Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

GOVERNMENT SERVICE G.R. No. 186242

INSURANCE SYSTEM,
Petitioner, Present:

CORONA, J., Chairperson,

VELASCO, JR.,
- versus - NACHURA,
PERALTA, and
DEL CASTILLO,* JJ.

CITY TREASURER and CITY Promulgated:

ASSESSOR of the CITY
OF MANILA, December 23, 2009
Respondents.
x-----------------------------------------------------------------------------------------x

DECISION
VELASCO, JR., J.:
The Case

For review under Rule 45 of the Rules of Court on pure question of law are
the November 15, 2007 Decision[1] and January 7, 2009 Order[2] of the Regional
Trial Court (RTC), Branch 49 in Manila, in Civil Case No. 02-104827, a suit to
nullify the assessment of real property taxes on certain properties belonging to
petitioner Government Service Insurance System (GSIS).

The Facts
 Petitioner GSIS owns or used to own two (2) parcels of land, one located at
Katigbak 25th St., Bonifacio Drive, Manila (Katigbak property), and the other, at
Concepcion cor. Arroceros Sts., also in Manila (Concepcion-Arroceros property).
Title to the Concepcion-Arroceros property was transferred to this Court in 2005
pursuant to Proclamation No. 835[3] dated April 27, 2005. Both the GSIS and the
Metropolitan Trial Court (MeTC) of Manila occupy the Concepcion-Arroceros
property, while the Katigbak property was under lease.

The controversy started when the City Treasurer of Manila addressed a

[4]
letter dated September 13, 2002 to GSIS President and General Manager
Winston F. Garcia informing him of the unpaid real property taxes due on the
aforementioned properties for years 1992 to 2002, broken down as follows: (a) PhP
54,826,599.37 for the Katigbak property; and (b) PhP 48,498,917.01 for the
Concepcion-Arroceros property. The letter warned of the inclusion of the subject
properties in the scheduled October 30, 2002 public auction of all delinquent
properties in Manila should the unpaid taxes remain unsettled before that date.

On September 16, 2002, the City Treasurer of Manila issued

separate Notices of Realty Tax Delinquency[5] for the subject properties, with the
usual warning of seizure and/or sale. On October 8, 2002, GSIS, through its legal
counsel, wrote back emphasizing the GSIS exemption from all kinds of taxes,
including realty taxes, under Republic Act No. (RA) 8291. [6]

Two days after, GSIS filed a petition for certiorari and prohibition[7] with
prayer for a restraining and injunctive relief before the Manila RTC. In it, GSIS
prayed for the nullification of the assessments thus made and
that respondents City of Manila officials be permanently enjoined from
proceedings against GSIS property. GSIS would later amend its petition[8] to
include the fact that: (a) the Katigbak property, covered by TCT Nos. 117685 and
119465 in the name of GSIS, has, since November 1991, been leased to and
occupied by the Manila Hotel Corporation (MHC), which has contractually bound
itself to pay any realty taxes that may be imposed on the subject property; and (b)
the Concepcion-Arroceros property is partly occupied by GSIS and partly occupied
by the MeTC of Manila.
 The Ruling of the RTC

By Decision of November 15, 2007, the RTC dismissed GSIS petition, as

follows:

WHEREFORE, in view of the foregoing, judgment is hereby

rendered, DISMISSING the petition for lack of merit, and declaring the
assessment conducted by the respondents City of Manila on the subject
real properties of GSIS as valid pursuant to law.
SO ORDERED.[9]

GSIS sought but was denied reconsideration per the assailed Order dated
January 7, 2009.

Thus, the instant petition for review on pure question of law.

The Issues

1. Whether petitioner is exempt from the payment of real property taxes

from 1992 to 2002;
2. Whether petitioner is exempt from the payment of real property taxes
on the property it leased to a taxable entity; and

3. Whether petitioners real properties are exempt from warrants of levy

and from tax sale for non-payment of real property taxes.[10]

The Courts Ruling

The issues raised may be formulated in the following wise: first, whether
GSIS under its charter is exempt from real property taxation; second, assuming that
it is so exempt, whether GSIS is liable for real property taxes for its properties
leased to a taxable entity; and third, whether the properties of GSIS are exempt
from levy.
 In the main, it is petitioners posture that both its old charter, Presidential
Decree No. (PD) 1146, and present charter, RA 8291 or the GSIS Act of 1997,
exempt the agency and its properties from all forms of taxes and assessments,
inclusive of realty tax. Excepting, respondents counter that GSIS may not
successfully resist the citys notices and warrants of levy on the basis of its
exemption under RA 8291, real property taxation being governed by RA 7160 or
the Local Government Code of 1991 (LGC, hereinafter).

The petition is meritorious.

First Core Issue: GSIS Exempt from Real Property Tax

Full tax exemption granted through PD 1146

In 1936, Commonwealth Act No. (CA) 186[11] was enacted abolishing the
then pension systems under Act No. 1638, as amended, and establishing the GSIS
to manage the pension system, life and retirement insurance, and other benefits of
all government employees. Under what may be considered as its first charter, the
GSIS was set up as a non-stock corporation managed by a board of
trustees. Notably, Section 26 of CA 186 provided exemption from any legal
process and liens but only for insurance policies and their proceeds, thus:

Section 26. Exemption from legal process and liens. No policy of life
insurance issued under this Act, or the proceeds thereof, when paid to any
member thereunder, nor any other benefit granted under this Act, shall be liable to
attachment, garnishment, or other process, or to be seized, taken, appropriated, or
applied by any legal or equitable process or operation of law to pay any debt or
liability of such member, or his beneficiary, or any other person who may have a
right thereunder, either before or after payment; nor shall the proceeds thereof,
when not made payable to a named beneficiary, constitute a part of the estate of
the member for payment of his debt. x x x

In 1977, PD 1146,[12] otherwise known as the Revised Government Service

Insurance Act of 1977, was issued, providing for an expanded insurance system for
government employees. Sec. 33 of PD 1146 provided for a new tax treatment for
GSIS, thus:

Section 33. Exemption from Tax, Legal Process and Lien. It is hereby
declared to be the policy of the State that the actuarial solvency of the funds of the
System shall be preserved and maintained at all times and that the contribution
rates necessary to sustain the benefits under this Act shall be kept as low as
possible in order not to burden the members of the System and/or their
employees. Taxes imposed on the System tend to impair the actuarial solvency of
its funds and increase the contribution rate necessary to sustain the benefits under
this Act. Accordingly, notwithstanding any laws to the contrary, the System, its
assets, revenues including all accruals thereto, and benefits paid, shall be
exempt from all taxes, assessments, fees, charges or duties of all kinds. These
exemptions shall continue unless expressly and specifically revoked and any
assessment against the System as of the approval of this Act are hereby
considered paid.
The benefits granted under this Act shall not be subject, among others, to
attachment, garnishment, levy or other processes. This, however, shall not apply
to obligations of the member to the System, or to the employer, or when the
benefits granted herein are assigned by the member with the authority of the
System.(Emphasis ours.)

A scrutiny of PD 1146 reveals that the non-stock corporate structure of

GSIS, as established under CA 186, remained unchanged. Sec. 34[13] of PD 1146
pertinently provides that the GSIS, as created by CA 186, shall implement the
provisions of PD 1146.

RA 7160 lifted GSIS tax exemption

Then came the enactment in 1991 of the LGC or RA 7160, providing the
exercise of local government units (LGUs) of their power to tax, the scope and
limitations thereof,[14] and the exemptions from taxations. Of particular pertinence
is the general provision on withdrawal of tax exemption privileges in Sec. 193 of
the LGC, and the special provision on withdrawal of exemption from payment of
real property taxes in the last paragraph of the succeeding Sec. 234, thus:

SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise

provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government-owned
or -controlled corporations, except local water districts, cooperatives duly
 registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.

SEC. 234. Exemption from Real Property Tax. x x x 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 corporation are hereby withdrawn upon the
effectivity of this Code.
From the foregoing provisos, there can be no serious doubt about the
Congress intention to withdraw, subject to certain defined exceptions, tax
exemptions granted prior to the passage of RA 7160. The question that easily
comes to mind then is whether or not the full tax exemption heretofore granted to
GSIS under PD 1146, particular insofar as realty tax is concerned, was deemed
withdrawn. We answer in the affirmative.

In Mactan Cebu International Airport Authority v. Marcos,[15] the Court held

that the express withdrawal by the LGC of previously granted exemptions from
realty taxes applied to instrumentalities and government-owned and controlled
corporations (GOCCs), such as the Mactan-Cebu International Airport
Authority. In City of Davao v. RTC, Branch XII, Davao City,[16] the Court,
citing Mactan Cebu International Airport Authority, declared the GSIS liable for
real property taxes for the years 1992 to 1994 (contested real estate tax assessment
therein), its previous exemption under PD 1146 being considered withdrawn with
the enactment of the LGC in 1991.

Significantly, the Court, in City of Davao, stated the observation that the
GSIS tax-exempt status withdrawn in 1992 by the LGC was restored in 1997 by
RA 8291.[17]

Full tax exemption reenacted through RA 8291

Indeed, almost 20 years to the day after the issuance of the GSIS charter, i.e.,
PD 1146, it was further amended and expanded by RA 8291 which took effect on
June 24, 1997.[18] Under it, the full tax exemption privilege of GSIS was restored,
the operative provision being Sec. 39 thereof, a virtual replication of the earlier
quoted Sec. 33 of PD 1146. Sec. 39 of RA 8291 reads:
SEC. 39. Exemption from Tax, Legal Process and Lien. It is hereby
declared to be the policy of the State that the actuarial solvency of the funds of the
GSIS shall be preserved and maintained at all times and that contribution rates
necessary to sustain the benefits under this Act shall be kept as low as possible in
 order not to burden the members of the GSIS and their employers. Taxes imposed
on the GSIS tend to impair the actuarial solvency of its funds and increase the
contribution rate necessary to sustain the benefits of this Act. Accordingly,
notwithstanding, any laws to the contrary, the GSIS, its assets, revenues
including all accruals thereto, and benefits paid, shall be exempt from all
taxes, assessments, fees, charges or duties of all kinds. These exemptions shall
continue unless expressly and specifically revoked and any assessment
against the GSIS as of the approval of this Act are hereby considered
paid. Consequently, all laws, ordinances, regulations, issuances, opinions or
jurisprudence contrary to or in derogation of this provision are hereby deemed
repealed, superseded and rendered ineffective and without legal force and effect.
Moreover, these exemptions shall not be affected by subsequent laws
to the contrary unless this section is expressly, specifically and categorically
revoked or repealed by law and a provision is enacted to substitute or replace
the exemption referred to herein as an essential factor to maintain or protect
the solvency of the fund, notwithstanding and independently of the guaranty of
the national government to secure such solvency or liability.
The funds and/or the properties referred to herein as well as the
benefits, sums or monies corresponding to the benefits under this Act shall be
exempt from attachment, garnishment, execution, levy or other processes
issued by the courts, quasi-judicial agencies or administrative
bodies including Commission on Audit (COA) disallowances and from all
financial obligations of the members, including his pecuniary accountability
arising from or caused or occasioned by his exercise or performance of his official
functions or duties, or incurred relative to or in connection with his position or
work except when his monetary liability, contractual or otherwise, is in favor of
the GSIS. (Emphasis ours.)

The foregoing exempting proviso, couched as it were in an encompassing

manner, brooks no other construction but that GSIS is exempt from all forms of
taxes. While not determinative of this case, it is to be noted that prominently added
in GSIS present charter is a paragraph precluding any implied repeal of the tax-
exempt clause so as to protect the solvency of GSIS funds. Moreover, an express
repeal by a subsequent law would not suffice to affect the full exemption benefits
granted the GSIS, unless the following conditionalities are met: (1) The repealing
clause must expressly, specifically, and categorically revoke or repeal Sec.
39; and (2) a provision is enacted to substitute or replace the
exemption referred to herein as an essential factor to maintain or protect the
solvency of the fund. These restrictions for a future express repeal,
notwithstanding, do not make the proviso an irrepealable law, for such restrictions
do not impinge or limit the carte blanche legislative authority of the legislature to
so amend it. The restrictions merely enhance other provisos in the law ensuring the
solvency of the GSIS fund.

Given the foregoing perspectives, the following may be assumed: (1)

Pursuant to Sec. 33 of PD 1146, GSIS enjoyed tax exemption from real estate
taxes, among other tax burdens, until January 1, 1992 when the LGC took effect
and withdrew exemptions from payment of real estate taxes privileges granted
under PD 1146; (2) RA 8291 restored in 1997 the tax exempt status of GSIS by
reenacting under its Sec. 39 what was once Sec. 33 of P.D. 1146;[19] and (3) If any
real estate tax is due to the City of Manila, it is, following City of Davao, only for
the interim period, or from 1992 to 1996, to be precise.

Real property taxes assessed and due from GSIS considered paid

While recognizing the exempt status of GSIS owing to the reenactment of

the full tax exemption clause under Sec. 39 of RA 8291 in 1997,
the ponencia in City of Davao appeared to have failed to take stock of and fully
appreciate the all-embracing condoning proviso in the very same Sec. 39 which,
for all intents and purposes, considered as paid any assessment against the GSIS
as of the approval of this Act. If only to stress the point, we hereby reproduce the
pertinent portion of said Sec. 39:

SEC. 39. Exemption from Tax, Legal Process and Lien. x x x Taxes
imposed on the GSIS tend to impair the actuarial solvency of its funds and
increase the contribution rate necessary to sustain the benefits of this
Act. Accordingly, notwithstanding, any laws to the contrary, the GSIS, its
assets, revenues including all accruals thereto, and benefits paid, shall be exempt
from all taxes, assessments, fees, charges or duties of all kinds. These
exemptions shall continue unless expressly and specifically revoked and any
assessment against the GSIS as of the approval of this Act are hereby
considered paid. Consequently, all laws, ordinances, regulations, issuances,
opinions or jurisprudence contrary to or in derogation of this provision are hereby
deemed repealed, superseded and rendered ineffective and without legal force and
effect. (Emphasis added.)

GSIS an instrumentality of the National Government

Apart from the foregoing consideration, the Courts fairly recent ruling
in Manila International Airport Authority v. Court of Appeals,[20] a case likewise
involving real estate tax assessments by a Metro Manila city on the real properties
administered by MIAA, argues for the non-tax liability of GSIS for real estate
taxes. There, the Court held that MIAA does not qualify as a GOCC, not having
been organized either as a stock corporation, its capital not being divided into
shares, or as a non-stock corporation because it has no members. MIAA is rather
an instrumentality of the National Government and, hence, outside the purview of
local taxation by force of Sec. 133 of the LGC providing in context that unless
otherwise provided, local governments cannot tax national government
instrumentalities. And as the Court pronounced in Manila International Airport
Authority, the airport lands and buildings MIAA administers belong to the
Republic of the Philippines, which makes MIAA a mere trustee of such assets. No
less than the Administrative Code of 1987 recognizes a scenario where a piece of
land owned by the Republic is titled in the name of a department, agency, or
instrumentality. The following provision of the said Code suggests as much:

Sec. 48. Official Authorized to Convey Real Property.Whenever real

property of the Government is authorized by law to be conveyed, the deed of
conveyance shall be executed in behalf of the government by the following: x x x
x

(2) For property belonging to the Republic of the Philippines, but titled in
the name of x x x any corporate agency or instrumentality, by the executive head
of the agency or instrumentality. [21]

While perhaps not of governing sway in all fours inasmuch as what were
involved in Manila International Airport Authority, e.g., airfields and runways, are
properties of the public dominion and, hence, outside the commerce of man, the
rationale underpinning the disposition in that case is squarely applicable to
GSIS, both MIAA and GSIS being similarly situated. First, while created under
CA 186 as a non-stock corporation, a status that has remained unchanged even
when it operated under PD 1146 and RA 8291, GSIS is not, in the context of the
afore quoted Sec. 193 of the LGC, a GOCC following the teaching of Manila
International Airport Authority, for, like MIAA, GSIS capital is not divided into
unit shares. Also, GSIS has no members to speak of. And by members, the
reference is to those who, under Sec. 87 of the Corporation Code, make up the
non-stock corporation, and not to the compulsory members of the system who are
government employees. Its management is entrusted to a Board of Trustees whose
members are appointed by the President.

Second, the subject properties under GSISs name are likewise owned by the
Republic. The GSIS is but a mere trustee of the subject properties which have
either been ceded to it by the Government or acquired for the enhancement of the
system. This particular property arrangement is clearly shown by the fact that the
disposal or conveyance of said subject properties are either done by or through the
authority of the President of the Philippines.Specifically, in the case of the
Concepcion-Arroceros property, it was transferred, conveyed, and ceded to this
Court on April 27, 2005 through a presidential proclamation, Proclamation No.
835. Pertinently, the text of the proclamation announces that the Concepcion-
Arroceros property was earlier ceded to the GSIS on October 13, 1954 pursuant to
Proclamation No. 78 for office purposes and had since been titled to GSIS which
constructed an office building thereon. Thus, the transfer on April 27, 2005 of the
Concepcion-Arroceros property to this Court by the President through
Proclamation No. 835. This illustrates the nature of the government ownership of
the subject GSIS properties, as indubitably shown in the last clause of Presidential
Proclamation No. 835:

WHEREAS, by virtue of the Public Land Act (Commonwealth Act No.

141, as amended), Presidential Decree No. 1455, and the Administrative Code of
1987, the President is authorized to transfer any government property that is
no longer needed by the agency to which it belongs to other branches or
agencies of the government. (Emphasis ours.)

Third, GSIS manages the funds for the life insurance, retirement,
survivorship, and disability benefits of all government employees and their
beneficiaries. This undertaking, to be sure, constitutes an essential and vital
function which the government, through one of its agencies or instrumentalities,
ought to perform if social security services to civil service employees are to be
delivered with reasonable dispatch. It is no wonder, therefore, that the Republic
guarantees the fulfillment of the obligations of the GSIS to its members
(government employees and their beneficiaries) when and as they become due.
This guarantee was first formalized under Sec. 24[22] of CA 186, then Sec. 8[23] of
PD 1146, and finally in Sec. 8[24] of RA 8291.

Second Core Issue: Beneficial Use Doctrine Applicable

The foregoing notwithstanding, the leased Katigbak property shall be

taxable pursuant to the beneficial use principle under Sec. 234(a) of the LGC.
 It is true that said Sec. 234(a), quoted below, exempts from real estate taxes
real property owned by the Republic, unless the beneficial use of the property is,
for consideration, transferred to a taxable person.
SEC. 234. Exemptions from Real Property Tax. The following are
exempted from payment of the real property tax:

(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 exemption, however, must be read in relation with Sec. 133(o) of the
LGC, which prohibits LGUs from imposing taxes or fees of any kind on the
national government, its agencies, and instrumentalities:

SEC. 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:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government,

its agencies and instrumentalities, and local government units. (Emphasis
supplied.)

Thus read together, the provisions allow the Republic to grant the beneficial
use of its property to an agency or instrumentality of the national government.
Such grant does not necessarily result in the loss of the tax exemption. The tax
exemption the property of the Republic or its instrumentality carries ceases only if,
as stated in Sec. 234(a) of the LGC of 1991, beneficial use thereof has been
granted, for a consideration or otherwise, to a taxable person. GSIS, as a
government instrumentality, is not a taxable juridical person under Sec. 133(o) of
the LGC. GSIS, however, lost in a sense that status with respect to the Katigbak
property when it contracted its beneficial use to MHC, doubtless a taxable person.
Thus, the real estate tax assessment of PhP 54,826,599.37 covering 1992 to 2002
over the subject Katigbak property is valid insofar as said tax delinquency is
concerned as assessed over said property.
Taxable entity having beneficial use of leased
property liable for real property taxes thereon

The next query as to which between GSIS, as the owner of the Katigbak
property, or MHC, as the lessee thereof, is liable to pay the accrued real estate tax,
need not detain us long. MHC ought to pay.

As we declared in Testate Estate of Concordia T. Lim, the unpaid tax

attaches to the property and is chargeable against the taxable person who had
actual or beneficial use and possession of it regardless of whether or not he is the
owner. Of the same tenor is the Courts holding in the subsequent Manila Electric
Company v. Barlis[25] and later in Republic v. City of Kidapawan.[26] Actual use
refers to the purpose for which the property is principally or predominantly utilized
by the person in possession thereof.[27]

Being in possession and having actual use of the Katigbak property since
November 1991, MHC is liable for the realty taxes assessed over the Katigbak
property from 1992 to 2002.

The foregoing is not all. As it were, MHC has obligated itself under the
GSIS-MHC Contract of Lease to shoulder such assessment. Stipulation l8 of the
contract pertinently reads:

18. By law, the Lessor, [GSIS], is exempt from taxes, assessments

and levies. Should there be any change in the law or the interpretation
thereof or any other circumstances which would subject the Leased
Property to any kind of tax, assessment or levy which would constitute a
charge against the Lessor or create a lien against the Leased Property,
the Lessee agrees and obligates itself to shoulder and pay such tax,
assessment or levy as it becomes due.[28] (Emphasis ours.)
 As a matter of law and contract, therefore, MHC stands liable to pay the
realty taxes due on the Katigbak property. Considering, however, that MHC has
not been impleaded in the instant case, the remedy of the City of Manila is to serve
the realty tax assessment covering the subject Katigbak property to MHC and to
pursue other available remedies in case of nonpayment, for said property cannot be
levied upon as shall be explained below.

Third Core Issue: GSIS Properties Exempt from Levy

In light of the foregoing disquisition, the issue of the propriety of the

threatened levy of subject properties by the City of Manila to answer for the
demanded realty tax deficiency is now moot and academic. A valid tax levy
presupposes a corresponding tax liability. Nonetheless, it will not be remiss to note
that it is without doubt that the subject GSIS properties are exempt from any
attachment, garnishment, execution, levy, or other legal processes. This is the clear
import of the third paragraph of Sec. 39, RA 8291, which we quote anew for
clarity:

SEC. 39. Exemption from Tax, Legal Process and Lien. x x x.

xxxx
The funds and/or the properties referred to herein as well as the
benefits, sums or monies corresponding to the benefits under this Act shall be
exempt from attachment, garnishment, execution, levy or other processes
issued by the courts, quasi-judicial agencies or administrative
bodies including Commission on Audit (COA) disallowances and from all
financial obligations of the members, including his pecuniary accountability
arising from or caused or occasioned by his exercise or performance of his official
functions or duties, or incurred relative to or in connection with his position or
work except when his monetary liability, contractual or otherwise, is in favor of
the GSIS. (Emphasis ours.)

The Court would not be indulging in pure speculative exercise to say that the
underlying legislative intent behind the above exempting proviso cannot be other
than to isolate GSIS funds and properties from legal processes that will
either impair the solvency of its fund or hamper its operation that would ultimately
require an increase in the contribution rate necessary to sustain the benefits of the
system. Throughout GSIS life under three different charters, the need to ensure the
solvency of GSIS fund has always been a legislative concern, a concern expressed
in the tax-exempting provisions.

Thus, even granting arguendo that GSIS liability for realty taxes attached
from 1992, when RA 7160 effectively lifted its tax exemption under PD 1146, to
1996, when RA 8291 restored the tax incentive, the levy on the subject properties
to answer for the assessed realty tax delinquencies cannot still be sustained. The
simple reason: The governing law, RA 8291, in force at the time of the levy
prohibits it. And in the final analysis, the proscription against the levy extends to
the leased Katigbak property, the beneficial use doctrine, notwithstanding.

Summary

In sum, the Court finds that GSIS enjoys under its charter full tax exemption.
Moreover, as an instrumentality of the national government, it is itself not liable to
pay real estate taxes assessed by the City of Manila against its Katigbak and
Concepcion-Arroceros properties. Following the beneficial use rule, however,
accrued real property taxes are due from the Katigbak property, leased as it is to a
taxable entity. But the corresponding liability for the payment thereof devolves on
the taxable beneficial user. The Katigbak property cannot in any event be subject
of a public auction sale, notwithstanding its realty tax delinquency. This means that
the City of Manila has to satisfy its tax claim by serving the accrued realty tax
assessment on MHC, as the taxable beneficial user of the Katigbak property and, in
case of nonpayment, through means other than the sale at public auction of the
leased property.

WHEREFORE, the instant petition is hereby GRANTED. The November

15, 2007 Decision and January 7, 2009 Order of the Regional Trial Court, Branch
49, Manila are REVERSED and SET ASIDE. Accordingly, the real property tax
assessments issued by the City of Manila to the Government Service Insurance
System on the subject properties are declared VOID, except that the real property
tax assessment pertaining to the leased Katigbak property shall be valid if served
on the Manila Hotel Corporation, as lessee which has actual and beneficial use
thereof. The City of Manila is permanently restrained from levying on or selling at
public auction the subject properties to satisfy the payment of the real property tax
delinquency.

No pronouncement as to costs.
 SO ORDERED.

EN BANC

ABAKADA GURO PARTY LIST (Formerly G.R. No. 168056

AASJAS) OFFICERS SAMSON S.
ALCANTARA and ED VINCENT S.
ALBANO,

Petitioners, Present:

DAVIDE, JR., C.J.,

PUNO,

PANGANIBAN,

QUISUMBING,

YNARES-SANTIAGO,

SANDOVAL-GUTIERREZ,

- versus - CARPIO,

AUSTRIA-MARTINEZ,

CORONA,

CARPIO-MORALES,

CALLEJO, SR.,
 AZCUNA,

TINGA,

CHICO-NAZARIO, and

GARCIA, JJ.

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.

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

AQUILINO Q. PIMENTEL, JR., LUISA P. G.R. No. 168207

EJERCITO-ESTRADA, JINGGOY E.
ESTRADA, PANFILO M. LACSON,
ALFREDO S. LIM, JAMBY A.S.
MADRIGAL, AND SERGIO R. OSMEA III,

Petitioners,

- versus -

EXECUTIVE SECRETARY EDUARDO R.

ERMITA, CESAR V. PURISIMA,
SECRETARY OF FINANCE, GUILLERMO
L. PARAYNO, JR., COMMISSIONER OF
THE BUREAU OF INTERNAL REVENUE,

Respondents.

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

ASSOCIATION OF PILIPINAS SHELL G.R. No. 168461

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

Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as

Secretary of the Department of
Finance and GUILLERMO L. PARAYNO,
JR., in his capacity as Commissioner of
Internal Revenue,

Respondents.

x-------------------------x
FRANCIS JOSEPH G. ESCUDERO, G.R. No. 168463
VINCENT CRISOLOGO, EMMANUEL
JOEL J. VILLANUEVA, RODOLFO G.
PLAZA, DARLENE ANTONINO-
CUSTODIO, OSCAR G. MALAPITAN,
BENJAMIN C. AGARAO, JR. JUAN
EDGARDO M. ANGARA, JUSTIN MARC
SB. CHIPECO, FLORENCIO G. NOEL,
MUJIV S. HATAMAN, RENATO B.
MAGTUBO, JOSEPH A. SANTIAGO,
TEOFISTO DL. GUINGONA III, RUY ELIAS
C. LOPEZ, RODOLFO Q. AGBAYANI and
TEODORO A. CASIO,

Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as

Secretary of Finance, GUILLERMO L.
PARAYNO, JR., in his capacity as
Commissioner of Internal Revenue,
and EDUARDO R. ERMITA, in his
capacity as Executive Secretary,

Respondents.
x-------------------------x

BATAAN GOVERNOR ENRIQUE T. G.R. No. 168730

GARCIA, JR.

Petitioner,

- versus -

HON. EDUARDO R. ERMITA, in his

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

Promulgated:

Respondents. September 1, 2005

x-----------------------------------------------------------x
 DECISION

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest

of all, should be borne by everyone, and the more man enjoys the
advantages of society, the more he ought to hold himself honored in
contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation

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

Every law enjoys in its favor the presumption of constitutionality. Their

arguments notwithstanding, petitioners failed to justify their call for the invalidity
of the law. Hence, R.A. No. 9337 is not unconstitutional.

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

House Bill No. 3555[2] was introduced on first reading on January 7, 2005.
The House Committee on Ways and Means approved the bill, in substitution of
House Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced
on August 8, 2004. The President certified the bill on January 7, 2005 for
immediate enactment. On January 27, 2005, the House of Representatives
approved the bill on second and third reading.

House Bill No. 3705[3] on the other hand, substituted House Bill No. 3105
introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by
Rep. Jacinto V. Paras. Its mother bill is House Bill No. 3555. The House Committee
on Ways and Means approved the bill on February 2, 2005. The President also
certified it as urgent on February 8, 2005. The House of Representatives approved
the bill on second and third reading on February 28, 2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate

Bill No. 1950[4] on March 7, 2005, in substitution of Senate Bill Nos. 1337, 1838
and 1873, taking into consideration House Bill Nos. 3555 and 3705. Senator Ralph
G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873
were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N.
Pangilinan. The President certified the bill on March 11, 2005, and was approved
by the Senate on second and third reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the
House of Representatives for a committee conference on the disagreeing
provisions of the proposed bills.
 Before long, the Conference Committee on the Disagreeing Provisions of
House Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950, after having
met and discussed in full free and conference, recommended the approval of its
report, which the Senate did on May 10, 2005, and with the House of
Representatives agreeing thereto the next day, May 11, 2005.

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

July 1, 2005 is the effectivity date of R.A. No. 9337.[5] When said date came,
the Court issued a temporary restraining order, effective immediately and
continuing until further orders, enjoining respondents from enforcing and
implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the
hearing, the Court speaking through Mr. Justice Artemio V. Panganiban, voiced
the rationale for its issuance of the temporary restraining order on July 1, 2005, to
wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell
you a little background. You know when the law took effect
on July 1, 2005, the Court issued a TRO at about 5 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

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.

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?

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 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.

 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:

. . . 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 %).

Petitioners argue that the law is unconstitutional, as it constitutes

abandonment by Congress of its exclusive authority to fix the rate of taxes under
Article VI, Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition

for certiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A.
No. 9337.

Aside from questioning the so-called stand-by authority of the President to

increase the VAT rate to 12%, on the ground that it amounts to an undue
delegation of legislative power, petitioners also contend that the increase in the
VAT rate to 12% contingent on any of the two conditions being satisfied violates
the due process clause embodied in Article III, Section 1 of the Constitution, as it
imposes an unfair and additional tax burden on the people, in that: (1) the 12%
increase is ambiguous because it does not state if the rate would be returned to
the original 10% if the conditions are no longer satisfied; (2) the rate is unfair and
unreasonable, as the people are unsure of the applicable VAT rate from year to
year; and (3) the increase in the VAT rate, which is supposed to be an incentive to
the President to raise the VAT collection to at least 2 4/5 of the GDP of the
previous year, should only be based on fiscal adequacy.
 Petitioners further claim that the inclusion of a stand-by authority granted
to the President by the Bicameral Conference Committee is a violation of the no-
amendment rule upon last reading of a bill laid down in Article VI, Section 26(2) of
the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the
Association of Pilipinas Shell Dealers, Inc., et al., assailing the following provisions
of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on
depreciable goods shall be amortized over a 60-month period, if the acquisition,
excluding the VAT components, exceeds One Million Pesos (P1, 000,000.00);

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

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

Petitioners contend that these provisions are unconstitutional for being

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

Petitioners also believe that these provisions violate the constitutional

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

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

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis

Joseph G. Escudero filed this petition for certiorari on June 30, 2005. They
question the constitutionality of R.A. No. 9337 on the following grounds:
 1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative
power, in violation of Article VI, Section 28(2) of the Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in deleting the no

pass on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117,
119, 121, 125,[7] 148, 151, 236, 237 and 288, which were present in Senate Bill
No. 1950, violates Article VI, Section 24(1) of the Constitution, which provides
that all appropriation, revenue or tariff bills shall originate exclusively in the
House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition

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

RESPONDENTS COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of

respondents. Preliminarily, respondents contend that R.A. No. 9337 enjoys the
presumption of constitutionality and petitioners failed to cast doubt on its
validity.

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

630 (1994), respondents argue that the procedural issues raised by

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

Respondents also refute petitioners argument that the increase to 12%, as

well as the 70% limitation on the creditable input tax, the 60-month amortization
on the purchase or importation of capital goods exceeding P1,000,000.00, and the
5% final withholding tax by government agencies, is arbitrary, oppressive, and
confiscatory, and that it violates the constitutional principle on progressive
taxation, among others.

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

ISSUES
The Court defined the issues, as follows:

PROCEDURAL ISSUE

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

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

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

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

b. Article VI, Section 28(2)

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

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

b. Article III, Section 1

RULING OF THE COURT

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

The VAT is a tax on spending or consumption. It is levied on the sale, barter,

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

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

In the Philippines, the value-added system of sales taxation has long been
in existence, albeit in a different mode. Prior to 1978, the system was a single-
stage tax computed under the cost deduction method and was payable only by
the original sellers. The single-stage system was subsequently modified, and a
mixture of the cost deduction method and tax credit method was used to
determine the value-added tax payable.[13] Under the tax credit method, an entity
can credit against or subtract from the VAT charged on its sales or outputs the
VAT paid on its purchases, inputs and imports.[14]
 It was only in 1987, when President Corazon C. Aquino issued Executive
Order No. 273, that the VAT system was rationalized by imposing a multi-stage
tax rate of 0% or 10% on all sales using the tax credit method.[15]

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT
Law, R.A. No. 8241 or the Improved VAT Law,[17] R.A. No. 8424 or the Tax
[16]

Reform Act of 1997,[18] and finally, the presently beleaguered R.A. No. 9337, also
referred to by respondents as the VAT Reform Act.

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

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

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral
Conference Committee exceeded its authority by:
 1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A.
No. 9337;

2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

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

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

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

It should be borne in mind that the power of internal regulation and

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

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives

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

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

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

A comparative presentation of the conflicting House and Senate provisions and

a reconciled version thereof with the explanatory statement of the conference
committee shall be attached to the report.

...

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

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

In the recent case of 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. 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.
 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

House Bill No.3705 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 Provides for a single rate of 10%
on sales of goods or properties VAT on sale of goods or
and reduced rates for sale of properties (amending Sec. 106 of
certain locally manufactured NIRC), 10% VAT on sale of
goods and petroleum products services including sale of
and raw materials to be used in electricity by generation
the manufacture thereof companies, transmission and
(amending Sec. 106 of NIRC); distribution companies, and use
12% VAT on importation of or lease of properties (amending
goods and reduced rates for Sec. 108 of NIRC)
certain imported products
including petroleum products
(amending Sec. 107 of NIRC);
and 12% VAT on sale of services
and use or lease of properties
and a reduced rate for certain
services including power
generation (amending Sec. 108
of NIRC)

With regard to the no pass-on provision

No similar provision Provides that the VAT imposed Provides that the VAT imposed
on power generation and on on sales of electricity by
the sale of petroleum products generation companies and
shall be absorbed by generation services of transmission
companies or sellers, companies and distribution
respectively, and shall not be companies, as well as those of
passed on to consumers 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 No similar provision Provides that the input tax credit
credit for capital goods on for capital goods on which a VAT
which a VAT has been paid has been paid shall be equally
shall be equally distributed distributed over 5 years or the
over 5 years or the depreciable life of such capital
depreciable life of such goods; the input tax credit for
capital goods; the input tax goods and services other than
credit for goods and capital goods shall not exceed
services other than capital 90% of the output VAT.
goods shall not exceed 5%
of the total amount of such
goods and services; and for
persons engaged in retail
trading of goods, the
allowable input tax credit
shall not exceed 11% of the
total amount of goods
purchased.

With regard to amendments to be made to NIRC provisions regarding income and excise 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 bill; (3) in what manner input
tax credits should be limited; (4) and whether the NIRC provisions on corporate
income taxes, percentage, franchise and excise taxes should be amended.

There being differences and/or disagreements on the foregoing provisions

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

1. With regard to the disagreement on the rate of VAT to be imposed, it

would appear from the Conference Committee Report that the Bicameral

Conference Committee tried to bridge the gap in the difference between the 10%

VAT rate proposed by the Senate, and the various rates with 12% as the highest

VAT rate proposed by the House, by striking a compromise whereby the present

10% VAT rate would be retained until certain conditions arise, i.e., the value-
added tax collection as a percentage of gross domestic product (GDP) of the
previous year exceeds 2 4/5%, or National Government deficit as a percentage of

GDP of the previous year exceeds 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 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 zero-rated sales by a VAT-registered person may at
his option be refunded or credited against other internal revenue taxes,
...

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

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

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

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

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

Committee on disagreeing provisions were meant only to reconcile and
harmonize the disagreeing provisions for it did not inject any idea or intent that is
wholly foreign to the subject embraced by the original provisions.

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

The no pass-on provision was deleted altogether. In the transcripts of the

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

. . . the thinking was just to keep the VAT law or the VAT bill
simple. And we were thinking that no sector should be a beneficiary of
legislative grace, neither should any sector be discriminated on. The
VAT is an indirect tax. It is a pass on-tax. And 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 value-

added tax proposed in Senate Bill No. 1950, since said provisions were among
those referred to it, the conference committee had to act on the same and it
basically adopted the version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference

Committee were germane to subjects of the provisions referred

to it for reconciliation. Such being the case, the Court does not see any grave
abuse of discretion amounting to lack or excess of jurisdiction committed by the
Bicameral Conference Committee. In the earlier cases of Philippine Judges
Association vs. Prado[29] and Tolentino vs. Secretary of Finance,[30] the Court
recognized the long-standing legislative practice of giving said conference
committee ample latitude for compromising differences between the Senate and
the House. Thus, in the Tolentino case, it was held that:

. . . it is within the power of a conference committee to include in its report an

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

B. R.A. No. 9337 Does Not Violate Article VI, Section

26(2) of the Constitution on the No-Amendment
Rule

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

No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been
distributed to its Members three days before its passage, except when the President
certifies to the necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and
the vote thereon shall be taken immediately thereafter, and the yeas and nays entered
in the Journal.
 Petitioners argument that the practice where a bicameral conference
committee is allowed to add or delete provisions in the House bill and the Senate
bill after these had passed three readings is in effect a circumvention of the no
amendment rule (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince
the Court to deviate from its ruling in the Tolentino case that:

Nor is there any reason for requiring that the 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)

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

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

Section

27
Rates of Income Tax on Domestic Corporation

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

28(B)(1) Inter-corporate Dividends

34(B)(1) Inter-corporate Dividends

116 Tax on Persons Exempt from VAT

117 Percentage Tax on domestic carriers and keepers of

Garage

119 Tax on franchises

121 Tax on banks and Non-Bank Financial

Intermediaries

148 Excise Tax on manufactured oils and other fuels

 151 Excise Tax on mineral products

236 Registration requirements

237 Issuance of receipts or sales or commercial invoices

288 Disposition of Incremental Revenue

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

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills shall originate exclusively in the
House of Representatives but the Senate may propose or concur with amendments.
 In the present cases, petitioners admit that it was indeed House Bill Nos.
3555 and 3705 that initiated the move for amending provisions of the NIRC
dealing mainly with the value-added tax. Upon transmittal of said House bills to
the Senate, the Senate came out with Senate Bill No. 1950 proposing
amendments not only to NIRC provisions on the value-added tax but also
amendments to NIRC provisions on other kinds of taxes. Is the introduction by the
Senate of provisions not dealing directly with the value- added tax, which is the
only kind of tax being amended in the House bills, still within the purview of the
constitutional provision authorizing the Senate to propose or concur with
amendments to a revenue bill that originated from the House?

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

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

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

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

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

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

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

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

The other sections amended by the Senate pertained to matters of tax

administration which are necessary for the implementation of the changes in the
VAT system.

To reiterate, the sections introduced by the Senate are germane to the

subject matter and purposes of the house bills, which is to supplement our
countrys fiscal deficit, among others. Thus, the Senate acted within its power to
propose those amendments.

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

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

b. Article VI, Section 28(2)

A. No Undue Delegation of Legislative Power

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

The assailed provisions read as follows:

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

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

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

(i) value-added tax collection as a percentage of Gross Domestic

Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%) or

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

year exceeds one and one-half percent (1 %).

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended
to read as follows:
 SEC. 107. Value-Added Tax on Importation of Goods.

(A) In General. There shall be levied, assessed and collected on every

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

(i) value-added tax collection as a percentage of Gross Domestic

Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%) or

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

year exceeds one and one-half percent (1 %).

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.

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.

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

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

corollary to the doctrine of separation of powers is the principle of non-

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

With respect to the Legislature, Section 1 of Article VI of the Constitution

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

Nonetheless, the general rule barring delegation of legislative powers is

subject to the following recognized limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of

Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23
(2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
 (5) Delegation to administrative bodies.

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

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

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

In testing whether a statute constitutes an undue delegation of legislative

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

...

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

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

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

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

Clearly, the legislature may delegate to executive officers or bodies the

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

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

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

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

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

(i) Value-added tax collection as a percentage of Gross Domestic

Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%); or

(ii) National government deficit as a percentage of GDP of the

previous year exceeds one and one-half percent (1 %).

The case before the Court is not a delegation of legislative power. It is

simply a delegation of ascertainment of facts upon which enforcement and

administration of the increase rate under the law is contingent. The legislature has
made the operation of the 12% rate effective January 1, 2006, contingent upon a

specified fact or condition. It leaves the entire operation or non-operation of the

12% rate upon factual matters outside of the control of the executive.

No discretion would be exercised by the President. Highlighting the

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

Thus, it is the ministerial duty of the President to immediately impose the

12% rate upon the existence of any of the conditions specified by Congress. This is
a duty which cannot be evaded by the President. Inasmuch as the law specifically
uses the word shall, the exercise of discretion by the President does not come
into play. It is a clear directive to impose the 12% VAT rate when the specified
conditions are present. The time of taking into effect of the 12% VAT rate is based
on the happening of a certain specified contingency, or upon the ascertainment of
certain facts or conditions by a person or body other than the legislature itself.

The Court finds no merit to the contention of petitioners ABAKADA

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

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

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

Congress simply granted the Secretary of Finance the authority to ascertain

the existence of a fact, namely, whether by December 31, 2005, the value-added
tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (24/5%) or the national government
deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (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 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 %).

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]
 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 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 the judgment of the legislature, and the serious conflict of opinions does not
suffice to bring them within the range of judicial cognizance. [66]
 In the same vein, the Court in this case will not dawdle on the purpose of
Congress or the executive policy, given that it is not for the judiciary to "pass upon
questions of wisdom, justice or expediency of legislation.[67]

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

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

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

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

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

Petitioners also contend that these provisions violate the constitutional

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

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

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

Petitioners claim that the contested sections impose limitations on the

amount of input tax that may be claimed. In effect, a portion of the input tax that
has already been paid cannot now be credited against the output tax.

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

More importantly, the excess input tax, if any, is retained in a businesss

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

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

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

Therefore, petitioners argument must be rejected.

On the other hand, it appears that petitioner Garcia failed to comprehend

the operation of the 70% limitation on the input tax. According to petitioner, the
limitation on the creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they collect, which violates the
principle that tax collection and revenue should be for public purposes and
expenditures

As earlier stated, the input tax is the tax paid by a person, passed on to him
by the seller, when he buys goods. Output tax meanwhile is the tax due to the
person when he sells goods. In computing the VAT payable, three possible
scenarios may arise:

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

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

Third, if the input taxes exceed the output taxes, the excess shall be carried
over to the succeeding quarter or quarters. Should the input taxes result from
zero-rated or effectively zero-rated transactions, any excess over the output taxes
shall instead be refunded to the taxpayer or credited against other internal
revenue taxes, at the 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 importation of goods
and services by VAT-registered persons against the output tax was
introduced.[73] This was adopted by the Expanded VAT Law (R.A. No. 7716),[74] and
The Tax Reform Act of 1997 (R.A. No. 8424).[75] The right to credit input tax as
against the output tax is clearly a privilege created by law, a privilege that also the
law can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory,

Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC, which provides:

SEC. 110. Tax Credits.

(A) Creditable Input Tax.

Provided, That the input tax on goods purchased or imported in a calendar month for
use in trade or business for which deduction for depreciation is allowed under this Code,
shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding
months if the aggregate acquisition cost for such goods, excluding the VAT component
thereof, exceeds One million pesos (P1,000,000.00): Provided, however, That if the
estimated useful life of the capital goods is less than five (5) years, as used for
depreciation purposes, then the input VAT shall be spread over such a shorter
period: Provided, finally, That in the case of purchase of services, lease or use of
properties, the input tax shall be creditable to the purchaser, lessee or license upon
payment of the compensation, rental, royalty or fee.

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

the creditable input tax on purchase or importation of capital goods with
acquisition cost of P1 Million pesos, exclusive of the VAT component. Such spread
out only poses a delay in the crediting of the input tax. Petitioners argument is
without basis because the taxpayer is not permanently deprived of his privilege to
credit the input tax.
 It is worth mentioning that Congress admitted that the spread-out of the
creditable input tax in this case amounts to a 4-year interest-free loan to the
government.[76] In the same breath, Congress also justified its move by saying that
the provision was designed to raise an annual revenue of 22.6 billion. [77] The
legislature also dispelled the fear that the provision will fend off foreign
investments, saying that foreign investors have other tax incentives provided by
law, and citing the case of China, where despite a 17.5% non-creditable VAT,
foreign investments were not deterred.[78] Again, for whatever is the purpose of
the 60-month amortization, this involves executive economic policy and
legislative wisdom in which the Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments

made by the government for taxable transactions, Section 12 of R.A. No. 9337,
which amended Section 114 of the NIRC, reads:

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

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

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

The value-added tax withheld under this Section shall be remitted within ten
(10) days following the end of the month the withholding was made.
 Section 114(C) merely provides a method of collection, or as stated by
respondents, a more simplified VAT withholding system. The government in this
case is constituted as a withholding agent with respect to their payments for
goods and services.

Prior to its amendment, Section 114(C) provided for different rates of

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

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

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

SECTION 2.57. Withholding of Tax at Source

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

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

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

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

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

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

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

The valued-added tax withheld under this Section shall be

remitted within ten (10) days following the end of the month the
withholding was made. (Emphasis supplied)

As amended, the use of the word final and the deletion of the
word creditable exhibits 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, one-

sided. The Court will not engage in a legal joust where premises are what ifs,
arguments, theoretical and facts, uncertain. Any disquisition by the Court on this
point will only be, as Shakespeare describes life in Macbeth,[82] full of sound and
fury, signifying nothing.

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 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.

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

R.A. No. 9337 is also equitable. The law is equipped with a threshold
margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or
services with gross annual sales or receipts not exceeding P1,500,000.00.[88] Also,
basic marine and agricultural food products in their original state are still not
subject to the tax,[89] thus ensuring that prices at the grassroots level will remain
accessible. As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng
Pilipinas, Inc. vs. Tan:[90]

The disputed sales tax is also equitable. It is imposed only on sales of goods or
services by persons engaged in business with an aggregate gross annual sales
exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales of farm and marine products, so that
the costs of basic food and other necessities, spared as they are from the incidence of
the VAT, are expected to be relatively lower and within the reach of the general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low
profit margins, and unduly favors those with high profit margins. Congress was
not oblivious to this. Thus, to equalize the weighty burden the law entails, the
law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons
under Section 109(v), i.e., transactions with gross annual sales and/or receipts not
exceeding P1.5 Million. This acts as a equalizer because in effect, bigger
businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on
equal-footing.
 Moreover, Congress provided mitigating measures to cushion the impact of
the imposition of the tax on those previously exempt. Excise taxes on petroleum
products[91] and natural gas[92] were reduced. Percentage tax on domestic carriers
was removed.[93] Power producers are now exempt from paying franchise tax. [94]

Aside from these, Congress also increased the income tax rates of
corporations, in order to distribute the burden of taxation. Domestic, foreign, and
non-resident corporations are now subject to a 35% income tax rate, from a
previous 32%.[95] Intercorporate dividends of non-resident foreign corporations
are still subject to 15% final withholding tax but the tax credit allowed on the
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;
that is, in proportion to the revenue which they respectively enjoy under the
protection of the state.

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

the person affected.[98]

The VAT is an antithesis of progressive taxation. By its very nature, it is

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

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

Nevertheless, the Constitution does not really prohibit the imposition of

indirect taxes, like the VAT. What it simply provides is that Congress shall "evolve
a progressive system of taxation." The Court stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which,
like the VAT, are regressive. What it simply provides is that Congress shall evolve a
progressive system of taxation. The constitutional provision has been interpreted to
 mean simply that direct taxes are . . . to be preferred [and] as much as possible, indirect
taxes should be minimized. (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221
(Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a
progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of
indirect taxes, would have been prohibited with the proclamation of Art. VIII, 17 (1) of
the 1973 Constitution from which the present Art. VI, 28 (1) was taken. Sales taxes are
also regressive.

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

CONCLUSION

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

Let us not be overly influenced by the plea that for every wrong there is a
remedy, and that the judiciary should stand ready to afford relief. There are
undoubtedly many wrongs the judicature may not correct, for instance, those involving
political questions. . . .
 Let us likewise disabuse our minds from the notion that the judiciary is the
repository of remedies for all political or social ills; We should not forget that the
Constitution has judiciously allocated the powers of government to three distinct and
separate compartments; and that judicial interpretation has tended to the preservation
of the independence of the three, and a zealous regard of the prerogatives of each,
knowing full well that one is not the guardian of the others and that, for official wrong-
doing, each may be brought to account, either by impeachment, trial or by the ballot
box.[100]

The words of the Court in Vera vs. 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.

Republic of the Philippines

Supreme Court
Manila

THIRD DIVISION
PLANTERS PRODUCTS, INC., G.R. No. 166006
Petitioner,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

Promulgated:
FERTIPHIL CORPORATION,
Respondent. March 14, 2008

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

DECISION

REYES, R.T., J.:

THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the
constitutionality of statutes, executive orders, presidential decrees and other
issuances. The Constitution vests that power not only in the Supreme Court but in
all Regional Trial Courts.

The principle is relevant in this petition for review on certiorari of the

Decision[1] of the Court of Appeals (CA) affirming with modification that of
the RTC in Makati City,[2] finding petitioner Planters Products, Inc. (PPI) liable to
private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under
Letter of Instruction (LOI) No. 1465.

The Facts

Petitioner PPI and private respondent Fertiphil are private corporations

incorporated under Philippine laws.[3] They are both engaged in the importation
and distribution of fertilizers, pesticides and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative

powers, issued LOI No. 1465 which provided, among others, for the imposition of
a capital recovery component (CRC) on the domestic sale of all grades of fertilizers
in the Philippines.[4] The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its

fertilizer pricing formula a capital contribution component of not
less than P10 per bag. This capital contribution shall be collected
until adequate capital is raised to make PPI viable. Such capital
contribution shall be applied by FPA to all domestic sales of
fertilizers in the Philippines.[5] (Underscoring supplied)

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in
the domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then
remitted the amount collected to the Far East Bank and Trust Company, the
depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8,
1985 to January 24, 1986.[6]

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of
the P10 levy. With the return of democracy, Fertiphil demanded from PPI a refund
of the amounts it paid under LOI No. 1465, but PPI refused to accede to the
demand.[7]

Fertiphil filed a complaint for collection and damages[8] against FPA and PPI
with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for
being unjust, unreasonable, oppressive, invalid and an unlawful imposition that
amounted to a denial of due process of law.[9] Fertiphil alleged that the LOI solely
favored PPI, a privately owned corporation, which used the proceeds to maintain
its monopoly of the fertilizer industry.

In its Answer,[10] FPA, through the Solicitor General, countered that the
issuance of LOI No. 1465 was a valid exercise of the police power of the State in
ensuring the stability of the fertilizer industry in the country. It also averred that
Fertiphil did not sustain any damage from the LOI because the burden imposed by
the levy fell on the ultimate consumer, not the seller.

RTC Disposition

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil,

disposing as follows:

WHEREFORE, in view of the foregoing, the Court hereby renders

judgment in favor of the plaintiff and against the defendant Planters
Product, Inc., ordering the latter to pay the former:

1) the sum of P6,698,144.00 with interest at 12% from the

time of judicial demand;

2) the sum of P100,000 as attorneys fees;

 3) the cost of suit.

SO ORDERED.[11]

Ruling that the imposition of the P10 CRC was an exercise of the States inherent
power of taxation, the RTC invalidated the levy for violating the basic principle
that taxes can only be levied for public purpose, viz.:

It is apparent that the imposition of P10 per fertilizer bag sold in

the country by LOI 1465 is purportedly in the exercise of the power of
taxation. It is a settled principle that the power of taxation by the state
is plenary. Comprehensive and supreme, the principal check upon its
abuse resting in the responsibility of the members of the legislature to
their constituents. However, there are two kinds of limitations on the
power of taxation: the inherent limitations and the constitutional
limitations.

One of the inherent limitations is that a tax may be levied only for
public purposes:

The power to tax can be resorted to only for a

constitutionally valid public purpose. By the same token,
taxes may not be levied for purely private purposes, for
building up of private fortunes, or for the redress of
 private wrongs. They cannot be levied for the
improvement of private property, or for the benefit, and
promotion of private enterprises, except where the aid is
incident to the public benefit. It is well-settled principle of
constitutional law that no general tax can be levied except
for the purpose of raising money which is to be expended
for public use. Funds cannot be exacted under the guise of
taxation to promote a purpose that is not of public
interest. Without such limitation, the power to tax could
be exercised or employed as an authority to destroy the
economy of the people. A tax, however, is not held void on
the ground of want of public interest unless the want of
such interest is clear. (71 Am. Jur. pp. 371-372)

In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the
Fertilizer and Pesticide Authority pursuant to the P10 per bag of
fertilizer sold imposition under LOI 1465 which, in turn, remitted the
amount to the defendant Planters Products, Inc. thru the latters
depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI 1465
the plaintiff, Fertiphil Corporation, which is a private domestic
corporation, became poorer by the amount of P6,698,144.00 and the
defendant, Planters Product, Inc., another private domestic
corporation, became richer by the amount of P6,698,144.00.

Tested by the standards of constitutionality as set forth in the afore-

quoted jurisprudence, it is quite evident that LOI 1465 insofar as it
imposes the amount of P10 per fertilizer bag sold in the country and
orders that the said amount should go to the defendant Planters
Product, Inc. is unlawful because it violates the mandate that a tax can
be levied only for a public purpose and not to benefit, aid and promote
a private enterprise such as Planters Product, Inc.[12]
PPI moved for reconsideration but its motion was denied. [13] PPI then filed a
notice of appeal with the RTC but it failed to pay the requisite appeal docket
fee. In a separate but related proceeding, this Court[14] allowed the appeal of PPI
and remanded the case to the CA for proper disposition.

CA Decision

On November 28, 2003, the CA handed down its decision affirming with
modification that of the RTC, with the following fallo:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is

hereby AFFIRMED, subject to the MODIFICATION that the award of
attorneys fees is hereby DELETED.[15]

In affirming the RTC decision, the CA ruled that the lis mota of the complaint for
collection was the constitutionality of LOI No. 1465, thus:

The question then is whether it was proper for the trial court to
exercise its power to judicially determine the constitutionality of the
subject statute in the instant case.

As a rule, where the controversy can be settled on other grounds, the

courts will not resolve the constitutionality of a law (Lim v. Pacquing,
240 SCRA 649 [1995]).The policy of the courts is to avoid ruling on
constitutional questions and to presume that the acts of political
departments are valid, absent a clear and unmistakable showing to the
contrary.
 However, the courts are not precluded from exercising such power
when the following requisites are obtaining in a controversy before
it: First, there must be before the court an actual case calling for the
exercise of judicial review. Second, the question must be ripe for
adjudication. Third, the person challenging the validity of the act must
have standing to challenge. Fourth, the question of constitutionality
must have been raised at the earliest opportunity; and lastly, the issue
of constitutionality must be the very lis mota of the case (Integrated Bar
of the Philippines v. Zamora, 338 SCRA 81 [2000]).

Indisputably, the present case was primarily instituted for collection

and damages. However, a perusal of the complaint also reveals
that the instant action is founded on the claim that the levy imposed
was an unlawful and unconstitutional special
assessment. Consequently, the requisite that the constitutionality of
the law in question be the very lis mota of the case is present, making it
proper for the trial court to rule on the constitutionality of LOI 1465.[16]

The CA held that even on the assumption that LOI No. 1465 was issued under the
police power of the state, it is still unconstitutional because it did not promote
public welfare. The CA explained:

In declaring LOI 1465 unconstitutional, the trial court held that

the levy imposed under the said law was an invalid exercise of the
States power of taxation inasmuch as it violated the inherent and
constitutional prescription that taxes be levied only for public
purposes. It reasoned out that the amount collected under the levy was
remitted to the depository bank of PPI, which the latter used to
advance its private interest.
On the other hand, appellant submits that the subject statutes passage
was a valid exercise of police power. In addition, it disputes the court a
quos findings arguing that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation created
by law to hold in trust for millions of farmers, the stock ownership of
PPI.

Of the three fundamental powers of the State, the exercise of police

power has been characterized as the most essential, insistent and the
least limitable of powers, extending as it does to all the great public
needs. It may be exercised as long as the activity or the property sought
to be regulated has some relevance to public welfare (Constitutional
Law, by Isagani A. Cruz, p. 38, 1995 Edition).

Vast as the power is, however, it must be exercised within the limits set
by the Constitution, which requires the concurrence of a lawful subject
and a lawful method.Thus, our courts have laid down the test to
determine the validity of a police measure as follows: (1) the interests
of the public generally, as distinguished from those of a particular class,
requires its exercise; and (2) the means employed are reasonably
necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals (National Development Company v.
Philippine Veterans Bank, 192 SCRA 257 [1990]).

It is upon applying this established tests that We sustain the trial courts
holding LOI 1465 unconstitutional. To be sure, ensuring the continued
supply and distribution of fertilizer in the country is an undertaking
imbued with public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will promote the
 public welfare. The governments commitment to support the successful
rehabilitation and continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statutes impartiality. There is
no way to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the countrys farmers or
even the Filipino people in general. Well to stress, substantive due
process exacts fairness and equal protection disallows distinction where
none is needed. When a statutes public purpose is spoiled by private
interest, the use of police power becomes a travesty which must be
struck down for being an arbitrary exercise of government power. To
rule in favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private purposes
or for the exclusive benefit of private individuals.[17]

The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was
for the benefit of Planters Foundation, Inc., a foundation created to hold in trust
the stock ownership of PPI. The CA stated:

Appellant next claims that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation created
by law to hold in trust for millions of farmers, the stock ownership
of PFI on the strength of Letter of Undertaking (LOU) issued by then
Prime Minister Cesar Virata on April 18, 1985 and affirmed by the
Secretary of Justice in an Opinion dated October 12, 1987, to wit:

2. Upon the effective date of this Letter of Undertaking,

the Republic shall cause FPA to include in its fertilizer
pricing formula a capital recovery component, the
proceeds of which will be used initially for the purpose of
funding the unpaid portion of the outstanding capital stock
of Planters presently held in trust by Planters Foundation,
Inc. (Planters Foundation), which unpaid capital is
estimated at approximately P206 million (subject to
validation by Planters and Planters Foundation) (such
unpaid portion of the outstanding capital stock of Planters
being hereafter referred to as the Unpaid Capital), and
subsequently for such capital increases as may be required
for the continuing viability of Planters.

The capital recovery component shall be in the minimum

amount of P10 per bag, which will be added to the price of
all domestic sales of fertilizer in the Philippines by any
importer and/or fertilizer mother company. In this
connection, the Republic hereby acknowledges that the
advances by Planters to Planters Foundation which were
applied to the payment of the Planters shares now held in
trust by Planters Foundation, have been assigned to,
among others, the Creditors. Accordingly, the Republic,
through FPA, hereby agrees to deposit the proceeds of the
capital recovery component in the special trust account
designated in the notice dated April 2, 1985, addressed by
counsel for the Creditors to Planters Foundation. Such
proceeds shall be deposited by FPA on or before the
15th day of each month.

The capital recovery component shall continue to be

charged and collected until payment in full of (a) the
Unpaid Capital and/or (b) any shortfall in the payment of
the Subsidy Receivables, (c) any carrying cost accruing
from the date hereof on the amounts which may be
 outstanding from time to time of the Unpaid Capital
and/or the Subsidy Receivables and (d) the capital
increases contemplated in paragraph 2 hereof. For the
purpose of the foregoing clause (c), the carrying cost shall
be at such rate as will represent the full and reasonable
cost to Planters of servicing its debts, taking into account
both its peso and foreign currency-denominated
obligations. (Records, pp. 42-43)

Appellants proposition is open to question, to say the least. The LOU

issued by then Prime Minister Virata taken together with the Justice
Secretarys Opinion does not preponderantly demonstrate that the
collections made were held in trust in favor of millions of
farmers. Unfortunately for appellant, in the absence of sufficient
evidence to establish its claims, this Court is constrained to rely on what
is explicitly provided in LOI 1465 that one of the primary aims in
imposing the levy is to support the successful rehabilitation and
continued viability of PPI.[18]

PPI moved for reconsideration but its motion was denied. [19] It then filed
the present petition with this Court.

Issues

Petitioner PPI raises four issues for Our consideration, viz.:

I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY
ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE
FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE OF
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE. NEITHER
CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY
WHICH HAS NO STANDING TO DO SO.

II

LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF

ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE
COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW TO
HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP
IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE
OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.

III

THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY

COMPONENT WAS REMITTED TO THE GOVERNMENT, AND BECAME
GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY
ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY
VIRTUE OF THE PRINCIPLE OF OPERATIVE FACT PRIOR TO ANY
DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.

IV

THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS

NO APPLICATION IN THE INSTANT CASE.[20] (Underscoring supplied)

Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of
the RTC to resolve constitutional issues.

Fertiphil has locus standi because it

suffered direct injury; doctrine of standing
is a mere procedural technicality which
may be waived.

PPI argues that Fertiphil has no locus standi to question the

constitutionality of LOI No. 1465 because it does not have a personal and
substantial interest in the case or will sustain direct injury as a result of its
enforcement.[21] It asserts that Fertiphil did not suffer any damage from
the CRCimposition because incidence of the levy fell on the ultimate consumer or
the farmers themselves, not on the seller fertilizer company.[22]

We cannot agree. The doctrine of locus standi or the right of appearance in

a court of justice has been adequately discussed by this Court in a catena of
cases. Succinctly put, the doctrine requires a litigant to have a material interest in
the outcome of a case. In private suits, locus standi requires a litigant to be a real
party in interest, which is defined as the
party who stands to be benefited or injured by the judgment in the suit or the
party entitled to the avails of the suit.[23]

In public suits, this Court recognizes the difficulty of applying the doctrine
especially when plaintiff asserts a public right on behalf of the general public
because of conflicting public policy issues. [24] On one end, there is the right of the
ordinary citizen to petition the courts to be freed from unlawful government
intrusion and illegal official action. At the other end, there is the public policy
precluding excessive judicial interference in official acts, which may unnecessarily
hinder the delivery of basic public services.

In this jurisdiction, We have adopted the direct injury test to

determine locus standi in public suits. In People v. Vera,[25] it was held that
a person who impugns the validity of a statute must have a personal and
substantial interest in the case such that he has sustained, or will sustain direct
injury as a result. The direct injury test in public suits is similar to the real party in
interest rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil
Procedure.[26]

Recognizing that a strict application of the direct injury test may hamper
public interest, this Court relaxed the requirement in cases of transcendental
importance or with far reaching implications. Being a mere procedural
technicality, it has also been held that locus standi may be waived in the public
interest.[27]

Whether or not the complaint for collection is characterized as a private or

public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury
from the enforcement of LOI No. 1465. It was required, and it did pay, the P10
levy imposed for every bag of fertilizer sold on the domestic market. It may be
true that Fertiphil has passed some or all of the levy to the ultimate consumer,
but that does not disqualify it from attacking the constitutionality of the LOI or
from seeking a refund. As seller, it bore the ultimate burden of paying the levy. It
faced the possibility of severe sanctions for failure to pay the levy. The fact of
payment is sufficient injury to Fertiphil.
 Moreover, Fertiphil suffered harm from the enforcement of the LOI
because it was compelled to factor in its product the levy. The levy certainly
rendered the fertilizer products of Fertiphil and other domestic sellers much more
expensive. The harm to their business consists not only in fewer clients because
of the increased price, but also in adopting alternative corporate strategies to
meet the demands of LOI No. 1465. Fertiphil and other fertilizer sellers may have
shouldered all or part of the levy just to be competitive in the market. The harm
occasioned on the business of Fertiphil is sufficient injury for purposes of locus
standi.

Even assuming arguendo that there is no direct injury, We find that the
liberal policy consistently adopted by this Court on locus standi must apply. The
issues raised by Fertiphil are of paramount public importance. It involves not only
the constitutionality of a tax law but, more importantly, the use of taxes for public
purpose. Former President Marcos issued LOI No. 1465 with the intention of
rehabilitating an ailing private company. This is clear from the text of the LOI. PPI
is expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy
was made dependent and conditional upon PPI becoming financially viable. The
LOI provided that the capital contribution shall be collected until adequate capital
is raised to make PPI viable.

The constitutionality of the levy is already in doubt on a plain reading of the

statute. It is Our constitutional duty to squarely resolve the issue as the final
arbiter of all justiciable controversies. The doctrine of standing, being a mere
procedural technicality, should be waived, if at all, to adequately thresh out an
important constitutional issue.

RTC may resolve constitutional issues; the

constitutional issue was adequately raised
in the complaint; it is the lis mota of the
case.
 PPI insists that the RTC and the CA erred in ruling on the constitutionality of
the LOI. It asserts that the constitutionality of the LOI cannot be collaterally
attacked in a complaint for collection.[28] Alternatively, the resolution of the
constitutional issue is not necessary for a determination of the complaint for
collection.[29]

Fertiphil counters that the constitutionality of the LOI was adequately

pleaded in its complaint. It claims that the constitutionality of LOI No. 1465 is the
very lis mota of the case because the trial court cannot determine its claim
without resolving the issue.[30]

It is settled that the RTC has jurisdiction to resolve the constitutionality of a

statute, presidential decree or an executive order. This is clear from Section 5,
Article VIII of the 1987 Constitution, which provides:

SECTION 5. The Supreme Court shall have the following powers:

xxxx

(2) Review, revise, reverse, modify, or affirm on appeal

or certiorari, as the law or the Rules of Court may provide, final
judgments and orders of lower courtsin:
 (a) All cases in which the constitutionality or validity
of any treaty, international or executive agreement, law,
presidential decree, proclamation, order, instruction,
ordinance, or regulation is in question. (Underscoring
supplied)

In Mirasol v. Court of Appeals,[31] this Court recognized the power of

the RTC to resolve constitutional issues, thus:

On the first issue. It is settled that Regional Trial Courts have the
authority and jurisdiction to consider the constitutionality of a statute,
presidential decree, or executive order. 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 not only in this Court, but in all
Regional Trial Courts.[32]

In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign

Affairs,[33] this Court reiterated:

There is no denying that regular courts have jurisdiction over

cases involving the validity or constitutionality of a rule or regulation
issued by administrative agencies. Such jurisdiction, however, is not
limited to the Court of Appeals or to this Court alone for even the
regional trial courts can take cognizance of actions assailing a specific
rule or set of rules promulgated by administrative bodies. 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.[34]
 Judicial review of official acts on the ground of unconstitutionality may be
sought or availed of through any of the actions cognizable by courts of justice, not
necessarily in a suit for declaratory relief. Such review may be had in criminal
actions, as in People v. Ferrer[35] involving the constitutionality of the now defunct
Anti-Subversion law, or in ordinary actions, as in Krivenko v. Register of
Deeds[36] involving the constitutionality of laws prohibiting aliens from acquiring
public lands. The constitutional issue, however, (a) must be properly raised
and presented in the case, and (b) its resolution is necessary to a determination of
the case, i.e., the issue of constitutionality must be the very lis mota presented.[37]

Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly
and adequately raised in the complaint for collection filed with the RTC.The
pertinent portions of the complaint allege:

6. The CRC of P10 per bag levied under LOI 1465 on domestic
sales of all grades of fertilizer in the Philippines, is unlawful, unjust,
uncalled for, unreasonable, inequitable and oppressive because:

xxxx

(c) It favors only one private domestic corporation,

i.e., defendant PPPI, and imposed at the expense and
disadvantage of the other fertilizer importers/distributors
who were themselves in tight business situation and were
then exerting all efforts and maximizing management and
marketing skills to remain viable;

xxxx
 (e) It was a glaring example of crony capitalism, a
forced program through which the PPI, having been
presumptuously masqueraded as the fertilizer industry
itself, was the sole and anointed beneficiary;

7. The CRC was an unlawful; and unconstitutional special

assessment and its imposition is tantamount to illegal exaction

amounting to a denial of due process since the persons of entities

which had to bear the burden of paying the CRC derived no benefit

therefrom; that on the contrary it was used by PPI in trying to regain its

former despicable monopoly of the fertilizer industry to the detriment

of other distributors and importers.[38] (Underscoring supplied)

The constitutionality of LOI No. 1465 is also the very lis mota of the
complaint for collection. Fertiphil filed the complaint to compel PPI to refund the
levies paid under the statute on the ground that the law imposing the levy is
unconstitutional. The thesis is that an unconstitutional law is void. It has no legal
effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all
levies duly paid pursuant to an unconstitutional law should be refunded under the
civil code principle against unjust enrichment. The refund is a mere consequence
of the law being declared unconstitutional. The RTCsurely cannot order PPI to
refund Fertiphil if it does not declare the LOI unconstitutional. It is the
unconstitutionality of the LOI which triggers the refund. The issue of
constitutionality is the very lis mota of the complaint with the RTC.

The P10 levy under LOI No. 1465 is an

exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against
the constitutionality of the LOI.

PPI insists that LOI No. 1465 is a valid exercise either of the police power or
the power of taxation. It claims that the LOI was implemented for the purpose of
assuring the fertilizer supply and distribution in the country and for benefiting a
foundation created by law to hold in trust for millions of farmers their stock
ownership in PPI.

Fertiphil counters that the LOI is unconstitutional because it was enacted to

give benefit to a private company. The levy was imposed to pay the corporate
debt of PPI. Fertiphil also argues that, even if the LOI is enacted under the police
power, it is still unconstitutional because it did not promote the general welfare
of the people or public interest.

Police power and the power of taxation are inherent powers of the
State. These powers are distinct and have different tests for validity. Police power
is the power of the State to enact legislation that may interfere with personal
liberty or property in order to promote the general welfare,[39] while the power of
taxation is the power to levy taxes to be used for public purpose. The main
purpose of police power is the regulation of a behavior or conduct, while taxation
is revenue generation. The lawful subjects and lawful means tests are used to
determine the validity of a law enacted under the police power. [40] The power of
taxation, on the other hand, is circumscribed by inherent and constitutional
limitations.

We agree with the RTC that the imposition of the levy was an exercise by
the State of its taxation power. While it is true that the power of taxation can be
used as an implement of police power,[41] the primary purpose of the levy is
revenue generation. If the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is properly called a
tax.[42]

In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a

vehicle registration fee is not an exercise by the State of its police power, but of
its taxation power, thus:

It is clear from the provisions of Section 73 of Commonwealth Act

123 and Section 61 of the Land Transportation and Traffic Code that the
legislative intent and purpose behind the law requiring owners of
vehicles to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much lesser
degree, pay for the operating expenses of the administering agency. x x
x Fees may be properly regarded as taxes even though they also serve
as an instrument of regulation.

Taxation may be made the implement of the state's police power

(Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if
revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax. Such is the case of motor vehicle
registration fees. The same provision appears as Section 59(b) in the
Land Transportation Code. It is patent therefrom that the legislators
had in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a tax or fee. x
x x Simply put, if the exaction under Rep. Act 4136 were merely a
regulatory fee, the imposition in Rep. Act 5448 need not be an
additional tax. Rep. Act 4136 also speaks of other fees such as the
special permit fees for certain types of motor vehicles (Sec. 10) and
additional fees for change of registration (Sec. 11). These are not to be
understood as taxes because such fees are very minimal to be revenue-
raising.Thus, they are not mentioned by Sec. 59(b) of the Code as taxes
 like the motor vehicle registration fee and chauffeurs license fee. Such
fees are to go into the expenditures of the Land Transportation
Commission as provided for in the last proviso of Sec.
61.[44] (Underscoring supplied)

The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory
purpose. The levy, no doubt, was a big burden on the seller or the ultimate
consumer. It increased the price of a bag of fertilizer by as much as five
percent.[45] A plain reading of the LOI also supports the conclusion that the levy
was for revenue generation. The LOI expressly provided that the levy was
imposed until adequate capital is raised to make PPI viable.

Taxes are exacted only for a public

purpose. The P10 levy is unconstitutional
because it was not for a public purpose.
The levy was imposed to give undue
benefit to PPI.

An inherent limitation on the power of taxation is public purpose. Taxes are

exacted only for a public purpose. They cannot be used for purely private
purposes or for the exclusive benefit of private persons.[46] The reason for this is
simple. The power to tax exists for the general welfare; hence, implicit in its
power is the limitation that it should be used only for a public purpose. It would
be a robbery for the State to tax its citizens and use the funds generated for a
private purpose. As an old United States case bluntly put it: To lay with one hand,
the power of the government on the property of the citizen, and with the other to
bestow it upon favored individuals to aid private enterprises and build up private
fortunes, is nonetheless a robbery because it is done under the forms of law and
is called taxation.[47]
 The term public purpose is not defined. It is an elastic concept that can be
hammered to fit modern standards. Jurisprudence states that public purpose
should be given a broad interpretation. It does not only pertain to those purposes
which are traditionally viewed as essentially government functions, such as
building roads and delivery of basic services, but also includes those purposes
designed to promote social justice. Thus, public money may now be used for the
relocation of illegal settlers, low-cost housing and urban or agrarian reform.

While the categories of what may constitute a public purpose are

continually expanding in light of the expansion of government functions, the
inherent requirement that taxes can only be exacted for a public purpose still
stands. Public purpose is the heart of a tax law. When a tax law is only a mask to
exact funds from the public when its true intent is to give undue benefit and
advantage to a private enterprise, that law will not satisfy the requirement of
public purpose.

The purpose of a law is evident from its text or inferable from other
secondary sources. Here, We agree with the RTC and that CA that the levy
imposed under LOI No. 1465 was not for a public purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI, a
private company. The purpose is explicit from Clause 3 of the law, thus:

3. The Administrator of the Fertilizer Pesticide Authority to include in its

fertilizer pricing formula a capital contribution component of not
less than P10 per bag. This capital contribution shall be collected
until adequate capital is raised to make PPI viable. Such capital
contribution shall be applied by FPA to all domestic sales of
fertilizers in the Philippines.[48] (Underscoring supplied)
 It is a basic rule of statutory construction that the text of a statute should
be given a literal meaning. In this case, the text of the LOI is plain that the levy
was imposed in order to raise capital for PPI. The framers of the LOI did not even
hide the insidious purpose of the law. They were cavalier enough to name PPI as
the ultimate beneficiary of the taxes levied under the LOI. We find it utterly
repulsive that a tax law would expressly name a private company as the ultimate
beneficiary of the taxes to be levied from the public. This is a clear case of crony
capitalism.

Second, the LOI provides that the imposition of the P10 levy was
conditional and dependent upon PPI becoming financially viable. This suggests
that the levy was actually imposed to benefit PPI. The LOI notably does not fix a
maximum amount when PPI is deemed financially viable. Worse, the liability of
Fertiphil and other domestic sellers of fertilizer to pay the levy is made
indefinite. They are required to continuously pay the levy until adequate capital is
raised for PPI.

Third, the RTC and the CA held that the levies paid under the LOI were
directly remitted and deposited by FPA to Far East Bank and Trust Company, the
depositary bank of PPI.[49] This proves that PPI benefited from the LOI. It is also
proves that the main purpose of the law was to give undue benefit and advantage
to PPI.

Fourth, the levy was used to pay the corporate debts of PPI. A reading of
the Letter of Understanding[50] dated May 18, 1985 signed by then Prime Minister
Cesar Virata reveals that PPI was in deep financial problem because of its huge
corporate debts. There were pending petitions for rehabilitation against PPI
before the Securities and Exchange Commission. The government guaranteed
payment of PPIs debts to its foreign creditors. To fund the payment, President
Marcos issued LOI No. 1465. The pertinent portions of the letter of understanding
read:

Republic of the Philippines

Office of the Prime Minister

Manila

LETTER OF UNDERTAKING

May 18, 1985

TO: THE BANKING AND FINANCIAL INSTITUTIONS

LISTED IN ANNEX A HERETO WHICH ARE

CREDITORS (COLLECTIVELY, THE CREDITORS)

OF PLANTERS PRODUCTS, INC. (PLANTERS)

Gentlemen:

This has reference to Planters which is the principal importer and

distributor of fertilizer, pesticides and agricultural chemicals in the
Philippines. As regards Planters, the Philippine Government confirms its
awareness of the following: (1) that Planters has outstanding
obligations in foreign currency and/or pesos, to the Creditors, (2)
that Planters is currently experiencing financial difficulties, and (3)
that there are presently pending with the Securities and Exchange
Commission of the Philippines a petition filed at Planters own behest
for the suspension of payment of all its obligations, and a separate
petition filed by Manufacturers Hanover Trust Company, Manila
Offshore Branch for the appointment of a rehabilitation receiver for
Planters.

In connection with the foregoing, the Republic of the Philippines (the

Republic) confirms that it considers and continues to consider Planters
as a major fertilizer distributor. Accordingly, for and in consideration of
your expressed willingness to consider and participate in the effort to
rehabilitate Planters, the Republic hereby manifests its full and
unqualified support of the successful rehabilitation and continuing
viability of Planters, and to that end, hereby binds and obligates itself to
the creditors and Planters, as follows:

xxxx

2. Upon the effective date of this Letter of Undertaking, the

Republic shall cause FPA to include in its fertilizer pricing formula a
capital recovery component, the proceeds of which will be used initially
for the purpose of funding the unpaid portion of the outstanding capital
stock of Planters presently held in trust by Planters Foundation, Inc.
(Planters Foundation), which unpaid capital is estimated at
approximately P206 million (subject to validation by Planters and
Planters Foundation) such unpaid portion of the outstanding capital
stock of Planters being hereafter referred to as the Unpaid Capital), and
subsequently for such capital increases as may be required for the
continuing viability of Planters.

xxxx
 The capital recovery component shall continue to be charged and
collected until payment in full of (a) the Unpaid Capital and/or (b) any
shortfall in the payment of the Subsidy Receivables, (c) any carrying
cost accruing from the date hereof on the amounts which may be
outstanding from time to time of the Unpaid Capital and/or the Subsidy
Receivables, and (d) the capital increases contemplated in paragraph 2
hereof. For the purpose of the foregoing clause (c), the carrying cost
shall be at such rate as will represent the full and reasonable cost to
Planters of servicing its debts, taking into account both its peso and
foreign currency-denominated obligations.

REPUBLIC OF THE PHILIPPINES

By:

(signed)

CESAR E. A. VIRATA

Prime Minister and Minister of Finance[51]

It is clear from the Letter of Understanding that the levy was imposed
precisely to pay the corporate debts of PPI. We cannot agree with PPI that the
levy was imposed to ensure the stability of the fertilizer industry in the
country. The letter of understanding and the plain text of the LOI clearly indicate
that the levy was exacted for the benefit of a private corporation.

All told, the RTC and the CA did not err in holding that the levy imposed
under LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to comply
with the public purpose requirement for tax laws.
The LOI is still unconstitutional even if
enacted under the police power; it did not
promote public interest.

Even if We consider LOI No. 1695 enacted under the police power of the State, it
would still be invalid for failing to comply with the test of lawful subjects and
lawful means. Jurisprudence states the test as follows: (1) the interest of the
public generally, as distinguished from those of particular class, requires its
exercise; and (2) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals. [52]
For the same reasons as discussed, LOI No. 1695 is invalid because it did not
promote public interest. The law was enacted to give undue advantage to a
private corporation. We quote with approval the CA ratiocination on this point,
thus:

It is upon applying this established tests that We sustain the trial

courts holding LOI 1465 unconstitutional. To be sure, ensuring the
continued supply and distribution of fertilizer in the country is an
undertaking imbued with public interest. However, the method by
which LOI 1465 sought to achieve this is by no means a measure that
will promote the public welfare. The governments commitment to
support the successful rehabilitation and continued viability of PPI, a
private corporation, is an unmistakable attempt to mask the subject
statutes impartiality. There is no way to treat the self-interest of a
favored entity, like PPI, as identical with the general interest of the
countrys farmers or even the Filipino people in general. Well to stress,
substantive due process exacts fairness and equal protection disallows
distinction where none is needed. When a statutes public purpose is
spoiled by private interest, the use of police power becomes a travesty
which must be struck down for being an arbitrary exercise of
government power. To rule in favor of appellant would contravene the
general principle that revenues derived from taxes cannot be used for
 purely private purposes or for the exclusive benefit of private
individuals. (Underscoring supplied)

The general rule is that an unconstitutional

law is void; the doctrine of operative fact is
inapplicable.

PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is
declared unconstitutional. It banks on the doctrine of operative fact, which
provides that an unconstitutional law has an effect before being declared
unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if it
is subsequently declared to be unconstitutional.

We cannot agree. It is settled that no question, issue or argument will be

entertained on appeal, unless it has been raised in the court a quo.[53] PPI did not
raise the applicability of the doctrine of operative fact with the RTC and the CA. It
cannot belatedly raise the issue with Us in order to extricate itself from the dire
effects of an unconstitutional law.

At any rate, We find the doctrine inapplicable. The general rule is that an
unconstitutional law is void. It produces no rights, imposes no duties and affords
no protection. It has no legal effect. It is, in legal contemplation, inoperative as if
it has not been passed.[54] Being void, Fertiphil is not required to pay the levy. All
levies paid should be refunded in accordance with the general civil code principle
against unjust enrichment. The general rule is supported by Article 7 of the Civil
Code, which provides:

ART. 7. Laws are repealed only by subsequent ones, and their

violation or non-observance shall not be excused by disuse or custom or
practice to the contrary.
 When the courts declare a law to be inconsistent with the
Constitution, the former shall be void and the latter shall govern.

The doctrine of operative fact, as an exception to the general rule, only

applies as a matter of equity and fair play.[55] It nullifies the effects of an
unconstitutional law by recognizing that the existence of a statute prior to a
determination of unconstitutionality is an operative fact and may have
consequences which cannot always be ignored. The past cannot always be erased
by a new judicial declaration.[56]

The doctrine is applicable when a declaration of unconstitutionality will

impose an undue burden on those who have relied on the invalid law. Thus, it was
applied to a criminal case when a declaration of unconstitutionality would put the
accused in double jeopardy[57] or would put in limbo the acts done by a
municipality in reliance upon a law creating it.[58]

Here, We do not find anything iniquitous in ordering PPI to refund the

amounts paid by Fertiphil under LOI No. 1465. It unduly benefited from the
levy. It was proven during the trial that the levies paid were remitted and
deposited to its bank account. Quite the reverse, it would be inequitable and
unjust not to order a refund. To do so would unjustly enrich PPI at the expense of
Fertiphil. Article 22 of the Civil Code explicitly provides that every person who,
through an act of performance by another comes into possession of something at
the expense of the latter without just or legal ground shall return the same to
him. We cannot allow PPI to profit from an unconstitutional law. Justice and
equity dictate that PPI must refund the amounts paid by Fertiphil.

WHEREFORE, the petition is DENIED. The Court of Appeals Decision

dated November 28, 2003 is AFFIRMED.
 SO ORDERED.

RUBEN T. REYES
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

WE CONCUR:

HILARIO G. DAVIDE, JR.

Chief Justice