ABAKADA v.
ERMITA
The case tackles the constitutionality of RA 9337 or the E-VAT Law.
Assailed Provisions
• Sec. 4 — imposes a 10%
VAT on sale of goods
and properties
• Sec. 5 — imposes a 10%
VAT on importation of
goods
• Sec. 6 — imposes a 10%
VAT on sale of services
and use or lease of
properties
Stand-by authority:
These provisions also include
a uniform proviso authorizing
the President, upon
recommendation of the DOF
Sec. to raise the VAT rate to
12%, effective 1 January
2006, after any of the following
conditions have been
satisfied:
• VAT/GDP Ratio of the
previous year exceeds
2 4/5% or;
• National government
deficit/GDP Ratio of
the previous year
exceeds 1 ½%
Petitioner’s Contentions
ABAKADA’s contention:
• This is in violation of the exclusive authority
of the Congress to fix the rate of taxes under
the Constitution.
• VAT is a tax levied on the sale, barter or
exchange of goods and properties as well as
on the sale or exchange of services which
cannot be included within the purview of
tariffs under the exempted delegation.
Pimentel’s contention:
The assailed provisions violates the due process
clause as it imposes an unfair and additional tax
burden on the people:
• the increase to 12% is ambiguous because it
does not state if the rate would be returned to the
original 10% if the conditions are no longer
satisfied
• the rate is unfair and unreasonable, as the people
are unsure of the applicable VAT rate from year to
year
• the increase in VAT rate should only be based on
fiscal adequacy
Escudero’s contention:
• The DOF Sec. is not mandated to give a
recommendation.
• No standards are provided in the law on what
basis and as to how he will make the
recommendation.
Ruling of the Court
• No undue delegation of power but only discretion as
to the execution of a law.
o 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 on their authority.
o What is delegated to the Executive in this case is the
ascertainment of facts upon which enforcement and
administration of the increase rate under the law is
contingent.
o The legislature has made the operation of the 12%
rate contingent upon a specified fact or condition.
o No discretion would be exercised by the President; it
is simply a ministerial duty to impose the 12% rate
upon the existence of any of the conditions specified
by Congress.
o The DOF Sec. is acting as an agent of the legislative
department to determine and declare the event upon
which it is expressed will is to take effect.
• The 12% increase in VAT Rate does not impose an
unfair and unnecessary additional tax burden.
o In the absence of any provision for a return to the
10% rate, thus there is no fluctuating VAT rate.
o Fiscal adequacy — sources of revenues must be
adequate to meet gov’t expenditures and their
variations.
o The present condition when the law was passed
show that majority of the revenue went to debt
service and the GDP level is low compared to
neighboring countries. Thus there was a dire need to
respond to the needs.
Assailed Provisions
• Sec. 8 — requiring that
input tax on depreciable
goods shall be amortized
over a 60-month period, if
the acquisition excluding
the VT compents, exceeds
P1M; imposing a 70% limit
on the amount of input tax
to be credited against the
output tax
• Sec. 12 — authorizing the
Gov’t or any of its political
subdivisions,
instrumentalities or
agencies to deduct a 5%
final withholding tax on
gross payments of goods
and services, which are
subject to 10% VAT
Petitioner’s Contentions
Association of Pilipinas Shell’s contentions:
Input tax partakes the nature of a property that may
not be confiscated, appropriated, or limited without
due process of law.
It viotales the equal protection of the as the limitation
on the creditable input tax if:
• the entity has a high ratio of input tax;
• the entity invests in capital equipment
• the entity has several transactions with the
gov’t is not based on real and substantial
differences to meet a valid classification
The limitation on the creditable input tax in effect
allows VAT-registered establishments to retain a
portion of the taxes they collect, thus violating the
principe that tax collection and revenue should be
solely allocated for public purposes and
expenditures.
Ruling of the Court
• No violation of equal protection clause and due
process
o Input Tax — VAT due from or paid by a VAT-
registered person on the importation of goods or local
purchase of goods and services from a VAT-
registered person
o Output Tax— VAT due on the sale or lease of
taxable goods or properties or services by any
person registered or required to register under the
law
o The law states that if the input tax is less than 70% of
the output tax, then 100% of such input tax is still
creditable.
o The excess input tax, if any, is retained in a business
books of accounts and remains creditable in the
succeeding quarters.
o If at the end of a taxable quarter, the output taxes
charged by the seller are equal to the input taxes that
he paid and passed on by the suppliers, no payment
is required.
o When the output taxes exceed the input taxes, the
person shall be liable for the excess which has to be
paid to the BIR
o If the input taxes exceed the output taxes, the excess
shall be carried over to the succeeding quarter or
quarters
o A VAT-registered persons entitlement to the
creditable input tax is a mere statutory privilige
Other Matters Discussed by the Court:
• Definitions:
o VAT — a form of indirect tax ; tax on spending or
consumption; the burden is intended to fall on the immediate
buyers
o Direct tax — for which a taxpayer is directly liable on the
transaction or business it engages in
• On the Uniformity and Equitability of Taxation
o Uniformity – all taxable articles or kinds of property of the
same class shall be taxed at the same rate
o The tax law is uniform as it provides a standard rate on all
goods and services; there is no distinction as to the type of
industry or trade that will bear the 70% limitation on the
creditable input tax
o It is also equitable as it is equipped with a threshold margin.
o Basic marine and agricultural food products in their original
state are still not subject to the tax.
o There are mitigating measures such as reduction on excise
tax on petroleum gases and natural gases.
o Increased tax rates of corporation — 35%
o PAGCOR is not exempt anymore
• On Progressive Taxation
o Progressive — rate goes up depending on the resources of
the person affected
o VAT is regressive; it is the lower income group which is
always hardest hit
o The Constitution does not prohibit the imposition of indirect
taxes like the VAT
J. PANGANIBAN, Separate Opinion
• The standyby authority granted to the President is valid.
However, the DOF Sec. remains to be an alter ego of the
President and conducts an administrative function.
• Since the unutilized input VAT can be carried over to
succeeding quarters, there is no undue deprivation of
property. Alternatively, it can be passed on to the
consumers;
• The deferred input tax account -- which accumulates the
unutilized input VAT -- remains an asset in the accounting
records of a business. It is not at all confiscated by the
government.
• The matter of business establishments shouldering 30
percent of output tax and remitting the amount, as computed,
to the government is in effect imposing a tax that is
equivalent to a maximum of 3 percent of gross sales or
revenues. This imposition is arguably another tax on gross --
not net -- income and thus a deviation from the concept of
VAT as a tax on consumption; it also assumes that sales or
revenues are on cash basis or, if on credit, given credit terms
shorter than a quarter of a year.
• The reduction of tax credits is a question of economic policy.
Its determination is vested in Congress, not in this Court.
Since the purpose of the law is to raise revenues, it cannot
be denied that the means employed is reasonably related to
the achievement of that purpose.
• With the imposition of the 70 percent cap, there will be an
assurance of a steady cash flow to the government, which
can be translated to the production of improved goods,
rendition of better services, and construction of better
facilities for the people, including all private enterprises.
• The advantages and disadvantages of the E-VAT Law, as
well as its long-term effects on the economy, are beyond the
reach of judicial review.