Annex D or a new brand classified after the effectivity of RA 8240 on January

1, 1997, would increase (due to inflation, increase of production costs,
manufacturers decision to increase its prices, etc.) to a point that its net retail
price pierces the tax bracket to which it was previously classified.[38]
Consequently, even if its present day net retail price would make it fall under
a higher tax bracket, the previously classified brand would continue to be
subject to the excise tax rate under the lower tax bracket by virtue of the
legislative classification freeze.
Petitioner claims that this is what happened in 2004 to the Marlboro and
Philip Morris brands, which were permanently classified under Annex D. As
of October 1, 1996, Marlboro had net retail prices ranging from P6.78 to
P6.84 while Philip Morris had net retail prices ranging from P7.39 to P7.48.
Thus, pursuant to RA 8240,[39] Marlboro and Philip Morris were classified
under the high-priced tax bracket and subjected to an excise tax rate of P8.96
per pack. Petitioner then presented evidence showing that after the lapse of
about seven years or sometime in 2004, Marlboros and Philip Morris net
retail prices per pack both increased to about P15.59.[40] This meant that
they would fall under the premium-priced tax bracket, with a higher excise tax
rate of P13.44 per pack,[41] had they been classified based on their 2004 net
retail prices. However, due to the legislative classification freeze, they
continued to be classified under the high-priced tax bracket with a lower
excise tax rate. Petitioner thereafter deplores the fact that its Lucky Strike
Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights cigarettes,
introduced in the market sometime in 2001 and validated by a BIR survey in
2003, were found to have net retail prices of P11.53, P11.59 and P10.34,[42]
respectively, which are lower than those of Marlboro and Philip Morris.
However, since petitioners cigarettes were newly introduced brands in the
market, they were taxed based on their current net retail prices and, thus, fall
under the premium-priced tax bracket with a higher excise tax rate of P13.44
per pack. This unequal tax treatment between Marlboro and Philip Morris, on
the one hand, and Lucky Strike, on the other, is the crux of petitioners
contention that the legislative classification freeze violates the equal
protection and uniformity of taxation clauses of the Constitution.

129

TAX 1
one particular class for taxation, or exemption infringe no constitutional
limitation.'"
Petitioner likewise invoked the kindred concept of uniformity. According to the
Constitution: "The rule of taxation shall be uniform and equitable." This
requirement is met according to Justice Laurel in Philippine Trust Company v.
Yatco, decided in 1940, when the tax "operates with the same force and
effect in every place where the subject may be found." He likewise added:
"The rule of uniformity does not call for perfect uniformity or perfect equality,
because this is hardly attainable." The problem of classification did not
present itself in that case. It did not arise until nine years later, when the
Supreme Court held: "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, . . . As clarified by Justice
Tuason, where "the differentiation" complained of "conforms to the practical
dictates of justice and equity" it "is not discriminatory within the meaning of
this clause and is therefore uniform." There is quite a similarity then to the
standard of equal protection for all that is required is that the tax "applies
equally to all persons, firms and corporations placed in similar situation."[46]
(Emphasis supplied)
In consonance thereto, we have held that in our jurisdiction, the standard and
analysis of equal protection challenges in the main have followed the rational
basis test, coupled with a deferential attitude to legislative classifications and
a reluctance to invalidate a law unless there is a showing of a clear and
unequivocal breach of the Constitution.[47] Within the present context of tax
legislation on sin products which neither contains a suspect classification nor
impinges on a fundamental right, the rational-basis test thus finds application.
Under this test, a legislative classification, to survive an equal protection
challenge, must be shown to rationally further a legitimate state interest.[48]
The classifications must be reasonable and rest upon some ground of
difference having a fair and substantial relation to the object of the legislation.
[49] Since every law has in its favor the presumption of constitutionality, the
burden of proof is on the one attacking the constitutionality of the law to prove
beyond reasonable doubt that the legislative classification is without rational
basis.[50] The presumption of constitutionality can be overcome only by the

In Sison, Jr. v. Ancheta,[45] this Court, through Chief Justice Fernando,

explained the applicable standard in deciding equal protection and uniformity
of taxation challenges:
Now for equal protection. The applicable standard to avoid the charge that
there is a denial of this constitutional mandate whether the assailed act is in
the exercise of the police power or the power of eminent domain is to
demonstrate "that the governmental act assailed, far from being inspired by
the attainment of the common weal was prompted by the spirit of hostility, or
at the very least, discrimination that finds no support in reason. It suffices
then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the
conditions not being different, both in the privileges conferred and the
liabilities imposed. Favoritism and undue preference cannot be allowed. For
the principle is that equal protection and security shall be given to every
person under circumstances, which if not identical are analogous. If law be
looks upon in terms of burden or charges, those that fall within a class should
be treated in the same fashion, whatever restrictions cast on some in the
group equally binding on the rest." That same formulation applies as well to
taxation measures. The equal protection clause is, of course, inspired by the
noble concept of approximating the ideal of the laws's benefits being
available to all and the affairs of men being governed by that serene and
impartial uniformity, which is of the very essence of the idea of law. There is,
however, wisdom, as well as realism, in these words of Justice Frankfurter:
"The equality at which the 'equal protection' clause aims is not a disembodied
equality. The Fourteenth Amendment enjoins 'the equal protection of the
laws,' and laws are not abstract propositions. They do not relate to abstract
units A, B and C, but are expressions of policy arising out of specific
difficulties, addressed to the attainment of specific ends by the use of specific
remedies. The Constitution does not require things which are different in fact
or opinion to be treated in law as though they were the same." Hence the
constant reiteration of the view that classification if rational in character is
allowable. As a matter of fact, in a leading case of Lutz v. Araneta, this Court,
through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent
in the power to tax that a state be free to select the subjects of taxation, and it
has been repeatedly held that 'inequalities which result from a singling out of

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First, to evolve a tax structure which will promote fair competition among the
players in the industries concerned and generate buoyant and stable revenue
for the government.

most explicit demonstration that a classification is a hostile and oppressive

discrimination against particular persons and classes, and that there is no
conceivable basis which might support it.[51]

Second, to ensure that the tax burden is equitably distributed not only
amongst the industries affected but equally amongst the various levels of our
society that are involved in various markets that are going to be affected by
the excise tax on distilled spirits, fermented liquor, cigars and cigarettes.

A legislative classification that is reasonable does not offend the

constitutional guaranty of the equal protection of the laws. The classification
is considered valid and reasonable provided that: (1) it rests on substantial
distinctions; (2) it is germane to the purpose of the law; (3) it applies, all
things being equal, to both present and future conditions; and (4) it applies
equally to all those belonging to the same class.[52]

In the case of firms engaged in the industries producing the products that we
are about to tax, this means relating the tax burden to their market share, not
only in terms of quantity, Mr. President, but in terms of value.
In case of consumers, this will mean evolving a multi-tiered rate structure so
that low-priced products are subject to lower tax rates and higher-priced
products are subject to higher tax rates.
Third, to simplify the tax administration and compliance with the tax laws that
are about to unfold in order to minimize losses arising from inefficiencies and
tax avoidance scheme, if not outright tax evasion.[54]
In the initial stages of the crafting of the assailed law, the Department of
Finance (DOF) recommended to Congress a shift from the then existing ad
valorem taxation system to a specific taxation system with respect to sin
products, including cigarettes. The DOF noted that the ad valorem taxation
system was a source of massive tax leakages because the taxpayer was able
to evade paying the correct amount of taxes through the undervaluation of
the price of cigarettes using various marketing arms and dummy
corporations. In order to address this problem, the DOF proposed a specific
taxation system where the cigarettes would be taxed based on volume or on
a per pack basis which was believed to be less susceptible to price
manipulation. The reason was that the BIR would only need to monitor the
sales volume of cigarettes, from which it could easily compute the
corresponding tax liability of cigarette manufacturers. Thus, the DOF
suggested the use of a three-tiered system which operates in substantially

The first, third and fourth requisites are satisfied. The classification freeze
provision was inserted in the law for reasons of practicality and expediency.
That is, since a new brand was not yet in existence at the time of the passage
of RA 8240, then Congress needed a uniform mechanism to fix the tax
bracket of a new brand. The current net retail price, similar to what was used
to classify the brands under Annex D as of October 1, 1996, was thus the
logical and practical choice. Further, with the amendments introduced by RA
9334, the freezing of the tax classifications now expressly applies not just to
Annex D brands but to newer brands introduced after the effectivity of RA
8240 on January 1, 1997 and any new brand that will be introduced in the
future.[53] (However, as will be discussed later, the intent to apply the
freezing mechanism to newer brands was already in place even prior to the
amendments introduced by RA 9334 to RA 8240.) This does not explain,
however, why the classification is frozen after its determination based on
current net retail price and how this is germane to the purpose of the assailed
law. An examination of the legislative history of RA 8240 provides interesting
answers to this question.
RA 8240 was the first of three parts in the Comprehensive Tax Reform
Package then being pushed by the Ramos Administration. It was enacted
with the following objectives stated in the Sponsorship Speech of Senator
Juan Ponce Enrile (Senator Enrile), viz:

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account the movement of the consumer price index for cigars and cigarettes
as established by the National Statistics Office: provided, that the increase in
taxes and/or price levels shall be equal to the present change in such
consumer price index for the two-year period: provided, further, that the
President, upon the recommendation of the Secretary of Finance, may
suspend or defer the adjustment in price levels and tax rates when the
interest of the national economy and general welfare so require, such as the
need to obviate unemployment, and economic and social dislocation:
provided, finally, that the revised price levels and tax rates authorized herein
shall in all cases be rounded off to the nearest centavo and shall be in force
and effect on the date of publication thereof in a newspaper of general
circulation. x x x (Emphasis supplied)
What is of particular interest with respect to the proposal of the DOF is that it
contained a provision for the periodic adjustment of the excise tax rates and
tax brackets, and a corresponding periodic resurvey and reclassification of
cigarette brands based on the increase in the consumer price index as
determined by the Commissioner of Internal Revenue subject to certain
guidelines. The evident intent was to prevent inflation from eroding the value
of the excise taxes that would be collected from cigarettes over time by
adjusting the tax rate and tax brackets based on the increase in the
consumer price index. Further, under this proposal, old brands as well as new
brands introduced thereafter would be subjected to a resurvey and
reclassification based on their respective values at the end of every two years
in order to align them with the adjustment of the excise tax rate and tax
brackets due to the movement in the consumer price index.[55]
Of course, we now know that the DOF proposal, insofar as the periodic
adjustment of tax rates and tax brackets, and the periodic resurvey and
reclassification of cigarette brands are concerned, did not gain approval from
Congress. The House and Senate pushed through with their own versions of
the excise tax system on beers and cigarettes both denominated as H.B. No.
7198. For convenience, we shall refer to the bill deliberated upon by the
House as the House Version and that of the Senate as the Senate Version.

the same manner as the four-tiered system under RA 8240 as earlier

discussed. The proposal of the DOF was embodied in House Bill (H.B.) No.
6060, the pertinent portions of which states
SEC. 142. Cigars and cigarettes.
(c) Cigarettes packed by machine. There shall be levied, assessed and
collected on cigarettes packed by machine a tax at the rates prescribed
below:
(1) If the manufacturers or importers wholesale price (net of excise tax and
value-added tax) per pack exceeds four pesos and twenty centavos (P4.20),
the tax shall be seven pesos and fifty centavos (P7.50);
(2) If the manufacturers or importers wholesale price (net of excise tax and
value-added tax) per pack exceeds three pesos and ninety centavos (P3.90)
but does not exceed four pesos and twenty centavos (P4.20), the tax shall be
five pesos and fifty centavos (P5.50): provided, that after two (2) years from
the effectivity of this Act, cigarettes otherwise subject to tax under this
subparagraph shall be taxed under subparagraph (1) above.
(3) If the manufacturers or importers wholesale price (net of excise tax and
value-added tax) per pack does not exceeds three pesos and ninety centavos
(P3.90), the tax rate shall be one peso (P1.00).
Variants of existing brands and new brands of cigarettes packed by machine
to be introduced in the domestic market after the effectivity of this Act, shall
be taxed under paragraph (c)(1) hereof.
The rates of specific tax on cigars and cigarettes under paragraphs (a), (b),
and (c) hereof, including the price levels for purposes of classifying cigarettes
packed by machine, shall be revised upward two (2) years after the effectivity
of this Act and every two years thereafter by the Commissioner of Internal
Revenue, subject to the approval of the Secretary of Finance, taking into

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countenance the shift for ethical reasons, lest we be accused of betraying the
trust reposed on this Chamber by the people. x x x
A final point on this proposal, Mr. Speaker, is the exercise of the taxing power
of the Commissioner of Internal Revenue which will be triggered by inflation
rates based on the consumer price index. Simply stated, Mr. Speaker, the
specific tax rates will be fixed by the Commissioner depending on the price
levels of beers and cigarettes as determined by the consumers price index.
This is a novel idea, if not necessarily weird in the field of taxation. What if the
brewer or the cigarette manufacturer sells at a price below the consumers
price index? Will it be taxed on the basis of the consumers price index which
is over and above its wholesale or retail price as the case may be? This is a
weird form of exaction where the tax is based not on what the brewer or
manufacturer actually realized but on an imaginary wholesale or retail price.
This amounts to a taxation based on presumptive price levels and renders
the specific tax a presumptive tax. We hope, the DOF and the BIR will also
honor a presumptive tax payment.
Moreover, specific tax rates based on price levels tied to consumers price
index as proposed by the DOF engenders anti-trust concerns. The proposal if
enacted into law will serve as a barrier to the entry of new players in the beer
and cigarette industries which are presently dominated by shared
monopolies. A new player in these industries will be denied business
flexibility to fix its price levels to promote its product and penetrate the market
as the price levels are dictated by the consumer price index. The proposed
tax regime, Mr. Speaker, will merely enhance the stranglehold of the
oligopolies in the beer and cigarette industries, thus, reversing the
governments policy of dismantling monopolies and combinations in restraint
of trade.[56]
For its part, the Senates Committee on Ways and Means, then chaired by
Senator Juan Ponce Enrile (Senator Enrile), developed its own version of the
excise tax system on cigarettes. The Senate Version consisted of a fourtiered system and, interestingly enough, contained a periodic excise tax rate
and tax bracket adjustment as well as a periodic resurvey and reclassification

The Houses Committee on Ways and Means, then chaired by Congressman

Exequiel B. Javier (Congressman Javier), roundly rejected the DOF proposal.
Instead, in its Committee Report submitted to the plenary, it proposed a
different excise tax system which used a specific tax as a basic tax with an
ad valorem comparator. Further, it deleted the proposal to have a periodic
adjustment of tax rates and the tax brackets as well as periodic resurvey and
reclassification of cigarette brands, to wit:
The rigidity of the specific tax system calls for the need for frequent
congressional intervention to adjust the tax rates to inflation and to keep pace
with the expanding needs of government for more revenues. The DOF admits
this flaw inherent in the tax system it proposed. Hence, to obviate the need
for remedial legislation, the DOF is asking Congress to grant to the
Commissioner the power to revise, one, the specific tax rates: and two, the
price levels of beer and cigarettes. What the DOF is asking, Mr. Speaker, is
for Congress to delegate to the Commissioner of Internal Revenue the power
to fix the tax rates and classify the subjects of taxation based on their price
levels for purposes of fixing the tax rates. While we sympathize with the
predicament of the DOF, it is not for Congress to abdicate such power. The
power sought to be delegated to be exercised by the Commissioner of
Internal Revenue is a legislative power vested by the Constitution in
Congress pursuant to Section 1, Article VI of the Constitution. Where the
power is vested, there it must remain in Congress, a body of representatives
elected by the people. Congress may not delegate such power, much less
abdicate it.
xxxx
Moreover, the grant of such power, if at all constitutionally permissible, to the
Commissioner of Internal Revenue is fraught with ethical implications. The
debates on how much revenue will be raised, how much money will be taken
from the pockets of taxpayers, will inexorably shift from the democratic Halls
of Congress to the secret and non-transparent corridors of unelected
agencies of government, the Department of Finance and the Bureau of
Internal Revenue, which are not accountable to our people. We cannot

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TAX 1

xxx
The rates of specific tax on cigars and cigarettes under subparagraph (a), (b)
and (c) hereof, including the net retail prices for purposes of classification,
shall be adjusted on the sixth of January three years after the effectivity of
this Act and every three years thereafter. The adjustment shall be in
accordance with the inflation rate measured by the average increase in the
consumer price index over the three-year period. The adjusted tax rates and
net price levels shall be in force on the eighth of January.

of brands provision (periodic adjustment and reclassification provision, for

brevity) to be conducted by the DOF in coordination with the BIR and the
National Statistics Office based on the increase in the consumer price index
similar to the one proposed by the DOF, viz:
SEC. 4 Section 142 of the National Internal Revenue Code, as amended, is
hereby further amended to read as follows:
SEC. 142. Cigars and cigarettes.
xxxx

Within the period hereinabove mentioned, the Secretary of Finance shall

direct the conduct of a survey of retail prices of each brand of cigarettes in
coordination with the Bureau of Internal Revenue and the National Statistics
Office.
For purposes of this Section, net retail price shall mean the price at which the
cigarette is sold on retail in 20 major supermarkets in Metro Manila (for
brands of cigarettes marketed nationally), excluding the amount intended to
cover the applicable excise tax and the value-added tax. For brands which
are marketed only outside Metro Manila, the net retail price shall mean the
price at which the cigarette is sold in five major supermarkets in the region
excluding the amount intended to cover the applicable excise tax and the
value-added tax.
The classification of each brand of cigarettes in the initial year of
implementation of this Act shall be based on its average net retail price as of
October 1, 1996. The said classification by brand shall remain in force until
January 7, 2000.
New brands shall be classified according to their current net retail price.[57]
(Emphasis supplied)

(c) Cigarettes packed by machine. There shall be levied, assessed and

collected on cigarettes packed by machine a tax at the rates prescribed
below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax shall be Twelve pesos (P12.00)
per pack;
(2) If the net retail price (excluding the excise tax and the value-added tax)
exceeds Six pesos and fifty centavos (P6.50) per pack, the tax shall be Eight
pesos (P8.00) per pack;
(3) If the net retail price (excluding the excise tax and the value-added tax) is
Five pesos (P5.00) up to Six pesos and fifty centavos (P6.50) per pack, the
tax shall be Five pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax shall be One peso (P1.00) per
pack.
Variants of existing brands of cigarettes which are introduced in the domestic
market after the effectivity of this Act shall be taxed under the highest
classification of any variant of that brand.

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Senator Roco: Mr. President, we certainly share the judgment of the

distinguished gentleman as regards the comparator provision in the House of
Representatives and we appreciate the reasons given. But we are under the
impression that the House also, aside from the comparator, has an
adjustment clause that is fixed. It has fixed rates for the adjustment. So that
one of the basic differences between the Senate proposed version now and
the House version is that, the House of Representatives has manifested its
will and judgment as regards the tax to which we will adjust, whereas the
Senate version relegates fundamentally that judgment to the Department of
Finance.
Senator Enrile: That is correct, Mr. President, because we felt that in
imposing a fixed adjustment, we might be fixing an amount that is either too
high or too low. We cannot foresee the economic trends in this country over a
period of two years, three years, let alone ten years. So we felt that a
mechanism ought to be adopted in order to serve the interest of the
government, the interest of the producers, and the interest of the consuming
public.
Senator Roco: This is where, Mr. President, my policy difficulties start. Under
the Constitution I think it is Article VI, Section 24, and it was the distinguished
chairman of the Committee on Ways and Means who made this Chamber
very conscious of this provision revenue measures and tariff measures shall
originate exclusively from the House of Representatives.
The reason for this, Mr. President, is, there is a long history why the House of
Representatives must originate judgments on tax. The House members
represent specific districts. They represent specific constituencies, and the
whole history of parliamentarism, the whole history of Congress as an
institution is founded on the proposition that the direct representatives of the
people must speak about taxes.
Mr. President, while the Senate can concur and can introduce amendments,
the proposed change here is radical. This is the policy difficulty that I wish to

During the period of interpellations, the late Senator Raul S. Roco (Senator
Roco) expressed doubts as to the legality and wisdom of putting a periodic
adjustment and reclassification provision:
Senator Enrile: This will be the first time that a tax burden will be allowed to
be automatically adjusted upwards based on a system of indexing tied up
with the Consumers Price Index (CPI). Although I must add that we have
adopted a similar system in adjusting the personal tax exemption from
income tax of our individual taxpayers.
Senator Roco: They are not exactly the same, Mr. President. But even then,
we do note that this the first time we are trying to put an automatic
adjustment. My concern is, why do we propose now this automatic
adjustment? What is the reason that impels the committee? Maybe we can
be enlightened and maybe we shall embrace it forthwith. But what is the
reason?
Senator Enrile: Mr. President, we will recall that in the House of
Representatives, it has adopted a tax proposal on these products based on a
specific tax as a basic tax with an ad valorem comparator. The Committee on
Ways and Means of the Senate has not seen it fit to adopt this system, but it
recognized the possibility that there may be an occasion where the price
movement in the country might unwarrantedly move upwards, in which case,
if we peg the government to a specific tax rate of P6.30, P9.30 and P12.30
for beer, since we are talking of beer, [58] the government might lose in the
process.
In order to consider the interest of the government in this, Mr. President, and
in order to obviate the possibility that some of these products categorized
under the different tiers with different specific tax rates from moving upwards
and piercing their own tiers and thereby expose themselves to an incremental
tax of higher magnitude, it was felt that we should adopt a system where, in
spite of any escalation in the price of these products in the future, the tax
rates could be adjusted upwards so that none of these products would leave
their own tier. That was the basic principle under which we crafted this
portion of the tax proposal.

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possible abuse and corruption that will arise from the periodic adjustment and
reclassification provision. Continuing
Senator Roco: Mr. President, if that is the argument, that the distinguished
gentleman has a different legal interpretation, we will then now examine the
choice. Because his legal interpretation is different from mine, then the issues
becomes: Is it more advantageous that this judgment be exercised by the
House? Should we not concur or modify in terms of the exercise by the
House of its power or are we better off giving this judgment call to the
Department of Finance?
Let me now submit, Mr. President, that in so doing, it is more advantageous
to fix the rate so that even if we modify the rates identified by Congress, it is
better and less susceptible to abuse.
For instance, Mr. President, would the gentlemen wish to demonstrate to us
how this will be done? On page 8, lines 5 to 9, there is a provision here as to
when the Secretary of Finance shall direct the conduct of survey of retail
prices of each brand of fermented liquor in coordination with the Bureau of
Internal Revenue and the National Statistics Office.
These offices are not exactly noted, Mr. President, for having been sanctified
by the Holy Spirit in their noble intentions. x x x[60] (Emphasis supplied)
Pressing this point, Senator Roco continued his query:
Senator Roco: x x x [On page 8, lines 5 to 9] it says that during the two-year
period, the Secretary of Finance shall direct the conduct of the survey. How?
When? Which retail prices and what brand shall he consider? When he
coordinates with the Bureau of Internal Revenue, what is the Bureau of
Internal Revenue supposed to be doing? What is the National Statistics
Office supposed to be doing, and under what guides and standards?
May the gentleman wish to demonstrate how this will be done? My point, Mr.
President, is, by giving the Secretary of Finance, the BIR and the National

clarify with the gentleman because the judgment call now on the amount of
tax to be imposed is not coming from Congress. It is shifted to the
Department of Finance. True, the Secretary of Finance may have been the
best finance officer two years ago and now the best finance officer in Asia,
but that does not make him qualified to replace the judgment call of the
House of Representatives. That is my first difficulty.
Senator Enrile: Mr. President, precisely the law, in effect, authorizes this rate
beforehand. The computation of the rate is the only thing that was left to the
Department of Finance as a tax implementor of Congress. This is not
unusual because we have already, as I said, adopted a system similar to this.
If we adjust the personal exemption of an individual taxpayer, we are in effect
adjusting the applicable tax rate to him.
Senator Roco: But the point I was trying to demonstrate, Mr. President, is that
we depart precisely from the mandate of the Constitution that judgment on
revenue must emanate from Congress. Here, it is shifted to the Department
of Finance for no visible or patent reason insofar as I could understand. The
only difference is, who will make the judgment? Should it be Congress?
Senator Enrile: Mr. President, forgive me for answering sooner than I should.
My understanding of the Constitution is that all revenue measures must
emanate from the House. That is all the Constitution says.
Now, it does not say that the judgment call must belong to the House. The
judgment call can belong both to the House and to the Senate. We can
change whatever proposal the House did. Precisely, we are now crafting a
measure, and we are saying that this is the rate subject to an adjustment
which we also provide. We are not giving any unusual power to the Secretary
of Finance because we tell him, This is the formula that you must adopt in
arriving at the adjustment so that you do not have to come back to us.[59]

Apart from his doubts as to the legality of the delegation of taxing power to
the DOF and BIR, Senator Roco also voiced out his concern about the

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When the Secretary of Finance is now subjected to pressure, are we saying
that the Secretary of Finance and the Department of Finance is better-suited
to withstand the pressure? Or are we saying Let the Finance Secretary
decide whom to yield?
I am saying that the temptation and the pressure on the Secretary of Finance
is more dangerous and more corruption-friendly than ascertaining for
ourselves now a fixed rate of increase for a fixed period.
Senator Enrile: Mr. President, perhaps the gentleman may not agree with this
representation, but in my humble opinion, this formulation is less susceptible
to pressure because there is a definite point of reference which is the
consumer price index, and that consumer price index is not going to be used
only for this purpose. The CPI is used for a national purpose, and there is
less possibility of tinkering with it.[62]
Further, Senator Roco, like Congressman Javier, expressed the view that the
periodic adjustment and reclassification provision would create an anticompetitive atmosphere. Again, Senators Roco and Enrile had genuine
divergence of opinions on this matter, to wit:
Senator Roco: x x x On the marketing level, an adjustment clause may, in
fact, be disadvantageous to both companies, whether it is the Lucio Tan
companies or the San Miguel companies. If we have to adjust our marketing
position every two years based on the adjustment clause, the established
company may survive, but the new ones will have tremendous difficulty.
Therefore, this provision tends to indicate an anticompetitive bias.
It is good for San Miguel and the Lucio Tan companies, but the new
companies assuming there may be new companies and we want to
encourage them because of the old point of liberalization will be at a
disadvantage under this situation. If this observation will find receptivity in the
policy consideration of the distinguished Gentleman, maybe we can also
further, later on, seek amendments to this automatic adjustment clause in
some manner.

Statistics Office discretion over a two-year period will invite corruption and
arbitrariness, which is more dangerous than letting the House of
Representatives and this Chamber set the adjustment rate. Why not set the
adjustment rate? Why should Congress not exercise that judgment now? x x
x
Senator Enrile: x x x
Senator Roco: x x x We respectfully submit that the Chairman consider
choosing the judgment of this Chamber and the House of Representatives
over a delegated judgment of the Department of Finance.
Again, it is not to say that I do not trust the Department of Finance. It has won
awards, and I also trust the undersecretary. But that is beside the point.
Tomorrow, they may not be there.[61] (Emphasis supplied)

This point was further dissected by the two senators. There was a genuine
difference of opinion as to which system one with a fixed excise tax rate and
classification or the other with a periodic adjustment of excise tax rate and
reclassification was less susceptible to abuse, as the following exchanges
show:
Senator Enrile: Mr. President, considering the sensitivity of these products
from the viewpoint of exerted pressures because of the understandable
impact of this measure on the pockets of the major players producing these
products, the committee felt that perhaps to lessen such pressures, it is best
that we now establish a norm where the tax will be adjusted without incurring
too much political controversy as has happened in the case of this proposal.
Senator Roco: But that is exactly the same reason we say we must rely upon
Congress because Congress, if it is subjected to pressure, at least balances
off because of political factors.

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TAX 1
excise tax rate per tier. However, the House Panel prevailed upon the Senate
Panel to delete the power of the DOF and BIR to periodically adjust the
excise tax rate and tax brackets, and periodically resurvey and reclassify the
cigarette brands based on the increase in the consumer price index.
In lieu thereof, the classification of existing brands based on their average net
retail price as of October 1, 1996 was frozen and a fixed across-the-board
12% increase in the excise tax rate of each tier after three years from the
effectivity of the Act was put in place. There is a dearth of discussion in the
deliberations as to the applicability of the freezing mechanism to new brands
after their classification is determined based on their current net retail price.
But a plain reading of the text of RA 8240, even before its amendment by RA
9334, as well as the previously discussed deliberations would readily lead to
the conclusion that the intent of Congress was to likewise apply the freezing
mechanism to new brands. Precisely, Congress rejected the proposal to
allow the DOF and BIR to periodically adjust the excise tax rate and tax
brackets as well as to periodically resurvey and reclassify cigarettes brands
which would have encompassed old and new brands alike. Thus, it would be
absurd for us to conclude that Congress intended to allow the periodic
reclassification of new brands by the BIR after their classification is
determined based on their current net retail price. We shall return to this point
when we tackle the second issue.
In explaining the changes made at the Bicameral Conference Committee
level, Senator Enrile, in his report to the Senate plenary, noted that the fixing
of the excise tax rates was done to avoid confusion.[64] Congressman Javier,
for his part, reported to the House plenary the reasons for fixing the excise
tax rate and freezing the classification, thus:
Finally, this twin feature, Mr. Speaker, fixed specific tax rates and frozen
classification, rejects the Senate version which seeks to abdicate the power
of Congress to tax by pegging the rates as well as the classification of sin
products to consumer price index which practically vests in the Secretary of
Finance the power to fix the rates and to classify the products for tax
purposes.[65] (Emphasis supplied)

Senator Enrile: Mr. President, I cannot foresee any anti-competitiveness of

this provision with respect to a new entrant, because a new entrant will not
just come in without studying the market. He is a lousy businessman if he will
just come in without studying the market. If he comes in, he will determine at
what retail price level he will market his product, and he will be coming under
any of the tiers depending upon his net retail price. Therefore, I do not see
how this particular provision will affect a new entrant.
Senator Roco: Be that as it may, Mr. President, we obviously will not resort to
debate until this evening, and we will have to look for other ways of resolving
the policy options.
Let me just close that particular area of my interpellation, by summarizing the
points we were hoping could be clarified.
1. That the automatic adjustment clause is at best questionable in law.
2. It is corruption-friendly in the sense that it shifts the discretion from the
House of Representatives and this Chamber to the Secretary of Finance, no
matter how saintly he may be.
3. There is, although the judgment call of the gentleman disagrees to our
view, an anticompetitive situation that is geared at[63]
After these lengthy exchanges, it appears that the views of Senator Enrile
were sustained by the Senate Body because the Senate Version was passed
on Third Reading without substantially altering the periodic adjustment and
reclassification provision.
It was actually at the Bicameral Conference Committee level where the
Senate Version underwent major changes. The Senate Panel prevailed upon
the House Panel to abandon the basic excise tax rate and ad valorem
comparator as the means to determine the applicable excise tax rate. Thus,
the Senates four-tiered system was retained with minor adjustments as to the

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levels or bribe the tax implementers in order to allow their brands to be
classified at a lower tax bracket even if their net retail prices have already
migrated to a higher tax bracket after the adjustment of the tax brackets to
the increase in the consumer price index. Presumably, this could be done
when a resurvey and reclassification is forthcoming. As briefly touched upon
in the Congressional deliberations, the difference of the excise tax rate
between the medium-priced and the high-priced tax brackets under RA 8240,
prior to its amendment, was P3.36. For a moderately popular brand which
sells around 100 million packs per year, this easily translates to
P336,000,000.[68] The incentive for tax avoidance, if not outright tax evasion,
would clearly be present. Then again, the tax implementers may use the
power to periodically adjust the tax rate and reclassify the brands as a tool to
unduly oppress the taxpayer in order for the government to achieve its
revenue targets for a given year.
Thus, Congress sought to, among others, simplify the whole tax system for
sin products to remove these potential areas of abuse and corruption from
both the side of the taxpayer and the government. Without doubt, the
classification freeze provision was an integral part of this overall plan. This is
in line with one of the avowed objectives of the assailed law to simplify the
tax administration and compliance with the tax laws that are about to unfold
in order to minimize losses arising from inefficiencies and tax avoidance
scheme, if not outright tax evasion.[69] RA 9334 did not alter this
classification freeze provision of RA 8240. On the contrary, Congress
affirmed this freezing mechanism by clarifying the wording of the law. We can
thus reasonably conclude, as the deliberations on RA 9334 readily show, that
the administrative concerns in tax administration, which moved Congress to
enact the classification freeze provision in RA 8240, were merely continued
by RA 9334. Indeed, administrative concerns may provide a legitimate,
rational basis for legislative classification.[70] In the case at bar, these
administrative concerns in the measurement and collection of excise taxes on
sin products are readily apparent as afore-discussed.
Aside from the major concern regarding the elimination of potential areas for
abuse and corruption from the tax administration of sin products, the

Congressman Javier later added that the frozen classification was intended
to give stability to the industry as the BIR would be prevented from tinkering
with the classification since it would remain unchanged despite the increase
in the net retail prices of the previously classified brands.[66] This would also
assure the industry players that there would be no new impositions as long
as the law is unchanged.[67]
From the foregoing, it is quite evident that the classification freeze provision
could hardly be considered arbitrary, or motivated by a hostile or oppressive
attitude to unduly favor older brands over newer brands. Congress was
unequivocal in its unwillingness to delegate the power to periodically adjust
the excise tax rate and tax brackets as well as to periodically resurvey and
reclassify the cigarette brands based on the increase in the consumer price
index to the DOF and the BIR. Congress doubted the constitutionality of such
delegation of power, and likewise, considered the ethical implications thereof.
Curiously, the classification freeze provision was put in place of the periodic
adjustment and reclassification provision because of the belief that the latter
would foster an anti-competitive atmosphere in the market. Yet, as it is, this
same criticism is being foisted by petitioner upon the classification freeze
provision.
To our mind, the classification freeze provision was in the main the result of
Congresss earnest efforts to improve the efficiency and effectivity of the tax
administration over sin products while trying to balance the same with other
state interests. In particular, the questioned provision addressed Congresss
administrative concerns regarding delegating too much authority to the DOF
and BIR as this will open the tax system to potential areas for abuse and
corruption. Congress may have reasonably conceived that a tax system
which would give the least amount of discretion to the tax implementers
would address the problems of tax avoidance and tax evasion.
To elaborate a little, Congress could have reasonably foreseen that, under
the DOF proposal and the Senate Version, the periodic reclassification of
brands would tempt the cigarette manufacturers to manipulate their price

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their tax brackets, and, if so, how this has affected the overall competition in
the market. Further, it does not necessarily follow that newer brands cannot
compete against older brands because price is not the only factor in the
market as there are other factors like consumer preference, brand loyalty, etc.
In other words, even if the newer brands are priced higher due to the
differential tax treatment, it does not mean that they cannot compete in the
market especially since cigarettes contain addictive ingredients so that a
consumer may be willing to pay a higher price for a particular brand solely
due to its unique formulation. It may also be noted that in 2003, the BIR
surveyed 29 new brands[72] that were introduced in the market after the
effectivity of RA 8240 on January 1, 1997, thus negating the sweeping
generalization of petitioner that the classification freeze provision has
become an insurmountable barrier to the entry of new brands. Verily, where
there is a claim of breach of the due process and equal protection clauses,
considering that they are not fixed rules but rather broad standards, there is a
need for proof of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must prevail.
[73]

legislative deliberations also show that the classification freeze provision was
intended to generate buoyant and stable revenues for government. With the
frozen tax classifications, the revenue inflow would remain stable and the
government would be able to predict with a greater degree of certainty the
amount of taxes that a cigarette manufacturer would pay given the trend in its
sales volume over time. The reason for this is that the previously classified
cigarette brands would be prevented from moving either upward or downward
their tax brackets despite the changes in their net retail prices in the future
and, as a result, the amount of taxes due from them would remain
predictable. The classification freeze provision would, thus, aid in the revenue
planning of the government.[71]

Be that as it may, petitioners evidence does suggest that, at least in 2004,

Philip Morris and Marlboro, older brands, would have been taxed at the same
rate as Lucky Strike, a newer brand, due to certain conditions (i.e., the
increase of the older brands net retail prices beyond the tax bracket to which
they were previously classified after the lapse of some time) were it not for
the classification freeze provision. It may be conceded that this has adversely
affected, to a certain extent, the ability of petitioner to competitively price its
newer brands vis--vis the subject older brands. Thus, to a limited extent, the
assailed law seems to derogate one of its avowed objectives, i.e. promoting
fair competition among the players in the industry. Yet, will this occurrence, by
itself, render the assailed law unconstitutional on equal protection grounds?

Going now to the contention of petitioner that the classification freeze

provision unduly favors older brands over newer brands, we must first
contextualize the basis of this claim. As previously discussed, the evidence
presented by the petitioner merely showed that in 2004, Marlboro and Philip
Morris, on the one hand, and Lucky Strike, on the other, would have been
taxed at the same rate had the classification freeze provision been not in
place. But due to the operation of the classification freeze provision, Lucky
Strike was taxed higher. From here, petitioner generalizes that this differential
tax treatment arising from the classification freeze provision adversely
impacts the fairness of the playing field in the industry, particularly, between
older and newer brands. Thus, it is virtually impossible for new brands to
enter the market.

All in all, the classification freeze provision addressed Congresss

administrative concerns in the simplification of tax administration of sin
products, elimination of potential areas for abuse and corruption in tax
collection, buoyant and stable revenue generation, and ease of projection of
revenues. Consequently, there can be no denial of the equal protection of the
laws since the rational-basis test is amply satisfied.

We answer in the negative.

Whether Congress acted improvidently in derogating, to a limited extent, the
states interest in promoting fair competition among the players in the industry,

Petitioner did not, however, clearly demonstrate the exact extent of such
impact. It has not been shown that the net retail prices of other older brands
previously classified under this classification system have already pierced

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the current excise tax system on sin products is imperfect. But, certainly, we
cannot declare a statute unconstitutional merely because it can be improved
or that it does not tend to achieve all of its stated objectives.[75] This is
especially true for tax legislation which simultaneously addresses and
impacts multiple state interests.[76] Absent a clear showing of breach of
constitutional limitations, Congress, owing to its vast experience and
expertise in the field of taxation, must be given sufficient leeway to formulate
and experiment with different tax systems to address the complex issues and
problems related to tax administration. Whatever imperfections that may
occur, the same should be addressed to the democratic process to refine and
evolve a taxation system which ideally will achieve most, if not all, of the
states objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision
of Congress and the method by which the latter sought to achieve the same.
But its remedy is with Congress and not this Court. As succinctly articulated
in Vance v. Bradley:[77]
The Constitution presumes that, absent some reason to infer antipathy, even
improvident decisions will eventually be rectified by the democratic process,
and that judicial intervention is generally unwarranted no matter how unwisely
we may think a political branch has acted. Thus, we will not overturn such a
statute unless the varying treatment of different groups or persons is so
unrelated to the achievement of any combination of legitimate purposes that
we can only conclude that the legislature's actions were irrational.[78]
We now tackle the second issue.
Petitioner asserts that Revenue Regulations No. 1-97, as amended by
Revenue Regulations No. 9-2003, Revenue Regulations No. 22-2003 and
Revenue Memorandum Order No. 6-2003, are invalid insofar as they
empower the BIR to reclassify or update the classification of new brands of
cigarettes based on their current net retail prices every two years or earlier. It
claims that RA 8240, even prior to its amendment by RA 9334, did not
authorize the BIR to conduct said periodic resurvey and reclassification.

while pursuing other state interests regarding the simplification of tax

administration of sin products, elimination of potential areas for abuse and
corruption in tax collection, buoyant and stable revenue generation, and ease
of projection of revenues through the classification freeze provision, and
whether the questioned provision is the best means to achieve these state
interests, necessarily go into the wisdom of the assailed law which we cannot
inquire into, much less overrule. The classification freeze provision has not
been shown to be precipitated by a veiled attempt, or hostile attitude on the
part of Congress to unduly favor older brands over newer brands. On the
contrary, we must reasonably assume, owing to the respect due a co-equal
branch of government and as revealed by the Congressional deliberations,
that the enactment of the questioned provision was impelled by an earnest
desire to improve the efficiency and effectivity of the tax administration of sin
products. For as long as the legislative classification is rationally related to
furthering some legitimate state interest, as here, the rational-basis test is
satisfied and the constitutional challenge is perfunctorily defeated.
We do not sit in judgment as a supra-legislature to decide, after a law is
passed by Congress, which state interest is superior over another, or which
method is better suited to achieve one, some or all of the states interests, or
what these interests should be in the first place. This policy-determining
power, by constitutional fiat, belongs to Congress as it is its function to
determine and balance these interests or choose which ones to pursue. Time
and again we have ruled that the judiciary does not settle policy issues. The
Court can only declare what the law is and not what the law should be. Under
our system of government, policy issues are within the domain of the political
branches of government and of the people themselves as the repository of all
state power.[74] Thus, the legislative classification under the classification
freeze provision, after having been shown to be rationally related to achieve
certain legitimate state interests and done in good faith, must, perforce, end
our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited
extent, one of its avowed objectives (i.e. promoting fair competition among
the players in the industry) would suggest that, by Congresss own standards,

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4. The determination of the current retail prices of new brands of the

aforesaid excisable products shall be initiated as follows:

The questioned provisions are found in the following sections of the assailed
issuances:

xxxx

(1)
Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 197, as amended by Section 2 of Revenue Regulations 9-2003, viz:

b. After the lapse of the prescribed two-year period or as the Commissioner

may otherwise direct, the appropriate tax reclassification of these brands
based on the current net retail prices thereof shall be determined by a survey
to be conducted upon a written directive by the Commissioner.
For this purpose, a memorandum order to the Assistant Commissioner, Large
Taxpayers Service, Heads, Excise Tax Areas, and Regional Directors of all
Revenue Regions, except Revenue Region Nos. 4, 5, 6, 7, 8 and 9, shall be
issued by the Commissioner for the submission of the list of major
supermarkets/retail outlets where the above excisable products are being
sold, as well as the list of selected revenue officers who shall be designated
to conduct the said activity(ies).
xxxx
6. The results of the survey conducted in Revenue Region Nos. 4 to 9 shall
be submitted directly to the Chief, LT Assistance Division II (LTAD II), National
Office for consolidation. On the other hand, the results of the survey
conducted in Revenue Regions other than Revenue Region Nos. 4 to 9, shall
be submitted to the Office of the Regional Director for regional consolidation.
The consolidated regional survey, together with the accomplished survey
forms shall be transmitted to the Chief, LTAD II for national consolidation
within three (3) days from date of actual receipt from the survey teams. The
LTAD II shall be responsible for the evaluation and analysis of the submitted
survey forms and the preparation of the recommendation for the
updating/revision of the tax classification of each brand of cigarettes and
alcohol products. The said recommendation, duly validated by the ACIR, LTS,
shall be submitted to the Commissioner for final review within ten (10) days

For the purpose of establishing or updating the tax classification of new

brands and variant(s) thereof, their current net retail price shall be reviewed
periodically through the conduct of survey or any other appropriate activity, as
mentioned above, every two (2) years unless earlier ordered by the
Commissioner. However, notwithstanding any increase in the current net
retail price, the tax classification of such new brands shall remain in force
until the same is altered or changed through the issuance of an appropriate
Revenue Regulations.

(2)
Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers
Assistance Division II) II(b) of Revenue Memorandum Order No. 6-2003,
insofar as pertinent to cigarettes packed by machine, viz:
II. POLICIES AND GUIDELINES
1. The conduct of survey covered by this Order, for purposes of determining
the current retail prices of new brands of cigarettes and alcohol products
introduced in the market on or after January 1, 1997, shall be undertaken in
the following instances:
xxxx
b. For reclassification of new brands of said excisable products that were
introduced in the market after January 1, 1997.
xxxx

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Ensure that the minimum number of establishments to be surveyed, as
prescribed under existing revenue laws and regulations, is complied with. In
addition, the names and designations of revenue officers selected to conduct
the survey shall be clearly indicated opposite the names of the
establishments to be surveyed.

from the date of actual receipt of complete reports from all the surveying
Offices.
7. Upon final review by the Commissioner of the revised tax classification of
the different new brands of cigarettes and alcohol products, the appropriate
revenue regulations shall be prepared and submitted for approval by the
Secretary of Finance.

There is merit to the contention.

xxxx
In order to implement RA 8240 following its effectivity on January 1, 1997,
the BIR issued Revenue Regulations No. 1-97, dated December 13, 1996,
which mandates a one-time classification only.[79] Upon their launch, new
brands shall be initially taxed based on their suggested net retail price.
Thereafter, a survey shall be conducted within three (3) months to determine
their current net retail prices and, thus, fix their official tax classifications.
However, the BIR made a turnaround by issuing Revenue Regulations No. 92003, dated February 17, 2003, which partly amended Revenue Regulations
No. 1-97, by authorizing the BIR to periodically reclassify new brands (i.e.,
every two years or earlier) based on their current net retail prices. Thereafter,
the BIR issued Revenue Memorandum Order No. 6-2003, dated March 11,
2003, prescribing the guidelines on the implementation of Revenue
Regulations No. 9-2003. This was patent error on the part of the BIR for
being contrary to the plain text and legislative intent of RA 8240.
It is clear that the afore-quoted portions of Revenue Regulations No. 1-97, as
amended by Section 2 of Revenue Regulations 9-2003, and Revenue
Memorandum Order No. 6-2003 unjustifiably emasculate the operation of
Section 145 of the NIRC because they authorize the Commissioner of
Internal Revenue to update the tax classification of new brands every two
years or earlier subject only to its issuance of the appropriate Revenue
Regulations, when nowhere in Section 145 is such authority granted to the
Bureau. Unless expressly granted to the BIR, the power to reclassify cigarette
brands remains a prerogative of the legislature which cannot be usurped by
the former.

III. PROCEDURES
xxxx
Large Taxpayers Assistance Division II
xxxx
1. Perform the following preparatory procedures on the identification of
brands to be surveyed, supermarkets/retail outlets where the survey shall be
conducted, and the personnel selected to conduct the survey.
xxxx
b. On the tax reclassification of new brands
i. Submit a master list of registered brands covered by the survey pursuant to
the provisions of Item II.2 of this Order containing the complete description of
each brand, existing net retail price and the corresponding tax rate thereof.
ii. Submit to the ACIR, LTS, a list of major supermarkets/retail outlets within
the territorial jurisdiction of the concerned revenue regions where the survey
will be conducted to be used as basis in the issuance of Mission Orders.

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being covered by the freezing mechanism after their classification based on
their current net retail prices.
Unfortunately for petitioner, this result will not cause a downward
reclassification of Lucky Strike. It will be recalled that petitioner introduced
Lucky Strike in June 2001. However, as admitted by petitioner itself, the BIR
did not conduct the required market survey within three months from product
launch. As a result, Lucky Strike was never classified based on its actual
current net retail price. Petitioner failed to timely seek redress to compel the
BIR to conduct the requisite market survey in order to fix the tax classification
of Lucky Strike. In the meantime, Lucky Strike was taxed based on its
suggested net retail price of P9.90 per pack, which is within the high-priced
tax bracket. It was only after the lapse of two years or in 2003 that the BIR
conducted a market survey which was the first time that Lucky Strikes actual
current net retail price was surveyed and found to be from P10.34 to P11.53
per pack, which is within the premium-priced tax bracket. The case of
petitioner falls under a situation where there was no reclassification based on
its current net retail price which would have been invalid as previously
explained. Thus, we cannot grant petitioners prayer for a downward
reclassification of Lucky Strike because it was never reclassified by the BIR
based on its actual current net retail price.
It should be noted though that on August 8, 2003, the BIR issued Revenue
Regulations No. 22-2003 which implemented the revised tax classifications of
new brands based on their current net retail prices through the market survey
conducted pursuant to Revenue Regulations No. 9-2003. Annex A of
Revenue Regulations No. 22-2003 lists the result of the market survey and
the corresponding recommended tax classification of the new brands therein
aside from Lucky Strike. However, whether these other brands were illegally
reclassified based on their actual current net retail prices by the BIR must be
determined on a case-to-case basis because it is possible that these brands
were classified based on their actual current net retail price for the first time in
the year 2003 just like Lucky Strike. Thus, we shall not make any
pronouncement as to the validity of the tax classifications of the other brands
listed therein.

More importantly, as previously discussed, the clear legislative intent was for
new brands to benefit from the same freezing mechanism accorded to Annex
D brands. To reiterate, in enacting RA 8240, Congress categorically rejected
the DOF proposal and Senate Version which would have empowered the
DOF and BIR to periodically adjust the excise tax rate and tax brackets, and
to periodically resurvey and reclassify cigarette brands. (This resurvey and
reclassification would have naturally encompassed both old and new brands.)
It would thus, be absurd for us to conclude that Congress intended to allow
the periodic reclassification of new brands by the BIR after their classification
is determined based on their current net retail price while limiting the freezing
of the classification to Annex D brands. Incidentally, Senator Ralph G. Recto
expressed the following views during the deliberations on RA 9334, which
later amended RA 8240:
Senator Recto: Because, like I said, when Congress agreed to adopt a
specific tax system [under R.A. 8240], when Congress did not index the
brackets, and Congress did not index the rates but only provided for a one
rate increase in the year 2000, we shifted from ad valorem which was based
on value to a system of specific which is based on volume. Congress then, in
effect, determined the classification based on the prices at that particular
period of time and classified these products accordingly.
Of course, Congress then decided on what will happen to the new brands or
variants of existing brands. To favor government, a variant would be classified
as the highest rate of tax for that particular brand. In case of a new brand, Mr.
President, then the BIR should classify them. But I do not think it was the
intention of Congress then to give the BIR the authority to reclassify them
every so often. I do not think it was the intention of Congress to allow the BIR
to classify a new brand every two years, for example, because it will be
arbitrary for the BIR to do so. x x x[80] (Emphasis supplied)
For these reasons, the amendments introduced by RA 9334 to RA 8240,
insofar as the freezing mechanism is concerned, must be seen merely as
underscoring the legislative intent already in place then, i.e. new brands as

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In sum, Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97,

as amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)
(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of
Revenue Memorandum Order No. 6-2003, as pertinent to cigarettes packed
by machine, are invalid insofar as they grant the BIR the power to reclassify
or update the classification of new brands every two years or earlier. Further,
these provisions are deemed modified upon the effectivity of RA 9334 on
January 1, 2005 insofar as the manner of determining the permanent
classification of new brands is concerned.
We now tackle the last issue.
Petitioner contends that RA 8240, as amended by RA 9334, and its
implementing rules and regulations violate the General Agreement on Tariffs
and Trade (GATT) of 1947, as amended, specifically, Paragraph 2, Article III,
Part II:
2. The products of the territory of any contracting party imported into the
territory of any other contracting party shall not be subject, directly or
indirectly, to internal taxes or other internal charges of any kind in excess of
those applied, directly or indirectly, to like domestic products. Moreover, no
contracting party shall otherwise apply internal taxes or other internal
charges to imported or domestic products in a manner contrary to the
principles set forth in paragraph 1.
It claims that it is the duty of this Court to correct, in favor of the GATT,
whatever inconsistency exists between the assailed law and the GATT in
order to prevent triggering the international dispute settlement mechanism
under the GATT-WTO Agreement.
We disagree.

Finally, it must be noted that RA 9334 introduced changes in the manner by

which the current net retail price of a new brand is determined and how its
classification is permanently fixed, to wit:
New brands, as defined in the immediately following paragraph, shall initially
be classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of R.A.
No. 8240 [on January 1, 1997].
Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported cigarettes are
intended by the manufacture or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed nationwide,
and in other regions, for those with regional markets. At the end of three (3)
months from the product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand against the net retail
price as defined herein and determine the correct tax bracket under which a
particular new brand of cigarette, as defined above, shall be classified. After
the end of eighteen (18) months from such validation, the Bureau of Internal
Revenue shall revalidate the initially validated net retail price against the net
retail price as of the time of revalidation in order to finally determine the
correct tax bracket under which a particular new brand of cigarettes shall be
classified; Provided however, That brands of cigarettes introduced in the
domestic market between January 1, 1997 and December 31, 2003 shall
remain in the classification under which the Bureau of Internal Revenue has
determined them to belong as of December 31, 2003. Such classification of
new brands and brands introduced between January 1, 1997 and December
31, 2003 shall not be revised except by an act of Congress. (Emphasis
supplied)
Thus, Revenue Regulations No. 9-2003 and Revenue Memorandum Order
No. 6-2003 should be deemed modified by the above provisions from the
date of effectivity of RA 9334 on January 1, 2005.

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the validity of R.A. No. 6734 would therefore be what is so provided in the
Constitution. Thus, any conflict between the provisions of R.A. No. 6734 and
the provisions of the Tripoli Agreement will not have the effect of enjoining the
implementation of the Organic Act. Assuming for the sake of argument that
the Tripoli Agreement is a binding treaty or international agreement, it would
then constitute part of the law of the land. But as internal law it would not be
superior to R.A. No. 6734, an enactment of the Congress of the Philippines,
rather it would be in the same class as the latter [SALONGA, PUBLIC
INTERNATIONAL LAW 320 (4th ed., 1974), citing Head Money Cases, 112
U.S. 580 (1884) and Foster v. Nelson, 2 Pet. 253 (1829)]. Thus, if at all, R.A.
No. 6734 would be amendatory of the Tripoli Agreement, being a subsequent
law. Only a determination by this Court that R.A. No. 6734 contravenes the
Constitution would result in the granting of the reliefs sought. (Emphasis
supplied)
WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the
Regional Trial Court of Makati, Branch 61, in Civil Case No. 03-1032, is
AFFIRMED with MODIFICATION. As modified, this Court declares that:
(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is
CONSTITUTIONAL; and that
(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as
amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b),
II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of
Revenue Memorandum Order No. 6-2003, insofar as pertinent to cigarettes
packed by machine, are INVALID insofar as they grant the BIR the power to
reclassify or update the classification of new brands every two years or
earlier.
SO ORDERED.

The classification freeze provision uniformly applies to all newly introduced

brands in the market, whether imported or locally manufactured. It does not
purport to single out imported cigarettes in order to unduly favor locally
produced ones. Further, petitioners evidence was anchored on the alleged
unequal tax treatment between old and new brands which involves a different
frame of reference vis--vis local and imported products. Petitioner has,
therefore, failed to clearly prove its case, both factually and legally, within the
parameters of the GATT.
At any rate, even assuming arguendo that petitioner was able to prove that
the classification freeze provision violates the GATT, the outcome would still
be the same. The GATT is a treaty duly ratified by the Philippine Senate and
under Article VII, Section 21[81] of the Constitution, it merely acquired the
status of a statute.[82] Applying the basic principles of statutory construction
in case of irreconcilable conflict between statutes, RA 8240, as amended by
RA 9334, would prevail over the GATT either as a later enactment by
Congress or as a special law dealing with the taxation of sin products. Thus,
in Abbas v. Commission on Elections,[83] we had occasion to explain:
Petitioners premise their arguments on the assumption that the Tripoli
Agreement is part of the law of the land, being a binding international
agreement. The Solicitor General asserts that the Tripoli Agreement is
neither a binding treaty, not having been entered into by the Republic of the
Philippines with a sovereign state and ratified according to the provisions of
the 1973 or 1987 Constitutions, nor a binding international agreement.
We find it neither necessary nor determinative of the case to rule on the
nature of the Tripoli Agreement and its binding effect on the Philippine
Government whether under public international or internal Philippine law. In
the first place, it is now the Constitution itself that provides for the creation of
an autonomous region in Muslim Mindanao. The standard for any inquiry into

146