TAX I

MFABalili

MODULE 2

CONSTITUTIONAL AND INERENT LIMITATIONS

I. INHERENT LIMITATIONS

1) Public purpose

See Wenceslao Pascual vs Secretary of Public Works & Communications above

Bagatsing vs Ramirez, GR No. L-41631, Dec 17, 1976

Private respondent bewails that the market stall fees imposed in the disputed ordinance are
diverted to the exclusive private use of the Asiatic Integrated Corporation since the collection
of said fees had been let by the City of Manila to the said corporation in a "Management and
Operating Contract." The assumption is of course saddled on erroneous premise. The fees
collected do not go direct to the private coffers of the corporation. Ordinance No. 7522 was
not made for the corporation but for the purpose of raising revenues for the city. That is the
object it serves. The entrusting of the collection of the fees does not destroy the public
purpose of the ordinance. So long as the purpose is public, it does not matter whether the
agency through which the money is dispensed is public or private. The right to tax depends
upon the ultimate use, purpose and object for which the fund is raised. It is not dependent on
the nature or character of the person or corporation whose intermediate agency is to be used
in applying it. The people may be taxed for a public purpose, although it be under the
direction of an individual or private corporation.

2) Non-delegation of legislative power to tax; Exceptions

Abakada Guro Party List vs Executive Secretary, GR No. 168056, Sept 1, 2005:

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

Exceptions:

a) Each local government unit shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments. (Art X, Sec 5)

Mactan Cebu International Airport Authority vs Marcos

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may
be exercised by local legislative bodies, no longer merely by virtue of a valid delegation
as before, but pursuant to direct authority conferred by Section 5, Article X of the
Constitution. Under the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide which, however, must be

1
 TAX I
MFABalili

consistent with the basic policy of local autonomy.

Pepsi-Cola Bottling Company of the Philippines, Inc. vs Municipality of Tanauan,

Leyte et al, GR No. L-31156, February 27, 1976:

The power of taxation is an essential and inherent attribute of sovereignty, belonging as

a matter of right to every independent government, without being expressly conferred by
the people. It is a power that is purely legislative and which the central legislative body
cannot delegate either to the executive or judicial department of the government without
infringing upon the theory of separation of powers. The exception, however, lies in the
case of municipal corporations, to which, said theory does not apply. Legislative powers
may be delegated to local governments in respect of matters of local concern. This is
sanctioned by immemorial practice. By necessary implication, the legislative power to
create political corporations for purposes of local self-government carries with it the
power to confer on such local governmental agencies the power to tax.

Under the New Constitution, local governments are granted the autonomous authority to
create their own sources of revenue and to levy taxes. Section 5, Article X provides:
"Each local government unit shall have the power to create its sources of revenue and to
levy taxes, subject to such limitations as may be provided by law."

X x x When it is said that the taxing power may be delegated to municipalities and the
like, it is meant that there may be delegated such measure of power to impose and
collect taxes as the legislature may deem expedient. Thus, municipalities may be
permitted to tax subjects which for reasons of public policy the State has not deemed
wise to tax for more general purposes. This is not to say though that the constitutional
injunction against deprivation of property without due process of law may be passed over
under the guise of the taxing power, except when the taking of the property is in the
lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the
rule on uniformity of taxation is observed; (3) either the person or property taxed is within
the jurisdiction of the government levying the tax; and (4) in the assessment and
collection of certain kinds of taxes notice and opportunity for hearing are provided. Due
process is usually violated where the tax imposed is for a private as distinguished from a
public purpose; a tax is imposed on property outside the State, i.e., extraterritorial
taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes.
But, a tax does not violate the due process clause, as applied to a particular taxpayer,
although the purpose of the tax will result in an injury rather than a benefit to such
taxpayer. Due process does not require that the property subject to the tax or the amount
of tax to be raised should be determined by judicial inquiry, and a notice and hearing as
to the amount of the tax and the manner in which it shall be apportioned are generally
not necessary to due process of law.

b) The Congress may, by law, authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the Government. (Art VI, Sec 28[2])

c) When the delegation relates merely to administrative implementation that may call for
some degree of discretionary powers under a set of sufficient standards expressed by
law, or implied from the policy and purpose of the Act

Maceda vs Macaraig, GR No. 88291, June 8, 1993:

• Classifications or kinds of Taxes:

According to Persons who pay or who bear the burden:

a) Direct Tax — the where the person supposed to pay the tax really pays it.
WITHOUT transferring the burden to someone else.

2
 TAX I
MFABalili

Examples: Individual income tax, corporate income tax, transfer taxes (estate
tax, donor's tax), residence tax, immigration tax

b) Indirect Tax — that where the tax is imposed upon goods BEFORE reaching
the consumer who ultimately pays for it, not as a tax, but as a part of the
purchase price.

Examples: the internal revenue indirect taxes (specific tax, percentage taxes,
(VAT) and the tariff and customs indirect taxes (import duties, special import
tax and other dues)

A chronological review of the NPC laws will show that it has been the
lawmaker's intention that the NPC was to be completely tax exempt from all
forms of taxes — direct and indirect.

• Contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were both
legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not
created NPC's tax exemption status but merely restored it.

Actually under said Amendment No. 6, then President Marcos could issue decrees
not only when the Interim Batasang Pambansa failed or was unable to act
adequately on any matter for any reason that in his (Marcos') judgment required
immediate action, but also when there existed a grave emergency or a threat or
thereof. It must be remembered that said Presidential Decree was issued only
around nine (9) months after the Philippines unilaterally declared a moratorium on its
foreign debt payments as a result of the economic crisis triggered by loss of
confidence in the government brought about by the Aquino assassination. The
Philippines was then trying to reschedule its debt payments. One of the big
borrowers was the NPC which had a US$ 2.1 billion white elephant of a Bataan
Nuclear Power Plant on its back. From all indications, it must have been this grave
emergency of a debt rescheduling which compelled Marcos to issue P.D. No. 1931,
under his Amendment 6 power.

The rule, therefore, that under the 1973 Constitution "no law granting a tax
exemption shall be passed without the concurrence of a majority of all the
members of the Batasang Pambansa" does not apply as said P.D. No. 1931
was not passed by the Interim Batasang Pambansa but by then President
Marcos under His Amendment No. 6 power.

Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this
time, President Aquino. Its section 2 allowed the NPC to apply for the restoration of
its tax exemption privileges. The same was granted under FIRB Resolution No. 17-
87 78 dated June 24, 1987 which restored NPC's tax exemption privileges effective,
starting March 10, 1987, the date of effectivity of E.O. No. 93 (S'86).

While as above-mentioned, FIRB Resolution No. 17-87 was approved by President

Aquino on October 5, 1987, the view has been expressed that President Aquino, at
least with regard to E.O. 93 (S'86), had no authority to sub-delegate to the FIRB,
which was allegedly not a delegate of the legislature, the power delegated to her
thereunder.

When E.O No. 93 (S'86) was issued, President Aquino was exercising both
Executive and Legislative powers. Thus, there was no power delegated to her, rather
it was she who was delegating her power. She delegated it to the FIRB, which, for
purposes of E.O No. 93 (S'86), is a delegate of the legislature. Clearly, she was not
sub-delegating her power.

And E.O. No. 93 (S'86), as a delegating law, was complete in itself — it set forth the
policy to be carried out and it fixed the standard to which the delegate had to
conform in the performance of his functions.

3
 TAX I
MFABalili

• The next question that projects itself is — who pays the tax?

It is clear that private respondents-oil companies have to absorb the taxes they add
to the bunker fuel oil they sell to NPC. It should be stated at this juncture that, as
early as May 14, 1954, the Secretary of Justice renders an opinion, wherein he
stated and We quote:

Republic Act No. 358 exempts the National Power Corporation from "all taxes,
duties, fees, imposts, charges, and restrictions of the Republic of the Philippines
and its provinces, cities, and municipalities." This exemption is broad enough to
include all taxes, whether direct or indirect, which the National Power Corporation
may be required to pay, such as the specific tax on petroleum products. That it is
indirect or is of no amount [should be of no moment], for it is the corporation that
ultimately pays it. The view which refuses to accord the exemption because the
tax is first paid by the seller disregards realities and gives more importance to
form than to substance. Equity and law always exalt substance over from.

Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as

knowledge that many impositions taxpayers have to pay are in the nature of
indirect taxes. To limit the exemption granted the National Power Corporation to
direct taxes notwithstanding the general and broad language of the statue will be
to thwart the legislative intention in giving exemption from all forms of taxes and
impositions without distinguishing between those that are direct and those that
are not.

In view of all the foregoing, the Court rules and declares that the oil companies
which supply bunker fuel oil to NPC have to pay the taxes imposed upon said
bunker fuel oil sold to NPC. By the very nature of indirect taxation, the
economic burden of such taxation is expected to be passed on through the
channels of commerce to the user or consumer of the goods sold. Because,
however, the NPC has been exempted from both direct and indirect
taxation, the NPC must beheld exempted from absorbing the economic
burden of indirect taxation. This means, on the one hand, that the oil
companies which wish to sell to NPC absorb all or part of the economic burden of
the taxes previously paid to BIR, which they could shift to NPC if NPC did not
enjoy exemption from indirect taxes. This means also, on the other hand, that
the NPC may refuse to pay the part of the "normal" purchase price of
bunker fuel oil which represents all or part of the taxes previously paid by
the oil companies to BIR. If NPC nonetheless purchases such oil from the oil
companies — because to do so may be more convenient and ultimately less
costly for NPC than NPC itself importing and hauling and storing the oil from
overseas — NPC is entitled to be reimbursed by the BIR for that part of the
buying price of NPC which verifiably represents the tax already paid by the oil
company-vendor to the BIR.

3) Exemption of government entities

Mactan Cebu International Airport Authority vs Marcos

A claim of exemption from tax payments must be clearly shown and based on language in the
law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the
exception. However, if the grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply because the practical effect of the
exemption is merely to reduce the amount of money that has to be handled by the
government in the course of its operations.

4) International comity

4
 TAX I
MFABalili

5) Territorial jurisdiction

II. CONSTITUTIONAL LIMITATIONS

1. No person shall be deprived of life, liberty, or property without due process of law, nor
shall any person be denied the equal protection of the laws. (Art III, Sec 1)

2. The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation. (Art VI, Sec 28[1])

3. No law impairing the obligation of contracts shall be passed. (Art III, Sec 10)

4. No law shall be made respecting an establishment of religion, or prohibiting the free

exercise thereof. The free exercise and enjoyment of religious profession and
worship, without discrimination or preference, shall forever be allowed. No religious
test shall be required for the exercise of civil or political rights. (Art III, Sec 5)

5. No law shall be passed abridging the freedom of speech, of expression, or of the press,
(Art III, Sec 4)

6. Charitable institutions, churches and parsonages or covenants appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall
be exempt from taxation. (Art VI, Sec 28[3])

7. All appropriation, revenue or tariff bills, bills authorizing increase of 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. (Art VI,
Sec 24)

8. No law granting any tax exemption shall be passed without the concurrence of a majority
of all the Members of the Congress. (Art VI, Sec 28[4[)

9. Every bill passed by the Congress shall embrace only one subject which shall be
expressed in the title thereof. (Art VI, Sec 26[1])

Churchill & Tait vs Concepcion, GR No. 11572, Sept 22, 1916:

Is the tax void for lack of uniformity or because it is not graded according to value or constitutes
double taxation, or because the classification upon which it is based is mere arbitrary selection and
not based on any reasonable grounds? The only limitation, in so far as these questions are
concerned, placed upon the Philippine Legislature in the exercise of its taxing power is that found in
section 5 of the Philippine Bill, wherein it is declared "that the rule of taxation in said Islands shall be
uniform."

Uniformity in taxation xxx means that all taxable articles or kinds of property, of the same class,
shall be taxed at the same rate. It does not mean that lands, chattels, securities, incomes,
occupations, franchises, privileges, necessities, and luxuries, shall all be assessed at the same
rate. Different articles may be taxed at different amounts, provided the rate is uniform on the
same class everywhere, with all people, and at all times.

A tax is uniform when it operates with the same force and effect in every place where the subject of it
is found xxx. The words "uniform throughout the United States," as required of a tax by the
Constitution, do not signify an intrinsic, but simply a geographical, uniformity, and such uniformity is

5
 TAX I
MFABalili

therefore the only uniformity which is prescribed by the Constitution. xxx "Uniformity," as applied to
the constitutional provision that all taxes shall be uniform, means that all property belonging to the
same class shall be taxed alike. Xxx

The statute under consideration imposes a tax of P2 per square meter or fraction thereof upon every
electric sign, bill-board, etc., wherever found in the Philippine Islands. Or in other words, "the rule of
taxation" upon such signs is uniform throughout the Islands. The rule, which we have just quoted from
the Philippine Bill, does not require taxes to be graded according to the value of the subject or
subjects upon which they are imposed, especially those levied as privilege or occupation taxes.

Eastern Theatrical vs Alfonso, GR No. L-11104, May 31, 1949:

To support this contention that Ordinance No. 2958 violated the principle of equality and uniformity of
taxation enjoined by the Constitution, appellants point out to the fact that the ordinance in question
does not tax "many more kinds of amusements" than those therein specified, such as "race tracks,
cockpits, cabarets, concert halls, circuses, and other places of amusement." The argument has
absolutely no merit. The fact that some places of amusement are not taxed while others, such as
cinematographs, theaters, vaudeville companies, theatrical shows, and boxing exhibitions and other
kinds of amusements or places of amusement are taxed, is no argument at all against the equality
and uniformity of the tax imposition.

Equality and uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The taxing power has the authority to make reasonable
and natural classifications for purposes of taxation; and the appellants cannot point out what places of
amusement taxed by the ordinance do not constitute a class by themselves and which can be
confused with those not included in the ordinance.

Sison vs Ancheta, GR No. L-59431, July 25, 1984:

Petitioner as taxpayer alleges that by virtue of the amendments introduced by BP 135, "he would be
unduly discriminated against by the imposition of higher rates of tax upon his income arising from the
exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried individual
taxpayers. He characterizes the amendments as arbitrary amounting to class legislation, oppressive
and capricious in character, in violation of the equal protection and due process clauses of the
Constitution as well as of the rule requiring uniformity in taxation.

It suffices then that the laws operate equally and uniformly on all persons under similar circumstances
or that all persons must be treated in the same manner, the conditions not being different, both in the
privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed.
For the principle is that equal protection and security shall be given to every person under
circumstances which if not Identical are analogous. If law be looked upon in terms of burden or
charges, those that fall within a class should be treated in the same fashion, whatever restrictions cast
on some in the group equally binding on the rest." That same formulation applies as well to taxation
measures. The equal protection clause is, of course, inspired by the noble concept of approximating
the Ideal of the laws’ benefits being available to all and the affairs of men being governed by that
serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however,
wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal
protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal
protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units A,
B and C, but are expressions of policy arising out of specific difficulties, address to the attainment of
specific ends by the use of specific remedies. The Constitution does not require things which are
different in fact or opinion to be treated in law as though they were the same." Hence the
constant reiteration of the view that classification if rational in character is allowable. As a matter
of fact, in a leading case of Lutz V. Araneta, this Court, through Justice J.B.L. Reyes, went so far as to
hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation,
and it has been repeatedly held that 'inequalities which result from a singling out of one particular
class for taxation, or exemption infringe no constitutional limitation.'"

6
 TAX I
MFABalili

According to the Constitution: "The rule of taxation shall be uniform and equitable." This requirement
is met according to Justice Laurel in Philippine Trust Company v. Yatco, decided in 1940, when the
tax "operates with the same force and effect in every place where the subject may be found."
He likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality,
because this is hardly attainable." The problem of classification did not present itself in that case. It
did not arise until nine years later, when the Supreme Court held: "Equality and uniformity in
taxation means that all taxable articles or kinds of property of the same class shall be taxed at
the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation, ....

What misled petitioner is his failure to take into consideration the distinction between a tax rate and a
tax base. There is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified
into different categories. To repeat, it. is enough that the classification must rest upon substantial
distinctions that make real differences.

In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible
basis of classification is the susceptibility of the income to the application of generalized rules
removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to
be applied to all of them. Taxpayers who are recipients of compensation income are set apart as a
class. As there is practically no overhead expense, these taxpayers are not entitled to make
deductions for income tax purposes because they are in the same situation more or less. On the other
hand, in the case of professionals in the practice of their calling and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. It would not be just then to
disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike
the same tax rates on the basis of gross income. There is ample justification then for the Batasang
Pambansa to adopt the gross system of income taxation to compensation income, while continuing
the system of net income taxation as regards professional and business income.

British American Tobacco vs. Camacho, GR No. 163583, August 20, 2008 and
No. 81311, June 30, 1988:

• The classification freeze provision DOES NOT violate the equal protection and uniformity of taxation
clauses of the Constitution.

Following the pronouncements in Sison vs Ancheta, we have held that in our jurisdiction, the
standard and analysis of equal protection challenges in the main have followed the rational basis
test, coupled with a deferential attitude to legislative classifications and a reluctance to invalidate a
law unless there is a showing of a clear and unequivocal breach of the Constitution. Within the
present context of tax legislation on sin products which neither contains a suspect classification nor
impinges on a fundamental right, the rational-basis test thus finds application.

Under this test, a legislative classification, to survive an equal protection challenge, must be
shown to rationally further a legitimate state interest. The classifications must be reasonable
and rest upon some ground of difference having a fair and substantial relation to the object
of the legislation. Since every law has in its favor the presumption of constitutionality, the burden
of proof is on the one attacking the constitutionality of the law to prove beyond reasonable doubt
that the legislative classification is without rational basis. The presumption of constitutionality can
be overcome only by the most explicit demonstration that a classification is a hostile and oppressive
discrimination against particular persons and classes, and that there is no conceivable basis which
might support it.

A legislative classification that is reasonable does not offend the constitutional guaranty of the equal
protection of the laws. The classification is considered valid and reasonable provided that:

(1) it rests on substantial distinctions;

(2) it is germane to the purpose of the law;
(3) it applies, all things being equal, to both present and future conditions; and
(4) it applies equally to all those belonging to the same class.

7
 TAX I
MFABalili

The first, third and fourth requisites are satisfied. The classification freeze provision was inserted in
the law for reasons of practicality and expediency. That is, since a new brand was not yet in
existence at the time of the passage of RA 8240, then Congress needed a uniform mechanism to
fix the tax bracket of a new brand. The current net retail price, similar to what was used to classify
the brands under Annex D as of October 1, 1996, was thus the logical and practical choice. Further,
with the amendments introduced by RA 9334, the freezing of the tax classifications now expressly
applies not just to Annex D brands but to newer brands introduced after the effectivity of RA 8240
on January 1, 1997 and any new brand that will be introduced in the future.

This does not explain, however, why the classification is frozen after its determination based on
current net retail price and how this is germane to the purpose of the assailed law. An examination
of the legislative history of RA 8240 provides interesting answers to this question.

From the history and discussions in Congress, it is quite evident that the classification freeze
provision could hardly be considered arbitrary, or motivated by a hostile or oppressive attitude to
unduly favor older brands over newer brands. Congress was unequivocal in its unwillingness
to delegate the power to periodically adjust the excise tax rate and tax brackets as well as
to periodically resurvey and reclassify the cigarette brands based on the increase in the
consumer price index to the DOF and the BIR. Congress doubted the constitutionality of such
delegation of power, and likewise, considered the ethical implications thereof. Curiously, the
classification freeze provision was put in place of the periodic adjustment and reclassification
provision because of the belief that the latter would foster an anti-competitive atmosphere in the
market. Yet, as it is, this same criticism is being foisted by petitioner upon the classification freeze
provision.

Thus, Congress sought to, among others, simplify the whole tax system for sin products to remove
these potential areas of abuse and corruption from both the side of the taxpayer and the
government. Without doubt, the classification freeze provision was an integral part of this overall
plan. This is in line with one of the avowed objectives of the assailed law to simplify the tax
administration and compliance with the tax laws that are about to unfold in order to minimize losses
arising from inefficiencies and tax avoidance scheme, if not outright tax evasion. RA 9334 did not
alter this classification freeze provision of RA 8240. On the contrary, Congress affirmed this freezing
mechanism by clarifying the wording of the law. We can thus reasonably conclude, as the
deliberations on RA 9334 readily show, that the administrative concerns in tax administration,
which moved Congress to enact the classification freeze provision in RA 8240, were merely
continued by RA 9334. Indeed, administrative concerns may provide a legitimate, rational
basis for legislative classification. In the case at bar, these administrative concerns in the
measurement and collection of excise taxes on sin products are readily apparent as afore-
discussed.

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

• BAT contends that the classification freeze provision unduly favors older brands over newer brands.

BAT did not, however, clearly demonstrate the exact extent of such impact. It has not been shown
that the net retail prices of other older brands previously classified under this classification system
have already pierced their tax brackets, and, if so, how this has affected the overall competition in
the market. Further, it does not necessarily follow that newer brands cannot compete against older
brands because price is not the only factor in the market as there are other factors like consumer
preference, brand loyalty, etc. In other words, even if the newer brands are priced higher due to the
differential tax treatment, it does not mean that they cannot compete in the market especially since
cigarettes contain addictive ingredients so that a consumer may be willing to pay a higher price for
a particular brand solely due to its unique formulation. It may also be noted that in 2003, the BIR
surveyed 29 new brands that were introduced in the market after the effectivity of RA 8240 on
January 1, 1997, thus negating the sweeping generalization of petitioner that the classification

8
 TAX I
MFABalili

freeze provision has become an insurmountable barrier to the entry of new brands. Verily, where
there is a claim of breach of the due process and equal protection clauses, considering that
they are not fixed rules but rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail.

BAT’s evidence does suggest that, at least in 2004, Philip Morris and Marlboro, older brands, would
have been taxed at the same rate as Lucky Strike, a newer brand, due to certain conditions (i.e.,
the increase of the older brands net retail prices beyond the tax bracket to which they were
previously classified after the lapse of some time) were it not for the classification freeze provision.
It may be conceded that this has adversely affected, to a certain extent, the ability of petitioner to
competitively price its newer brands vis--vis the subject older brands. Thus, to a limited extent, the
assailed law seems to derogate one of its avowed objectives, i.e. promoting fair competition among
the players in the industry. Yet, will this occurrence, by itself, render the assailed law
unconstitutional on equal protection grounds? No.

Whether Congress acted improvidently in derogating, to a limited extent, the state’s interest in
promoting fair competition among the players in the industry, while pursuing other state interests
regarding the simplification of tax administration of sin products, elimination of potential areas for
abuse and corruption in tax collection, buoyant and stable revenue generation, and ease of
projection of revenues through the classification freeze provision, and whether the questioned
provision is the best means to achieve these state interests, necessarily go into the wisdom of
the assailed law which we cannot inquire into, much less overrule. The classification freeze
provision has not been shown to be precipitated by a veiled attempt, or hostile attitude on
the part of Congress to unduly favor older brands over newer brands. On the contrary, we
must reasonably assume, owing to the respect due a co-equal branch of government and as
revealed by the Congressional deliberations, that the enactment of the questioned provision
was impelled by an earnest desire to improve the efficiency and effectivity of the tax
administration of sin products. For as long as the legislative classification is rationally
related to furthering some legitimate state interest, as here, the rational-basis test is satisfied
and the constitutional challenge is perfunctorily defeated.

We do not sit in judgment as a supra-legislature to decide, after a law is passed by Congress, which
state interest is superior over another, or which method is better suited to achieve one, some or all
of the state’s interests, or what these interests should be in the first place. This policy-determining
power, by constitutional fiat, belongs to Congress as it is its function to determine and balance
these interests or choose which ones to pursue. Time and again we have ruled that the judiciary
does not settle policy issues. The Court can only declare what the law is and not what the
law should be. Under our system of government, policy issues are within the domain of the political
branches of government and of the people themselves as the repository of all state power. Thus,
the legislative classification under the classification freeze provision, after having been
shown to be rationally related to achieve certain legitimate state interests and done in good
faith, must, perforce, end our inquiry.

• Section 4(B)(e)(c), 2nd paragraph of RR 1-97, as amended by Section 2 of RR 9-2003, and Sections
II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of RMO 6-2003, as
pertinent to cigarettes packed by machine, are invalid insofar as they grant the BIR the power
to reclassify or update the classification of new brands every two years or earlier. Further,
these provisions are deemed modified upon the effectivity of RA 9334 on January 1, 2005 insofar
as the manner of determining the permanent classification of new brands is concerned.

In order to implement RA 8240 following its effectivity on January 1, 1997, the BIR issued RR 1-97,
dated December 13, 1996, which mandates a one-time classification only. Upon their launch, new
brands shall be initially taxed based on their suggested net retail price. Thereafter, a survey shall
be conducted within three (3) months to determine their current net retail prices and, thus, fix their
official tax classifications. However, the BIR made a turnaround by issuing RR 9-2003, dated
February 17, 2003, which partly amended RR 1-97, by authorizing the BIR to periodically reclassify
new brands (i.e., every two years or earlier) based on their current net retail prices. Thereafter, the
BIR issued RMO 6-2003, dated March 11, 2003, prescribing the guidelines on the implementation

9
 TAX I
MFABalili

of RR 9-2003. This was patent error on the part of the BIR for being contrary to the plain text and
legislative intent of RA 8240.

It is clear that the afore-quoted portions of RR 1-97, as amended by Section 2 of RR 9-2003, and
RMO 6-2003 unjustifiably emasculate the operation of Section 145 of the NIRC because they
authorize the Commissioner of Internal Revenue to update the tax classification of new brands
every two years or earlier subject only to its issuance of the appropriate Revenue Regulations,
when nowhere in Section 145 is such authority granted to the Bureau. Unless expressly
granted to the BIR, the power to reclassify cigarette brands remains a prerogative of the
legislature which cannot be usurped by the former.

• BAT contends that RA 8240, as amended by RA 9334, and its implementing rules and regulations
violate the General Agreement on Tariffs and Trade (GATT) of 1947. It claims that it is the duty of
this Court to correct, in favor of the GATT, whatever inconsistency exists between the assailed law
and the GATT in order to prevent triggering the international dispute settlement mechanism under
the GATT-WTO Agreement.

We disagree.

The classification freeze provision uniformly applies to all newly introduced brands in the market,
whether imported or locally manufactured. It does not purport to single out imported cigarettes in
order to unduly favor locally produced ones. Further, petitioners evidence was anchored on the
alleged unequal tax treatment between old and new brands which involves a different frame of
reference vis--vis local and imported products. Petitioner has, therefore, failed to clearly prove its
case, both factually and legally, within the parameters of the GATT.

At any rate, even assuming arguendo that petitioner was able to prove that the classification freeze
provision violates the GATT, the outcome would still be the same. The GATT is a treaty duly ratified
by the Philippine Senate and, under Article VII, Section 21 of the Constitution, it merely acquired
the status of a statute. Applying the basic principles of statutory construction in case of irreconcilable
conflict between statutes, RA 8240, as amended by RA 9334, would prevail over the GATT
either as a later enactment by Congress or as a special law dealing with the taxation of sin
products.

Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas vs Tan, GR No. 81311, June 30,
1988:

• EO 273 is NOT unconstitutional; the President had authority to issue EO 273 on 25 July 1987
under the Provisional Constitution. Under Proclamation No. 3, which decreed a Provisional
Constitution, sole legislative authority was vested upon the President. Art. II, Sec. 1 of the
Provisional Constitution states:

Sec. 1. Until a legislature is elected and convened under a new Constitution, the President
shall continue to exercise legislative powers.

On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the
Republic of the Philippines which was ratified in a plebiscite conducted on 2 February 1987.
Article XVIII, sec. 6 of said Constitution, hereafter referred to as the 1987 Constitution, provides:

Sec. 6. The incumbent President shall continue to exercise legislative powers until the first
Congress is convened.

The first Congress, created and elected under the 1987 Constitution, was convened on 27 July
1987. Hence, the enactment of EO 273 on 25 July 1987, two (2) days before Congress convened
on 27 July 1987, was within the President's constitutional power and authority to legislate.

• EO 273 is NOT oppressive, discriminatory, unjust and regressive, and does not violate the
provisions of Art. VI, Sec. 28(1) of the 1987 Constitution that taxation shall be uniform and
equitable and Congress shall evolve a progressive system of taxation.

10
 TAX I
MFABalili

The petitioners" assertions in this regard are not supported by facts and circumstances to warrant
their conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory
or unjust. Petitioners merely rely upon newspaper articles which are actually hearsay and have
evidentiary value. To justify the nullification of a law, there must be a clear and unequivocal
breach of the Constitution, not a doubtful and argumentative implication.

EO 273 satisfies all the requirements of a valid tax. It is uniform. The court, in City of Baguio vs.
De Leon, said:

... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, xxx, stated: "A tax is
considered uniform when it operates with the same force and effect in every place where the
subject may be found."

There was no occasion in that case to consider the possible effect on such a constitutional
requirement where there is a classification. The opportunity came in Eastern Theatrical Co. v.
Alfonso. Thus: "Equality and uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate. The taxing power has the
authority to make reasonable and natural classifications for purposes of taxation; . . ."

The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public,
which are not exempt, at the constant rate of 0% or 10%.

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

No merit in the contention of the petitioner Integrated Customs Brokers Association of the
Philippines that EO 273, more particularly the new Sec. 103 (r) of the National Internal Revenue
Code, unduly discriminates against customs brokers. The contested provision states:

(r) Service performed in the exercise of profession or calling (except customs brokers) subject
to the occupation tax under the Local Tax Code, and professional services performed by
registered general professional partnerships;

The phrase "except customs brokers" is not meant to discriminate against customs brokers. It
was inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes
the services of customs brokers subject to the payment of the VAT and to distinguish customs
brokers from other professionals who are subject to the payment of an occupation tax under the
Local Tax Code.

At any rate, the distinction of the customs brokers from the other professionals who are subject to
occupation tax under the Local Tax Code is based upon material differences, in that the activities
of customs brokers (like those of stock, real estate and immigration brokers) partake more of a
business, rather than a profession and were thus subjected to the percentage tax under Sec. 174
of the National Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the
percentage tax and replaced it with the VAT. If the petitioner Association did not protest the
classification of customs brokers then, the Court sees no reason why it should protest now.

Abakada Guro Party List vs Executive Secretary, GR No. 168056, Sept 1, 2005:

• The President’s stand-by power to raise the VAT rate from 10% to 12% is NOT an undue delegation
of legislative power.

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

11
 TAX I
MFABalili

effect and as to whom it shall be applicable and to determine the expediency of its
enactment. Thus, the rule is that in order that a court may be justified in holding a statute
unconstitutional as a delegation of legislative power, it must appear that the power involved is purely
legislative in nature that is, one appertaining exclusively to the legislative department. It is the nature
of the power, and not the liability of its use or the manner of its exercise, which determines the
validity of its delegation.

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

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the
Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI
of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.

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

In People vs. Vera, 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.

Xxx 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. Xxx 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

12
 TAX I
MFABalili

the happening of future specified contingencies leaving to some other

person or body the power to determine when the specified contingency has
arisen.

In Edu vs. Ericta, 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.

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. While the power to tax cannot be delegated to executive
agencies, details as to the enforcement and administration of an exercise of such power
may be left to them, including the power to determine the existence of facts on which its
operation depends.

• The 70% limitation on input tax is NOT arbitrary, oppressive, excessive and confiscatory and DOES
NOT constitute a deprivation of life, liberty of property without due process of law and the 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.

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).

• 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.

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

13
 TAX I
MFABalili

the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all
sales, it was then that the crediting of the input tax paid on purchase or importation of goods and
services by VAT-registered persons against the output tax was introduced. This was adopted by
the Expanded VAT Law (R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The
right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that
also the law can remove, or in this case, limit.

• The spreading over 60 months of the input tax on capital goods is NOT arbitrary, oppressive,
excessive and confiscatory. Such spread out only poses a delay in the crediting of the input tax.
The taxpayer is not permanently deprived of his privilege to credit the input tax.

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

• The 5% final VAT withholding on payments made by the government is NOT confiscatory; it 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.

As amended, the use of the word final and the deletion of the word creditable exhibits Congress’
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.

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

The power of the State to make reasonable and natural classifications for the purposes of taxation
has long been established. Whether it relates to the subject of taxation, the kind of property, the
rates to be levied, or the amounts to be raised, the methods of assessment, valuation and collection,
the 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.

14
 TAX I
MFABalili

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.

• RA 9337 is uniform and equitable.

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

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods
and services. xxx

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

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0%
or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts
not exceeding P1,500,000.00. Also, basic marine and agricultural food products in their original
state are still not subject to the tax, thus ensuring that prices at the grassroots level will remain
accessible.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly
favors those with high profit margins. Congress was not oblivious to this. Thus, to equalize the
weighty burden the law entails, the law, under Section 116, imposed a 3% percentage tax on VAT-
exempt persons under Section 109(v), i.e., transactions with gross annual sales and/or receipts not
exceeding P1.5 Million. This acts as a equalizer because in effect, bigger businesses that qualify
for VAT coverage and VAT-exempt taxpayers stand on equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the
tax on those previously exempt. Excise taxes on petroleum products and natural gas were reduced.
Percentage tax on domestic carriers was removed. Power producers are now exempt from paying
franchise tax. Aside from these, Congress also increased the income tax rates of corporations, in
order to distribute the burden of taxation.

• Petitioners contend that the limitation on the creditable input tax is regressive. It is the smaller
business with higher input tax-output tax ratio that will suffer the consequences.

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

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

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

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

15
 TAX I
MFABalili

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. xxx 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,
while granting exemptions to other transactions.

Cagayan Electric Power & Light Co vs CIR & CA, GR No. L-60126, Sept 25, 1985:

Congress could impair petitioner's legislative franchise by making it liable for income tax from which
heretofore it was exempted by virtue of the exemption provided for in section 3 of its franchise.

The Constitution provides that a franchise is subject to amendment, alteration or repeal by the
Congress when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. 5, Art. XIV,
1973 Constitution).

Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the provisions
of the Constitution and to the terms and conditions established in Act No. 3636 whose section 12
provides that the franchise is subject to amendment, alteration or repeal by Congress.

Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all
corporate taxpayers not expressly exempted therein and in section 27 of the Code, had the effect of
withdrawing petitioner's exemption from income tax.

The Tax Court acted correctly in holding that the exemption was restored by the subsequent
enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the said tax exemption.
Hence, the petitioner is liable only for the income tax for the period from January 1 to August 3, 1969
when its tax exemption was modified by Republic Act No. 5431.
It is relevant to note that franchise companies, like the Philippine Long Distance Telephone Company,
have been paying income tax in addition to the franchise tax.

However, it cannot be denied that the said 1969 assessment appears to be highly controversial. The
Commissioner at the outset was not certain as to petitioner's income tax liability. It had reason not to
pay income tax because of the tax exemption in its franchise.
For this reason, it should be liable only for tax proper and should not be held liable for the surcharge
and interest.

Pepsi Cola Bottling Co of the Phils vs City of Butuan, GR L-22814, Aug 28, 1968:

• Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of the
nature of an import tax; (2) it amounts to double taxation; (3) it is excessive, oppressive and

16
 TAX I
MFABalili

confiscatory; (4) it is highly unjust and discriminatory; and (5) section 2 of Republic Act No. 2264,
upon the authority of which it was enacted, is an unconstitutional delegation of legislative powers.

• The second and last objections are manifestly devoid of merit. Indeed — independently of
whether or not the tax in question, when considered in relation to the sales tax prescribed by Acts
of Congress, amounts to double taxation, on which we need not and do not express any opinion -
double taxation, in general, is not forbidden by our fundamental law. We have not adopted, as
part thereof, the injunction against double taxation found in the Constitution of the United States
and of some States of the Union. Then, again, the general principle against delegation of
legislative powers, in consequence of the theory of separation of powers is subject to one
well-established exception, namely: legislative powers may be delegated to local
governments — to which said theory does not apply — in respect of matters of local
concern.

• The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of soft drinks
or carbonated drinks — in the production and sale of which plaintiff is engaged — or less than
P0.0042 per bottle, is manifestly too small to be excessive, oppressive, or confiscatory.

• The first and the fourth objections merit, however, serious consideration. The tax prescribed in
section 3 of Ordinance No. 110, as originally approved, was imposed upon dealers "engaged in
selling" soft drinks or carbonated drinks. Thus, it would seem that the intent was then to levy a tax
upon the sale of said merchandise. As amended by Ordinance No. 122, the tax is, however,
imposed only upon "any agent and/or consignee of any person, association, partnership,
company or corporation engaged in selling ... soft drinks or carbonated drinks." And, pursuant to
section 3-A, which was inserted by said Ordinance No. 122:

... — Definition of the Term Consignee or Agent. — For purposes of this Ordinance, a
consignee of agent shall mean any person, association, partnership, company or corporation
who acts in the place of another by authority from him or one entrusted with the business of
another or to whom is consigned or shipped no less than 1,000 cases of hard liquors or soft
drinks every month for resale, either retail or wholesale.

As a consequence, merchants engaged in the sale of soft drink or carbonated drinks, are not
subject to the tax, unless they are agents and/or consignees of another dealer, who, in the very
nature of things, must be one engaged in business outside the City. Besides, the tax would not be
applicable to such agent and/or consignee, if less than 1,000 cases of soft drinks are consigned
or shipped to him every month. When we consider, also, that the tax "shall be based and
computed from the cargo manifest or bill of lading ... showing the number of cases" — not sold —
but "received" by the taxpayer, the intention to limit the application of the ordinance to soft drinks
and carbonated drinks brought into the City from outside thereof becomes apparent. Viewed from
this angle, the tax partakes of the nature of an import duty, which is beyond defendant's
authority to impose by express provision of law.

Even however, if the burden in question were regarded as a tax on the sale of said beverages, it
would still be invalid, as discriminatory, and hence, violative of the uniformity required by the
Constitution and the law therefor, since only sales by "agents or consignees" of outside dealers
would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants,
regardless of the volume of their sales, and even if the same exceeded those made by said
agents or consignees of producers or merchants established outside the City of Butuan, would be
exempt from the disputed tax.

It is true that the uniformity essential to the valid exercise of the power of taxation does not require
identity or equality under all circumstances, or negate the authority to classify the objects of
taxation. The classification made in the exercise of this authority, to be valid, must,
however, be reasonable and this requirement is not deemed satisfied unless: (1) it is based
upon substantial distinctions which make real differences; (2) these are germane to the
purpose of the legislation or ordinance; (3) the classification applies, not only to present
conditions, but, also, to future conditions substantially identical to those of the present;
and (4) the classification applies equally all those who belong to the same class.

17
 TAX I
MFABalili

These conditions are not fully met by the ordinance in question. Indeed, if its purpose were merely
to levy a burden upon the sale of soft drinks or carbonated beverages, there is no reason why
sales thereof by dealers other than agents or consignees of producers or merchants established
outside the City of Butuan should be exempt from the tax.

American Bible Society vs City of Manila, GR No. L-9637, April 30, 1957:

• Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines,
provides that:

(7) No law shall be made respecting an establishment of religion, or prohibiting the free
exercise thereof, and the free exercise and enjoyment of religious profession and worship,
without discrimination or preference, shall forever be allowed. No religion test shall be
required for the exercise of civil or political rights.

Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees the
freedom of religious profession and worship. "Religion has been spoken of as a profession of faith
to an active power that binds and elevates man to its Creator" xxx. It has reference to one's views
of his relations to His Creator and to the obligations they impose of reverence to His being and
character, and obedience to His Will xxx. The constitutional guaranty of the free exercise and
enjoyment of religious profession and worship carries with it the right to disseminate
religious information. Any restraints of such right can only be justified like other restraints
of freedom of expression on the grounds that there is a clear and present danger of any
substantive evil which the State has the right to prevent".

• The provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied to
appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession
and worship as well as its rights of dissemination of religious beliefs.

In the case at bar the license fee herein involved is imposed upon appellant for its distribution and
sale of bibles and other religious literature:

In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that a
license be obtained before a person could canvass or solicit orders for goods,
paintings, pictures, wares or merchandise cannot be made to apply to members of
Jehovah's Witnesses who went about from door to door distributing literature and
soliciting people to "purchase" certain religious books and pamphlets, all published by
the Watch Tower Bible & Tract Society. The "price" of the books was twenty-five cents
each, the "price" of the pamphlets five cents each. It was shown that in making the
solicitations there was a request for additional "contribution" of twenty-five cents each for the
books and five cents each for the pamphlets. Lesser sums were accepted, however, and
books were even donated in case interested persons were without funds.

On the above facts the Supreme Court held that it could not be said that petitioners were
engaged in commercial rather than a religious venture. Their activities could not be described
as embraced in the occupation of selling books and pamphlets. Then the Court continued:

"We do not mean to say that religious groups and the press are free from all financial
burdens of government. See Grosjean vs. American Press Co., 297 U.S., 233, 250, 80 L.
ed. 660, 668, 56 S. Ct. 444. We have here something quite different, for example, from a
tax on the income of one who engages in religious activities or a tax on property used or
employed in connection with activities. It is one thing to impose a tax on the income or
property of a preacher. It is quite another to exact a tax from him for the privilege of
delivering a sermon. The tax imposed by the City of Jeannette is a flat license tax,
payment of which is a condition of the exercise of these constitutional privileges. The
power to tax the exercise of a privilege is the power to control or suppress its
enjoyment. . . . Those who can tax the exercise of this religious practice can make
its exercise so costly as to deprive it of the resources necessary for its

18
 TAX I
MFABalili

maintenance. Those who can tax the privilege of engaging in this form of
missionary evangelism can close all its doors to all those who do not have a full
purse. Spreading religious beliefs in this ancient and honorable manner would thus be
denied the needy. . . .

It is contended however that the fact that the license tax can suppress or control this
activity is unimportant if it does not do so. But that is to disregard the nature of this tax. It
is a license tax — a flat tax imposed on the exercise of a privilege granted by the
Bill of Rights . . . The power to impose a license tax on the exercise of these freedom is
indeed as potent as the power of censorship which this Court has repeatedly struck
down. . . . It is not a nominal fee imposed as a regulatory measure to defray the expenses
of policing the activities in question. It is in no way apportioned. It is flat license tax
levied and collected as a condition to the pursuit of activities whose enjoyment is
guaranteed by the constitutional liberties of press and religion and inevitably tends
to suppress their exercise. That is almost uniformly recognized as the inherent vice
and evil of this flat license tax."

• With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's
permit before any person can engage in any of the businesses, trades or occupations
enumerated therein, We do not find that it imposes any charge upon the enjoyment of a right
granted by the Constitution, nor tax the exercise of religious practices. In the case of Coleman vs.
City of Griffin, 189 S.E. 427, this point was elucidated as follows:

An ordinance by the City of Griffin, declaring that the practice of distributing either by hand or
otherwise, circulars, handbooks, advertising, or literature of any kind, whether said articles are
being delivered free, or whether same are being sold within the city limits of the City of Griffin,
without first obtaining written permission from the city manager of the City of Griffin, shall be
deemed a nuisance and punishable as an offense against the City of Griffin, does not deprive
defendant of his constitutional right of the free exercise and enjoyment of religious profession
and worship, even though it prohibits him from introducing and carrying out a scheme or
purpose which he sees fit to claim as a part of his religious system.

It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if
applied to plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as amended, is not
applicable to plaintiff-appellant and defendant-appellee is powerless to license or tax the business
of plaintiff Society involved herein for, as stated before, it would impair plaintiff's right to the free
exercise and enjoyment of its religious profession and worship, as well as its rights of
dissemination of religious beliefs, We find that Ordinance No. 3000, as amended is also
inapplicable to said business, trade or occupation of the plaintiff.

Philippine Press Institute et al vs Chato, GR No 115754, August 25, 1994

• Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate
possesses less power than the U.S. Senate because of textual differences between constitutional
provisions giving them the power to propose or concur with amendments.

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

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

Art. VI, §24 of our Constitution reads:

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.

The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the
phrase "as on other Bills" in the American version, according to petitioners, shows the intention of
the framers of our Constitution to restrict the Senate's power to propose amendments to revenue
bills. Petitioner Tolentino contends that the word "exclusively" was inserted to modify "originate"

19
 TAX I
MFABalili

and "the words 'as in any other bills' (sic) were eliminated so as to show that these bills were not
to be like other bills but must be treated as a special kind."

The history of this provision does not support this contention. The supposed indicia of
constitutional intent are nothing but the relics of an unsuccessful attempt to limit the power of the
Senate. It will be recalled that the 1935 Constitution originally provided for a unicameral National
Assembly. When it was decided in 1939 to change to a bicameral legislature, it became
necessary to provide for the procedure for lawmaking by the Senate and the House of
Representatives. The work of proposing amendments to the Constitution was done by the
National Assembly, acting as a constituent assembly, some of whose members, jealous of
preserving the Assembly's lawmaking powers, sought to curtail the powers of the proposed
Senate. Accordingly they proposed the following provision:

All bills appropriating public funds, revenue or tariff bills, bills of local application, and private
bills shall originate exclusively in the Assembly, but the Senate may propose or concur with
amendments. In case of disapproval by the Senate of any such bills, the Assembly may
repass the same by a two-thirds vote of all its members, and thereupon, the bill so repassed
shall be deemed enacted and may be submitted to the President for corresponding action. In
the event that the Senate should fail to finally act on any such bills, the Assembly may, after
thirty days from the opening of the next regular session of the same legislative term,
reapprove the same with a vote of two-thirds of all the members of the Assembly. And upon
such reapproval, the bill shall be deemed enacted and may be submitted to the President for
corresponding action.

The special committee on the revision of laws of the Second National Assembly vetoed the
proposal. It deleted everything after the first sentence. As rewritten, the proposal was approved by
the National Assembly and embodied in Resolution No. 38, as amended by Resolution No. 73. (J.
ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment was
submitted to the people and ratified by them in the elections held on June 18, 1940.

This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24 of the
present Constitution was derived. It explains why the word "exclusively" was added to the
American text from which the framers of the Philippine Constitution borrowed and why the phrase
"as on other Bills" was not copied. Considering the defeat of the proposal, the power of the
Senate to propose amendments must be understood to be full, plenary and complete "as on other
Bills." Thus, because revenue bills are required to originate exclusively in the House of
Representatives, the Senate cannot enact revenue measures of its own without such bills. After a
revenue bill is passed and sent over to it by the House, however, the Senate certainly can pass its
own version on the same subject matter. This follows from the coequality of the two chambers of
Congress.

In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills must "originate exclusively in
the House of Representatives," it also adds, "but the Senate may propose or concur with
amendments." In the exercise of this power, the Senate may propose an entirely new bill as a
substitute measure.

• PAL maintains that R.A. No. 7716 violates Art. VI, §26 (1) of the Constitution which provides that
"Every bill passed by Congress shall embrace only one subject which shall be expressed in the
title thereof." PAL contends that the amendment of its franchise by the withdrawal of its exemption
from the VAT is not expressed in the title of the law.

The amendment of §103 is expressed in the title of R.A. No. 7716 which reads:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING

ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER
PURPOSES.

20
 TAX I
MFABalili

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT)
SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR
THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER PURPOSES,"
Congress thereby clearly expresses its intention to amend any provision of the NIRC which
stands in the way of accomplishing the purpose of the law.

PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific
reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional
requirement, since it is already stated in the title that the law seeks to amend the pertinent
provisions of the NIRC, among which is §103(q), in order to widen the base of the VAT. Actually,
it is the bill which becomes a law that is required to express in its title the subject of legislation.
The titles of H. No. 11197 and S. No. 1630 in fact specifically referred to §103 of the NIRC as
among the provisions sought to be amended. We are satisfied that sufficient notice had been
given of the pendency of these bills in Congress before they were enacted into what is now R.A.
No. 7716.

In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL
was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL
CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES,
PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES
CONNECTED THEREWITH. It contained a provision repealing all franking privileges. It was
contended that the withdrawal of franking privileges was not expressed in the title of the law. In
holding that there was sufficient description of the subject of the law in its title, including the repeal
of franking privileges, this Court held:

To require every end and means necessary for the accomplishment of the general
objectives of the statute to be expressed in its title would not only be unreasonable but
would actually render legislation impossible. [Cooley, Constitutional Limitations, 8th Ed.,
p. 297] As has been correctly explained:

The details of a legislative act need not be specifically stated in its title, but matter
germane to the subject as expressed in the title, and adopted to the accomplishment of
the object in view, may properly be included in the act. Thus, it is proper to create in the
same act the machinery by which the act is to be enforced, to prescribe the penalties for its
infraction, and to remove obstacles in the way of its execution. If such matters are properly
connected with the subject as expressed in the title, it is unnecessary that they should also
have special mention in the title.

• Claims of press freedom and religious liberty.

We have held that, as a general proposition, the press is not exempt from the taxing power of the
State and that what the constitutional guarantee of free press prohibits are laws which single out
the press or target a group belonging to the press for special treatment or which in any way
discriminate against the press on the basis of the content of the publication, and R.A. No. 7716 is
none of these.

Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is
unconstitutional."

With respect to the first contention, it would suffice to say that since the law granted the press a
privilege, the law could take back the privilege anytime without offense to the Constitution. The
reason is simple: by granting exemptions, the State does not forever waive the exercise of its
sovereign prerogative.

Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden
to which other businesses have long ago been subject.

21
 TAX I
MFABalili

Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn
"absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those
previously granted to PAL, petroleum concessionaires, enterprises registered with the Export
Processing Zone Authority, and many more are likewise totally withdrawn, in addition to
exemptions which are partially withdrawn, in an effort to broaden the base of the tax.

The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An
enumeration of some of these transactions will suffice to show that by and large this is not so and
that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions
are granted, in some cases, to encourage agricultural production and, in other cases, for the
personal benefit of the end-user rather than for profit.

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

• Alleged violations of the due process, equal protection and contract clauses and the rule on
taxation.

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

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

The short answer to this is the one given by this Court in an early case: "Authorities from
numerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a new
subject, or an increased tax on an old one, interferes with a contract or impairs its
obligation, within the meaning of the Constitution. Even though such taxation may affect
particular contracts, as it may increase the debt of one person and lessen the security of another,
or may impose additional burdens upon one class and release the burdens of another, still the tax
must be paid unless prohibited by the Constitution, nor can it be said that it impairs the
obligation of any existing contract in its true legal sense." xxx. Indeed not only existing
laws but also "the reservation of the essential attributes of sovereignty, is . . . read into
contracts as a postulate of the legal order." xxx Contracts must be understood as having
been made in reference to the possible exercise of the rightful authority of the government
and no obligation of contract can extend to the defeat of that authority. xxx.

It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale of
agricultural products, food items, petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The sale of real property for
socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise
be exempted.

The sale of food items, petroleum, medical and veterinary services, etc., which are essential
goods and services was already exempt under §103, pars. (b) (d) (1) of the NIRC before the
enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted
exemption to these transactions, while subjecting those of petitioner to the payment of the VAT.
Moreover, there is a difference between the "homeless poor" and the "homeless less poor" in the
example given by petitioner, because the second group or middle class can afford to rent houses

22
 TAX I
MFABalili

in the meantime that they cannot yet buy their own homes. The two social classes are thus
differently situated in life. "It is inherent in the power to tax that the State be free to select the
subjects of taxation, and it has been repeatedly held that 'inequalities which result from a
singling out of one particular class for taxation, or exemption infringe no constitutional
limitation.'" Xxx

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI,
§28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation."

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same
class be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation. To satisfy this requirement it is enough that the
statute or ordinance applies equally to all persons, forms and corporations placed in similar
situation.

The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union
of the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the
mandate of Congress to provide for a progressive system of taxation because the law imposes a
flat rate of 10% and thus places the tax burden on all taxpayers without regard to their ability to
pay.

The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall "evolve a progressive
system of taxation." The constitutional provision has been interpreted to mean simply that
"direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be
minimized." xxx. 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.

The problem with CREBA's petition is that it presents broad claims of constitutional violations by
tendering issues not at retail but at wholesale and in the abstract. There is no fully developed
record which can impart to adjudication the impact of actuality. There is no factual foundation to
show in the concrete the application of the law to actual contracts and exemplify its effect on
property rights. For the fact is that petitioner's members have not even been assessed the VAT.
Petitioner's case is not made concrete by a series of hypothetical questions asked which are no
different from those dealt with in advisory opinions.

• Alleged violation of policy towards cooperatives.

The Cooperative Union of the Philippines (CUP), after briefly surveying the course of legislation,
argues that it was to adopt a definite policy of granting tax exemption to cooperatives that the
present Constitution embodies provisions on cooperatives. To subject cooperatives to the VAT
would therefore be to infringe a constitutional policy.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out
cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175,
§5. What P.D. No. 1955, §1 did was to withdraw the exemptions and preferential treatments
theretofore granted to private business enterprises in general, in view of the economic crisis
which then beset the nation. It is true that after P.D. No. 2008, §2 had restored the tax exemptions
of cooperatives in 1986, the exemption was again repealed by E.O. No. 93, §1, but then again
cooperatives were not the only ones whose exemptions were withdrawn. The withdrawal of tax
incentives applied to all, including government and private entities.

In the second place, the Constitution does not really require that cooperatives be granted tax
exemptions in order to promote their growth and viability. Hence, there is no basis for petitioner's
assertion that the government's policy toward cooperatives had been one of vacillation, as far as
the grant of tax privileges was concerned, and that it was to put an end to this indecision that the
constitutional provisions cited were adopted. Perhaps as a matter of policy cooperatives should

23
 TAX I
MFABalili

be granted tax exemptions, but that is left to the discretion of Congress. If Congress does not
grant exemption and there is no discrimination to cooperatives, no violation of any constitutional
policy can be charged.

Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt
from taxation. Such theory is contrary to the Constitution under which only the following are
exempt from taxation: charitable institutions, churches and parsonages, by reason of Art. VI, §28
(3), and non-stock, non-profit educational institutions by reason of Art. XIV, §4 (3).

CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives
the equal protection of the law because electric cooperatives are exempted from the VAT. The
classification between electric and other cooperatives (farmers cooperatives, producers
cooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination
that there is greater need to provide cheaper electric power to as many people as possible,
especially those living in the rural areas, than there is to provide them with other necessities in
life. We cannot say that such classification is unreasonable.

Hospital de San Juan de Dios vs Pasay City, GR No. L-19371 Feb 28, 1966:

• Hospital presented its Articles of Incorporation showing that it had no capital stock and that no
part of its net income, if any, could inure to the benefit of any private individual; there is Exhibit D,
a ruling of June 20, 1957 of the Workmen's Compensation Commissioner and the Undersecretary
of Labor to the effect that appellant is a charitable institution exempt from the scope of the
Workmen's Compensation Act; a written statement of appellant's cashier that the latter maintains
two free wards of sixty beds each; an admission by appellees to the effect that, in addition to the
free wards just mentioned, appellant also maintains six free beds in the Pediatrics Section It is not
therefore correct to say that there is no evidence whatsoever showing how appellant doles out
charity.

• The question of whether or not appellant and other institutions similarly situated and operated are
charitable institutions has been decided both here and in the United States. The American rule is
summarized in 51 American Jurisprudence, p. 607, as follows:

636. Effect of Receipt of Pay from Patients.

The general rule that a charitable institution does not lose its charitable character and
its consequent exemption from taxation merely because recipients of its benefits who
are able to pay are required to do so, where funds derived in this manner are devoted
to the charitable purposes of the institution, applies to hospitals. A hospital owned and
conducted by a charitable organization, devoted for the most part to the gratuitous
care of charity patients, is exempt from taxation as a building used for "purposes
purely charitable", notwithstanding it receives and cares for pay patients, where any
profit thus derived is applied to the purposes of the institution. An institution established,
maintained, and operated for the purpose of taking care of the sick, without any profit or view
to profit, but at a loss, which is made up by benevolent contributions, the benefits of which are
open to the public generally, is a purely public charity within the meaning of a statute
exempting the property of institutions of purely public charity from taxation; the fact that
patients who are able to pay are charged for services rendered, according to their
ability, being of no importance upon the question of the character of the institution.

In Jesus Sacred Heart College vs. Collector, etc., G.R. No. L-6807, May 20, 1954, We overruled
the contention of the Collector of Internal Revenue to the effect that the fact that the appellant
herein had a profit or net income was sufficient to show that it was an institution "for profit and
gain" and therefore no longer exempt from income tax as follows:

To hold that an educational institution is subject to income tax wherever it is so administered

as to reasonably assure that it will not incur a deficit, is to nullify and defeat the
aforementioned exemption. Indeed, the effect, in general, of the interpretation advocated by
appellant would be to deny the exemption whenever there is a net income, contrary to the

24
 TAX I
MFABalili

tenor of said Section 27 (e) which positively exempts from taxation those corporations which,
otherwise, would be subject thereto, because of the existence of said net income.

Explaining our view that the making of profit does not destroy the tax exemption of a charitable,
benevolent or educational institution, We said:

Needless to say, every responsible organization must be so run as to at least, insure its
existence, by operating within the limits of its own resources, especially its regular income. In
other words, it should always strive, whenever possible, to have a surplus. Upon the other
hand, appellant's pretense, would limit the benefits of the exemption, under said Section 27
(e), to institutions which do not hope, or propose, to have such surplus. Under this view, the
exemption would apply only to schools which are on the verge of bankruptcy, for—unlike the
United States, where a substantial number of institutions of learning are dependent upon
voluntary contributions and still enjoy economic stability, such as Harvard, the trust fund of
which has been steadily increasing with the years—there are, and there have always been
very few educational enterprises in the Philippines which are supported by donations, and
those organizations usually have a very precarious existence. The final result of appellant's
contention, if adopted, would be to discourage the establishment of colleges in the
Philippines, which is precisely the opposite of the objective consistently sought by our laws.

In U.S.T. Hospital Employees Association vs. Sto. Tomas University Hospital, G.R. No. L-6988
(May 24, 1952), it was argued that the fact that the aforesaid hospital charged fees for 140 paying
beds made it lose its character of a charitable institution. We likewise rejected this view because
the paying beds aforesaid were maintained to partly finance the expenses of the free
wards maintained by the hospital. We express the same view in Collector of Internal Revenue
vs. St. Paul's Hospital in Iloilo, G.R. No. L-12127 (May 25, 1959) where We said the following:

In this connection, it should be noted that respondent therein is a corporation organized for
"charitable, educational and religious purposes"; that no part of its net income inures to the
benefit of any private individual; that it is exempt from paying income tax; that it operates a
hospital in which MEDICAL assistance is given to destitute persons free of charge; that it
maintains a pharmacy department within the premises of said hospital, to supply drugs and
medicines only to charity and paying patients confined therein; and that only the paying
patients are required to pay the medicines supplied to them, for which they are charged the
cost of the medicines, plus an additional 10% thereof, to partly offset the cost of medicines
supplied free of charge to charity patients. Under these facts, we are of the opinion, and so
hold, that the Hospital may not be regarded as engaged in "business" by reason of said sale
of medicines to its paying patients.

In line with the foregoing, in U.S.T. Hospital Employees Association vs. Santo Tomas University
Hospital (G.R. No. L-6988, decided May 24, 1954), we held that the U.S.T. Hospital was not
established for profit-making purposes, despite the fact that it had 140 paying beds,
because the same were maintained only to "partly finance the expenses of the free wards",
containing 203 beds for charity patients. Although said case involved the interpretation of
Republic Act No. 772, it is patent from our decision therein that said institution was not considered
engaged in "business."

It is trite to say that a tax on the limited revenue of charitable institutions of this kind tends to
hamper its operation, and accordingly, to discourage the establishment and maintenance
thereof. In the absence of a clear legal provision thereon, we must not so construe our laws
as to lead to such result. In other words, the second, third and fourth assignments of error are
untenable.

In San Juan de Dios Hospital (the same party appellant herein) vs. Metropolitan Water District, 54
Phil. 174, this Court considered said hospital as a charitable institution in spite of the fact that it
maintained paying beds. From the decision in said case, We quote the following:

A hospital (referring to the San Juan de Dios Hospital) is generally considered to be a

charitable institution. It is good public policy to encourage works of charity. What Carriedo did
in his will was to make a beneficient grant not to a hospital thought of as a building, but to a

25
 TAX I
MFABalili

hospital thought of as an institution. The free water was for the good of the hospital in this
large sense. Should the hospital be enlarged or rebuilt, the water concession would continue
just the same. But a hospital cannot function without personnel. And such personnel must
have a place to live, which is the reason why a home devoted exclusively to the needs of the
nurses was founded. Free water for a nurses home as an adjunct to a hospital is as beneficial
to the charitable purposes of the hospital as is free water for the hospital proper.
Finally, in Manila Sanitarium and Hospital vs. Gabuco, G.R. No. L-14331, January 31, 1963, We
held that the mere charging of medical and hospital fees from those who could afford to
pay, did not make the institution one established for profit or gain.

Lung Center of the Philippines vs Quezon City, GR No. 144104, June 29, 2004:

• We hold that the petitioner is a charitable institution within the context of the 1973 and 1987
Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the
elements which should be considered include the statute creating the enterprise, its
corporate purposes, its constitution and by-laws, the methods of administration, the nature
of the actual work performed, the character of the services rendered, the indefiniteness of
the beneficiaries, and the use and occupation of the properties.

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing
laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts
under the influence of education or religion, by assisting them to establish themselves in life or
otherwise lessening the burden of government. It may be applied to almost anything that tend to
promote the well-doing and well-being of social man. It embraces the improvement and promotion
of the happiness of man. The word charitable is not restricted to relief of the poor or sick. The test
of a charity and a charitable organization are in law the same. The test whether an enterprise
is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable
or whether it is maintained for gain, profit, or private advantage.

The medical services of the petitioner are to be rendered to the public in general in any and all
walks of life including those who are poor and the needy without discrimination. After all, any person,
the rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether out-
patient, or confined in the hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the charitable object which it is intended
to achieve; and no money inures to the private benefit of the persons managing or operating
the institution.

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its
character as a charitable institution simply because the gift or donation is in the form of subsidies
granted by the government.

In this case, the petitioner adduced substantial evidence that it spent its income, including the
subsidies from the government for 1991 and 1992 for its patients and for the operation of the
hospital. It even incurred a net loss in 1991 and 1992 from its operations.

• Although the petitioner is a charitable institution, we hold that those portions of its real property that
are leased to private entities are not exempt from real property taxes as these are not actually,
directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The effect of an exemption is equivalent to an appropriation. Hence, a
claim for exemption from tax payments must be clearly shown and based on language in the law
too plain to be mistaken.

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that

26
 TAX I
MFABalili

the petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock

corporation organized primarily to help combat the high incidence of lung and pulmonary
diseases in the Philippines, all donations, contributions, endowments and equipment and
supplies to be imported by authorized entities or persons and by the Board of Trustees of
the Lung Center of the Philippines, Inc., for the actual use and benefit of the Lung Center,
shall be exempt from income and gift taxes, the same further deductible in full for the
purpose of determining the maximum deductible amount under Section 30, paragraph (h),
of the National Internal Revenue Code, as amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes,
charges and fees imposed by the Government or any political subdivision or
instrumentality thereof with respect to equipment purchases made by, or for the Lung
Center.

It is plain as day that under the decree, the petitioner does not enjoy any property tax
exemption privileges for its real properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among the enumeration of tax exempt
privileges under Section 2:

It is a settled rule of statutory construction that the express mention of one person,
thing, or consequence implies the exclusion of all others. The rule is expressed in the
familiar maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways.
One variation of the rule is principle that what is expressed puts an end to that which is
implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is
expressly limited to certain matters, it may not, by interpretation or construction, be
extended to other matters.
...
The rule of expressio unius est exclusio alterius and its variations are canons of
restrictive interpretation. They are based on the rules of logic and the natural workings of
the human mind. They are predicated upon ones own voluntary act and not upon that of
others. They proceed from the premise that the legislature would not have made specified
enumeration in a statute had the intention been not to restrict its meaning and confine its
terms to those expressly mentioned.

The exemption must not be so enlarged by construction since the reasonable presumption is
that the State has granted in express terms all it intended to grant at all, and that unless the privilege
is limited to the very terms of the statute the favor would be intended beyond what was meant.

• Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

(3) Charitable institutions, churches and parsonages or convents appurtenant

thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements,
actually, directly and exclusively used for religious, charitable or educational purposes
shall be exempt from taxation.

The tax exemption under this constitutional provision covers property taxes only. As Chief Justice
Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: . . . what
is exempted is not the institution itself . . .; those exempted from real estate taxes are lands,
buildings and improvements actually, directly and exclusively used for religious, charitable
or educational purposes.

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No.
7160 (otherwise known as the Local Government Code of 1991) as follows:

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

27
 TAX I
MFABalili

...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and all lands, buildings, and improvements
actually, directly, and exclusively used for religious, charitable or educational purposes.

We note that under the 1935 Constitution, ... all lands, buildings, and improvements used
exclusively for charitable purposes shall be exempt from taxation. However, under the 1973 and
the present Constitutions, for lands, buildings, and improvements of the charitable
institution to be considered exempt, the same should not only be exclusively used for
charitable purposes; it is required that such property be used actually and directly for such
purposes.

As this Court held in Province of Abra v. Hernando:

Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents

appurtenant thereto, and all lands, buildings, and improvements used exclusively for
religious, charitable, or educational purposes shall be exempt from taxation. The present
Constitution added charitable institutions, mosques, and non-profit cemeteries
and required that for the exemption of lands, buildings, and improvements, they
should not only be exclusively but also actually and directly used for religious or
charitable purposes. The Constitution is worded differently. The change should not
be ignored. It must be duly taken into consideration. Reliance on past decisions would
have sufficed were the words actually as well as directly not added. There must be proof
therefore of the actual and direct use of the lands, buildings, and improvements for
religious or charitable purposes to be exempt from taxation.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a
charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY
used for charitable purposes. Exclusive is defined as possessed and enjoyed to the exclusion of
others; debarred from participation or enjoyment; and exclusively is defined, in a manner to exclude;
as enjoying a privilege exclusively. If real property is used for one or more commercial purposes, it
is not exclusively used for the exempted purposes but is subject to taxation. The words dominant
use or principal use cannot be substituted for the words used exclusively without doing violence to
the Constitutions and the law. Solely is synonymous with exclusively.

What is meant by actual, direct and exclusive use of the property for charitable purposes is the
direct and immediate and actual application of the property itself to the purposes for which
the charitable institution is organized. It is not the use of the income from the real property
that is determinative of whether the property is used for tax-exempt purposes.

The petitioner failed to discharge its burden to prove that the entirety of its real property is actually,
directly and exclusively used for charitable purposes. While portions of the hospital are used for the
treatment of patients and the dispensation of medical services to them, whether paying or non-
paying, other portions thereof are being leased to private individuals for their clinics and a canteen.
Further, a portion of the land is being leased to a private individual for her business enterprise under
the business name Elliptical Orchids and Garden Center.

Accordingly, we hold that the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes. On the other hand, the
portions of the land occupied by the hospital and portions of the hospital used for its patients,
whether paying or non-paying, are exempt from real property taxes.

CIR vs St Luke’s Medical Center, Inc, GR No 195909, Sept 26, 2012:

• Issue: Effect of the introduction of Section 27(B) vis-à-vis Section 30(E) and (G) on the income tax
exemption of charitable and social welfare institutions. The 10% income tax rate under Section
27(B) specifically pertains to proprietary educational institutions and proprietary non-profit
hospitals.

28
 TAX I
MFABalili

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions
and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof: Provided, That if the gross income
from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross
income derived by such educational institutions or hospitals from all sources, the tax
prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade, business or other activity' means any
trade, business or other activity, the conduct of which is not substantially related to the
exercise or performance by such educational institution or hospital of its primary purpose or
function. A 'proprietary educational institution' is any private school maintained and
administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher
Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as
the case may be, in accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's
focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable
institutions. St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
remove the exemption for "proprietary non-profit" hospitals. Section 30€ and (G) state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be
taxed under this Title in respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part
of its net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.

We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary
non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E)
and (G) on the other hand, can be construed together without the removal of such tax exemption.
The effect of the introduction of Section 27(B) is to subject the taxable income of two
specific institutions, namely, proprietary non-profit educational institutions and
proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10%
preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the
last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications
for hospitals are that they must be proprietary and non-profit. "Proprietary" means private,
following the definition of a "proprietary educational institution" as "any private school maintained
and administered by private individuals or groups" with a government permit. "Non-profit" means
no net income or asset accrues to or benefits any member or specific person, with all the net
income or asset devoted to the institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club
Filipino Inc. de Cebu, this Court considered as non-profit a sports club organized for recreation

29
 TAX I
MFABalili

and entertainment of its stockholders and members. The club was primarily funded by
membership fees and dues. If it had profits, they were used for overhead expenses and improving
its golf course. The club was non-profit because of its purpose and there was no evidence that it
was engaged in a profit-making enterprise.

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The
Court defined "charity" in Lung Center of the Philippines v. Quezon City as "a gift, to be
applied consistently with existing laws, for the benefit of an indefinite number of persons,
either by bringing their minds and hearts under the influence of education or religion, by
assisting them to establish themselves in life or [by] otherwise lessening the burden of
government." A non-profit club for the benefit of its members fails this test. An organization may
be considered as non-profit if it does not distribute any part of its income to stockholders or
members. However, despite its being a tax exempt institution, any income such institution earns
from activities conducted for profit is taxable, as expressly provided in the last paragraph of
Section 30.
To be a charitable institution, however, an organization must meet the substantive test of
charity in Lung Center. The issue in Lung Center concerns exemption from real property tax and
not income tax. However, it provides for the test of charity in our jurisdiction. Charity is
essentially a gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free goods and services to
the public which would otherwise fall on the shoulders of government. Thus, as a matter of
efficiency, the government forgoes taxes which should have been spent to address public
needs, because certain private entities already assume a part of the burden. This is the
rationale for the tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works which would have been
funded by appropriations from the Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements
for a tax exemption are specified by the law granting it. The power of Congress to tax implies the
power to exempt from tax. Congress can create tax exemptions, subject to the constitutional
provision that "[n]o law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of Congress." The requirements for a tax exemption are strictly
construed against the taxpayer because an exemption restricts the collection of taxes necessary
for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable
institution for the purpose of exemption from real property taxes. This ruling uses the same
premise as Hospital de San Juan and Jesus Sacred Heart College which says that receiving
income from paying patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether out-patient,
or confined in the hospital, or receives subsidies from the government, so long as the money
received is devoted or used altogether to the charitable object which it is intended to achieve; and
no money inures to the private benefit of the persons managing or operating the institution.

For real property taxes, the incidental generation of income is permissible because the test
of exemption is the use of the property. The Constitution provides that "[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and
all lands, buildings, and improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation." The test of exemption is not
strictly a requirement on the intrinsic nature or character of the institution. The test requires that
the institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held
that the Lung Center of the Philippines did not lose its charitable character when it used a portion
of its lot for commercial purposes. The effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress
crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the

30
 TAX I
MFABalili

Constitution. Section 30(E) of the NIRC defines the corporation or association that is
exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution
does not define a charitable institution, but requires that the institution "actually, directly
and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted
"exclusively" for charitable purposes. The organization of the institution refers to its corporate
form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section
30(E) of the NIRC specifically requires that the corporation or association be non-stock, which is
defined by the Corporation Code as "one where no part of its income is distributable as dividends
to its members, trustees, or officers" and that any profit "obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized." However, under Lung Center, any profit by a
charitable institution must not only be plowed back "whenever necessary or proper," but must be
"devoted or used altogether to the charitable object which it is intended to achieve."

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of
the NIRC requires that these operations be exclusive to charity. There is also a specific
requirement that "no part of [the] net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person." The use of lands, buildings and improvements
of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable
institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3),
Article VI of the Constitution requires that a charitable institution use the property
"actually, directly and exclusively" for charitable purposes. To be exempt from income
taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized
and operated exclusively" for charitable purposes. Likewise, to be exempt from income
taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for
social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and
operated exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts "any" activity for profit, such activity is not tax exempt even as its not-for-profit activities
remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-
stock corporation or association [must be] organized and operated exclusively for x x x charitable
x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the civic
organization must be "operated exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its
tax exempt status for its not-for-profit activities. The only consequence is that the "income of

31
 TAX I
MFABalili

whatever kind and character" of a charitable institution "from any of its activities conducted for
profit, regardless of the disposition made of such income, shall be subject to tax."

Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities was
the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax
rate is now 10%.

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for
the words "used exclusively" without doing violence to the Constitution and the law. Solely is
synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered
any other way. There is a "purpose to make profit over and above the cost" of services. The
P1.73 billion total revenues from paying patients is not even incidental to St. Luke's charity
expenditure of P218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in
property, equipment or facilities used for services to paying and non-paying patients, then it
cannot be said that the income is "devoted or used altogether to the charitable object which it is
intended to achieve." The income is plowed back to the corporation not entirely for charitable
purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC
expressly qualifies that income from activities for profit is taxable "regardless of the disposition
made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the
phrase "any activity conducted for profit." However, it quoted a deposition of Senator Mariano
Jesus Cuenco, who was a member of the Committee of Conference for the Senate, which
introduced the phrase "or from any activity conducted for profit."

Xxx The question was whether having a hospital is essential to an educational institution like the
College of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the
hospital has paid rooms generally occupied by people of good economic standing, then it
should be subject to income tax. He said that this was one of the reasons Congress
inserted the phrase "or any activity conducted for profit." The question in Jesus Sacred Heart
College involves an educational institution. However, it is applicable to charitable institutions
because Senator Cuenco's response shows an intent to focus on the activities of charitable
institutions. Activities for profit should not escape the reach of taxation. Being a non-stock and
non-profit corporation does not, by this reason alone, completely exempt an institution from tax.
An institution cannot use its corporate form to prevent its profitable activities from being taxed.

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit hospital
under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members
and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary
non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit
activities.

CIR vs CA & CTA & Young Mens Christian Association of the Philippines, GR No. 124043,
October 14, 1998:

• Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict
interpretation in construing tax exemptions. Furthermore, a claim of statutory exemption from
taxation should be manifest and unmistakable from the language of the law on which it is based.
Thus, the claimed exemption must expressly be granted in a statute stated in a language too clear

32
 TAX I
MFABalili

to be mistaken.

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of
exempt organizations (such as the YMCA) from any of their properties, real or personal, be subject
to the imposed by the same Code. Because the last paragraph of said section unequivocally
subjects to tax the rent income f the YMCA from its rental property, the Court is duty-bound to
abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at
construction.

It is axiomatic that where the language of the law is clear and unambiguous, its express terms
must be applied. Parenthetically, a consideration of the question of construction must not even
begin, particularly when such question is on whether to apply a strict construction or a literal one
on statutes that grant tax exemptions to religious, charitable and educational propert[ies] or
institutions.

The last paragraph of Section 27, the YMCA argues, should be subject to the qualification that the
income from the properties must arise from activities conducted for profit before it may be
considered taxable. This argument is erroneous. As previously stated, a reading of said paragraph
ineludibly shows that the income from any property of exempt organizations, as well as that arising
from any activity it conducts for profit, is taxable. The phrase any of their activities conducted
for profit does not qualify the word properties. This makes income from the property of the
organization taxable, regardless of how that income is used -- whether for profit or for lofty
non-profit purposes.

• Invoking not only the NIRC but also the fundamental law, private respondent submits that Article
VI, Section 28 of par. 3 of the 1987 Constitution, exempts charitable institutions from the payment
not only of property taxes but also of income tax from any source.

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that [t]he tax exemption covers
property taxes only." Indeed, the income tax exemption claimed by private respondent finds
no basis in Article VI, Section 28, par. 3 of the Constitution.

• Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter, claiming that the YMCA
is a non-stock, non-profit educational institution whose revenues and assets are used actually,
directly and exclusively for educational purposes so it is exempt from taxes on its properties and
income. We reiterate that private respondent is exempt from the payment of property tax, but not
income tax on the rentals from its property. The bare allegation alone that it is a non-stock, non-
profit educational institution is insufficient to justify its exemption from the payment of income tax.

As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for
the YMCA to be granted the exemption it claims under the aforecited provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and
exclusively for educational purposes.

Is the YMCA an educational institution within the purview of Article XIV, Section 4, par.3 of the
Constitution?

We rule that it is not. The term educational institution or institution of learning has acquired a well-
known technical meaning, of which the members of the Constitutional Commission are deemed
cognizant. Under the Education Act of 1982, such term refers to schools. The school system is
synonymous with formal education, which refers to the hierarchically structured and chronological
graded learnings organized and provided by the formal school system and for which certification
is required in order for the learner to progress through the grades or move to the higher levels. The
Court has examined the Amended Articles of Incorporation and By-Laws of the YMCA, but found
nothing in them that even hints that it is a school or an educational institution.

Furthermore, under the Education Act of 1982, even non-formal education is understood to be
school-based and private auspices such as foundations and civic-spirited organizations are ruled

33
 TAX I
MFABalili

out. It is settled that the term educational institution, when used in laws granting tax
exemptions, refers to a xxx school seminary, college or educational establishment xxx.
Therefore, the private respondent cannot be deemed one of the educational institutions covered
by the constitutional provision under consideration.

Moreover, without conceding that Private Respondent YMCA is an educational institution, the
Court also notes that the former did not submit proof of the proportionate amount of the subject
income that was actually, directly and exclusively used for educational purposes. Article XIII,
Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is patently
insufficient, since the same merely signified that [t]he net income derived from the rentals of the
commercial buildings shall be apportioned to the Federation and Member Associations as the
National Board may decide. In sum, we find no basis for granting the YMCA exemption from
income tax under the constitutional provision invoked.

• In deliberating on this petition, the Court expresses its sympathy with private respondent. It
appreciates the nobility its cause. However, the Courts power and function are limited merely to
applying the law fairly and objectively. It cannot change the law or bend it to suit its sympathies and
appreciations. Otherwise, it would be overspilling its role and invading the realm of legislation.

We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the
Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom or
propriety of legislation. That prerogative belongs to the political departments of government.
Indeed, some of the member of the Court may even believe in the wisdom and prudence of
granting more tax exemptions to private respondent. But such belief, however well-meaning and
sincere, cannot bestow upon the Court the power to change or amend the law.

Davao Gulf Lumber Corp vs CIR & CA, GR No. 117359, July 23, 1998:

A tax cannot be imposed unless it is supported by the clear and express language of a statute; on the
other hand, once the tax is unquestionably imposed, [a] claim of exemption from tax payments must be
clearly shown and based on language in the law too plain to be mistaken. Since the partial refund
authorized under Section 5, RA 1435, is in the nature of a tax exemption, it must be construed
strictissimi juris against the grantee. Hence, petitioner’s claim of refund on the basis of the specific taxes
it actually paid must expressly be granted in a statute stated in a language too clear to be mistaken.

We have carefully scrutinized RA 1435 and the subsequent pertinent statutes and found no expression
of a legislative will authorizing a refund based on the higher rates claimed by petitioner. The mere fact
that the privilege of refund was included in Section 5, and not in Section 1, is insufficient to support
petitioners claim. When the law itself does not explicitly provide that a refund under RA 1435 may be
based on higher rates which were nonexistent at the time of its enactment, this Court cannot presume
otherwise. A legislative lacuna cannot be filled by judicial fiat.

Finally, petitioner asserts that equity and justice demand that the computation of the tax refunds be
based on actual amounts paid under Sections 153 and 156 of the NIRC. We disagree. According to an
eminent authority on taxation, there is no tax exemption solely on the ground of equity.

34