EN BANC
 
CHAMBER OF REAL G.R. No. 160756
ESTATE AND BUILDERS
ASSOCIATIONS, INC.,
Petitioner, Present:
PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.
 
THE HON. EXECUTIVE
SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents. Promulgated:
 
March 9, 2010
 
 
 
 
 
 
 
x-------------------------------------------------x

DECISION
 
CORONA, J.:
 
 
In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real Estate and Builders
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424[2] and the revenue
regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving
creditable withholding taxes.[3]
 
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive
Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.
 
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and
creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.
 
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-
98. Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no
realized gain.
 
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section
4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the
sale of real properties categorized as ordinary assets. Petitioner contends that these revenue regulations are
contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital
assets and second, respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on
the gross selling price or fair market value of the real properties classified as ordinary assets.
 
Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process
clause because, like the MCIT, the government collects income tax even when the net income has not yet been
determined. They contravene the equal protection clause as well because the CWT is being levied upon real estate
enterprises but not on other business enterprises, more particularly those in the manufacturing sector.
 
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary
assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.
 
 
OVERVIEW OF THE ASSAILED PROVISIONS
 
 
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2%
of its gross income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A).
[4]
 If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT
over the normal tax shall be carried forward and credited against the normal income tax for the three immediately
succeeding taxable years. Section 27(E) of RA 8424 provides:
 
Section 27 (E). [MCIT] on Domestic Corporations. -
 
(1)      Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of
the taxable year, as defined herein, is hereby imposed on a corporation taxable under
this Title, beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A) of this Section for
the taxable year.
 
(2)      Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal
income tax as computed under Subsection (A) of this Section shall be carried forward
and credited against the normal income tax for the three (3) immediately succeeding
taxable years.
 
(3)      Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers
 losses on account of prolonged labor dispute, or because of force majeure, or because
of legitimate business reverses.
 
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and regulations that shall
define the terms and conditions under which he may suspend the imposition of the
[MCIT] in a meritorious case.
 
(4)      Gross Income Defined. For purposes of applying the [MCIT] provided under
Subsection (E) hereof, the term gross income shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. Cost of goods sold shall include all
business expenses directly incurred to produce the merchandise to bring them to their
present location and use.
 
For trading or merchandising concern, cost of goods sold shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the goods to
the place where the goods are actually sold including insurance while the goods are in
transit.
 
For a manufacturing concern, cost of goods manufactured and sold shall include
all costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
 
In the case of taxpayers engaged in the sale of service, gross income means
gross receipts less sales returns, allowances, discounts and cost of services. Cost of
services shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries and employee
benefits of personnel, consultants and specialists directly rendering the service and (B)
cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, that in the case of banks,
cost of services shall include interest expense.
 
 
On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of
Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).[5]The pertinent portions thereof read:
 
Sec. 2.27(E) [MCIT] on Domestic Corporations.
 
 
(1)     Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end
of the taxable year (whether calendar or fiscal year, depending on the accounting
period employed) is hereby imposed upon any domestic corporation beginning the
fourth (4th) taxable year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever the amount of
minimum corporate income tax is greater than the normal income tax due from such
corporation.
 
 
For purposes of these Regulations, the term, normal income tax means the
income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32%
effective January 1, 2000 and thereafter.
 
xxx xxx xxx
  
(2)      Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax
as computed under Sec. 27(A) of the Code shall be carried forward on an annual basis
and credited against the normal income tax for the three (3) immediately succeeding
taxable years.
 
xxx xxx xxx
 
 
Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-
98 implementing certain provisions of RA 8424 involving the withholding of taxes. [6] Under Section 2.57.2(J) of RR
No. 2-98, income payments from the sale, exchange or transfer of real property, other than capital assets, by
persons residing in the Philippines and habitually engaged in the real estate business were subjected to CWT:
 
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
 
xxx xxx xxx
 
(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of. Real property, other than capital assets, sold by
an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is
habitually engaged in the real estate business in accordance with the following schedule

  Those which are exempt from a  

withholding tax at source as  
  prescribed in Sec. 2.57.5 of these  
regulations. Exempt
   
With a selling price of five hundred  
thousand pesos (P500,000.00) or  
less. 1.5%
   
With a selling price of more than  
five hundred thousand pesos  
(P500,000.00) but not more than  
two million pesos (P2,000,000.00).  
3.0%
   
With selling price of more than two  
million pesos (P2,000,000.00)  
5.0%
 
Gross selling price shall mean the consideration stated in the sales document or the fair market
value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In
an exchange, the fair market value of the property received in exchange, as determined in the
Income Tax Regulations shall be used.
 
Where the consideration or part thereof is payable on installment, no withholding tax is required to
be made on the periodic installment payments where the buyer is an individual not engaged in
trade or business. In such a case, the applicable rate of tax based on the entire consideration shall
be withheld on the last installment or installments to be paid to the seller.
 
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax
shall be deducted and withheld by the buyer on every installment.
 
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J)      Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of real property classified as ordinary
asset. - A [CWT] based on the gross selling price/total amount of consideration or the
fair market value determined in accordance with Section 6(E) of the Code, whichever
is higher, paid to the seller/owner for the sale, transfer or exchange of real property,
other than capital asset, shall be imposed upon the withholding agent,/buyer, in
accordance with the following schedule:
 
Where the seller/transferor is exempt from  
[CWT] in accordance with Sec. 2.57.5 of these  
regulations. Exempt
   
Upon the following values of real property,
where the seller/transferor is habitually
engaged in the real estate business.
   
With a selling price of Five Hundred Thousand  
Pesos (P500,000.00) or less. 1.5%
   
With a selling price of more than Five Hundred  
Thousand Pesos (P500,000.00) but not more  
than Two Million Pesos (P2,000,000.00).  
3.0%
   
With a selling price of more than two Million  
Pesos (P2,000,000.00). 5.0%
xxx xxx xxx
 
Gross selling price shall remain the consideration stated in the sales document or the fair
market value determined in accordance with Section 6 (E) of the Code, as amended, whichever is
higher. In an exchange, the fair market value of the property received in exchange shall be
considered as the consideration.
 
xxx xxx xxx
 
However, if the buyer is engaged in trade or business, whether a corporation or otherwise,
these rules shall apply:
 
(i) If the sale is a sale of property on the installment plan (that is, payments in the
year of sale do not exceed 25% of the selling price), the tax shall be deducted and
withheld by the buyer on every installment.
 
(ii) If, on the other hand, the sale is on a cash basis or is a deferred-payment sale
not on the installment plan (that is, payments in the year of sale exceed 25% of the
selling price), the buyer shall withhold the tax based on the gross selling price or
fair market value of the property, whichever is higher, on the first installment.
 
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless
the [CWT] due on the sale, transfer or exchange of real property other than capital asset has been
fully paid.(Underlined amendments in the original)
 
  
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such
transfers and conveyances have been reported and the taxes thereof have been duly paid:[7]
 
Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his
duly authorized representative has certified that such transfers and conveyances have been
reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon
have been fully paid xxxx.
 
 
On February 11, 2003, RR No. 7-2003[8] was promulgated, providing for the guidelines in determining whether a
particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The
pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other disposition of real
properties shall, unless otherwise exempt, be subject to applicable taxes imposed under
the Code, depending on whether the subject properties are classified as capital assets or
ordinary assets;
 
a.            In the case of individual citizen (including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in the Philippines;
 
xxx xxx xxx
 
(ii)               The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or
current fair market value as determined in accordance with Section 6(E) of
the Code, whichever is higher, and consequently, to the ordinary income tax
imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be,
based on net taxable income.
 
xxx xxx xxx
 
c.       In the case of domestic corporations.
 
xxx xxx xxx
 
(ii)               The sale of land and/or building classified as ordinary asset and other real
property (other than land and/or building treated as capital asset), regardless of
the classification thereof, all of which are located in the Philippines, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations may become subject to the
[MCIT] under Sec. 27(E) of the Code, whichever is applicable.
 
xxx xxx xxx
 
We shall now tackle the issues raised.
 
  
EXISTENCE OF A JUSTICIABLE CONTROVERSY
  
Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question before the
court must be ripe for adjudication; (3) the person challenging the validity of the act must have standing to do so;
(4) the question of constitutionality must have been raised at the earliest opportunity and (5) the issue of
constitutionality must be the very lis mota of the case.[9]
 
Respondents aver that the first three requisites are absent in this case. According to them, there is no actual
case calling for the exercise of judicial power and it is not yet ripe for adjudication because
 
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been
assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did
petitioner allege that its members have shut down their businesses as a result of the payment of the
MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any
actual, specific and concrete instances cited that the assailed law and revenue regulations have
actually and adversely affected it. Lacking empirical data on which to base any conclusion, any
discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an
academic exercise.
 
Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion
that does not really settle legal issues.[10]
 
An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims
which is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute.
[11]
 On the other hand, a question is considered ripe for adjudication when the act being challenged has a direct
adverse effect on the individual challenging it.[12]
 
Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their
operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated
in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:[13]
 
By the mere enactment of the questioned law or the approval of the challenged act, the
dispute is said to have ripened into a judicial controversy even without any other overt act. Indeed,
even a singular violation of the Constitution and/or the law is enough to awaken judicial duty.[14]
 
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such
question once and for all.
 
Respondents next argue that petitioner has no legal standing to sue:
 
Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did not allege
any material interest or any wrong that it may suffer from the enforcement of [the assailed
provisions].[15]
 
Legal standing or locus standi is a partys personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged.[16] In Holy Spirit
Homeowners Association, Inc. v. Defensor,[17] we held that the association had legal standing because its members
stood to be injured by the enforcement of the assailed provisions:
 
Petitioner association has the legal standing to institute the instant petition xxx. There is no
dispute that the individual members of petitioner association are residents of the NGC. As such they
are covered and stand to be either benefited or injured by the enforcement of the IRR, particularly
as regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus,
 petitioner association may assail those provisions in the IRR which it believes to be unfavorable to
the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury
arising from the enforcement of the IRR in that they have been disqualified and eliminated from the
selection process.[18]
 
 
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an
actual case, ripeness or legal standing when paramount public interest is involved.[19] The questioned MCIT and
CWT affect not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental
importance of the issues raised and their overreaching significance to society make it proper for us to take
cognizance of this petition.[20]
 
CONCEPT AND RATIONALE OF THE MCIT
 
 
The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation
system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing the true
income of corporations.[21] It was devised as a relatively simple and effective revenue-raising instrument compared
to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will
make some minimum contribution to the support of the public sector. The congressional deliberations on this are
illuminating:
 
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of
reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing
in the cost of government. In this regard, the Tax Reform Act introduces for the first time a new
concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the
country and for administrative convenience. This will go a long way in ensuring that corporations
will pay their just share in supporting our public life and our economic advancement.[22]
 
Domestic corporations owe their corporate existence and their privilege to do business to the government.
They also benefit from the efforts of the government to improve the financial market and to ensure a favorable
business climate. It is therefore fair for the government to require them to make a reasonable contribution to the
public expenses.
 
Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report
minimal or negative net income resulting in minimal or zero income taxes year in and year out, through under-
declaration of income or over-deduction of expenses otherwise called tax shelters.[23]
 
Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed
the [MCIT]. Because from experience too, you have corporations which have been losing year in and
year out and paid no tax. So, if the corporation has been losing for the past five years to ten years,
then that corporation has no business to be in business. It is dead. Why continue if you are losing
year in and year out? So, we have this provision to avoid this type of tax shelters, Your Honor.[24]
 
The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements and its tax
payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and
minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and
other stratagems. Since the tax base was broader, the tax rate was lowered.
 
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:
 
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the
year in which the corporation commenced its operations. [25] This grace period allows a new business to stabilize
first and make its ventures viable before it is subjected to the MCIT.[26]
 
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax
which shall be credited against the normal income tax for the three immediately succeeding years.[27]
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary
of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force
majeure and legitimate business reverses.[28]
Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries
already had their own system of minimum corporate income taxation. Our lawmakers noted that most developing
countries, particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed
out during the committee hearings:
 
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room
for underdeclaration of gross receipts have this same form of safeguards.
 
In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent
(0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and
exemptions. Of course the different countries have different basis for that minimum income tax.
 
The other thing youll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries.[29]
 
 
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions
of the MCIT.[30]
 
MCIT IS NOT VIOLATIVE OF DUE PROCESS
 
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive,
arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that
gross income as defined under said provision only considers the cost of goods sold and other direct expenses;
other major expenditures, such as administrative and interest expenses which are equally necessary to produce
gross income, were not taken into account.[31] Thus, pegging the tax base of the MCIT to a corporations gross
income is tantamount to a confiscation of capital because gross income, unlike net income, is not realized gain.[32]
 
We disagree.
 
Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The
exercise of taxing power derives its source from the very existence of the State whose social contract with its
citizens obliges it to promote public interest and the common good.[33]
 
Taxation is an inherent attribute of sovereignty. [34] It is a power that is purely legislative.[35] Essentially, this
means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent
(rate), coverage (subjects) and situs (place) of taxation.[36] It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature
wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed,
against whom (or what) it shall be imposed and where it shall be imposed.
 
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits,
so that the principal check against its abuse is to be found only in the responsibility of the legislature (which
imposes the tax) to its constituency who are to pay it.[37] Nevertheless, it is circumscribed by constitutional
limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.
 
 The constitutional safeguard of due process is embodied in the fiat [no] person shall be deprived of life,
liberty or property without due process of law. In Sison, Jr. v. Ancheta, et al.,[38] we held that the due process clause
may properly be invoked to invalidate, in appropriate cases, a revenue measure[39] when it amounts to a
confiscation of property.[40] But in the same case, we also explained that we will not strike down a revenue measure
as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the
taxpayer.[41] There must be a factual foundation to such an unconstitutional taint.[42] This merely adheres to the
authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but
rather a broad standard, there is a need for proof of such persuasive character.[43]
 
Petitioner is correct in saying that income is distinct from capital.[44] Income means all the wealth which
flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct
point in time while income denotes a flow of wealth during a definite period of time.[45] Income is gain derived and
severed from capital.[46] For income to be taxable, the following requisites must exist:
 
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.[47]
 
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other
words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in
the sale of its goods, i.e., the cost of goods[48] and other direct expenses from gross sales. Clearly, the capital is not
being taxed.
 
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and
only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due
from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporations gross
income.
 
Besides, 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.[49]
 
Statutes taxing the gross "receipts," "earnings," or "income" of particular
corporations are found in many jurisdictions. Tax thereon is generally held to be within the power
of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the
requirement as to uniformity of taxation.[50]
 
 
The United States has a similar alternative minimum tax (AMT) system which is generally characterized by
a lower tax rate but a broader tax base. [51] Since our income tax laws are of American origin, interpretations by
American courts of our parallel tax laws have persuasive effect on the interpretation of these laws. [52] Although our
MCIT is not exactly the same as the AMT, the policy behind them and the procedure of their implementation are
comparable. On the question of the AMTs constitutionality, the United States Court of Appeals for the Ninth Circuit
stated in Okin v. Commissioner:[53]
 
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the
system growing from large numbers of taxpayers with large incomes who were yet paying no taxes.
 
xxx xxx xxx
 
We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional.[54]
 
 
The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a
minimum amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation.[55]
American courts have also emphasized that Congress has the power to condition, limit or deny deductions from
gross income in order to arrive at the net that it chooses to tax. [56] This is because deductions are a matter of
legislative grace.[57]
 
Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of
the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members
nor does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their
property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary
and confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes.[58] Taxation is
necessarily burdensome because, by its nature, it adversely affects property rights.[59] The party alleging the laws
unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.[60]
 
 
RR 9-98 MERELY CLARIFIES
SECTION 27(E) OF RA 8424
 
 
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is
being imposed and collected even when there is actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
 
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax
due from such corporation. (Emphasis supplied)
 
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable
income, merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its
business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its
gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the
amount of the net income. But the law also states that the MCIT is to be paid only if it is greater than the normal net
income.Obviously, it may well be the case that the MCIT would be less than the net income of the corporation
which posts a zero or negative taxable income.
 
We now proceed to the issues involving the CWT.
 
The withholding tax system is a procedure through which taxes (including income taxes) are collected.
[61]
 Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories:
(a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant
bonds. Petitioner is concerned with the second category (CWT) and maintains that the revenue regulations on the
collection of CWT on sale of real estate categorized as ordinary assets are unconstitutional.
 
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424,
contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were
promulgated with grave abuse of discretion amounting to lack of jurisdiction and patently in contravention of
law[62] because they ignore such distinctions. Petitioners conclusion is based on the following premises: (a) the
revenue regulations use gross selling price (GSP) or fair market value (FMV) of the real estate as basis for
determining the income tax for the sale of real estate classified as ordinary assets and (b) they mandate the
collection of income tax on a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA
8424 which calls for the payment of the net income at the end of the taxable period.[63]
 Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents
cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of
taxes on income from the sale of capital and ordinary assets.
Petitioners arguments have no merit.
 
 
AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER
THE COLLECTION OF CWT ON SALES OF REAL PROPERTY
CONSIDERED AS ORDINARY ASSETS
 
 
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law.Such authority is subject
to the limitation that the rules and regulations must not override, but must remain consistent and in harmony with,
the law they seek to apply and implement.[64] It is well-settled that an administrative agency cannot amend an act of
Congress.[65]
 
We have long recognized that the method of withholding tax at source is a procedure of collecting income tax
which is sanctioned by our tax laws.[66] The withholding tax system was devised for three primary reasons: first, to
provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the
collection of income tax which can otherwise be lost or substantially reduced through failure to file the
corresponding returns and third, to improve the governments cash flow.[67] This results in administrative savings,
prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to
collect taxes through more complicated means and remedies.[68]
Respondent Secretary has the authority to require the withholding of a tax on items of income payable to
any person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA
8424 which provides:
 
SEC. 57. Withholding of Tax at Source.
 
xxx xxx xxx
 
(B)     Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent
(1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year.
 
 
The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to
the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on
the income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.
 
EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX OF
INDIVIDUALS OR CORPORATIONS ENGAGED IN THE REAL
ESTATE BUSINESS
 
 
 
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business income tax
from net income to GSP or FMV of the property sold.
Petitioner is wrong.
 
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax
obligation. [69] They are installments on the annual tax which may be due at the end of the taxable year.[70]
Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets
remains to be the entitys net income imposed under Section 24 (resident individuals) or Section 27 (domestic
corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be
deducted from the net income tax payable by the taxpayer at the end of the taxable year.[71] Precisely, Section 4(a)
(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as ordinary assets
remains to be the net taxable income:
 
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt,
be subject to applicable taxes imposed under the Code, depending on whether the subject
properties are classified as capital assets or ordinary assets;
 
xxx xxx xxx
 
a. In the case of individual citizens (including estates and trusts), resident aliens, and non-
resident aliens engaged in trade or business in the Philippines;
 
xxx xxx xxx
 
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall
be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the
[GSP] or current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)
(1) of the Code, as the case may be, based on net taxable income.
 
xxx xxx xxx
 
c. In the case of domestic corporations.
 
The sale of land and/or building classified as ordinary asset and other real property (other than
land and/or building treated as capital asset), regardless of the classification thereof, all of which
are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR
2-98], as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code.
In lieu of the ordinary income tax, however, domestic corporations may become subject to the
[MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)
 
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld
(by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the
taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not
know, nor is he privy to, how much the taxpayer/seller will have as its net income at the end of the taxable
year. Instead, said withholding agents knowledge and privity are limited only to the particular transaction in which
he is a party. In such a case, his basis can only be the GSP or FMV as these are the only factors reasonably known or
knowable by him in connection with the performance of his duties as a withholding agent.
 
 
NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY ASSETS
AND CAPITAL ASSETS
 
 
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as
ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain
presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at
source.[72]
The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary
assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are
distinguished as follows:
 
 
FWT CWT
a) The amount of income tax a) Taxes withheld on certain income
withheld by the withholding agent payments are intended to equal or at
is constituted as a full and final least approximate the tax due of the
payment of the income tax due payee on said income.
from the payee on the said income.
 
b)The liability for payment of the b) Payee of income is required to
tax rests primarily on the payor as report the income and/or pay the
a withholding agent. difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more
than the tax due.
c) The payee is not required to file  
an income tax return for the c) The income recipient is still
particular income.[73] required to file an income tax return,
as prescribed in Sec. 51 and Sec. 52
of the NIRC, as amended.[74]
 
As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of
ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioners contention
that ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the
pertinent provisions of RA 8424.
 
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the
provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax
involving ordinary assets.[75]
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same
way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The
withholding agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due from
the income payable is the essence of the withholding tax method of tax collection.
 
NO RULE THAT ONLY PASSIVE
INCOMES CAN BE SUBJECT TO CWT
 
Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on passive
income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It follows that Section
57(B) on CWT should also be limited to passive income:
 
 
SEC. 57. Withholding of Tax at Source.
 
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary]
may promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by
 certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)
(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3),
28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items
of income shall be withheld by payor-corporation and/or person and paid in the same manner and
subject to the same conditions as provided in Section 58 of this Code.
 
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of
the [CIR], require the withholding of a tax on the items of income payable to natural or juridical
persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which
shall be credited against the income tax liability of the taxpayer for the taxable year. (Emphasis
supplied)
 
This line of reasoning is non sequitur.
 
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates
these as passive income. The BIR defines passive income by stating what it is not:
 
if the income is generated in the active pursuit and performance of the corporations
primary purposes, the same is not passive income[76]
 
It is income generated by the taxpayers assets. These assets can be in the form of real properties that return rental
income, shares of stock in a corporation that earn dividends or interest income received from savings.
 
On the other hand, Section 57(B) provides that the Secretary can require a CWT on income payable to
natural or juridical persons, residing in the Philippines. There is no requirement that this income be passive
income. If that were the intent of Congress, it could have easily said so.
 
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The
former covers the kinds of passive income enumerated therein and the latter encompasses any income other than
those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.
 
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section
57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has been held that,
where a statute does not require any particular procedure to be followed by an administrative agency, the agency
may adopt any reasonable method to carry out its functions. [77] Similarly, considering that the law uses the general
term income, the Secretary and CIR may specify the kinds of income the rules will apply to based on what is
feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight and respect by the
courts[78] in view of the rule-making authority given to those who formulate them and their specific expertise in
their respective fields.
 
 
NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS
 
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business, gain is never
assured by mere receipt of the selling price. As a result, the government is collecting tax from net income not yet
gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the
taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is
taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due
process. More importantly, the due process requirement applies to the power to tax. [79] The CWT does not impose
new taxes nor does it increase taxes.[80] It relates entirely to the method and time of payment.
 
Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers
have to wait years and may even resort to litigation before they are granted a refund.[81]This argument is
misleading. The practical problems encountered in claiming a tax refund do not affect the constitutionality and
validity of the CWT as a method of collecting the tax.
Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay
labor wages, materials, cost of money and other expenses which can then save the entity from having to obtain
loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add
to the burden of the realty industry: huge investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling development/construction costs; heavy taxes and
prohibitive up-front regulatory fees from at least 20 government agencies.[82]
Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners
complaints are essentially matters of policy best addressed to the executive and legislative branches of the
government. Besides, the CWT is applied only on the amounts actually received or receivable by the real estate
entity. Sales on installment are taxed on a per-installment basis. [83]Petitioners desire to utilize for its operational
and capital expenses money earmarked for the payment of taxes may be a practical business option but it is not a
fundamental right which can be demanded from the court or from the government.
 
 
 
 
NO VIOLATION OF EQUAL PROTECTION
 
 
Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being
levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not
similarly imposed a CWT on their sales, even if their manner of doing business is not much different from that of a
real estate enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of
production and it incurs costs and expenditures on a regular basis. The only difference is that goods produced by
the real estate business are house and lot units.[84]
 
Again, we disagree.
 
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.[85] Stated differently, all persons belonging to the same class shall be taxed alike. It follows that
the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable
classification. Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of
the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the same class.[86]
 
The taxing power has the authority to make reasonable classifications for purposes of taxation. [87] Inequalities
which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional
limitation.[88] The real estate industry is, by itself, a class and can be validly treated differently from other business
enterprises.
 
Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize
that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the
imposition of the CWT, is not their production processes but the prices of their goods sold and the number of
transactions involved. The income from the sale of a real property is bigger and its frequency of transaction
limited, making it less cumbersome for the parties to comply with the withholding tax scheme.
 
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several
thousand customers every month involving both minimal and substantial amounts. To require the customers of
manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or
hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the
purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy
equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly subjected to the CWT.
[89]
 As already discussed, the Secretary may adopt any reasonable method to carry out its functions. [90] Under
Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The sales of
manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT
for their transactions with said 5,000 corporations.[91]
 
 
 
SECTION 2.58.2 OF RR NO. 2-98 MERELY IMPLEMENTS
SECTION 58 OF RA 8424
 
 
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not
effect the regisration of any document transferring real property unless a certification is issued by the CIR that the
withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its
contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost
exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in accordance with it:
 
Sec. 58. Returns and Payment of Taxes Withheld at Source.
 
(E) Registration with Register of Deeds. - No registration of any document transferring real
property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been reported, and the capital gains or
[CWT], if any, has been paid: xxxx any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)
 
 
 
 
CONCLUSION
 
 
The renowned genius Albert Einstein was once quoted as saying [the] hardest thing in the world to understand is
the income tax.[92] When a party questions the constitutionality of an income tax measure, it has to contend not only
with Einsteins observation but also with the vast and well-established jurisprudence in support of the plenary
powers of Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court
that the imposition of MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
 SECOND DIVISION
COMMISSIONER OF INTERNAL G.R. Nos. 167274-75
REVENUE,
Petitioner, Present:
 
QUISUMBING, J.,
Chairperson,
YNARES-SANTIAGO,
- versus - CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
FORTUNE TOBACCO
CORPORATION, Promulgated:
Respondent.
July 21, 2008
 
x---------------------------------------------------------------------------x
 
 
DECISION
 
TINGA, J.:
 
 
Simple and uncomplicated is the central issue involved, yet whopping is the amount at stake in this case.
 
After much wrangling in the Court of Tax Appeals (CTA) and the Court of Appeals, Fortune Tobacco Corporation
(Fortune Tobacco) was granted a tax refund or tax credit representing specific taxes erroneously collected from its
tobacco products. The tax refund is being re-claimed by the Commissioner of Internal Revenue (Commissioner) in
this petition.
 
The following undisputed facts, summarized by the Court of Appeals, are quoted in the assailed Decision [1] dated 28
September 2004:
 
CAG.R. SP No. 80675
 
xxxx
 
Petitioner[2] is a domestic corporation duly organized and existing under and by virtue of
the laws of the Republic of the Philippines, with principal address at Fortune Avenue,
Parang, Marikina City.
 
Petitioner is the manufacturer/producer of, among others, the following cigarette brands,
with tax rate classification based on net retail price prescribed by Annex D to R.A. No. 4280, to wit:
 
Brand Tax Rate
Champion M 100 P1.00
Salem M 100 P1.00
Salem M King P1.00
Camel F King P1.00
Camel Lights Box 20s P1.00
Camel Filters Box 20s P1.00
Winston F Kings P5.00
Winston Lights P5.00
 
 Immediately prior to January 1, 1997, the above-mentioned cigarette brands were subject
to ad valorem tax pursuant to then Section 142 of the Tax Code of 1977, as amended. However,
on January 1, 1997, R.A. No. 8240 took effect whereby a shift from the ad valorem tax (AVT) system
to the specific tax system was made and subjecting the aforesaid cigarette brands to specific tax
under [S]ection 142 thereof, now renumbered as Sec. 145 of the Tax Code of 1997, pertinent
provisions of which are quoted thus:
 
 
 
 
 
 
Section 145. Cigars and Cigarettes-
 
(A) Cigars. There shall be levied, assessed and collected on cigars a tax of One peso
(P1.00) per cigar.
 
(B) Cigarettes packed by hand. There shall be levied, assessesed and collected on
cigarettes packed by hand a tax of Forty centavos (P0.40) per pack.
 
(C) Cigarettes packed by machine. There shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below:
 
(1) If the net retail price (excluding the excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax shall be Twelve (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value added tax) exceeds
Six pesos and Fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the
tax shall be Eight Pesos (P8.00) per pack.
 
(3) If the net retail price (excluding the excise tax and the value-added tax) is Five
pesos (P5.00) but does not exceed Six Pesos and fifty centavos (P6.50) per pack, the tax
shall be Five pesos (P5.00) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack;

Variants of existing brands of cigarettes which are introduced in the domestic

market after the effectivity of R.A. No. 8240 shall be taxed under the highest classification of
any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3) years from the
effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand
on October 1, 1996. Provided, however, that in cases were (sic) the excise tax rate imposed
in paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of
more than seventy percent (70%), for a brand of cigarette, the increase shall take effect in
two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof packed by

machine shall only be packed in twenties.
 The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3)
and (4) hereof, shall be increased by twelve percent (12%) on January 1, 2000.
(Emphasis supplied)

New brands shall be classified according to their current net retail price.

For the above purpose, net retail price shall mean the price at which the cigarette
is sold on retail in twenty (20) major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount intended to cover the applicable
excise tax and value-added tax. For brands which are marketed only outside Metro
[M]anila, the net retail price shall mean the price at which the cigarette is sold in five (5)
major supermarkets in the region excluding the amount intended to cover the applicable
excise tax and the value-added tax.

The classification of each brand of cigarettes based on its average retail price as
of October 1, 1996, as set forth in Annex D, shall remain in force until revised by Congress.

Variant of a brand shall refer to a brand on which a modifier is prefixed and/or

suffixed to the root name of the brand and/or a different brand which carries the same logo
or design of the existing brand.

To implement the provisions for a twelve percent (12%) increase of excise tax on, among
others, cigars and cigarettes packed by machines by January 1, 2000, the Secretary of Finance,
upon recommendation of the respondent Commissioner of Internal Revenue, issued Revenue
Regulations No. 17-99, dated December 16, 1999, which provides the increase on the applicable tax
rates on cigar and cigarettes as follows:

SECTION DESCRIPTION OF PRESENT NEW SPECIFIC

SPECIFIC TAX TAX RATE
ARTICLES RATE PRIOR TO EFFECTIVE JAN.
JAN. 1, 2000 1, 2000

145 (A) P1.00/cigar P1.12/cigar

  (B)Cigarettes packed    
by machine
   
(1) Net retail price
(excluding VAT and P12.00/pack P13.44/ pack
excise)
exceeds P10.00 per    
pack
P8.00/pack P8.96/pack
(2) Exceeds P10.00
per pack    

(3) Net retail price P5.00/pack P5.60/pack

(excluding VAT and
excise) is P5.00    
to P6.50 per pack
 (4) Net Retail Price    
(excluding VAT and
excise) is below P5.00 P1.00/pack P1.12/pack
per pack
   

Revenue Regulations No. 17-99 likewise provides in the last paragraph of Section 1
thereof, (t)hat the new specific tax rate for any existing brand of cigars, cigarettes packed
by machine, distilled spirits, wines and fermented liquor shall not be lower than the excise
tax that is actually being paid prior to January 1, 2000.

For the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all
brands manufactured and removed in the total amounts of P585,705,250.00.

On February 7, 2000, petitioner filed with respondents Appellate Division a claim for
refund or tax credit of its purportedly overpaid excise tax for the month of January 2000 in the
amount of P35,651,410.00

On June 21, 2001, petitioner filed with respondents Legal Service a letter dated June 20,
2001 reiterating all the claims for refund/tax credit of its overpaid excise taxes filed on various
dates, including the present claim for the month of January 2000 in the amount
of P35,651,410.00.

As there was no action on the part of the respondent, petitioner filed the instant petition
for review with this Court on December 11, 2001, in order to comply with the two-year period for
filing a claim for refund.

In his answer filed on January 16, 2002, respondent raised the following Special and
Affirmative Defenses;

4. Petitioners alleged claim for refund is subject to administrative routinary

investigation/examination by the Bureau;

5.             The amount of P35,651,410 being claimed by petitioner as alleged overpaid

excise tax for the month of January 2000 was not properly documented.

6.             In an action for tax refund, the burden of proof is on the taxpayer to establish its
right to refund, and failure to sustain the burden is fatal to its claim for
refund/credit.

7.             Petitioner must show that it has complied with the provisions of Section 204(C)
in relation [to] Section 229 of the Tax Code on the prescriptive period for claiming
tax refund/credit;

8.             Claims for refund are construed strictly against the claimant for the same
partake of tax exemption from taxation; and
 9.             The last paragraph of Section 1 of Revenue Regulation[s] [No.]17-99 is a valid
implementing regulation which has the force and effect of law.

CA G.R. SP No. 83165

The petition contains essentially similar facts, except that the said case questions the CTAs
December 4, 2003 decision in CTA Case No. 6612 granting respondents [3] claim for refund of the
amount of P355,385,920.00 representing erroneously or illegally collected specific taxes covering
the period January 1, 2002 to December 31, 2002, as well as its March 17, 2004 Resolution denying
a reconsideration thereof.

xxxx

In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of Tax Appeals reduced the issues to
be resolved into two as stipulated by the parties, to wit: (1) Whether or not the last paragraph of
Section 1 of Revenue Regulation[s] [No.] 17-99 is in accordance with the pertinent provisions of
Republic Act [No.] 8240, now incorporated in Section 145 of the Tax Code of 1997; and (2) Whether or
not petitioner is entitled to a refund of P35,651,410.00 as alleged overpaid excise tax for the month of
January 2000.

xxxx

Hence, the respondent CTA in its assailed October 21, 2002 [twin] Decisions[s] disposed in CTA Case
Nos. 6365 & 6383:

WHEREFORE, in view of the foregoing, the court finds the instant petition meritorious and in
accordance with law. Accordingly, respondent is hereby ORDERED to REFUND to
petitioner the amount ofP35,651.410.00 representing erroneously paid excise taxes
for the period January 1 to January 31, 2000.

SO ORDERED.

Herein petitioner sought reconsideration of the above-quoted decision. In [twin] resolution[s] [both]
dated July 15, 2003, the Tax Court, in an apparent change of heart, granted the petitioners
consolidated motions for reconsideration, thereby denying the respondents claim for refund.

However, on consolidated motions for reconsideration filed by the respondent in CTA Case Nos. 6363
and 6383, the July 15, 2002 resolution was set aside, and the Tax Court ruled, this time with a
semblance of finality, that the respondent is entitled to the refund claimed. Hence, in a resolution
dated November 4, 2003, the tax court reinstated its December 21, 2002 Decision and disposed as
follows:

WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are hereby
REINSTATED. Accordingly, respondent is hereby ORDERED to REFUND petitioner
the total amount of P680,387,025.00 representing erroneously paid excise taxes for
 the period January 1, 2000 to January 31, 2000 and February 1, 2000 to December
31, 2001.

SO ORDERED.

Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered decision in CTA Case No. 6612
granting the prayer for the refund of the amount of P355,385,920.00 representing overpaid excise tax
for the period covering January 1, 2002 to December 31, 2002. The tax court disposed of the case as
follows:

IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED. Accordingly, respondent

is hereby ORDERED to REFUND to petitioner the amount of P355,385,920.00
representing overpaid excise tax for the period covering January 1,
2002 to December 31, 2002.

SO ORDERED.

Petitioner sought reconsideration of the decision, but the same was denied in a Resolution
dated March 17, 2004.[4] (Emphasis supplied) (Citations omitted)

 
The Commissioner appealed the aforesaid decisions of the CTA. The petition questioning the grant of refund in the
amount of P680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas that assailing the grant of refund in
the amount of P355,385,920.00 was docketed as CA-G.R. SP No. 83165. The petitions were consolidated and
eventually denied by the Court of Appeals. The appellate court also denied reconsideration in its
Resolution[5] dated 1 March 2005.

In its Memorandum[6] 22 dated November 2006, filed on behalf of the Commissioner, the Office of the Solicitor
General (OSG) seeks to convince the Court that the literal interpretation given by the CTA and the Court of Appeals
of Section 145 of the Tax Code of 1997 (Tax Code) would lead to a lower tax imposable on 1 January 2000 than that
imposable during the transition period. Instead of an increase of 12% in the tax rate effective on 1 January 2000 as
allegedly mandated by the Tax Code, the appellate courts ruling would result in a significant decrease in the tax
rate by as much as 66%.

The OSG argues that Section 145 of the Tax Code admits of several interpretations, such as:

1.      That by January 1, 2000, the excise tax on cigarettes should be the higher tax imposed under
the specific tax system and the tax imposed under the ad valorem tax system plus the 12%
increase imposed by par. 5, Sec. 145 of the Tax Code;

2.      The increase of 12% starting on January 1, 2000 does not apply to the brands of cigarettes
listed under Annex D referred to in par. 8, Sec. 145 of the Tax Code;

3.      The 12% increment shall be computed based on the net retail price as indicated in par. C, sub-
par. (1)-(4), Sec. 145 of the Tax Code even if the resulting figure will be lower than the amount
already being paid at the end of the transition period. This is the interpretation followed by
both the CTA and the Court of Appeals.[7]

This being so, the interpretation which will give life to the legislative intent to raise revenue should govern, the
OSG stresses.
Finally, the OSG asserts that a tax refund is in the nature of a tax exemption and must, therefore, be construed
strictly against the taxpayer, such as Fortune Tobacco.

In its Memorandum[8] dated 10 November 2006, Fortune Tobacco argues that the CTA and the Court of Appeals
merely followed the letter of the law when they ruled that the basis for the 12% increase in the tax rate should be
the net retail price of the cigarettes in the market as outlined in paragraph C, sub paragraphs (1)-(4), Section 145 of
the Tax Code. The Commissioner allegedly has gone beyond his delegated rule-making power when he
promulgated, enforced and implemented Revenue Regulation No. 17-99, which effectively created a separate
classification for cigarettes based on the excise tax actually being paid prior to January 1, 2000.[9]

It should be mentioned at the outset that there is no dispute between the fact of payment of the taxes sought to be
refunded and the receipt thereof by the Bureau of Internal Revenue (BIR). There is also no question about the
mathematical accuracy of Fortune Tobaccos claim since the documentary evidence in support of the refund has not
been controverted by the revenue agency. Likewise, the claims have been made and the actions have been filed
within the two (2)-year prescriptive period provided under Section 229 of the Tax Code.

The power to tax is inherent in the State, such power being inherently legislative, based on the principle
that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of
the people; and where the people have laid the power, there it must remain and be exercised.[10]

This entire controversy revolves around the interplay between Section 145 of the Tax Code and Revenue
Regulation 17-99. The main issue is an inquiry into whether the revenue regulation has exceeded the allowable
limits of legislative delegation.

For ease of reference, Section 145 of the Tax Code is again reproduced in full as follows:

 
 
Section 145. Cigars and Cigarettes-
 
(A) Cigars.There shall be levied, assessed and collected on cigars a tax of One peso (P1.00)
per cigar.
 
(B). Cigarettes packed by hand.There shall be levied, assessed and collected on cigarettes
packed by hand a tax of Forty centavos (P0.40) per pack.
 
(C) Cigarettes packed by machine.There shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below:
 
(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten
pesos (P10.00) per pack, the tax shall be Twelve pesos (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six
pesos and Fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be
Eight Pesos (P8.00) per pack.
 
(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos
(P5.00) but does not exceed Six Pesos and fifty centavos (P6.50) per pack, the tax shall be Five
pesos (P5.00) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five
pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack;
 Variants of existing brands of cigarettes which are introduced in the domestic market after
the effectivity of R.A. No. 8240 shall be taxed under the highest classification of any variant of that
brand.

The excise tax from any brand of cigarettes within the next three (3) years from the
effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand
on October 1, 1996. Provided, however, That in cases where the excise tax rates imposed in
paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than
seventy percent (70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty
percent (50%) of the increase shall be effective in 1997 and one hundred percent (100%) of the
increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof packed by machine
shall only be packed in twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4)
hereof, shall be increased by twelve percent (12%) on January 1, 2000.

New brands shall be classified according to their current net retail price.

For the above purpose, net retail price shall mean the price at which the cigarette is sold
on retail in twenty (20) major supermarkets in Metro Manila (for brands of cigarettes marketed
nationally), excluding the amount intended to cover the applicable excise tax and value-added
tax. For brands which are marketed only outside Metro Manila, the net retail price shall mean the
price at which the cigarette is sold in five (5) major intended to cover the applicable excise tax and
the value-added tax.

The classification of each brand of cigarettes based on its average retail price as of October
1, 1996, as set forth in Annex D, shall remain in force until revised by Congress.

Variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to

the root name of the brand and/or a different brand which carries the same logo or design of the
existing brand.[11](Emphasis supplied)

Revenue Regulation 17-99, which was issued pursuant to the unquestioned authority of the Secretary of Finance to
promulgate rules and regulations for the effective implementation of the Tax Code,[12] interprets the above-quoted
provision and reflects the 12% increase in excise taxes in the following manner:

SECTION DESCRIPTION OF PRESENT NEW SPECIFIC

SPECIFIC TAX TAX RATE
ARTICLES RATES PRIOR TO Effective Jan.. 1,
JAN. 1, 2000 2000

145 (A) Cigars P1.00/cigar P1.12/cigar

  (B)Cigarettes packed    
by Machine
   
 (1) Net Retail Price P12.00/pack P13.44/pack
(excluding VAT and
Excise)    
exceeds P10.00 per
pack    

(2) Net Retail Price P8.00/pack P8.96/pack

(excluding VAT and
Excise) is P6.51 up    
to P10.00 per pack
P5.00/pack P5.60/pack
(3) Net Retail Price
(excluding VAT and    
excise) is P5.00
to P6.50 per pack    

(4) Net Retail Price P1.00/pack P1.12/pack

(excluding VAT and
excise) is below P5.00    
per pack)
 

This table reflects Section 145 of the Tax Code insofar as it mandates a 12% increase effective on 1 January 2000
based on the taxes indicated under paragraph C, sub-paragraph (1)-(4). However, Revenue Regulation No. 17-99
went further and added that [T]he new specific tax rate for any existing brand of cigars, cigarettes packed by
machine, distilled spirits, wines and fermented liquor shall not be lower than the excise tax that is actually being
paid prior to January 1, 2000.[13]

Parenthetically, Section 145 states that during the transition period, i.e., within the next three (3) years from the
effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not be lower than the tax due from each
brand on 1 October 1996. This qualification, however, is conspicuously absent as regards the 12% increase which
is to be applied on cigars and cigarettes packed by machine, among others, effective on 1 January 2000. Clearly and
unmistakably, Section 145 mandates a new rate of excise tax for cigarettes packed by machine due to the 12%
increase effective on 1 January 2000 without regard to whether the revenue collection starting from this period
may turn out to be lower than that collected prior to this date.

By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the
tax actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the
higher amount between the ad valorem tax being paid at the end of the three (3)-year transition period and the
specific tax under paragraph C, sub-paragraph (1)-(4), as increased by 12%a situation not supported by the plain
wording of Section 145 of the Tax Code.

This is not the first time that national revenue officials had ventured in the area of unauthorized administrative
legislation.
 
In Commissioner of Internal Revenue v. Reyes,[14] respondent was not informed in writing of the law and the
facts on which the assessment of estate taxes was made pursuant to Section 228 of the 1997 Tax Code, as amended
by Republic Act (R.A.) No. 8424. She was merely notified of the findings by the Commissioner, who had simply
relied upon the old provisions of the law and Revenue Regulation No. 12-85 which was based on the old provision
of the law. The Court held that in case of discrepancy between the law as amended and the implementing
regulation based on the old law, the former necessarily prevails. The law must still be followed, even though the
existing tax regulation at that time provided for a different procedure.[15]

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,[16] the tax authorities gave the term tax
credit in Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly disparate from what R.A. No. 7432
provides.  Their interpretation muddled up the intent of Congress to grant a mere discount privilege and not a sales
discount.  The Court, striking down the revenue regulation, held that an administrative agency issuing regulations
may not enlarge, alter or restrict the provisions of the law it administers, and it cannot engraft additional
requirements not contemplated by the legislature. The Court emphasized that tax administrators are not allowed
to expand or contract the legislative mandate and that the plain meaning rule or verba legis in statutory
construction should be applied such that where the words of a statute are clear, plain and free from ambiguity, it
must be given its literal meaning and applied without attempted interpretation.

As we have previously declared, rule-making power must be confined to details for regulating the mode or
proceedings in order to carry into effect the law as it has been enacted, and it cannot be extended to amend or
expand the statutory requirements or to embrace matters not covered by the statute. Administrative regulations
must always be in harmony with the provisions of the law because any resulting discrepancy between the two will
always be resolved in favor of the basic law.[17]

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,[18] Commissioner Jose Ong issued
Revenue Memorandum Order (RMO) No. 15-91, as well as the clarificatory Revenue Memorandum Circular (RMC)
43-91, imposing a 5% lending investors tax under the 1977 Tax Code, as amended by Executive Order (E.O.) No.
273, on pawnshops. The Commissioner anchored the imposition on the definition of lending investors provided in
the 1977 Tax Code which, according to him, was broad enough to include pawnshop operators. However, the Court
noted that pawnshops and lending investors were subjected to different tax treatments under the Tax Code prior
to its amendment by the executive order; that Congress never intended to treat pawnshops in the same way as
lending investors; and that the particularly involved section of the Tax Code explicitly subjected lending investors
and dealers in securities only to percentage tax. And so the Court affirmed the invalidity of the challenged circulars,
stressing that administrative issuances must not override, supplant or modify the law, but must remain consistent
with the law they intend to carry out.[19]

In Philippine Bank of Communications v. Commissioner of Internal Revenue,[20] the then acting Commissioner

issued RMC 7-85, changing the prescriptive period of two years to ten years for claims of excess quarterly income
tax payments, thereby creating a clear inconsistency with the provision of Section 230 of the 1977 Tax Code. The
Court nullified the circular, ruling that the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress. The Court held:

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in
the sense of more specific and less general interpretations of tax laws) which are issued from time
to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great
respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if
judicially found to be erroneous. Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the law they seek to apply and
implement.[21]
In Commissioner of Internal Revenue v. CA, et al.,[22] the central issue was the validity of RMO 4-87 which had
construed the amnesty coverage under E.O. No. 41 (1986) to include only assessments issued by the BIR after the
promulgation of the executive order on 22 August 1986 and not assessments made to that date. Resolving the issue
in the negative, the Court held:
 
x x x all such issuances must not override, but must remain consistent and in harmony with,
the law they seek to apply and implement. Administrative rules and regulations are intended to
carry out, neither to supplant nor to modify, the law.[23]
 
xxx
 
 If, as the Commissioner argues, Executive Order No. 41 had not been intended to include
1981-1985 tax liabilities already assessed (administratively) prior to 22 August 1986, the law could
have simply so provided in its exclusionary clauses. It did not. The conclusion is unavoidable, and it
is that the executive order has been designed to be in the nature of a general grant of tax amnesty
subject only to the cases specifically excepted by it.[24]
 
 
In the case at bar, the OSGs argument that by 1 January 2000, the excise tax on cigarettes should be the higher tax
imposed under the specific tax system and the tax imposed under the ad valorem tax system plus the 12% increase
imposed by paragraph 5, Section 145 of the Tax Code, is an unsuccessful attempt to justify what is clearly an
impermissible incursion into the limits of administrative legislation. Such an interpretation is not supported by the
clear language of the law and is obviously only meant to validate the OSGs thesis that Section 145 of the Tax Code is
ambiguous and admits of several interpretations.

The contention that the increase of 12% starting on 1 January 2000 does not apply to the brands of cigarettes
listed under Annex D is likewise unmeritorious, absurd even. Paragraph 8, Section 145 of the Tax Code simply
states that, [T]he classification of each brand of cigarettes based on its average net retail price as of October 1,
1996, as set forth in Annex D, shall remain in force until revised by Congress. This declaration certainly does not
lend itself to the interpretation given to it by the OSG. As plainly worded, the average net retail prices of the listed
brands under Annex D, which classify cigarettes according to their net retail price into low, medium or high,
obviously remain the bases for the application of the increase in excise tax rates effective on 1 January 2000.

The foregoing leads us to conclude that Revenue Regulation No. 17-99 is indeed indefensibly flawed. The
Commissioner cannot seek refuge in his claim that the purpose behind the passage of the Tax Code is to generate
additional revenues for the government. Revenue generation has undoubtedly been a major consideration in the
passage of the Tax Code. However, as borne by the legislative record, [25] the shift from the ad valorem system to the
specific tax system is likewise meant to promote fair competition among the players in the industries concerned, to
ensure an equitable distribution of the tax burden and to simplify tax administration by classifying cigarettes,
among others, into high, medium and low-priced based on their net retail price and accordingly graduating tax
rates.

At any rate, this advertence to the legislative record is merely gratuitous because, as we have held, the meaning of
the law is clear on its face and free from the ambiguities that the Commissioner imputes. We simply cannot
disregard the letter of the law on the pretext of pursuing its spirit.[26]
Finally, the Commissioners contention that a tax refund partakes the nature of a tax exemption does not
apply to the tax refund to which Fortune Tobacco is entitled. There is parity between tax refund and tax exemption
only when the former is based either on a tax exemption statute or a tax refund statute. Obviously, that is not the
situation here. Quite the contrary, Fortune Tobaccos claim for refund is premised on its erroneous payment of the
tax, or better still the governments exaction in the absence of a law.
 
Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation
must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken.
[27]
 The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be
conferred unless the terms under which it is granted clearly and distinctly show that such was the intention.[28]
 
A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule
of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an
exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and categorical
language. The taxpayer must show that the legislature intended to exempt him from the tax by words too plain to
be mistaken.[29]
Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal
principle which underlies all quasi-contracts abhorring a persons unjust enrichment at the expense of another.
[30]
 The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract, solutio indebiti, which
covers not only mistake in fact but also mistake in law.[31]
 
The Government is not exempt from the application of solutio indebiti.[32] Indeed, the taxpayer expects fair
dealing from the Government, and the latter has the duty to refund without any unreasonable delay what it has
erroneously collected.[33] If the State expects its taxpayers to observe fairness and honesty in paying their taxes, it
must hold itself against the same standard in refunding excess (or erroneous) payments of such taxes. It should not
unjustly enrich itself at the expense of taxpayers.[34] And so, given its essence, a claim for tax refund necessitates
only preponderance of evidence for its approbation like in any other ordinary civil case.
 
Under the Tax Code itself, apparently in recognition of the pervasive quasi-contract principle, a claim for
tax refund may be based on the following: (a) erroneously or illegally assessed or collected internal revenue taxes;
(b) penalties imposed without authority; and (c) any sum alleged to have been excessive or in any manner
wrongfully collected.[35]
 
What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the
similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be
construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose.Accordingly, the general rule of requiring adherence to the letter
in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be
extended by implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt,
such statutes are to be construed most strongly against the government and in favor of the subjects or citizens
because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly
import.[36] As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws.
[37]

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA G.R. SP No. 80675, dated 28
September 2004, and its Resolution, dated 1 March 2005, are AFFIRMED. No pronouncement as to costs.

SO ORDERED.

 
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 210551               June 30, 2015

JOSE J. FERRER, JR., Petitioner, 

vs.
CITY MAYOR HERBERT BAUTISTA, CITY COUNCIL OF QUEZON CITY, CITY TREASURER OF QUEZON CITY, and
CITY ASSESSOR OF QUEZON CITY, Respondents.

DECISION

PERALTA, J.:

Before this Court is a petition for certiorari under Rule 65 of the Rules of Court with prayer for the issuance of a
temporary restraining order (TRO) seeking to declare unconstitutional and illegal Ordinance Nos. SP-2095, S-2011
and SP-2235, S-2013 on the Socialized Housing Tax and Garbage Fee, respectively, which are being imposed by the
respondents.

The Case

On October 17, 2011,1 respondent Quezon City Council enacted Ordinance No. SP-2095, S-2011,2 or the Socialized
Housing Tax of Quezon City, Section 3 of which provides:

SECTION 3. IMPOSITION. A special assessment equivalent to one-half percent (0.5%) on the assessed value of land
in excess of One Hundred Thousand Pesos (Php100,000.00) shall be collected by the City Treasurer which shall
accrue to the Socialized Housing Programs of the Quezon City Government. The special assessment shall accrue to
the General Fund under a special account to be established for the purpose.

Effective for five (5) years, the Socialized Housing Tax ( SHT ) shall be utilized by the Quezon City Government for
the following projects: (a) land purchase/land banking; (b) improvement of current/existing socialized housing
facilities; (c) land development; (d) construction of core houses, sanitary cores, medium-rise buildings and other
similar structures; and (e) financing of public-private partners hip agreement of the Quezon City Government and
National Housing Authority ( NHA ) with the private sector.3

Under certain conditions, a tax credit shall be enjoyed by taxpayers regularly paying the special assessment:

SECTION 7. TAX CREDIT. Taxpayers dutifully paying the special assessment tax as imposed by this ordinance shall
enjoy a tax credit. The tax credit may be availed of only after five (5) years of continue[d] payment. Further, the
taxpayer availing this tax credit must be a taxpayer in good standing as certified by the City Treasurer and City
Assessor.

The tax credit to be granted shall be equivalent to the total amount of the special assessment paid by the property
owner, which shall be given as follows:

1. 6th year - 20%

 2. 7th year - 20%

3. 8th year - 20%

4. 9th year - 20%

5. 10th year - 20%

Furthermore, only the registered owners may avail of the tax credit and may not be continued by the subsequent
property owners even if they are buyers in good faith, heirs or possessor of a right in whatever legal capacity over
the subject property.4

On the other hand, Ordinance No. SP-2235, S-20135 was enacted on December 16, 2013 and took effect ten days
after when it was approved by respondent City Mayor.6 The proceeds collected from the garbage fees on
residential properties shall be deposited solely and exclusively in an earmarked special account under the general
fund to be utilized for garbage collections.7 Section 1 of the Ordinance se t forth the schedule and manner for the
collection of garbage fees:

SECTION 1. The City Government of Quezon City in conformity with and in relation to Republic Act No. 7160,
otherwise known as the Local Government Code of 1991 HEREBY IMPOSES THE FOLLOWING SCHEDULE AND
MANNER FOR THE ANNUAL COLLECTION OF GARBAGE FEES, AS FOLLOWS: On all domestic households in
Quezon City;

LAND AREA IMPOSABLE FEE

Less than 200 sq. m. PHP 100.00
201 sq. m. – 500 sq. m. PHP 200.00
501 sq. m. – 1,000 sq. m. PHP 300.00
1,001 sq. m. – 1,500 sq. m. PHP 400.00
1,501 sq. m. – 2,000 sq. m. or more PHP 500.00

On all condominium unit and socialized housing projects/units in Quezon City;

FLOOR AREA IMPOSABLE FEE

Less than 40 sq. m. PHP 25.00
41 sq. m. – 60 sq. m. PHP 50.00
61 sq. m. – 100 sq. m. PHP 75.00
101 sq. m. – 150 sq. m. PHP 100.00
151 sq. m. – 200 sq. [m.] or more PHP 200.00

On high-rise Condominium Units

a) High-rise Condominium – The Homeowners Association of high- rise condominiums shall pay the annual
garbage fee on the total size of the entire condominium and socialized Housing Unit and an additional
garbage fee shall be collected based on area occupied for every unit already so ld or being amortized.
 b) High-rise apartment units – Owners of high-rise apartment units shall pay the annual garbage fee on the
total lot size of the entire apartment and an additional garbage fee based on the schedule prescribed herein
for every unit occupied.

The collection of the garbage fee shall accrue on the first day of January and shall be paid simultaneously with the
payment of the real property tax, but not later than the first quarter installment.8 In case a household owner
refuses to pay, a penalty of 25% of the garbage fee due, plus an interest of 2% per month or a fraction thereof, shall
be charged.9

Petitioner alleges that he is a registered co-owner of a 371-square-meter residential property in Quezon City which
is covered by Transfer Certificate of Title (TCT ) No. 216288, and that, on January 7, 2014, he paid his realty tax
which already included the garbage fee in the sum of

Php100.00.10

The instant petition was filed on January 17, 2014. We issued a TRO on February 5, 2014, which enjoined the
enforcement of Ordinance Nos. SP-2095 and SP-2235 and required respondents to comment on the petition
without necessarily giving due course thereto.11

Respondents filed their Comment12 with urgent motion to dissolve the TRO on February 17, 2014. Thereafter,
petitioner filed a Reply and a Memorandum on March 3, 2014 and September 8, 2014, respectively.

Procedural Matters

A. Propriety of a Petition for Certiorari

Respondents are of the view that this petition for certiorari is improper since they are not tribunals, boards or
officers exercising judicial or quasi-judicial functions. Petitioner, however, counters that in enacting Ordinance
Nos. SP-2095 and SP-2235, the Quezon City Council exercised quasi-judicial function because the ordinances ruled
against the property owners who must pay the SHT and the garbage fee, exacting from them funds for basic
essential public services that they should not be held liable. Even if a Rule 65 petition is improper, petitioner still
asserts that this Court, in a number of cases like in Rosario v. Court of Appeals,13 has taken cognizance of an
improper remedy in the interest of justice.

We agree that respondents neither acted in any judicial or quasi-judicial capacity nor arrogated unto themselves
any judicial or quasi-judicial prerogatives.

A respondent is said to be exercising judicial function where he has the power to determine what the law is and
what the legal rights of the parties are, and then undertakes to determine these questions and adjudicate upon the
rights of the parties.

Quasi-judicial function, on the other hand, is "a term which applies to the actions, discretion, etc., of public
administrative officers or bodies … required to investigate facts or ascertain the existence of facts, hold hearings,
and draw conclusions from them as a basis for their official action and to exercise discretion of a judicial nature."

Before a tribunal, board, or officer may exercise judicial or quasi-judicial acts, it is necessary that there be a law
that gives rise to some specific rights of person s or property under which adverse claims to such rights are made,
and the controversy en suing therefrom is brought before a tribunal, board, or officer clothed with power and
authority to determine the law and adjudicate the respective rights of the contending parties.14

For a writ of certiorari to issue, the following requisites must concur: (1) it must be directed against a tribunal,
board, or officer exercising judicial or quasi-judicial functions; (2) the tribunal, board, or officer must have acted
without or in excess of jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction;
and (3) there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of law. The enactment
by the Quezon City Council of the assailed ordinances was done in the exercise of its legislative, not judicial or
quasi-judicial, function. Under Republic Act (R.A.) No.7160, or the Local Government Code of 1991 (LGC), local
legislative power shall be exercised by the Sangguniang Panlungsod for the city.15Said law likewise is specific in
providing that the power to impose a tax, fee, or charge , or to generate revenue shall be exercised by the
sanggunian of the local government unit concerned through an appropriate ordinance.16

Also, although the instant petition is styled as a petition for certiorari, it essentially seeks to declare the
unconstitutionality and illegality of the questioned ordinances. It, thus, partakes of the nature of a petition for
declaratory relief, over which this Court has only appellate, not original, jurisdiction.17

Despite these, a petition for declaratory relief may be treated as one for prohibition or mandamus, over which we
exercise original jurisdiction, in cases with far-reaching implications or one which raises transcendental issues or
questions that need to be resolved for the public good.18The judicial policy is that this Court will entertain direct
resort to it when the redress sought cannot be obtained in the proper courts or when exceptional and compelling
circumstances warrant availment of a remedy within and calling for the exercise of Our primary jurisdiction.19

Section 2, Rule 65 of the Rules of Court lay down under what circumstances a petition for prohibition may be filed:

SEC. 2. Petition for prohibition. - When the proceedings of any tribunal, corporation, board, officer or person,
whether exercising judicial, quasi-judicial or ministerial functions, are without or in excess of its or his jurisdiction,
or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal or any other
plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified
petition in the proper court, alleging the facts with certainty and praying that judgment be rendered commanding
the respondent to desist from further proceeding in the action or matter specified therein, or otherwise granting
such incidental reliefs as law and justice may require.

In a petition for prohibition against any tribunal, corporation, board, or person – whether exercising judicial, quasi-
judicial, or ministerial functions – who has acted without or in excess of jurisdiction or with grave abuse of
discretion, the petitioner prays that judgment be rendered, commanding the respondents to desist from further
proceeding in the action or matter specified in the petition. In this case, petitioner's primary intention is to prevent
respondents from implementing Ordinance Nos. SP-2095 and SP-2235. Obviously, the writ being sought is in the
nature of a prohibition, commanding desistance.

We consider that respondents City Mayor, City Treasurer, and City Assessor are performing ministerial functions. A
ministerial function is one that an officer or tribunal performs in the context of a given set of facts, in a prescribed
manner and without regard for the exercise of his or its own judgment, upon the propriety or impropriety of the
act done.20 Respondent Mayor, as chief executive of the city government, exercises such powers and performs such
duties and functions as provided for by the LGC and other laws.21 Particularly, he has the duty to ensure that all
taxes and other revenues of the city are collected, and that city funds are applied to the payment of expenses and
settlement of obligations of the city, in accordance with law or ordinance.22 On the other hand, under the LGC, all
local taxes, fees, and charges shall be collected by the provincial, city, municipal, or barangay treasurer, or their
duly-authorized deputies, while the assessor shall take charge, among others, of ensuring that all laws and policies
governing the appraisal and assessment of real properties for taxation purposes are properly executed.23 Anent the
SHT, the Department of Finance (DOF) Local Finance Circular No. 1-97, dated April 16, 1997, is more specific:

6.3 The Assessor’s office of the Identified LGU shall:

a. immediately undertake an inventory of lands within its jurisdiction which shall be subject
to the levy of the Social Housing Tax (SHT) by the local sanggunian concerned;

b. inform the affected registered owners of the effectivity of the SHT; a list of the lands and
registered owners shall also be posted in 3 conspicuous places in the city/municipality;
 c. furnish the Treasurer’s office and the local sanggunian concerned of the list of lands
affected;

6.4 The Treasurer’s office shall:

a. collect the Social Housing Tax on top of the Real Property Tax, SEF Tax and other special
assessments;

b. report to the DOF, thru the Bureau of Local Government Finance, and the Mayor’s office
the monthly collections on Social Housing Tax (SHT). An annual report should likewise be
submitted to the HUDCC on the total revenues raised during the year pursuant to Sec. 43,
R.A. 7279 and the manner in which the same was disbursed.

Petitioner has adduced special and important reasons as to why direct recourse to us should be allowed. Aside
from presenting a novel question of law, this case calls for immediate resolution since the challenged ordinances
adversely affect the property interests of all paying constituents of Quezon City. As well, this petition serves as a
test case for the guidance of other local government units (LGUs).Indeed, the petition at bar is of transcendental
importance warranting a relaxation of the doctrine of hierarchy of courts. In Social Justice Society (SJS) Officers, et
al. v. Lim ,24the Court cited the case of Senator Jaworski v. Phil. Amusement & Gaming Corp.,25 where We
ratiocinated:

Granting arguendo that the present action cannot be properly treated as a petition for prohibition, the
transcendental importance of the issues involved in this case warrants that we set aside the technical defects and
take primary jurisdiction over the petition at bar . x x x This is in accordance with the well entrenched principle
that rules of procedure are not inflexible tools designed to hinder or delay, but to facilitate and promote the
administration of justice. Their strict and rigid application, which would result in technicalities that tend to
frustrate, rather than promote substantial justice, must always be eschewed.26

B. Locus Standi of Petitioner

Respondents challenge petitioner’s legal standing to file this case on the ground that, in relation to Section 3 of
Ordinance No. SP-2095, petitioner failed to allege his ownership of a property that has an assessed value of more
than Php100,000.00 and, with respect to Ordinance No. SP-2335, by what standing or personality he filed the case
to nullify the same. According to respondents, the petition is not a class suit, and that, for not having specifically
alleged that petitioner filed the case as a taxpayer, it could only be surmised whether he is a party-in-interest who
stands to be directly benefited or injured by the judgment in this case.

It is a general rule that every action must be prosecuted or defended in the name of the real party-in-interest, who
stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit.

Jurisprudence defines interest as "material interest, an interest in issue and to be affected by the decree, as
distinguished from mere interest in the question involved, or a mere incidental interest. By real interest is meant a
present substantial interest, as distinguished from a mere expectancy or a future, contingent, subordinate, or
consequential interest." "To qualify a person to be a real party-in-interest in whose name an action must be
prosecuted, he must appear to be the present real owner of the right sought to be enforced."27

"Legal standing" or locus standi calls for more than just a generalized grievance.28 The concept has been define d as
a personal and substantial interest in the case such that the party has sustained or will sustain direct injury as a
result of the government al act that is being challenged.29 The gist of the question of standing is whether a party
alleges such personal stake in the outcome of the controversy as to assure that concrete adverseness which
sharpens the presentation of issues upon which the court depends for illumination of difficult constitutional
questions.30
A party challenging the constitutionality of a law, act, or statute must show "not only that the law is invalid, but
also that he has sustained or is in immediate, or imminent danger of sustaining some direct injury as a result of its
enforcement, and not merely that he suffers thereby in some indefinite way." It must be shown that he has been, or
is about to be, denied some right or privilege to which he is lawfully entitled, or that he is about to be subjected to
some burdens or penalties by reason of the statute complained of.31

Tested by the foregoing, petitioner in this case clearly has legal standing to file the petition. He is a real party-in-
interest to assail the constitutionality and legality of Ordinance Nos. SP-2095 and SP-2235 because respondents
did not dispute that he is a registered co-owner of a residential property in Quezon City an d that he paid property
tax which already included the SHT and the garbage fee. He has substantial right to seek a refund of the payments
he made and to stop future imposition. While he is a lone petitioner, his cause of action to declare the validity of the
subject ordinances is substantial and of paramount interest to similarly situated property owners in Quezon City.

C. Litis Pendentia

Respondents move for the dismissal of this petition on the ground of litis pendentia. They claim that, as early as
February 22, 2012, a case entitled Alliance of Quezon City Homeowners, Inc., et al., v. Hon. Herbert Bautista, et al. ,
docketed as Civil Case No. Q-12- 7-820, has been pending in the Quezon City Regional Trial Court, Branch 104,
which assails the legality of Ordinance No. SP-2095. Relying on City of Makati, et al. v. Municipality (now City) of
Taguig, et al.,32 respondents assert that there is substantial identity of parties between the two cases because
petitioner herein and plaintiffs in the civil case filed their respective cases as taxpayers of Quezon City.

For petitioner, however, respondents’ contention is untenable since he is not a party in Alliance and does not even
have the remotest identity or association with the plaintiffs in said civil case. Moreover, respondents’ arguments
would deprive this Court of its jurisdiction to determine the constitutionality of laws under Section 5, Article VIII of
the 1987 Constitution.33

Litis pendentia is a Latin term which literally means "a pending suit" and is variously referred to in some decisions
as lis pendens and auter action pendant.34 While it is normally connected with the control which the court has on a
property involved in a suit during the continuance proceedings, it is more interposed as a ground for the dismissal
of a civil action pending in court.35 In Film Development Council of the Philippines v. SM Prime Holdings, Inc.,36 We
elucidated:

Litis pendentia, as a ground for the dismissal of a civil action, refers to a situation where two actions are pending
between the same parties for the same cause of action, so that one of them becomes unnecessary and vexatious. It
is based on the policy against multiplicity of suit and authorizes a court to dismiss a case motu proprio.

xxxx

The requisites in order that an action may be dismissed on the ground of litis pendentia are: (a) the identity of
parties, or at least such as representing the same interest in both actions; (b) the identity of rights asserted and
relief prayed for, the relief being founded on the same facts, and (c) the identity of the two cases such that
judgment in one, regardless of which party is successful, would amount to res judicata in the other.

The underlying principle of litis pendentia is the theory that a party is not allowed to vex another more than once
regarding the same subject matter and for the same cause of action. This theory is founded on the public policy that
the same subject matter should not be the subject of controversy in courts more than once, in order that possible
conflicting judgments may be avoided for the sake of the stability of the rights and status of persons, and also to
avoid the costs and expenses incident to numerous suits.

Among the several tests resorted to in ascertaining whether two suits relate to a single or common cause of action
are: (1) whether the same evidence would support and sustain both the first and second causes of action; and (2)
whether the defenses in one case may be used to substantiate the complaint in the other.
The determination of whether there is an identity of causes of action for purposes of litis pendentia is inextricably
linked with that of res judicata , each constituting an element of the other. In either case, both relate to the sound
practice of including, in a single litigation, the disposition of all issues relating to a cause of action that is before a
court.37

There is substantial identity of the parties when there is a community of interest between a party in the first case
and a party in the second case albeit the latter was not impleaded in the first case.38Moreover, the fact that the
positions of the parties are reversed, i.e., the plaintiffs in the first case are the defendants in the second case or
vice-versa, does not negate the identity of parties for purposes of determining whether the case is dismissible on
the ground of litis pendentia .39

In this case, it is notable that respondents failed to attach any pleading connected with the alleged civil case
pending before the Quezon City trial court.1âwphi1 Granting that there is substantial identity of parties between
said case and this petition, dismissal on the ground of litis pendentia still cannot be had in view of the absence of
the second and third requisites. There is no way for us to determine whether both cases are based on the same set
of facts that require the presentation of the same evidence. Even if founded on the same set of facts, the rights
asserted and reliefs prayed for could be different. Moreover, there is no basis to rule that the two cases are
intimately related and/or intertwined with one another such that the judgment that may be rendered in one,
regardless of which party would be successful, would amount to res judicata in the other.

D. Failure to Exhaust Administrative Remedies

Respondents contend that petitioner failed to exhaust administrative remedies for his non-compliance with
Section 187 of the LGC, which mandates:

Section 187. Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures; Mandatory Public
Hearings. – The procedure for approval of local tax ordinances and revenue measures shall be in accordance with
the provisions of this Code: Provided, That public hearings shall be conducted for the purpose prior to the
enactment thereof: Provided, further, That any question on the constitutionality or legality of tax ordinances or
revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of
Justice who shall render a decision within sixty (60) days from the date of receipt of the appeal: Provided, however,
That such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and
payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the
decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved
party may file appropriate proceedings with a court of competent jurisdiction.

The provision, the constitutionality of which was sustained in Drilon v. Lim ,40 has been construed as
mandatory41 considering that –

A municipal tax ordinance empowers a local government unit to impose taxes. The power to tax is the most
effective instrument to raise needed revenues to finance and support the myriad activities of local government
units for the delivery of basic services essential to the promotion of the general welfare and enhancement of peace,
progress, and prosperity of the people. Consequently, any delay in implementing tax measures would be to the
detriment of the public. It is for this reason that protests over tax ordinances are required to be done within certain
time frames. x x x.42

The obligatory nature of Section 187 was underscored in Hagonoy Market Vendor Asso. v. Municipality of
Hagonoy:43

x x x [T]he timeframe fixed by law fo r parties to avail of their legal remedies before competent courts is not a
"mere technicality" that can be easily brushed aside. The periods stated in Section 187 of the Local Government
Code are mandatory. x x x Being its lifeblood, collection of revenues by the government is of paramount
importance. The funds for the operation of its agencies and provision of basic services to its inhabitants are largely
derived from its revenues and collections. Thus, it is essential that the validity of revenue measures is not left
uncertain for a considerable length of time. Hence, the law provided a time limit for an aggrieved party to assail the
legality of revenue measures and tax ordinances."44

Despite these cases, the Court, in Ongsuco, et al. v. Hon. Malones,45held that there was no need for petitioners
therein to exhaust administrative remedies before resorting to the courts, considering that there was only a pure
question of law, the parties did not dispute any factual matter on which they had to present evidence. Likewise, in
Cagayan Electric Power and Light Co., Inc. v. City of Cagayan de Oro,46 We relaxed the application of the rules in
view of the more substantive matters. For the same reasons, this petition is an exception to the general rule.

Substantive Issues

Petitioner asserts that the protection of real properties from informal settlers and the collection of garbage are
basic and essential duties and functions of the Quezon City Government. By imposing the SHT and the garbage fee,
the latter has shown a penchant and pattern to collect taxes to pay for public services that could be covered by its
revenues from taxes imposed on property, idle land, business, transfer, amusement, etc., as well as the Internal
Revenue Allotment (IRA ) from the National Government. For petitioner, it is noteworthy that respondents did not
raise the issue that the Quezon City Government is in dire financial state and desperately needs money to fund
housing for informal settlers and to pay for garbage collection. In fact, it has not denied that its revenue collection
in 2012 is in the sum of ₱13.69 billion.

Moreover, the imposition of the SHT and the garbage fee cannot be justified by the Quezon City Government as an
exercise of its power to create sources of income under Section 5, Article X of the 1987 Constitution.47 According to
petitioner, the constitutional provision is not a carte blanche for the LGU to tax everything under its territorial and
political jurisdiction as the provision itself admits of guidelines and limitations.

Petitioner further claims that the annual property tax is an ad valorem tax, a percentage of the assessed value of
the property, which is subject to revision every three (3) years in order to reflect an increase in the market value of
the property. The SHT and the garbage fee are actually increases in the property tax which are not based on the
assessed value of the property or its reassessment every three years; hence, in violation of Sections 232 and 233 of
the LGC.48

For their part, respondents relied on the presumption in favor of the constitutionality of Ordinance Nos. SP-2095
and SP-2235, invoking Victorias Milling Co., Inc. v. Municipality of Victorias, etc.,49 People v. Siton, et al.,50 and Hon.
Ermita v. Hon. Aldecoa-Delorino .51 They argue that the burden of establishing the invalidity of an ordinance rests
heavily upon the party challenging its constitutionality. They insist that the questioned ordinances are proper
exercises of police power similar to Telecom. & Broadcast Attys. of the Phils., Inc. v. COMELEC52 and Social Justice
Society (SJS), et al. v. Hon. Atienza, Jr.53 and that their enactment finds basis in the social justice principle enshrined
in Section 9,54 Article II of the 1987 Constitution.

As to the issue of publication, respondents argue that where the law provides for its own effectivity, publication in
the Official Gazette is not necessary so long as it is not punitive in character, citing Balbuna, et al. v. Hon. Secretary
of Education, et al.55 and Askay v. Cosalan .[56]] Thus, Ordinance No. SP-2095 took effect after its publication, while
Ordinance No. SP-2235 became effective after its approval on December 26, 2013.

Additionally, the parties articulate the following positions:

On the Socialized Housing Tax

Respondents emphasize that the SHT is pursuant to the social justice principle found in Sections 1 and 2, Article
XIII57 of the 1987 Constitution and Sections 2 (a)58 and 4359 of R.A. No. 7279, or the "Urban Development and
Housing Act of 1992 ( UDHA ).

Relying on Manila Race Horse Trainers Assn., Inc. v. De La Fuente,60and Victorias Milling Co., Inc. v. Municipality of
Victorias, etc.,61respondents assert that Ordinance No. SP-2095 applies equally to all real property owners without
discrimination. There is no way that the ordinance could violate the equal protection clause because real property
owners and informal settlers do not belong to the same class.

Ordinance No. SP-2095 is also not oppressive since the tax rate being imposed is consistent with the UDHA. While
the law authorizes LGUs to collect SHT on properties with an assessed value of more than ₱50,000.00, the
questioned ordinance only covers properties with an assessed value exceeding ₱100,000.00. As well, the ordinance
provides for a tax credit equivalent to the total amount of the special assessment paid by the property owner
beginning in the sixth (6th) year of the effectivity of the ordinance.

On the contrary, petitioner claims that the collection of the SHT is tantamount to a penalty imposed on real
property owners due to the failure of respondent Quezon City Mayor and Council to perform their duty to secure
and protect real property owners from informal settlers, thereby burdening them with the expenses to provide
funds for housing. For petitioner, the SHT cannot be viewed as a "charity" from real property owners since it is
forced, not voluntary.

Also, petitioner argues that the collection of the SHT is a kind of class legislation that violates the right of property
owners to equal protection of the laws since it favors informal settlers who occupy property not their own and pay
no taxes over law-abiding real property owners w ho pay income and realty taxes.

Petitioner further contends that respondents’ characterization of the SHT as "nothing more than an advance
payment on the real property tax" has no statutory basis. Allegedly, property tax cannot be collected before it is
due because, under the LGC, chartered cities are authorized to impose property tax based on the assessed value
and the general revision of assessment that is made every three (3) years.

As to the rationale of SHT stated in Ordinance No. SP-2095, which, in turn, was based on Section 43 of the UDHA,
petitioner asserts that there is no specific provision in the 1987 Constitution stating that the ownership and
enjoyment of property bear a social function. And even if there is, it is seriously doubtful and far-fetched that the
principle means that property owners should provide funds for the housing of informal settlers and for home site
development. Social justice and police power, petitioner believes, does not mean imposing a tax on one, or that one
has to give up something, for the benefit of another. At best, the principle that property ownership and enjoyment
bear a social function is but a reiteration of the Civil Law principle that property should not be enjoyed and abused
to the injury of other properties and the community, and that the use of the property may be restricted by police
power, the exercise of which is not involved in this case.

Finally, petitioner alleges that 6 Bistekvilles will be constructed out of the SHT collected. Bistek is the monicker of
respondent City Mayor. The Bistekvilles makes it clear, therefore, that politicians will take the credit for the tax
imposed on real property owners.

On the Garbage Fee

Respondents claim that Ordinance No. S-2235, which is an exercise of police power, collects on the average from
every household a garbage fee in the meager amount of thirty-three (33) centavos per day compared with the sum
of ₱1,659.83 that the Quezon City Government annually spends for every household for garbage collection and
waste management.62

In addition, there is no double taxation because the ordinance involves a fee. Even assuming that the garbage fee is
a tax, the same cannot be a direct duplicate tax as it is imposed on a different subject matter and is of a different
kind or character. Based on Villanueva, et al. v. City of Iloilo63 and Victorias Milling Co., Inc. v. Municipality of
Victorias, etc.,64 there is no "taxing twice" because the real property tax is imposed on ownership based on its
assessed value, while the garbage fee is required on the domestic household. The only reference to the property is
the determination of the applicable rate and the facility of collection.

Petitioner argues, however, that Ordinance No. S-2235 cannot be justified as an exercise of police power. The cases
of Calalang v. Williams,65 Patalinghug v. Court of Appeals,66 and Social Justice Society (SJS), et al. v. Hon. Atienza,
Jr.,67 which were cited by respondents, are inapplicable since the assailed ordinance is a revenue measure and does
not regulate the disposal or other aspect of garbage.

The subject ordinance, for petitioner, is discriminatory as it collects garbage fee only from domestic households
and not from restaurants, food courts, fast food chains, and other commercial dining places that spew garbage
much more than residential property owners.

Petitioner likewise contends that the imposition of garbage fee is tantamount to double taxation because garbage
collection is a basic and essential public service that should be paid out from property tax, business tax, transfer
tax, amusement tax, community tax certificate, other taxes, and the IRA of the Quezon City Government. To bolster
the claim, he states that the revenue collection of the Quezon City Government reached Php13.69 billion in 2012. A
small portion of said amount could be spent for garbage collection and other essential services.

It is further noted that the Quezon City Government already collects garbage fee under Section 4768 of R.A. No.
9003, or the Ecological Solid Waste Management Act of 2000, which authorizes LGUs to impose fees in amounts
sufficient to pay the costs of preparing, adopting, and implementing a solid waste management plan, and that LGUs
have access to the Solid Waste Management (SWM) Fund created under Section 4669 of the same law. Also,
according to petitioner, it is evident that Ordinance No. S2235 is inconsistent with R.A. No. 9003 for whil e the law
encourages segregation, composting, and recycling of waste, the ordinance only emphasizes the collection and
payment of garbage fee; while the law calls for an active involvement of the barangay in the collection, segregation,
and recycling of garbage, the ordinance skips such mandate. Lastly, in challenging the ordinance, petitioner avers
that the garbage fee was collected even if the required publication of its approval had not yet elapsed. He notes that
on January 7, 2014, he paid his realty tax which already included the garbage fee.

The Court's Ruling

Respondents correctly argued that an ordinance, as in every law, is presumed valid.

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial
inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in writing off an
ordinance as unreasonable unless the amount is so excessive as to be prohibitive, arbitrary, unreasonable,
oppressive, or confiscatory. A rule which has gained acceptance is that factors relevant to such an inquiry are the
municipal conditions as a whole and the nature of the business made subject to imposition.70

For an ordinance to be valid though, it must not only be within the corporate powers of the LGU to enact and must
be passed according to the procedure prescribed by law, it should also conform to the following requirements: (1)
not contrary to the Constitution or any statute; (2) not unfair or oppressive; (3) not partial or discriminatory; (4)
not prohibit but may regulate trade; (5) general and consistent with public policy; and (6) not unreasonable.71 As
jurisprudence indicates, the tests are divided into the formal (i.e., whether the ordinance was enacted within the
corporate powers of the LGU and whether it was passed in accordance with the procedure prescribed by law), and
the substantive ( i.e., involving inherent merit, like the conformity of the ordinance with the limitations under the
Constitution and the statutes, as well as with the requirements of fairness and reason, and its consistency with
public policy).72

An ordinance must pass muster under the test of constitutionality and the test of consistency with the prevailing
laws.73 If not, it is void.74

Ordinance should uphold the principle of the supremacy of the Constitution.75 As to conformity with existing
statutes,

Batangas CATV, Inc. v. Court of Appeals76 has this to say:

It is a fundamental principle that municipal ordinances are inferior in status and subordinate to the laws of the
state. An ordinance in conflict with a state law of general character and statewide application is universally held to
be invalid. The principle is frequently expressed in the declaration that municipal authorities, under a general
grant of power, cannot adopt ordinances which infringe the spirit of a state law or repugnant to the general policy
of the state. In every power to pass ordinances given to a municipality, there is an implied restriction that the
ordinances shall be consistent with the general law. In the language of Justice Isagani Cruz (ret.), this Court, in
Magtajas vs. Pryce Properties Corp., Inc., ruled that:

The rationale of the requirement that the ordinances should not contravene a statute is obvious. Municipal
governments are only agents of the national government. Local councils exercise only delegated legislative powers
conferred on them by Congress as the national lawmaking body. The delegate cannot be superior to the principal
or exercise powers higher than those of the latter. It is a heresy to suggest that the local government units can undo
the acts of Congress, from which they have derived their power in the first place, and negate by mere ordinance the
mandate of the statute.

Municipal corporations owe their origin to, and derive their powers and rights wholly from the legislature. It
breathes into them the breath of life, without which they cannot exist. As it creates, so it may destroy. As it may
destroy, it may abridge and control. Unless there is some constitutional limitation on the right, the legislature
might, by a single act, and if we can suppose it capable of so great a folly and so great a wrong, sweep from
existence all of the municipal corporations in the State, and the corporation could not prevent it. We know of no
limitation on the right so far as to the corporation themselves are concerned. They are so to phrase it, the mere
tenants at will of the legislature.

This basic relationship between the national legislature and the local government units has not been enfeebled by
the new provisions in the Constitution strengthening the policy of local autonomy. Without meaning to detract
from that policy, we here confirm that Congress retains control of the local government units although in
significantly reduced degree now than under our previous Constitutions. The power to create still includes the
power to destroy. The power to grant still includes the power to withhold or recall. True, there are certain notable
innovations in the Constitution, like the direct conferment on the local government units of the power to tax, which
cannot now be withdrawn by mere statute. By and large, however, the national legislature is still the principal of
the local government units, which cannot defy its will or modify or violate it.77

LGUs must be reminded that they merely form part of the whole; that the policy of ensuring the autonomy of local
governments was never intended by the drafters of the 1987 Constitution to create an imperium in imperio and
install an intra-sovereign political subdivision independent of a single sovereign state.78

"[M]unicipal corporations are bodies politic and corporate, created not only as local units of local self-government,
but as governmental agencies of the state. The legislature, by establishing a municipal corporation, does not divest
the State of any of its sovereignty; absolve itself from its right and duty to administer the public affairs of the entire
state; or divest itself of any power over the inhabitants of the district which it possesses before the charter was
granted."79

LGUs are able to legislate only by virtue of a valid delegation of legislative power from the national legislature; they
are mere agents vested with what is called the power of subordinate legislation.80 "Congress enacted the LGC as the
implementing law for the delegation to the various LGUs of the State’s great powers, namely: the police power, the
power of eminent domain, and the power of taxation. The LGC was fashioned to delineate the specific parameters
and limitations to be complied with by each LGU in the exercise of these delegated powers with the view of making
each LGU a fully functioning subdivision of the State subject to the constitutional and statutory limitations."81

Specifically, with regard to the power of taxation, it is indubitably the most effective instrument to raise needed
revenues in financing and supporting myriad activities of the LGUs for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people.82 As this
Court opined in National Power Corp. v. City of Cabanatuan:83

In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has
become a tool to realize social justice and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar objectives. Taxation assume s even greater
significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges
pursuant to Article X, Section 5 of the 1987 Constitution, viz: "Section 5. Each Local Government unit shall have the
power to create its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and
charges shall accrue exclusively to the local governments."

This paradigm shift results from the realization that genuine development can be achieved only by strengthening
local autonomy and promoting decentralization of governance. For a long time, the country’s highly centralized
government structure has bred a culture of dependence among local government leaders upon the national
leadership. It has also "dampened the spirit of initiative, innovation and imaginative resilience in matters of local
development on the part of local government leaders." The only way to shatter this culture of dependence is to give
the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own
sources for the purpose. To achieve this goal, Section 3 of Article X of the 1987 Constitution mandates Congress to
enact a local government code that will, consistent with the basic policy of local autonomy , set the guidelines and
limitations to this grant of taxing powers x x x84

Fairly recently, We also stated in Pelizloy Realty Corporation v. Province of Benguet85 that:

The rule governing the taxing power of provinces, cities, municipalities and barangays is summarized in Icard v.
City Council of Baguio :

It is settled that a municipal corporation unlike a sovereign state is clothed with no inherent power of taxation. The
charter or statute must plainly show an intent to confer that power or the municipality, cannot assume it. And the
power when granted is to be construed in strictissimi juris . Any doubt or ambiguity arising out of the term used in
granting that power must be resolved against the municipality. Inferences, implications, deductions – all these –
have no place in the interpretation of the taxing power of a municipal corporation. [Underscoring supplied]

xxxx

Per Section 5, Article X of the 1987 Constitution, "the power to tax is no longer vested exclusively on Congress;
local legislative bodies are now given direct authority to levy taxes, fees and other charges." Nevertheless, such
authority is "subject to such guidelines and limitations as the Congress may provide."

In conformity with Section 3, Article X of the 1987 Constitution, Congress enacted Republic Act No. 7160,
otherwise known as the Local Government Code of 1991. Book II of the LGC governs local taxation and fiscal
matters.86

Indeed, LGUs have no inherent power to tax except to the extent that such power might be delegated to them either
by the basic law or by the statute.87 "Under the now prevailing Constitution , where there is neither a grant nor a
prohibition by statute , the tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency
of local government units by directly granting them general and broad tax powers. Nevertheless, the fundamental
law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to
ensure that, while the local government units are being strengthened and made more autonomous , the legislature
must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable
impositions; (b) each local government unit will have its fair share of available resources; (c) the resources of the
national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just."88

Subject to the provisions of the LGC and consistent with the basic policy of local autonomy, every LGU is now
empowered and authorized to create its own sources of revenue and to levy taxes, fees, and charges which shall
accrue exclusively to the local government unit as well as to apply its resources and assets for productive,
developmental, or welfare purposes, in the exercise or furtherance of their governmental or proprietary powers
and functions.89 The relevant provisions of the LGC which establish the parameters of the taxing power of the LGUs
are as follows:
SECTION 130. Fundamental Principles. – The following fundamental principles shall govern th e exercise of the
taxing and other revenue-raising powers of local government units:

(a) Taxation shall be uniform in each local government unit;

(b) Taxes, fees, charges and other impositions shall:

(1) be equitable and based as far as practicable on the taxpayer’s ability to pay;

(2) be levied and collected only for public purposes;

(3) not be unjust, excessive, oppressive, or confiscatory;

(4) not be contrary to law, public policy, national economic policy, or in restraint of trade;

(c) The collection of local taxes, fees, charges and other impositions shall in no case be left to any private
person;

(d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be
subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition
unless otherwise specifically provided herein; and,

(e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation.

SECTION 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided
herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the
levy of the following:

(a) Income tax, except when levied on banks and other financial institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise
provided herein;

(d) Customs duties, registration fees of vessel and wharage on wharves, tonnage dues, and all other kinds
of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local
government unit concerned;

(e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the
territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise;

(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or
fishermen;

(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a
period of six (6) and four (4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes,
fees or charges on petroleum products;

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or
services except as otherwise provided herein;
 (j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of
passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;

(k) Taxes on premiums paid by way of reinsurance or retrocession;

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

(m) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided
herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly
registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the "Cooperative Code of the Philippines" respectively; and

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

SECTION 151. Scope of Taxing Powers. – Except as otherwise provided in this Code, the city, may levy the taxes,
fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and independent component cities shall accrue to them and
distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality
by not more than fifty percent (50%) except the rates of professional and amusement taxes.

SECTION 186. Power to Levy Other Taxes, Fees or Charges. – Local government units may exercise the power to
levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the
provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided, That the taxes,
fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy:
Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted without any prior
public hearing conducted for the purpose.

On the Socialized Housing Tax

Contrary to petitioner’s submission, the 1987 Constitution explicitly espouses the view that the use of property
bears a social function and that all economic agents shall contribute to the common good.90 The Court already
recognized this in Social Justice Society (SJS), et al. v. Hon. Atienza, Jr.:91

Property has not only an individual function, insofar as it has to provide for the needs of the owner, but also a
social function insofar as it has to provide for the needs of the other members of society. The principle is this:

Police power proceeds from the principle that every holder of property, however absolute and unqualified may be
his title, holds it under the implied liability that his use of it shall not be injurious to the equal enjoyment of others
having an equal right to the enjoyment of their property, no r injurious to the right of the community. Rights of
property, like all other social and conventional rights, are subject to reasonable limitations in their enjoyment as
shall prevent them from being injurious, and to such reasonable restraints and regulations established by law as
the legislature, under the governing an d controlling power vested in them by the constitution, may think
necessary and expedient.92

Police power, which flows from the recognition that salus populi est suprema lex (the welfare of the people is the
supreme law), is the plenary power vested in the legislature to make statutes and ordinances to promote the
health, morals, peace, education, good order or safety and general welfare of the people.93 Property rights of
individuals may be subjected to restraints and burdens in order to fulfill the objectives of the government in the
exercise of police power. 94 In this jurisdiction, it is well-entrenched that taxation may be made the implement of
the state’s police power.95

Ordinance No. SP-2095 imposes a Socialized Housing Tax equivalent to 0.5% on the assessed value of land in
excess of Php100,000.00. This special assessment is the same tax referred to in R.A. No. 7279 or the UDHA.96 The
SHT is one of the sources of funds for urban development and housing program.97 Section 43 of the law provides:

Sec. 43. Socialized Housing Tax . – Consistent with the constitutional principle that the ownership and enjoyment of
property bear a social function and to raise funds for the Program, all local government units are hereby
authorized to impose an additional one-half percent (0.5%) tax on the assessed value of all lands in urban areas in
excess of Fifty thousand pesos (₱50,000.00).

The rationale of the SHT is found in the preambular clauses of the subject ordinance, to wit:

WHEREAS, the imposition of additional tax is intended to provide the City Government with sufficient funds to
initiate, implement and undertake Socialized Housing Projects and other related preliminary activities;

WHEREAS, the imposition of 0.5% tax will benefit the Socialized Housing Programs and Projects of the City
Government, specifically the marginalized sector through the acquisition of properties for human settlements;

WHEREAS, the removal of the urban blight will definitely increase fair market value of properties in the city[.]

The above-quoted are consistent with the UDHA, which the LGUs are charged to implement in their respective
localities in coordination with the Housing and Urban Development Coordinating Council, the national housing
agencies, the Presidential Commission for the Urban Poor, the private sector, and other non-government
organizations.98 It is the declared policy of the State to undertake a comprehensive and continuing urban
development and housing program that shall, among others, uplift the conditions of the underprivileged and
homeless citizens in urban areas and in resettlement areas, and provide for the rational use and development of
urban land in order to bring a bout, among others, reduction in urban dysfunctions, particularly those that
adversely affect public health, safety and ecology, and access to land and housing by the underprivileged and
homeless citizens.99 Urban renewal and resettlement shall include the rehabilitation and development of blighted
and slum areas100 and the resettlement of program beneficiaries in accordance with the provisions of the
UDHA.101 Under the UDHA, socialized housing102 shall be the primary strategy in providing shelter for the
underprivileged and homeless.103 The LGU or the NHA, in cooperation with the private developers and concerned
agencies, shall provide socialized housing or re settlement areas with basic services and facilities such as potable
water, power and electricity, and an adequate power distribution system, sewerage facilities, and an efficient and
adequate solid waste disposal system; and access to primary roads and transportation facilities.104 The provisions
for health, education, communications, security, recreation, relief and welfare shall also be planned and be given
priority for implementation by the LGU and concerned agencies in cooperation with the private sector and the
beneficiaries themselves.105

Moreover, within two years from the effectivity of the UDHA, the LGUs, in coordination with the NHA, are directed
to implement the relocation and resettlement of persons living in danger areas such as esteros , railroad tracks,
garbage dumps, riverbanks, shorelines, waterways, and other public places like sidewalks, roads, parks, and
playgrounds.106 In coordination with the NHA, the LG Us shall provide relocation or resettlement sites with basic
services and facilities and access to employment and livelihood opportunities sufficient to meet the basic needs of
the affected families.107

Clearly, the SHT charged by the Quezon City Government is a tax which is within its power to impose. Aside from
the specific authority vested by Section 43 of the UDHA, cities are allowed to exercise such other powers and
discharge such other functions and responsibilities as are necessary, appropriate, or incidental to efficient and
effective provision of the basic services and facilities which include, among others, programs and projects for low-
cost housing and other mass dwellings.108 The collections made accrue to its socialized housing programs and
projects.
The tax is not a pure exercise of taxing power or merely to raise revenue; it is levied with a regulatory purpose. The
levy is primarily in the exercise of the police power for the general welfare of the entire city. It is greatly imbued
with public interest. Removing slum areas in Quezon City is not only beneficial to the underprivileged and
homeless constituents but advantageous to the real property owners as well. The situation will improve the value
of the their property investments, fully enjoying the same in view of an orderly, secure, and safe community, and
will enhance the quality of life of the poor, making them law-abiding constituents and better consumers of business
products.

Though broad and far-reaching, police power is subordinate to constitutional limitations and is subject to the
requirement that its exercise must be reasonable and for the public good.109 In the words of City of Manila v. Hon.
Laguio, Jr.:110

The police power granted to local government units must always be exercised with utmost observance of the rights
of the people to due process and equal protection of the law. Such power cannot be exercised whimsically,
arbitrarily or despotically as its exercise is subject to a qualification, limitation or restriction demanded by the
respect and regard due to the prescription of the fundamental law, particularly those forming part of the Bill of
Rights. Individual rights, it bears emphasis, may be adversely affected only to the extent that may fairly be required
by the legitimate demands of public interest or public welfare. Due process requires the intrinsic validity of the law
in interfering with the rights of the person to his life, liberty and property.

xxxx

To successfully invoke the exercise of police power as the rationale for the enactment of the Ordinance, and to free
it from the imputation of constitutional infirmity, not only must it appear that the interests of the public generally,
as distinguished from those of a particular class, require an interference with private rights, but the means adopted
must be reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.
It must be evident that no other alternative for the accomplishment of the purpose less intrusive of private rights
can work. A reasonable relation must exist between the purposes of the police measure and the means employed
for its accomplishment, for even under the guise of protecting the public interest, personal rights and those
pertaining to private property will not be permitted to be arbitrarily invaded.

Lacking a concurrence of these two requisites, the police measure shall be struck down as an arbitrary intrusion
into private rights – a violation of the due process clause.111

As with the State, LGUs may be considered as having properly exercised their police power only if there is a lawful
subject and a lawful method or, to be precise, if the following requisites are met: (1) the interests of the public
generally, as distinguished from those of a particular class, require its exercise and (2) the mean s employed are
reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.112

In this case, petitioner argues that the SHT is a penalty imposed on real property owners because it burdens them
with expenses to provide funds for the housing of informal settlers, and that it is a class legislation since it favors
the latter who occupy properties which is not their own and pay no taxes.

We disagree.

Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights
conferred and responsibilities imposed.113 The guarantee means that no person or class of persons shall be denied
the same protection of laws which is enjoyed by other persons or other classes in like circumstances.114 Similar
subjects should not be treated differently so as to give undue favor to some and unjustly discriminate against
others.115 The law may, therefore, treat and regulate one class differently from another class provided there are
real and substantial differences to distinguish one class from another.116

An ordinance based on reasonable classification does not violate the constitutional guaranty of the equal
protection of the law. The requirements for a valid and reasonable classification are: (1) it must rest on substantial
distinctions; (2) it must be germane to the purpose of the law; (3) it must not be limited to existing conditions only;
and (4) it must apply equally to all members of the same class.117For the purpose of undertaking a comprehensive
and continuing urban development and housing program, the disparities between a real property owner and an
informal settler as two distinct classes are too obvious and need not be discussed at length. The differentiation
conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the
Constitution. Notably, the public purpose of a tax may legally exist even if the motive which impelled the legislature
to impose the tax was to favor one over another.118 It is inherent in the power to tax that a State is free to select the
subjects of taxation.119Inequities which result from a singling out of one particular class for taxation or exemption
infringe no constitutional limitation.120

Further, the reasonableness of Ordinance No. SP-2095 cannot be disputed. It is not confiscatory or oppressive since
the tax being imposed therein is below what the UDHA actually allows. As pointed out by respondents, while the
law authorizes LGUs to collect SHT on lands with an assessed value of more than ₱50,000.00, the questioned
ordinance only covers lands with an assessed value exceeding ₱100,000.00. Even better, on certain conditions, the
ordinance grants a tax credit equivalent to the total amount of the special assessment paid beginning in the sixth
(6th) year of its effectivity. Far from being obnoxious, the provisions of the subject ordinance are fair and just.

On the Garbage Fee

In the United States of America, it has been held that the authority of a municipality to regulate garbage falls within
its police power to protect public health, safety, and welfare.121 As opined, the purposes and policy underpinnings
of the police power to regulate the collection and disposal of solid waste are: (1) to preserve and protect the public
health and welfare as well as the environment by minimizing or eliminating a source of disease and preventing and
abating nuisances; and (2) to defray costs and ensure financial stability of the system for the benefit of the entire
community, with the sum of all charges marshalled and designed to pay for the expense of a systemic refuse
disposal scheme.122

Ordinances regulating waste removal carry a strong presumption of

validity.123 Not surprisingly, the overwhelming majority of U.S. cases addressing a city's authority to impose
mandatory garbage service and fees have upheld the ordinances against constitutional and statutory challenges.124

A municipality has an affirmative duty to supervise and control the collection of garbage within its corporate
limits.125The LGC specifically assigns the responsibility of regulation and oversight of solid waste to local governing
bodies because the Legislature determined that such bodies were in the best position to develop efficient waste
management programs.126 To impose on local governments the responsibility to regulate solid waste but not grant
them the authority necessary to fulfill the same would lead to an absurd result."127 As held in one U.S. case:

x x x When a municipality has general authority to regulate a particular subject matter, the manner and means of
exercising those powers, where not specifically prescribed by the legislature, are left to the discretion of the
municipal authorities. x x x Leaving the manner of exercising municipal powers to the discretion of municipal
authorities "implies a range of reasonableness within which a municipality's exercise of discretion will not be
interfered with or upset by the judiciary."128

In this jurisdiction, pursuant to Section 16 of the LGC and in the proper exercise of its corporate powers under
Section 22 of the same, the Sangguniang Panlungsod of Quezon City, like other local legislative bodies, is
empowered to enact ordinances, approve resolutions, and appropriate funds for the genera l welfare of the city
and its inhabitants.129Section 16 of the LGC provides:

SECTION 16. General Welfare . – Every local government unit shall exercise the powers expressly granted, those
necessarily implied therefrom, as well as powers necessary, appropriate, or incidental for its efficient and effective
governance, and those which are essential to the promotion of the general welfare. Within their respective
territorial jurisdictions, local government units shall ensure and support, among other things, the preservation and
enrichment of culture, promote health and safety, enhance the right of the people to a balanced ecology, encourage
and support the development of appropriate and self-reliant scientific and technological capabilities, improve
public morals, enhance economic prosperity and social justice, promote full employment among their residents,
maintain peace and order, and preserve the comfort and convenience of their inhabitants.

The general welfare clause is the delegation in statutory form of the police power of the State to LGUs.130 The
provisions related thereto are liberally interpreted to give more powers to LGUs in accelerating economic
development and upgrading the quality of life for the people in the community.131 Wide discretion is vested on the
legislative authority to determine not only what the interests of the public require but also what measures are
necessary for the protection of such interests since the Sanggunian is in the best position to determine the needs of
its constituents.132

One of the operative principles of decentralization is that, subject to the provisions of the LGC and national policies,
the LGUs shall share with the national government the responsibility in the management and maintenance of
ecological balance within their territorial jurisdiction.133 In this regard, cities are allowed to exercise such other
powers and discharge such other functions and responsibilities as are necessary, appropriate, or incidental to
efficient and effective provision of the basic services and facilities which include, among others, solid waste
disposal system or environmental management system and services or facilities related to general hygiene and
sanitation.134R.A. No. 9003, or the Ecological Solid Waste Management Act of 2000,135 affirms this authority as it
expresses that the LGUs shall be primarily responsible for the implementation and enforcement of its provisions
within their respective jurisdictions while establishing a cooperative effort among the national government, other
local government units, non-government organizations, and the private sector.136

Necessarily, LGUs are statutorily sanctioned to impose and collect such reasonable fees and charges for services
rendered.137 "Charges" refer to pecuniary liability, as rents or fees against persons or property, while "Fee" means a
charge fixed by law or ordinance for the regulation or inspection of a business or activity.138

The fee imposed for garbage collections under Ordinance No. SP-2235 is a charge fixed for the regulation of an
activity. The basis for this could be discerned from the foreword of said Ordinance, to wit:

WHEREAS, Quezon City being the largest and premiere city in the Philippines in terms of population and urban
geographical areas, apart from being competent and efficient in the delivery of public service, apparently requires
a big budgetary allocation in order to address the problems relative and connected to the prompt and efficient
delivery of basic services such as the effective system of waste management, public information programs on
proper garb age and proper waste disposal, including the imposition of waste regulatory measures;

WHEREAS, to help augment the funds to be spent for the city’s waste management system, the City Government
through the Sangguniang Panlungsod deems it necessary to impose a schedule of reasonable fees or charges for the
garbage collection services for residential (domestic household) that it renders to the public.

Certainly, as opposed to petitioner’s opinion, the garbage fee is not a tax. In Smart Communications, Inc. v.
Municipality of Malvar, Batangas ,139the Court had the occasion to distinguish these two concepts:

In Progressive Development Corporation v. Quezon City, the Court declared that "if the generating of revenue is the
primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax."

In Victorias Milling Co., Inc. v. Municipality of Victorias, the Court reiterated that the purpose and effect of the
imposition determine whether it is a tax or a fee, and that the lack of any standards for such imposition gives the
presumption that the same is a tax.

We accordingly say that the designation given by the municipal authorities does not decide whether the imposition
is properly a license tax or a license fee.1awp++i1 The determining factors are the purpose and effect of the
imposition as may be apparent from the provisions of the ordinance. Thus, "[w]hen no police inspection,
supervision, or regulation is provided, nor any standard set for the applicant to establish, or that he agrees to attain
or maintain, but any and all persons engaged in the business designated, without qualification or hindrance, may
come, and a license on payment of the stipulated sum will issue, to do business, subject to no prescribed rule of
conduct and under no guardian eye, but according to the unrestrained judgment or fancy of the applicant and
licensee, the presumption is strong that the power of taxation, and not the police power, is being exercised."

In Georgia, U.S.A., assessments for garbage collection services have been consistently treated as a fee and not a
tax.140

In another U.S. case,141 the garbage fee was considered as a "service charge" rather than a tax as it was actually a fee
for a service given by the city which had previously been provided at no cost to its citizens.

Hence, not being a tax, the contention that the garbage fee under Ordinance No. SP-2235 violates the rule on
double taxation142 must necessarily fail.

Nonetheless, although a special charge, tax, or assessment may be imposed by a municipal corporation, it must be
reasonably commensurate to the cost of providing the garbage service.143 To pass judicial scrutiny, a regulatory fee
must not produce revenue in excess of the cost of the regulation because such fee will be construed as an illegal tax
when the revenue generated by the regulation exceeds the cost of the regulation.144

Petitioner argues that the Quezon City Government already collects garbage fee under Section 47 of R.A. No. 9003,
which authorizes LGUs to impose fees in amounts sufficient to pay the costs of preparing, adopting, and
implementing a solid waste management plan, and that it has access to the SWM Fund under Section 46 of the
same law. Moreover, Ordinance No. S-2235 is inconsistent with R.A. No. 9003, because the ordinance emphasizes
the collection and payment of garbage fee with no concern for segregation, composting and recycling of wastes. It
also skips the mandate of the law calling for the active involvement of the barangay in the collection, segregation,
and recycling of garbage.

We now turn to the pertinent provisions of R.A. No. 9003.

Under R.A. No. 9003, it is the declared policy of the State to adopt a systematic, comprehensive and ecological solid
waste management program which shall, among others, ensure the proper segregation, collection, transport,
storage, treatment and disposal of solid waste through the formulation and adoption of the best environmental
practices in ecological waste management.145 The law provides that segregation and collection of solid waste shall
be conducted at the barangay level, specifically for biodegradable, compostable and reusable wastes, while the
collection of non-recyclable materials and special wastes shall be the responsibility of the municipality or
city.146Mandatory segregation of solid wastes shall primarily be conducted at the source, to include household,
institutional, industrial, commercial and agricultural sources.147 Segregation at source refers to a solid waste
management practice of separating, at the point of origin, different materials found in soli d waste in order to
promote recycling and re-use of resources and to reduce the volume of waste for collection and disposal.148 Based
on Rule XVII of the Department of Environment and Natural Resources (DENR) Administrative Order No. 2001-34,
Series of 2001,149which is the Implementing Rules and Regulations ( IRR ) of R.A. No. 9003, barangays shall be
responsible for the collection, segregation, and recycling of biodegradable, recyclable , compostable and reusable
wastes.150

For the purpose, a Materials Recovery Facility (MRF), which shall receive biodegradable wastes for composting
and mixed non-biodegradable wastes for final segregation, re-use and recycling, is to be established in every
barangay or cluster of barangays.151

According to R.A. 9003, an LGU, through its local solid waste management board, is mandated by law to prepare a
10-year solid waste management plan consistent with the National Solid Waste Management Framework.152 The
plan shall be for the re-use, recycling and composting of wastes generated in its jurisdiction; ensure the efficient
management of solid waste generated within its jurisdiction; and place primary emphasis on implementation of all
feasible re-use, recycling, and composting programs while identifying the amount of landfill and transformation
capacity that will be needed for solid waste which cannot be re-used, recycled, or composted.153 One of the
components of the so lid waste management plan is source reduction:
(e) Source reduction – The source reduction component shall include a program and implementation schedule
which shows the methods by which the LGU will, in combination with the recycling and composting components,
reduce a sufficient amount of solid waste disposed of in accordance with the diversion requirements of Section 20.

The source reduction component shall describe the following:

(1) strategies in reducing the volume of solid waste generated at source;

(2) measures for implementing such strategies and the resources necessary to carry out such activities;

(3) other appropriate waste reduction technologies that may also be considered, provide d that such
technologies conform with the standards set pursuant to this Act;

(4) the types of wastes to be reduced pursuant to Section 15 of this Act;

(5) the methods that the LGU will use to determine the categories of solid wastes to be diverted from
disposal at a disposal facility through re-use , recycling and composting; and

(6) new facilities and of expansion of existing facilities which will be needed to implement re-use, recycling
and composting.

The LGU source reduction component shall include the evaluation and identification of rate structures and fees for
the purpose of reducing the amount of waste generated, and other source reduction strategies, including but not
limited to, program s and economic incentives provided under Sec. 45 of this Act to reduce the use of non-
recyclable materials, replace disposable materials and products with reusable materials and products, reduce
packaging, and increase the efficiency of the use of paper, cardboard, glass, metal, and other materials. The waste
reduction activities of the community shall al so take into account, among others, local capability, economic
viability, technical requirements, social concerns, disposition of residual waste and environmental impact:
Provided , That, projection of future facilities needed and estimated cost shall be incorporated in the plan. x x x154

The solid waste management pl an shall also include an implementation schedule for solid waste diversion:

SEC. 20. Establishing Mandatory Solid Waste Diversion. – Each LGU plan shall include an implementation schedule
which shows that within five (5) years after the effectivity of this Act, the LGU shall divert at least 25% of all solid
waste from waste disposal facilities through re-use, recycling, and composting activities and other resource
recovery activities: Provided , That the waste diversion goals shall be increased every three (3) years thereafter:
Provided , further, That nothing in this Section prohibits a local government unit from implementing re-use,
recycling, and composting activities designed to exceed the goal.

The baseline for the twenty-five percent (25%) shall be derived from the waste characterization result155 that each
LGU is mandated to undertake.156In accordance with Section 46 of R.A. No. 9003, the LGUs are entitled to avail of
the SWM Fund on the basis of their approved solid waste management plan. Aside from this, they may also impose
SWM Fees under Section 47 of the law, which states:

SEC. 47. Authority to Collect Solid Waste Management Fees – The local government unit shall impose fees in
amounts sufficient to pay the costs of preparing, adopting, and implementing a solid waste management plan
prepared pursuant to this Act. The fees shall be based on the following minimum factors:

(a) types of solid waste;

(b) amount/volume of waste; and

(c) distance of the transfer station to the waste management facility.

The fees shall be used to pay the actual costs incurred by the LGU in collecting the local fees. In determining the
amounts of the fees, an LGU shall include only those costs directly related to the adoption and implementation of
the plan and the setting and collection of the local fees.

Rule XVII of the IRR of R.A. No. 9003 sets forth the details:

Section 1. Power to Collect Solid Waste Management Fees . – The Local SWM Board/Local SWM Cluster Board shall
impose fees on the SWM services provided for by the LGU and/or any authorized organization or unit. In
determining the amounts of the fees, a Local SWM Board/Local SWM Cluster Board shall include only those costs
directly related to the adoption and implementation of the SWM Plan and the setting and collection of the local
fees. This power to impose fees may be ceded to the private sector and civil society groups which have been duly
accredited by the Local SWM Boar d/Local SWM Cluster Board; provided, the SWM fees shall be covered by a
Contract or Memorandum of Agreement between the respective boa rd and the private sector or civil society
group.

The fees shall pay for the costs of preparing, adopting and implementing a SWM Plan prepared pursuant to the Act.
Further, the fees shall also be used to pay the actual costs incurred in collecting the local fees and for project
sustainability.

Section 2. Basis of SWM Service Fees

Reasonable SWM service fees shall be computed based on but not limited to the following minimum factors:

a) Types of solid waste to include special waste

b) amount/volume of waste

c) distance of the transfer station to the waste management facility

d) capacity or type of LGU constituency

e) cost of construction

f) cost of management

g) type of technology

Section 3. Collection of Fees. – Fees may be collected corresponding to the following levels:

a) Barangay – The Barangay may impose fees for collection and segregation of biodegradable, compostable
and reusable wastes from households, commerce, other sources of domestic wastes, and for the use of
Barangay MRFs. The computation of the fees shall be established by the respective SWM boards. The
manner of collection of the fees shall be dependent on the style of administration of respective Barangay
Councils. However, all transactions shall follow the Commission on Audit rules on collection of fees.

b) Municipality – The municipal and city councils may impose fees on the barangay MRFs for the collection
and transport of non-recyclable and special wastes and for the disposal of these into the sanitary landfill.
The level and procedure for exacting fees shall be defined by the Local SWM Board/Local SWM Cluster
Board and supported by LGU ordinances; however, payments shall be consistent with the accounting
system of government.

c) Private Sector/Civil Society Group – On the basis of the stipulations of contract or Memorandum of
Agreement, the private sector or civil society group shall impose fees for collection, transport and tipping in
their SLFs. Receipts and invoices shall be issued to the paying public or to the government.
From the afore-quoted provisions, it is clear that the authority of a municipality or city to impose fees is limited to
the collection and transport of non-recyclable and special wastes and for the disposal of these into the sanitary
landfill. Barangays, on the other hand, have the authority to impose fees for the collection and segregation of
biodegradable, compostable and reusable wastes from households, commerce, other sources of domestic wastes,
and for the use of barangay MRFs. This is but consistent with

Section 10 of R.A. No. 9003 directing that segregation and collection of biodegradable, compostable and reusable
wastes shall be conducted at the barangay level, while the collection of non-recyclable materials and special wastes
shall be the responsibility of the municipality or city.

In this case, the alleged bases of Ordinance No. S-2235 in imposing the garbage fee is the volume of waste currently
generated by each person in Quezon City, which purportedly stands at 0.66 kilogram per day, and the increasing
trend of waste generation for the past three years.157 Respondents

did not elaborate any further. The figure presented does not reflect the specific types of wastes generated –
whether residential, market, commercial, industrial, construction/demolition, street waste, agricultural, agro-
industrial, institutional, etc. It is reasonable, therefore, for the Court to presume that such amount pertains to the
totality of wastes, without any distinction, generated by Quezon City constituents. To reiterate, however, the
authority of a municipality or city to impose fees extends only to those related to the collection and transport of
non-recyclable and special wastes.

Granting, for the sake of argument, that the 0.66 kilogram of solid waste per day refers only to non-recyclable and
special wastes, still, We cannot sustain the validity of Ordinance No. S-2235. It violates the equal protection clause
of the Constitution and the provisions of the LGC that an ordinance must be equitable and based as far as
practicable on the taxpayer’s ability to pay, and not unjust, excessive, oppressive, confiscatory.158

In the subject ordinance, the rates of the imposable fee depend on land or floor area and whether the payee is an
occupant of a lot, condominium, social housing project or apartment. For easy reference, the relevant provision is
again quoted below:

On all domestic households in Quezon City;

LAND AREA IMPOSABLE FEE

Less than 200 sq. m. PHP 100.00
201 sq. m. – 500 sq. m. PHP 200.00
501 sq. m. – 1,000 sq. m. PHP 300.00
1,001 sq. m. – 1,500 sq. m. PHP 400.00
1,501 sq. m. – 2,000 sq. m. or more PHP 500.00

On all condominium unit and socialized housing projects/units in Quezon City;

FLOOR AREA IMPOSABLE FEE

Less than 40 sq. m. PHP 25.00
41 sq. m. – 60 sq. m. PHP 50.00
61 sq. m. – 100 sq. m. PHP 75.00
101 sq. m. – 150 sq. m. PH₱100.00
151 sq. m. – 200 sq. [m.] or more PHP 200.00
On high-rise Condominium Units

a) High-rise Condominium – The Homeowners Association of high rise condominiums shall pay the annual
garbage fee on the total size of the entire condominium and socialized Housing Unit and an additional
garbage fee shall be collected based on area occupied for every unit already so ld or being amortized.

b) High-rise apartment units – Owners of high-rise apartment units shall pay the annual garbage fee on the
total lot size of the entire apartment and an additional garbage fee based on the schedule prescribed herein
for every unit occupied.

For the purpose of garbage collection, there is, in fact, no substantial distinction between an occupant of a lot, on
one hand, and an occupant of a unit in a condominium, socialized housing project or apartment, on the other hand.
Most likely, garbage output produced by these types of occupants is uniform and does not vary to a large degree;
thus, a similar schedule of fee is both just and equitable.159

The rates being charged by the ordinance are unjust and inequitable: a resident of a 200 sq. m. unit in a
condominium or socialized housing project has to pay twice the amount than a resident of a lot similar in size;
unlike unit occupants, all occupants of a lot with an area of 200 sq. m. and less have to pay a fixed rate of
Php100.00; and the same amount of garbage fee is imposed regardless of whether the resident is from a
condominium or from a socialized housing project.

Indeed, the classifications under Ordinance No. S-2235 are not germane to its declared purpose of "promoting
shared responsibility with the residents to attack their common mindless attitude in over-consuming the present
resources and in generating waste."160 Instead of simplistically categorizing the payee into land or floor occupant of
a lot or unit of a condominium, socialized housing project or apartment, respondent City Council should have
considered factors that could truly measure the amount of wastes generated and the appropriate fee for its
collection. Factors include, among others, household age and size, accessibility to waste collection, population
density of the barangay or district, capacity to pay, and actual occupancy of the property. R.A. No. 9003 may also be
looked into for guidance. Under said law, WM service fees may be computed based on minimum factors such as
type s of solid waste to include special waste, amount/volume of waste, distance of the transfer station to the waste
management facility, capacity or type of LGU constituency, cost of construction, cost of management, and type of
technology. With respect to utility rates set by municipalities, a municipality has the right to classify consumers
under reasonable classifications based upon factors such as the cost of service, the purpose for which the service or
the product is received, the quantity or the amount received, the different character of the service furnished, the
time of its use or any other matter which presents a substantial difference as a ground of distinction.161[A] lack of
uniformity in the rate charged is not necessarily unlawful discrimination. The establishment of classifications and
the charging of different rates for the several classes is not unreasonable and does not violate the requirements of
equality and uniformity. Discrimination to be unlawful must draw an unfair line or strike an unfair balance
between those in like circumstances having equal rights and privileges. Discrimination with respect to rates
charged does not vitiate unless it is arbitrary and without a reasonable fact basis or justification.162

On top of an unreasonable classification, the penalty clause of Ordinance No. SP-2235, which states:

SECTION 3. Penalty Clause – A penalty of 25% of the garbage fee due plus an interest of 2% per month or a fraction
thereof (interest) shall be charged against a household owner who refuses to pay the garbage fee herein imposed.
lacks the limitation required by Section 168 of the LGC, which provides:

SECTION 168. Surcharges and Penalties on Unpaid Taxes, Fees, or Charges. – The sanggunian may impose a
surcharge not exceeding twenty-five (25%) of the amount of taxes, fees or charges not paid on time and an interest
at the rate not exceeding two percent (2%) per month of the unpaid taxes, fees or charges including surcharges,
until such amount is fully paid but in no case shall the total interest on the unpaid amount or portion thereof
exceed thirty-six (36) months. (Emphasis supplied)

Finally, on the issue of publication of the two challenged ordinances.

Petitioner argues that the garbage fee was collected even if the required publication of its approval had not yet
elapsed. He notes that he paid his realty tax on January 7, 2014 which already included the garbage fee.
Respondents counter that if the law provides for its own effectivity, publication in the Official Gazette is not
necessary so long as it is not penal in nature. Allegedly, Ordinance No. SP-2095 took effect after its publication
while Ordinance No. SP-2235 became effective after its approval on December 26, 2013.

The pertinent provisions of the LGC state:

SECTION 59. Effectivity of Ordinances or Resolutions. – (a) Unless otherwise stated in the ordinance or the
resolution approving the local development plan and public investment program, the same shall take effect after
ten (10) days from the date a copy thereof is posted in a bulletin board at the entrance of the provincial capital or
city, municipal, or barangay hall, as the case may be, and in at least two (2) other conspicuous places in the local
government unit concerned.

(b) The secretary to the sanggunian concerned shall cause the posting of an ordinance or resolution in the
bulletin board at the entrance of the provincial capital and the city, municipal, or barangay hall in at least
two

(2) conspicuous places in the local government unit concerned not later than five (5) days after approval
thereof.

The text of the ordinance or resolution shall be disseminated and posted in Filipino or English and in the
language or dialect understood by the majority of the people in the local government unit concerned, and
the secretary to the sanggunian shall record such fact in a book kept for the purpose, stating the dates of
approval and posting.

(c) The gist of all ordinances with penal sanctions shall be published in a newspaper of general circulation
within the province where the local legislative body concerned belongs. In the absence of any newspaper of
general circulation within the province, posting of such ordinances shall be made in all municipalities and
cities of the province where the sanggunian of origin is situated.

(d) In the case of highly urbanized and independent component cities, the main features of the ordinance or
resolution duly enacted or adopted shall, in addition to being posted, be published once in a local
newspaper of general circulation within the city: Provided, That in the absence thereof the ordinance or
resolution shall be published in any newspaper of general circulation.

SECTION 188. Publication of Tax Ordinances and Revenue Measures. – Within ten (10) days after their approval,
certified true copies of all provincial, city, and municipal tax ordinances or revenue measures shall be published in
full for three (3) consecutive days in a newspaper of local circulation: Provided, however, That in provinces, cities
and municipalities where there are no newspapers of local circulation, the same may be posted in at least two (2)
conspicuous and publicly accessible places. (Emphasis supplied)

On October 17, 2011, respondent Quezon City Council enacted Ordinance No. SP-2095, which provides that it
would take effect after its publication in a newspaper of general circulation.163 On the other hand, Ordinance No.
SP-2235, which was passed by the City Council on December 16, 2013, provides that it would be effective upon its
approval.164

Ten (10) days after its enactment, or on December 26, 2013, respondent City Mayor approved the same.165

The case records are bereft of any evidence to prove petitioner’s negative allegation that respondents did not
comply with the posting and publication requirements of the law. Thus, We are constrained not to give credit to his
unsupported claim.
WHEREFORE, the petition is PARTIALLY GRANTED. The constitutionality and legality of Ordinance No. SP-2095, S-
2011, or the "Socialized Housing Tax of Quezon City," is· SUSTAINED for being consistent ·with Section·43 of
Republic Act No. ·7279. On the other hand, Ordinance No. SP-2235, S-2013, which collects an annual garbage fee on
all domestic households in Quezon City, is hereby declared as UNCONSTITUTIONAL AND ILLEGAL. Respondents
are DIRECTED to REFUND with reasonable dispatch the sums of money collected relative to its enforcement. The
temporary restraining order issued by the Court on February 5, 2014 is LIFTED with respect to Ordinance No. SP-
2095. In contrast, respondents are PERMANENTLY ENJOINED from taking any further action to enforce Ordinance
No. SP. 2235.

SO ORDERED.

EN BANC

April 25, 2017

G.R. No. 199669

SOUTHERN LUZON DRUG CORPORATION, Petitioner, 

vs.
THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT, THE NATIONAL COUNCIL FOR THE WELFARE
OF DISABLED PERSONS, THE DEPARTMENT OF FINANCE, and THE BUREAU OF INTERNAL
REVENUE, Respondents

DECISION

REYES, J.:

Before the Court is a Petition for Review on Certiorari1under Rule 45 of the Rules of Court, assailing the
Decision2dated June 17, 2011, and Resolution3 dated November 25, 2011 of the Court of Appeals (CA) in CA-G.R. SP
No. 102486, which dismissed the petition for prohibition filed by Southern Luzon Drug Corporation (petitioner)
against the Department of1 Social Welfare and Development (DSWD), the National Council for the Welfare of
Disabled Persons (NCWDP) (now National Council on Disability Affairs or NCDA), the Department of Finance (DOF)
and the Bureau of: Internal Revenue (collectively, the respondents), which sought to prohibit the implementation
of Section 4(a) of Republic Act (R.A.) No. 9257, otherwise known as the "Expanded Senior Citizens Act of 2003" and
Section 32 of R.A. No. 9442, which amends the "Magna Carta for Disabled Persons," particularly the granting of 20%
discount on the purchase of medicines by senior citizens and persons with disability (PWD),: respectively, and
treating them as tax deduction.

The petitioner is a domestic corporation engaged in the business of: drugstore operation in the Philippines while
the respondents are government' agencies, office and bureau tasked to monitor compliance with R.A. Nos. 9257
and 9442, promulgate implementing rules and regulations for their effective implementation, as well as prosecute
and revoke licenses of erring1 establishments.

Factual Antecedents

On April 23, 1992, R.A. No. 7432, entitled "An Act to Maximize the Contribution of Senior Citizens to Nation-Building,
Grant Benefits and Special Privileges and For Other Purposes," was enacted. Under the said law, a senior citizen, who
must be at least 60 years old and has an annual income of not more than P60,000.00,4 may avail of the privileges
provided in Section 4 thereof, one of which is 20% discount on the purchase of medicines. The said provision
states:

Sec. 4. Privileges for the Senior Citizen. - x x x:

a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation
services, hotels and similar lodging establishment, restaurants and recreation centers and purchase of medicine
anywhere in the country: Provided, That private establishments may claim the cost as tax credit[.]

x x x x (Emphasis ours)

To recoup the amount given as discount to qualified senior citizens, covered establishments can claim an equal
amount as tax credit which can be applied against the income tax due from them.

On February 26, 2004, then President Gloria Macapagal-Arroyo signed R.A. No. 9257, amending some provisions of
R.A. No. 7432. The new law retained the 20% discount on the purchase of medicines but removed the annual
income ceiling thereby qualifying all senior citizens to the privileges under the law. Further, R.A. No. 9257 modified
the tax treatment of the discount granted to senior citizens, from tax credit to tax deduction from gross income,
computed based on the net cost of goods sold or services rendered. The pertinent provision, as amended by R.A.
No. 9257, reads as follows:

SEC. 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the following:

(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in
hotels and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the
death of senior citizens;

xxxx

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the
net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the
total amount of the claimed tax deduction net of value-added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National
Internal Revenue Code, as amended. (Emphasis ours)

On May 28, 2004, the DSWD issued the Implementing Rules and Regulations (IRR) of R.A. No. 9257. Article 8 of
Rule VI of the said IRR provides:

Article 8. Tax Deduction of Establishments. - The establishment may claim the discounts granted under Rule V,
Section 4 - Discounts for Establishments; Section 9, Medical and Dental Services in Private Facilities and Sections
10 and 11 -Air, Sea and Land Transportation as tax deduction based on the net cost of the goods sold or services
rendered. Provided, That the cost of the discount shall be allowed as deduction from gross income for the
same taxable year that the discount is granted; Provided, further, That the total amount of the claimed tax
deduction net of value-added tax if applicable, shall be included in their gross sales receipts for tax purposes and
shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended;
Provided, finally, that the implementation of the tax deduction shall be subject to the Revenue Regulations to be
issued by the Bureau of Internal Revenue (BIR) and approved by the Department of Finance (DOF). (Emphasis
ours)

The change in the tax treatment of the discount given to senior citizens did not sit well with some drug store
owners and corporations, claiming it affected the profitability of their business. Thus, on January 13, 2005, I Carlos
Superdrug Corporation (Carlos Superdrug), together with other. corporation and proprietors operating drugstores
in the Philippines, filed a Petition for Prohibition with Prayer for Temporary Restraining Order (TRO) I and/or
Preliminary Injunction before this Court, entitled Carlos Superdrug I Corporation v. DSWD,5docketed as G.R. No.
166494, assailing the constitutionality of Section 4(a) of R.A. No. 9257 primarily on the ground that it amounts to
taking of private property without payment of just compensation. In a Decision dated June 29, 2007, the Court
upheld the constitutionality of the assailed provision, holding that the same is a legitimate exercise of police power.
The relevant portions of the decision read, thus:

The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare
for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to
underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible
response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has been described
as "the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs."
It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the
constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the
same."

For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the
primacy of police power because property rights, though sheltered by due process, must yield to general welfare.

xxxx

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the precept
for the protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation
of contracts and public utilities, continuously serve as a reminder that the right to property can be relinquished
upon the command of the State for the promotion of public good. Undeniably, the success of the senior citizens
program rests largely on the support imparted by petitioners and the other private establishments concerned. This
being the case, the means employed in invoking the active participation of the private sector, in order to achieve
the purpose or objective of the law, is reasonably and directly related. Without sufficient proof that Section 4(a) of
RA. No. 9257 is arbitrary, and that the continued implementation of the same would be unconscionably
detrimental to petitioners, the Court will refrain from quashing a legislative act.

WHEREFORE, the petition is DISMISSED for lack of merit.6 (Citations omitted)

On August 1, 2007, Carlos Superdrug filed a motion for reconsideration of the foregoing decision. Subsequently, the
Court issued Resolution dated August 21, 2007, denying the said motion with finality. 7

Meanwhile, on March 24, 1992, R.A. No. 7277 pertaining to the "Magna Carta for Disabled Persons" was enacted,
codifying the rights and privileges of PWDs. Thereafter, on April 30, 2007, R.A. No. 9442 was enacted, amending
R.A. No. 7277. One of the salient amendments in the law is the insertion of Chapter 8 in Title 2 thereof, which
enumerates the other privileges and incentives of PWDs, including the grant of 20% discount on the purchase of
medicines. Similar to R.A. No. 9257, covered establishments shall claim the discounts given to PWDs as tax
deductions from the gross income, based on the net cost of goods sold or services rendered. Section 32 ofR.A. No.
9442 reads:

CHAPTER 8. Other Privileges and Incentives

SEC. 32. Persons with disability shall be entitled to the following:

xxxx

(c) At least twenty percent (20%) discount for the purchase of medicines in all drugstores for the exclusive use or
enjoyment of persons with disability;

xxxx

The establishments may claim the discounts granted in subsections (a), (b), (c), (e), (t) and (g) as
taxdeductions based on the net cost of the goods sold or services rendered: Provided, however, That the cost
of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is
granted: Provided, further, That the total amount of the claimed tax deduction net of value-added tax if applicable,
shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to
the provisions of the National Internal Revenue Code (NIRC), as amended. (Emphasis ours)

Pursuant to the foregoing, the IRR of R.A. No. 9442 was promulgated by the DSWD, Department of Education, DOF,
Department of Tourism and the Department of Transportation and Communications.8Sections 5 .1 and 6.1.d
thereof provide:

Sec. 5. Definition of Terms. For purposes of these Rules and Regulations, these terms are defined as follows:

5.1. Persons with Disability are those individuals defined under Section 4 of RA 7277, "An Act
Providing for the Rehabilitation, Self-Development and Self-Reliance of Persons with Disability as
amended and their integration into the Mainstream of Society and for Other Purposes." This is
defined as a person suffering from restriction or different abilities, as a result of a mental, physical
or sensory impairment, to perform an activity in a manner or within the range considered normal
for human being. Disability shall mean: (1) a physical or mental impairment that substantially
limits one or more psychological, physiological or anatomical function of an individual or activities
of such individual; (2) a record of such an impairment; or (3) being regarded as having such an
impairment.

xxxx

6.1.d Purchase of Medicine - At least twenty percent (20%) discount on the purchase of medicine
for the exclusive use and enjoyment of persons with disability. All drug stores, hospital, pharmacies,
clinics and other similar establishments selling medicines are required to provide at least twenty
percent (20%) discount subject to the guidelines issued by DOH and PHILHEALTH.

On February 26, 2008, the petitioner filed a Petition for Prohibition with Application for TRO and/or Writ of
Preliminary Injunction9 with the CA, seeking to declare as unconstitutional (a) Section 4(a) of R.A. No.
9257, and (b) Section 32 of R.A. No. 9442 and Section 5.1 of its IRR, insofar as these provisions only allow tax
deduction on the gross income based on the net cost of goods sold or services rendered as compensation to private
establishments for the 20% discount that they are required to grant to senior citizens and PWDs. Further, the
petitioner prayed that the respondents be permanently enjoined from implementing the assailed provisions.

Ruling of the CA

On June 17, 2011, the CA dismissed the petition, reiterating the ruling of the Court in Carlos Superdrug10particularly
that Section 4(a) of R.A. No. 9257 was a valid exercise of police power. Moreover, the CA held that considering that
the same question had been raised by parties similarly situated and was resolved in Carlos Superdrug, the rule
of stare decisis stood as a hindrance to any further attempt to relitigate the same issue. It further noted that
jurisdictional considerations also compel the dismissal of the action. It particularly emphasized that it has no
original or appellate jurisdiction to pass upon the constitutionality of the assailed laws, 11 the same pertaining to
the Regional Trial Court (RTC). Even assuming that it had concurrent jurisdiction with the RTC, the principle of
hierarchy of courts mandates that the case be commenced and heard by the lower court. 12 The CA further ruled
that the petitioner resorted to the wrong remedy as a petition for prohibition will not lie to restrain the actions of
the respondents for the simple reason that they do not exercise judicial, quasi-judicial or ministerial duties relative
to the issuance or implementation of the questioned provisions. Also, the petition was wanting of the allegations of
the specific acts committed by the respondents that demonstrate the exercise of these powers which may be
properly challenged in a petition for prohibition.13

The petitioner filed its Motion for Reconsideration 14 of the Decision dated June 17, 2011 of the CA, but the same
was denied in a Resolution 15 dated November 25, 2011.
Unyielding, the petitioner filed the instant petition, raising the following assignment of errors, to wit:

THE CA SERIOUSLY ERRED WHEN IT RULED THAT A PETITION FOR PROHIBITION FILED WITH THE CA IS
AN IMPROPER REMEDY TO ASSAIL THE CONSTITUTIONALITY OF THE 20%, SALES DISCOUNT FOR SENIOR
CITIZENS AND PWDs;

II

THE CA SERIOUSLY ERRED WHEN IT HELD THAT THE SUPREME COURT'S RULING IN CARLOS
SUPERDRUG CONSTITUTES STARE DECISIS;

III

THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN IT RULED THAT THE 20%, SALES
DISCOUNT FOR SENIOR CITIZENS AND PWDs IS A VALID EXERCISE OF POLICE POWER. ON THE CONTRARY,
IT IS AN INVALID EXERCISE OF THE POWER OF EMINENT DOMAIN BECAUSE IT FAILS TO PROVIDE JUST
COMPENSATION TO THE PETITIONER AND OTHER SIMILARLY SITUATED DRUGSTORES;

IV

THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN IT RULED THAT THE 20°/o SALES
DISCOUNT FOR SENIOR CITIZENS AND PWDs DOES NOT VIOLATE THE PETITIONER'S RIGHT TO EQUAL
PROTECTION OF THE LAW; and

THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN IT RULED THAT THE DEFINITIONS OF
DISABILITIES AND PWDs ARE NOT VAGUE AND DO NOT VIOLATE THE PETITIONER'S RIGHT TO DUE
PROCESS OF LAW.16

Ruling of the Court

Prohibition may be filed to question

the constitutionality of a law

In the assailed decision, the CA noted that the action, although denominated as one for prohibition, seeks the
declaration of the unconstitutionality of Section 4(a) of R.A. No. 9257 and Section 32 of R.A. No.9442. It held that in
such a case, the proper remedy is not a special civil 1 action but a petition for declaratory relief, which falls under
the exclusive original jurisdiction of the RTC, in the first instance, and of the Supreme Court, on appeal. 17

The Court clarifies.

Generally, the office of prohibition is to prevent the unlawful and oppressive exercise of authority and is directed
against proceedings that are done without or in excess of jurisdiction, or with grave abuse of discretion, there
being no appeal or other plain, speedy, and adequate remedy in the ordinary course of law. It is the remedy to
prevent inferior courts, corporations, boards, or persons from usurping or exercising a jurisdiction or power with
which they have not been vested by law. 18 This is, however, not the lone office of an action for prohibition. In Diaz,
et al. v. The Secretary of Finance, et al.,  19 prohibition was also recognized as a proper remedy to prohibit or nullify
acts of executive officials that amount to usurpation of legislative authority. 20 And, in a number of jurisprudence,
prohibition was allowed as a proper action to assail the constitutionality of a law or prohibit its implementation.
In Social Weather Stations, Inc. v. Commission on Elections,21therein petitioner filed a petition for prohibition to
assail the constitutionality of Section 5.4 of R.A. No. 9006, or the "Fair Elections Act," which prohibited the
publication of surveys within 15 days before an election for national candidates, and seven days for local
candidates. Included in the petition is a prayer to prohibit the Commission on Elections from enforcing the said
provision. The Court granted the Petition and struck down the assailed provision for being unconstitutional. 22

In Social Justice Society (SJS) v. Dangerous Drugs Board, et al.,23 therein petitioner assailed the constitutionality of
paragraphs (c ), (d), (f) and (g) of Section 36 of R.A. No. 9165, otherwise known as the "Comprehensive Dangerous
Drugs Act of 2002," on the ground that they constitute undue delegation of legislative power for granting unbridled
discretion to schools and private employers in determining the manner of drug 'testing of their employees, and
that the law constitutes a violation of the right against unreasonable searches and seizures. It also sought to enjoin
the Dangerous Drugs Board and the Philippine Drug Enforcement Agency from enforcing the challenged
provision.24The Court partially granted the petition by declaring Section 36(f) and (g) of R.A. No. 9165
unconstitutional, and permanently enjoined the concerned agencies from implementing them. 25

In another instance, consolidated petitions for prohibitions26 questioning the constitutionality of the Priority
Development Assistance Fund were deliberated upon by this Court which ultimately granted the same.

Clearly, prohibition has been found an appropriate remedy to challenge the constitutionality of various laws, rules,
and regulations.

There is also no question regarding the jurisdiction of the CA to hear and decide a petition for prohibition. By
express provision of the law, particularly Section 9(1) of Batas Pambansa Bilang 129,27 the CA was granted
"original jurisdiction to issue writs of mandamus, prohibition, certiorari, habeas corpus, and quo warranto, and
auxiliary writs or I processes, whether or not in aid of its appellate jurisdiction." This authority· the CA enjoys
concurrently with RTCs and this Court.

In the same manner, the supposed violation of the principle of the ·. hierarchy of courts does not pose any
hindrance to the full deliberation of the issues at hand. It is well to remember that "the judicial hierarchy of courts
is not an iron-clad rule. It generally applies to cases involving warring factual allegations. For this reason, litigants
are required to [refer] to the trial courts at the first instance to determine the truth or falsity of these contending
allegations on the basis of the evidence of the parties. Cases which depend on disputed facts for decision cannot be
brought immediately before appellate courts as they are not triers of facts. Therefore, a strict application of the
rule of hierarchy of courts is not necessary when the cases brought before the appellate courts do not involve
factual but legal questions."28

Moreover, the principle of hierarchy of courts may be set aside for special and important reasons, such as when
dictated by public welfare and ' the advancement of public policy, or demanded by the broader interest of
justice.29Thus, when based on the good judgment of the court, the urgency and significance of the issues presented
calls for its intervention, it should not hesitate to exercise its duty to resolve.

The instant petition presents an exception to the principle as it basically raises a legal question on the
constitutionality of the mandatory discount and the breadth of its rightful beneficiaries. More importantly, the
resolution of the issues will redound to the benefit of the public as it will put to rest the questions on the propriety
of the granting of discounts to senior citizens and PWDs amid the fervent insistence of affected establishments that
the measure transgresses their property rights. The Court, therefore, finds it to the best interest of justice that the
instant petition be resolved.

The instant case is not barred by

stare decisis

The petitioner contends that the CA erred in holding that the ruling in Carlos Superdrug constitutes as stare
decisis or law of the case which bars the relitigation of the issues that had been resolved therein and had been
raised anew in the instant petition. It argues that there are substantial differences between Carlos Superdrug and
the circumstances in the instant case which take it out from the operation of the doctrine of stare decisis. It cites
that in Carlos Superdrug, the Court denied the petition because the petitioner therein failed to prove the
confiscatory effect of the tax deduction scheme as no proof of actual loss was submitted. It believes that its
submission of financial statements for the years 2006 and 2007 to prove the confiscatory effect of the law is a
material fact that distinguishes the instant case from that of Carlos Superdrug.  30

The Court agrees that the ruling in Carlos Superdrug does not constitute stare decisis to the instant case, not
because of the petitioner's submission of financial statements which were wanting in the first case, but because it
had the good sense of including questions that had not been raised or deliberated in the former case of Carlos
Superdrug, i.e., validity of the 20% discount granted to PWDs, the supposed vagueness of the provisions of R.A. No.
9442 and violation of the equal protection clause.

Nonetheless, the Court finds nothing in the instant case that merits a reversal of the earlier ruling of the Court
in Carlos Superdrug. Contrary to the petitioner's claim, there is a very slim difference between the issues in Carlos
Superdrug and the instant case with respect to the nature of the senior citizen discount. A perfunctory reading of
the circumstances of the two cases easily discloses marked similarities in the issues and the arguments raised by
the petitioners in both cases that semantics nor careful play of words can hardly obscure.

In both cases, it is apparent that what the petitioners are ultimately questioning is not the grant of the senior
citizen discount per se, but the manner by which they were allowed to recoup the said discount. In particular, they
are protesting the change in the tax treatment of the senior citizen discount from tax credit to being merely a
deduction from gross income which they claimed to have significantly reduced their profits.

This question had been settled in Carlos Superdrug, where the Court ruled that the change in the tax treatment of
the discount was a valid exercise of police power, thus:

Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments
concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257.

xxxx

A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the
definition of just compensation.

Having said that, this raises the question of whether the State, in promoting the health and welfare of a special
group of citizens, can impose upon private establishments the burden of partly subsidizing a government program.

The Court believes so.

The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-building,
and to grant benefits and privileges to them for their improvement and well-being as the State considers them an
integral part of our society.

The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus, the Act
provides:

SEC. 2. [R.A.] No. 7432 is hereby amended to read as follows:

SEC. 1. Declaration of Policies and Objectives.- Pursuant to Article XV, Section 4 of the Constitution, it is the duty of
the family to take care of its elderly members while the State may design programs of social security for them. In
addition to this, Section 10 in the Declaration of Principles and State Policies provides: "The State shall provide
social justice in all phases of national development." Further, Article XIII, Section 11, provides: "The State shall
adopt an integrated and comprehensive approach to health development which shall endeavor to make essential
goods, health and other social services available to all the people at affordable cost. There shall be priority for the
needs of the underprivileged sick, elderly, disabled, women and children." Consonant with these constitutional
principles the following are the declared policies of this Act:

xxxx

(f) To recognize the important role of the private sector in the improvement of the welfare of senior
citizens and to actively seek their partnership.

To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and dental
services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals,
and other similar places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of
services in hotels and similar lodging establishments, restaurants and recreation centers; and purchases of
medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax
deduction.

The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare
for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to
underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible
response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has been described
as "the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs."
It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the
constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the
same."

For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the
primacy of police power because proper rights, though sheltered by due process, must yield to general
welfare. 31 (Citations omitted and emphasis in the original)

Verily, it is the bounden duty of the State to care for the elderly as they reach the point in their lives when the vigor
of their youth has diminished and resources have become scarce. Not much because of choice, they become
needing of support from the society for whom they presumably spent their productive days and for whose
betterment they' exhausted their energy, know-how and experience to make our days better to live.

In the same way, providing aid for the disabled persons is an equally important State responsibility. Thus, the State
is obliged to give full support to the improvement of the total well-being of disabled persons and their integration
into the mainstream of society. 32This entails the creation of opportunities for them and according them privileges
if only to balance the playing field which had been unduly tilted against them because of their limitations.

The duty to care for the elderly and the disabled lies not only upon the State, but also on the community and even
private entities. As to the State, the duty emanates from its role as parens patriae which holds it under obligation to
provide protection and look after the welfare of its people especially those who cannot tend to themselves. Parens
patriae means parent of his or her country, and refers to the State in its role as "sovereign", or the State in its
capacity as a provider of protection to those unable to care for themselves. 33 In fulfilling this duty, the State may
resort to the exercise of its inherent powers: police power, eminent domain and power of taxation.

In Gerochi v. Department of Energy,34the Court passed upon one of the inherent powers of the state, the police
power, where it emphasized, thus:

[P]olice power is the power of the state to promote public welfare by restraining and regulating the use of liberty
and property. It is the most pervasive, the least limitable, and the most demanding of the three fundamental
powers of the State. The justification is found in the Latin maxim salus populi est suprema lex (the welfare of the
people is the supreme law) and sic utere tuo ut alienum non laedas (so use your property as not to injure the
property of others). As an inherent attribute of sovereignty which virtually extends to all public needs, police
power grants a wide panoply of instruments through which the State, as parens patriae, gives effect to a host of its
regulatory powers. We have held that the power to "regulate" means the power to protect, foster, promote,
preserve, and control, with due regard for the interests, first and foremost, of the public, then of the utility and of
its patrons. 35 (Citations omitted)

It is in the exercise of its police power that the Congress enacted R.A. Nos. 9257 and 9442, the laws mandating a
20% discount on purchases of medicines made by senior citizens and PWDs. It is also in further exercise of this
power that the legislature opted that the said discount be claimed as tax deduction, rather than tax credit, by
covered establishments.

The petitioner, however, claims that the change in the tax treatment of the discount is illegal as it constitutes taking
without just compensation. It even submitted financial statements for the years 2006 and 2007 to support its claim
of declining profits when the change in the policy was implemented.

The Court is not swayed.

To begin with, the issue of just compensation finds no relevance in the instant case as it had already been made
clear in Carlos Superdrug that the power being exercised by the State in the imposition of senior citizen discount
was its police power. Unlike in the exercise of the power of eminent domain, just compensation is not required in
wielding police power. This is precisely because there is no taking involved, but only an imposition of burden.

In Manila Memorial Park, Inc., et al. v. Secretary of the DSWD, et al.,  36 the Court ruled that by examining the nature
and the effects of R.A. No. 9257, it becomes apparent that the challenged governmental act was an exercise of
police power. It was held, thus:

[W]e now look at the nature and effects of the 20% discount to determine if it constitutes an exercise of police
power or eminent domain.

The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to be
gainfully employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic
commodities. It may not be amiss to mention also that the discount serves to honor senior citizens who
presumably spent the productive years of their lives on contributing to the development and progress of the
nation. This distinct cultural Filipino practice of honoring the elderly is an integral part of this law.

As to its nature and effects, the 20% discount is a regulation affecting the ability of private establishments to price
their products and services relative to a special class of individuals, senior citizens, for which the Constitution
affords preferential concern. In turn, this affects the amount of profits or income/gross sales that a private
establishment can derive from senior citizens. In other words, the subject regulation affects the pricing, and, hence,
the profitability of a private establishment. However, it does not purport to appropriate or burden specific
properties, used in the operation or conduct of the business of private establishments, for the use or benefit of the
public, or senior citizens for that matter, but merely regulates the pricing of goods and services relative to, and the
amount of profits or income/gross sales that such private establishments may derive from, senior citizens.

The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of
'return on investment control laws which are traditionally regarded as police power measures. x x x.37 (Citations
omitted)

In the exercise of police power, "property rights of private individuals are subjected to restraints and burdens in
order to secure the general comfort, health, and prosperity of the State."38 Even then, the State's claim of police
power cannot be arbitrary or unreasonable. After all, the overriding purpose of the exercise of the power is to
promote general welfare, public health and safety, among others. It is a measure, which by sheer necessity, the
State exercises, even to the point of interfering with personal liberties or property rights in order to advance
common good. To warrant such interference, two requisites must concur: (a) the interests of the public generally,
as distinguished from those of a particular class, require the interference of the! State; and (b) the means employed
are reasonably necessary to the: attainment of the object sought to be accomplished and not unduly oppressive
upon individuals. In other words, the proper exercise of the police power requires the concurrence of a lawful
subject and a lawful method.39

The subjects of R.A. Nos. 9257 and 9442, i.e., senior citizens and PWDs, are individuals whose well-being is a
recognized public duty. As a public duty, the responsibility for their care devolves upon the concerted efforts of the
State, the family and the community. In Article XIII, Section 1 of the Constitution, the State is mandated to give
highest priority to the enactment of measures that protect and enhance the right of all the people to human dignity,
reduce social, economic, and political inequalities, and remove cultural inequities by equitably diffusing wealth and
political power1 for the common good. The more apparent manifestation of these social inequities is the unequal
distribution or access to healthcare services. To: abet in alleviating this concern, the State is committed to adopt an
integrated! and comprehensive approach to health development which shall endeavor to make essential goods,
health and other social services available to all the people at affordable cost, with priority for the needs of the
underprivileged sick, elderly, disabled, women, and children.40

In the same manner, the family and the community have equally significant duties to perform in reducing social
inequality. The family as the basic social institution has the foremost duty to care for its elderly members.41 On the
other hand, the community, which include the private sector, is recognized as an active partner of the State in
pursuing greater causes. The private sector, being recipients of the privilege to engage business in our land, utilize
our goods as well as the services of our people for proprietary purposes, it is only fitting to expect their support in
measures that contribute to common good. Moreover, their right to own, establish and operate economic
enterprises is always subject to the duty of the State to promote distributive justice and to intervene when the
common good so demands.42

The Court also entertains no doubt on the legality of the method taken by the legislature to implement the declared
policies of the subject laws, that is, to impose discounts on the medical services and purchases of senior citizens
and PWDs and to treat the said discounts as tax deduction rather than tax credit. The measure is fair and
reasonable and no credible proof was presented to prove the claim that it was confiscatory. To be considered
confiscatory, there must be taking of property without just compensation.

Illuminating on this point is the discussion of the Court on the concept of taking in City of Manila v. Hon. Laguio,
Jr.,43viz.:

There are two different types of taking that can be identified. A "possessory" taking occurs when the government
confiscates or physically occupies property. A "regulatory" taking occurs when the government's regulation leaves
no reasonable economically viable use of the property.

xxxx

No formula or rule can be devised to answer the questions of what is too far and when regulation becomes a
taking. In Mahon, Justice Holmes recognized that it was "a question of degree and therefore cannot be disposed of
by general propositions." On many other occasions as well, the U.S. Supreme Court has said that the issue of when
regulation constitutes a taking is a matter of considering the facts in each case. x x x.

What is crucial in judicial consideration of regulatory takings is that government regulation is a taking if it leaves
no reasonable economically viable use of property in a manner that interferes with reasonable expectations for
use. A regulation that permanently denies all economically beneficial or productive use of land is, from the owner's
point of view, equivalent to a "taking" unless principles of nuisance or property law that existed when the owner
acquired the land make the use prohibitable. When the owner of real property has been called upon to sacrifice all
economically beneficial uses in the name of the common good, that is, to leave his property economically idle, he
has suffered a taking.

xxxx
A restriction on use of property may also constitute a "taking" if not reasonably necessary to the effectuation of a
substantial public purpose or if it has an unduly harsh impact on the distinct investment-backed expectations of
the owner.44 (Citations omitted)

The petitioner herein attempts to prove its claim that the pertinent provisions of R.A. Nos. 9257 and 9442 amount
to taking by presenting financial statements purportedly showing financial losses incurred by them due to the
adoption of the tax deduction scheme.

For the petitioner's clarification, the presentation of the financial statement is not of compelling significance in
justifying its claim for just compensation. What is imperative is for it to establish that there was taking in the
constitutional sense or that, in the imposition of the mandatory discount, the power exercised by the state was
eminent domain.

According to Republic of the Philippines v. Vda. de Castellvi,45five circumstances must be present in order to qualify
"taking" as an exercise of eminent domain. First, the expropriator must enter a private property. Second, the
entrance into private property must be for more than a momentary period. Third, the entry into the property
should be under warrant or color of legal authority. Fourth, the property must be devoted to a public use or
otherwise informally appropriated or injuriously affected. Fifth, the utilization of the property for public use must
be in such a way as to oust the owner and deprive him of all beneficial enjoyment of the property. 46

The first requirement speaks of entry into a private property which clearly does not obtain in this case. There is no
private property that is; invaded or appropriated by the State. As it is, the petitioner precipitately deemed future
profits as private property and then proceeded to argue that the State took it away without full compensation. This
seemed preposterous considering that the subject of what the petitioner supposed as taking was not even earned
profits but merely an expectation of profits, which may not even occur. For obvious reasons, there cannot be taking
of a contingency or of a mere possibility because it lacks physical existence that is necessary before there could be
any taking. Further, it is impossible to quantify the compensation for the loss of supposed profits before it is
earned.

The supposed taking also lacked the characteristics of permanence 47 and consistency.1âwphi1 The presence of
these characteristics is significant because they can establish that the effect of the questioned provisions is the
same on all establishments and those losses are indeed its unavoidable consequence. But apparently these
indications are wanting in this case. The reason is that the impact on the establishments varies depending on their
response to the changes brought about by the subject provisions. To be clear, establishments, are not prevented
from adjusting their prices to accommodate the effects of the granting of the discount and retain their profitability
while being fully compliant to the laws. It follows that losses are not inevitable because establishments are free to
take business measures to accommodate the contingency. Lacking in permanence and consistency, there can be no
taking in the constitutional sense. There cannot be taking in one establishment and none in another, such that the
former can claim compensation but the other may not. Simply told, there is no taking to justify compensation; there
is only poor business decision to blame.

There is also no ousting of the owner or deprivation of ownership. Establishments are neither divested of
ownership of any of their properties nor is anything forcibly taken from them. They remain the owner of their
goods and their profit or loss still depends on the performance of their sales.

Apart from the foregoing, covered establishments are also provided with a mechanism to recoup the amount of
discounts they grant the senior citizens and PWDs. It is provided in Section 4(a) of R.A. No. 9257 and Section 32 of
R.A. No. 9442 that establishments may claim the discounts as "tax deduction based on the net cost of the goods sold
or services rendered." Basically, whatever amount was given as discount, covered establishments may claim an
equal amount as an expense or tax deduction. The trouble is that the petitioner, in protesting the change in the tax
treatment of the discounts, apparently seeks tax incentive and not merely a return of the amount given as
discounts. It premised its interpretation of financial losses in terms of the effect of the change in the tax treatment
of the discount on its tax liability; hence, the claim that the measure was confiscatory. However, as mentioned
earlier in the discussion, loss of profits is not the inevitable result of the change in tax treatment of the discounts; it
is more appropriately a consequence of poor business decision.
It bears emphasizing that the law does not place a cap on the amount of mark up that covered establishments may
impose on their items. This rests on the discretion of the establishment which, of course, is expected to put in the
price of the overhead costs, expectation of profits and other considerations into the selling price of an item. In a
simple illustration, here is Drug A, with acquisition cost of ₱8.00, and selling price of ₱10.00. Then comes a law that
imposes 20% on senior citizens and PWDs, which affected Establishments 1, 2 and 3. Let us suppose that the
approximate number of patrons who purchases Drug A is 100, half of which are senior citizens and PWDs. Before
the passage of the law, all of the establishments are earning the same amount from profit from the sale of Drug A,
viz.:

Before the passage of the law:

Drug A
Acquisition cost ₱8.00
Selling price ₱10.00
Number of patrons 100
Sales:
100 x ₱10.00 = ₱1,000.00
Profit: ₱200

After the passage of the law, the three establishments reacted differently. Establishment 1 was passive and
maintained the price of Drug A at ₱8.00 which understandably resulted in diminution of profits.

Establishment 1

Drug A
Acquisition cost ₱8.00
Selling price ;₱10.00
Number of patrons 100
Senior Citizens/PWD 50
Sales
100 x ₱10.00 = ₱1,000.00
Deduction: ₱100.00
Profit: ₱100.00

On the other hand, Establishment 2, mindful that the new law will affect the profitability of the business, made a
calculated decision by increasing the mark up of Drug A to ₱3.20, instead of only ₱2.00. This brought a positive
result to the earnings of the company.

Establishment 2

Drug A
Acquisition cost ;₱8.00
Selling price ₱11.20
Number of patron 100
Senior Citizens/PWDs 50
 Sales
100 x ₱10.00 = ₱1,000.00
Deduction: ₱112.00
Profit: ₱208.00

For its part, Establishment 3 raised the mark up on Drug A to only ₱3.00 just to even out the effect of the law. This
measure left a negligible effect on its profit, but Establishment 3 took it as a social duty: to share in the cause being
promoted by the government while still maintaining profitability.

Establishment 3

Drug A
Acquisition cost ₱8.00
Selling price ₱11.20
Number of patrons 100
Senior Citizens/PWD 50
Sales
100 x ₱10.00 = ₱1,000.00
Deduction: ₱110.00
Profit: ₱190.00

The foregoing demonstrates that it is not the law per se which occasioned the losses in the covered establishments
but bad business I judgment. One of the main considerations in making business decisions is the law because its
effect is widespread and inevitable. Literally, anything can be a subject of legislation. It is therefore incumbent
upon business managers to cover this contingency and consider it in making business strategies. As shown in the
illustration, the better responses were exemplified by Establishments 2 and 3 which promptly put in the additional
costs brought about by the law into the price of Drug A. In doing so, they were able to maintain the profitability of
the business, even earning some more, while at the same time being fully compliant with the law. This is not to
mention that the illustration is even too simplistic and not' the most ideal since it dealt only with a single drug
being purchased by both regular patrons and senior citizens and PWDs. It did not consider the accumulated profits
from the other medical and non-medical products being sold by the establishments which are expected to further
curb the effect of the granting of the discounts in the business.

It is therefore unthinkable how the petitioner could have suffered losses due to the mandated discounts in R.A.
Nos. 9257 and 9442, when a fractional increase in the prices of items could bring the business standing at a
balance even with the introduction of the subject laws. A level adjustment in the pricing of items is a reasonable
business measure to take in order to adapt to the contingency. This could even make establishments earn more, as
shown in the illustration, since every fractional increase in the price of covered items translates to a wider cushion
to taper off the effect of the granting of discounts and ultimately results to additional profits gained from the
purchases of the same items by regular patrons who are not entitled to the discount. Clearly, the effect of the
subject laws in the financial standing of covered companies depends largely on how they respond and forge a
balance between profitability and their sense of social responsibility. The adaptation is entirely up to them and
they are not powerless to make adjustments to accommodate the subject legislations.

Still, the petitioner argues that the law is confiscatory in the sense that the State takes away a portion of its
supposed profits which could have gone into its coffers and utilizes it for public purpose. The petitioner claims that
the action of the State amounts to taking for which it should be compensated.
To reiterate, the subject provisions only affect the petitioner's right to profit, and not earned profits. Unfortunately
for the petitioner, the right to profit is not a vested right or an entitlement that has accrued on the person or entity
such that its invasion or deprivation warrants compensation. Vested rights are "fixed, unalterable, or
irrevocable."48 More extensively, they are depicted as follows:

Rights which have so completely and definitely accrued to or settled in a person that they are not subject to be
defeated or cancelled by the act of any other private person, and which it is right and equitable that the
government should recognize and protect, as being lawful in themselves, and settled according to the then current
rules of law, and of which the individual could not be deprived arbitrarily without injustice, or of which he could
not justly be deprived otherwise than by the established methods of procedure and for the public welfare. x x x A
right is not 'vested' unless it is more than a mere expectation based on the anticipated continuance of present laws;
it must be an established interest in property, not open to doubt. x x x To be vested in its accurate legal sense,
a right must be complete and consummated, and one of which the person to whom it belongs cannot be divested
without his consent.x x x.49 (Emphasis ours)

Right to profits does not give the petitioner the cause of action to ask for just compensation, it being only an
inchoate right or one that has not fully developed50 and therefore cannot be claimed as one's own. An inchoate
right is a mere expectation, which may or may not come into existence. It is contingent as it only comes "into
existence on an event or condition which may not happen or be performed until some other event may prevent
their vesting."51Certainly, the petitioner cannot claim confiscation or taking of something that has yet to exist. It
cannot claim deprivation of profit before the consummation of a sale and the purchase by a senior citizen or PWD.

Right to profit is not an accrued right; it is not fixed, absolute nor indefeasible. It does not come into being until the
occurrence or realization of a condition precedent. It is a mere "contingency that might never eventuate into a
right. It stands for a mere possibility of profit but nothing might ever be payable under it."52

The inchoate nature of the right to profit precludes the possibility of compensation because it lacks the quality or
characteristic which is necessary before any act of taking or expropriation can be effected. Moreover, there is no
yardstick fitting to quantify a contingency or to determine compensation for a mere possibility. Certainly, "taking"
presupposes the existence of a subject that has a quantifiable or determinable value, characteristics which a mere
contingency does not possess.

Anent the question regarding the shift from tax credit to tax deduction, suffice it is to say that it is within the
province of Congress to do so in the exercise of its legislative power. It has the authority to choose the subject of
legislation, outline the effective measures to achieve its declared policies and even impose penalties in case of non-
compliance. It has the sole discretion to decide which policies to pursue and devise means to achieve them, and
courts often do not interfere in this exercise for as long as it does not transcend constitutional limitations. "In
performing this duty, the legislature has no guide but its judgment and discretion and the wisdom of
experience."53 In Carter v. Carter Coal Co.,54legislative discretion has been described as follows:

Legislative congressional discretion begins with the choice of means, and ends with the adoption of methods and
details to carry the delegated powers into effect. x x x [W]hile the powers are rigidly limited to the enumerations of
the Constitution, the means which may be employed to carry the powers into effect are not restricted, save that
they must be appropriate, plainly adapted to the end, and not prohibited by, but consistent with, the letter and
spirit of the Constitution. x x x. 55 (Emphasis ours)

Corollary, whether to treat the discount as a tax deduction or tax credit is a matter addressed to the wisdom of the
legislature. After all, it is within its prerogative to enact laws which it deems sufficient to address a specific public
concern. And, in the process of legislation, a bill goes through rigorous tests of validity, necessity and sufficiency in
both houses of Congress before enrolment. It undergoes close scrutiny of the members of Congress and necessarily
had to surpass the arguments hurled against its passage. Thus, the presumption of validity that goes with every law
as a form of deference to the process it had gone through and also to the legislature's exercise of discretion. Thus,
in lchong, etc., et al. v. Hernandez) etc., and Sarmiento,56the Court emphasized, thus:
It must not be overlooked, in the first place, that the legislature, which is the constitutional repository of police
power and exercises the prerogative of determining the policy of the State, is by force of circumstances
primarily the judge of necessity, adequacy or reasonableness and wisdom, of any law promulgated in the
exercise of the police power, or of the measures adopted to implement the public policy or to achieve
public interest.x x x.57 (Emphasis ours)

The legislature may also grant rights and impose additional burdens: It may also regulate industries, in the
exercise of police power, for the protection of the public. R.A. Nos. 9257 and 9442 are akin to regulatory laws, the
issuance of which is within the ambit of police power. The minimum wage law, zoning ordinances, price control
laws, laws regulating the operation of motels and hotels, laws limiting the working hours to eight, and the like fall
under this category. 58

Indeed, regulatory laws are within the category of police power measures from which affected persons or entities
cannot claim exclusion or compensation. For instance, private establishments cannot protest that the imposition of
the minimum wage is confiscatory since it eats up a considerable chunk of its profits or that the mandated
remuneration is not commensurate for the work done. The compulsory nature of the provision for minimum
wages underlies the effort of the State; as R.A. No. 672759 expresses it, to promote productivity-improvement and
gain-sharing measures to ensure a decent standard of living for the workers and their families; to guarantee the
rights of labor to its just share in the fruits of production; to enhance employment generation in the countryside
through industry dispersal; and to allow business and industry reasonable returns on investment, expansion and
growth, and as the Constitution expresses it, to affirm labor as a primary social economic force. 60

Similarly, the imposition of price control on staple goods in R.A. No. 758161 is likewise a valid exercise of police
power and affected establishments cannot argue that the law was depriving them of supposed gains. The law seeks
to ensure the availability of basic necessities and prime commodities at reasonable prices at all times without
denying legitimate business a fair return on investment. It likewise aims to provide effective and sufficient
protection to consumers against hoarding, profiteering and cartels with respect to the supply, distribution,
marketing and pricing of said goods, especially during periods of calamity, emergency, widespread illegal price
manipulation and other similar situations.62

More relevantly, in Manila Memorial Park, Inc.,63it was ruled that it is within the bounds of the police power of the
state to impose burden on private entities, even if it may affect their profits, such as in the imposition of price
control measures. There is no compensable taking but only a recognition of the fact that they are subject to the
regulation of the State and that all personal or private interests must bow down to the more paramount interest of
the State.

This notwithstanding, the regulatory power of the State does not authorize the destruction of the business. While a
business may be regulated, such regulation must be within the bounds of reason, i.e., the regulatory ordinance
must be reasonable, and its provision cannot be oppressive amounting to an arbitrary interference with the
business or calling subject of regulation. A lawful business or calling may not, under the guise of regulation, be
unreasonably interfered with even by the exercise of police power. 64 After all, regulation only signifies control or
restraint, it does not mean suppression or absolute prohibition. Thus, in Philippine Communications Satellite
Corporation v. Alcuaz,  65the Court emphasized:

The power to regulate is not the power to destroy useful and harmless enterprises, but is the power to protect,
foster, promote, preserve, and control with due regard for the interest, first and foremost, of the public, then of the
utility and of its patrons. Any regulation, therefore, which operates as an effective confiscation of private property
or constitutes an arbitrary or unreasonable infringement of property rights is void, because it is repugnant to the
constitutional guaranties of due process and equal protection of the laws. 66 (Citation omitted)

Here, the petitioner failed to show that R.A. Nos. 9257 and 9442, under the guise of regulation, allow undue
interference in an otherwise legitimate business.1avvphi1 On the contrary, it was shown that the questioned laws
do not meddle in the business or take anything from it but only regulate its realization of profits.
The subject laws do not violate the
equal protection clause

The petitioner argues that R.A. Nos. 9257 and 9442 are violative of the equal protection clause in that it failed to
distinguish between those who have the capacity to pay and those who do not, in granting the 20% discount. R.A.
No. 9257, in particular, removed the income qualification in R.A. No. 7432 of'₱60,000.00 per annum before a senior
citizen may be entitled to the 20o/o discount.

The contention lacks merit.

The petitioner's argument is dismissive of the reasonable qualification on which the subject laws were based.
In City of Manila v. Hon. Laguio, Jr.,  67 the Court emphasized:

Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights
conferred and responsibilities imposed. Similar subjects, in other words, should not be treated differently, so as to
give undue favor to some and unjustly discriminate against others. The guarantee means that no person or class of
persons shall be denied the same protection of laws which is enjoyed by other persons or other classes in like
circumstances.68 (Citations omitted)

"The equal protection clause is not infringed by legislation which applies only to those persons falling within a
specified class. If the groupings are characterized by substantial distinctions that make real differences, one class
may be treated and regulated differently from another."69 For a classification to be valid, (1) it must be based upon
substantial distinctions, (2) it must be germane to the purposes of the law, (3) it must not be limited to existing
conditions only, and (4) it must apply equally to all members of the same class. 70

To recognize all senior citizens as a group, without distinction as to income, is a valid classification. The
Constitution itself considered the elderly as a class of their own and deemed it a priority to address their needs.
When the Constitution declared its intention to prioritize the predicament of the underprivileged sick, elderly,
disabled, women, and children,71 it did not make any reservation as to income, race, religion or any other personal
circumstances. It was a blanket privilege afforded the group of citizens in the enumeration in view of the
vulnerability of their class.

R.A. No. 9257 is an implementation of the avowed policy of the Constitution to enact measures that protect and
enhance the right of all the people to human dignity, reduce social, economic, and political inequalities. 72
Specifically, it caters to the welfare of all senior citizens. The classification is based on age and therefore qualifies
all who have attained the age of 60. Senior citizens are a class of their own, who are in need and should be entitled
to government support, and the fact that they may still be earning for their own sustenance should not disqualify
them from the privilege.

It is well to consider that our senior citizens have already reached the age when work opportunities have dwindled
concurrently as their physical health.1âwphi1 They are no longer expected to work, but there are still those who
continue to work and contribute what they can to the country. Thus, to single them out and take them out of the
privileges of the law for continuing to strive and earn income to fend for themselves is inimical to a welfare state
that the Constitution envisions. It is tantamount to penalizing them for their persistence. It is commending
indolence rather than rewarding diligence. It encourages them to become wards of the State rather than
productive partners.

Our senior citizens were the laborers, professionals and overseas contract workers of the past. While some may be
well to do or may have the capacity to support their sustenance, the discretion to avail of the privileges of the law is
up to them. But to instantly tag them. as undeserving of the privilege would be the height of ingratitude; it is an
outright discrimination.

The same ratiocination may be said of the recognition of PWDs as a class in R.A. No. 9442 and in granting them
discounts.1âwphi1 It needs no further explanation that PWDs have special needs which, for most,' last their entire
lifetime. They constitute a class of their own, equally deserving of government support as our elderlies. While some
of them maybe willing to work and earn income for themselves, their disability deters them from living their full
potential. Thus, the need for assistance from the government to augment the reduced income or productivity
brought about by their physical or intellectual limitations.

There is also no question that the grant of mandatory discount is germane to the purpose of R.A. Nos. 9257 and
9442, that is, to adopt an integrated and comprehensive approach to health development and make essential goods
and other social services available to all the people at affordable cost, with special priority given to the elderlies
and the disabled, among others. The privileges granted by the laws ease their concerns and allow them to live more
comfortably.

The subject laws also address a continuing concern of the government for the welfare of the senior citizens and
PWDs. It is not some random predicament but an actual, continuing and pressing concern that requires
preferential attention. Also, the laws apply to all senior citizens and PWDs, respectively, without further distinction
or reservation. Without a doubt, all the elements for a valid classification were met.

The definitions of "disabilities" and

"PWDs" are clear and unequivocal

Undeterred, the petitioner claims that R.A. No. 9442 is ambiguous particularly in defining the terms "disability" and
"PWDs," such that it lack comprehensible standards that men of common intelligence must guess at its meaning. It
likewise bewails the futility of the given safeguards to prevent abuse since government officials who are neither
experts nor practitioners of medicine are given the authority to issue identification cards that authorizes the
granting of the privileges under the law.

The Court disagrees.

Section 4(a) of R.A. No. 7277, the precursor of R.A. No. 94421 defines "disabled persons" as follows:

(a) Disabled persons are those suffering from restriction or different abilities, as a result of a mental, physical or
sensory impairment, to perform an activity in the manner or within the range considered normal for a human
being[.]

On the other hand, the term "PWDs" is defined in Section 5.1 of the IRR of R.A. No. 9442 as follows:

5.1. PersonswithDisability are those individuals defined under Section 4 of [R.A. No.] 7277 [or] An Act Providing
for the Rehabilitation, Self-Development and Self-Reliance of Persons with Disability as amended and their
integration into the Mainstream of Society and for Other Purposes. This is defined as a person suffering from
restriction or different abilities, as a result of a mental, physical or sensory impairment, to perform an activity in a
manner or within the range considered normal for human being. Disability shall mean (1) a physical 1or mental
impairment that substantially limits one or more psychological, physiological or anatomical function of an
individual or activities of such individual; (2) a record of such an impairment; or (3) being regarded as having such
an impairment.

The foregoing definitions have a striking conformity with the definition of "PWDs" in Article 1 of the United
Nations Convention on the Rights of Persons with Disabilities which reads:

Persons with disabilities include those who have long-term physical, mental, intellectual or sensory impairments
which in interaction with various barriers may hinder their full and effective participation in society on an equal
basis with others. (Emphasis and italics ours)

The seemingly broad definition of the terms was not without good reasons. It recognizes that "disability is an
evolving concept"73 and appreciates the "diversity of PWDs."74 The terms were given comprehensive definitions so
as to accommodate the various forms of disabilities, and not confine it to a particular case as this would effectively
exclude other forms of physical, intellectual or psychological impairments.

Moreover, in Estrada v. Sandiganbayan,  75 it was declared, thus:

A statute is not rendered uncertain and void merely because general terms are used therein, or because of the
employment of terms without defining them; much less do we have to define every word we use. Besides, there is
no positive constitutional or statutory command requiring the legislature to define each and every word in an
enactment. Congress is not restricted in the form of expression of its will, and its inability to so define the words
employed in a statute will not necessarily result in the vagueness or ambiguity of the law so long as the legislative
will is clear, or at least, can be gathered from the whole act x x x.76 (Citation omitted)

At any rate, the Court gathers no ambiguity in the provisions of R.A. No. 9442. As regards the petitioner's claim that
the law lacked reasonable standards in determining the persons entitled to the discount, Section 32 thereof is on
point as it identifies who may avail of the privilege and the manner of its availment. It states:

Sec. 32. x x x

The abovementioned privileges are available only to persons with disability who are Filipino citizens upon
submission of any of the following as proof of his/her entitlement thereto:

(I) An identification card issued by the city or municipal mayor or the barangay captain of the place
where the persons with disability resides;

(II) The passport of the persons with disability concerned; or

(III) Transportation discount fare Identification Card (ID) issued by the National Council for the
Welfare of Disabled Persons (NCWDP).

It is, however, the petitioner's contention that the foregoing authorizes government officials who had no medical
background to exercise discretion in issuing identification cards to those claiming to be PWDs. It argues that the
provision lends to the indiscriminate availment of the privileges even by those who are not qualified.

The petitioner's apprehension demonstrates a superficial understanding of the law and its implementing rules. To
be clear, the issuance of identification cards to PWDs does not depend on the authority of the city or municipal
mayor, the DSWD or officials of the NCDA (formerly NCWDP). It is well to remember that what entitles a person to
the privileges of the law is his disability, the fact of which he must prove to qualify. Thus, in NCDA Administrative
Order (A.O.) No. 001, series of 2008, 77 it is required that the person claiming disability must submit the following
requirements before he shall be issued a PWD Identification Card:

1. Two "1 x l" recent ID pictures with the names, and signatures or thumb marks at the back of the picture.

2. One (1) Valid ID

3. Document to confirm the medical or disability condition 78

To confirm his disability, the person must obtain a medical certificate or assessment, as the case maybe, issued by a
licensed private or government physician, licensed teacher or head of a business establishment attesting to his
impairment. The issuing entity depends on whether the disability is apparent or non-apparent. NCDAA.O. No. 001
further provides:79

DISABILITY DOCUMENT ISSUING ENTITY

Apparent  Medical  Licensed Private or 
 Disability  Certificate Government Physician
 
  School  Licensed Teacher duly 
Assessment signed by the School 
Principal
  Certificate of   Head of the Business
Disability

Establishment

 Head of Non-
Government
Organization

Non-Apparent  Medical  Licensed Private or 

Disability  Certificate Government Physician
 

To provide further safeguard, the Department of Health issued A.O. No. 2009-0011, providing guidelines for the
availment of the 20% discount on the purchase of medicines by PWDs. In making a purchase, the individual must
present the documents enumerated in Section VI(4)(b ), to wit:

i. PWD identification card x x x

ii. Doctor's prescription stating the name of the PWD, age, sex, address, date, generic name of the medicine,
dosage form, dosage strength, quantity, signature over printed name of physician, physician's address,
contact number of physician or dentist, professional license number, professional tax receipt number and
narcotic license number, if applicable. To safeguard the health of PWDs and to prevent abuse of [R.A. No.]
9257, a doctor's prescription is required in the purchase of over-the-counter medicines. x x x.

iii. Purchase booklet issued by the local social/health office to PWDs for free containing the following basic
information:

a) PWD ID number

b) Booklet control number

c) Name of PWD

d) Sex

e) Address

f) Date of Birth

g) Picture

h) Signature of PWD

i) Information of medicine purchased:

i.1 Name of medicine

 i.2 Quantity

i.3 Attending Physician

i.4 License Number

i.5 Servicing drug store name

i.6 Name of dispensing pharmacist

j) Authorization letter of the PWD x x x in case the medicine is bought by the representative
or caregiver of the PWD.

The PWD identification card also has a validity period of only three years which facilitate in the monitoring of
those who may need continued support and who have been relieved of their disability, and therefore may be taken
out of the coverage of the law.

At any rate, the law has penal provisions which give concerned establishments the option to file a case against
those abusing the privilege Section 46(b) of R.A. No. 9442 provides that "[a]ny person who abuses the privileges
granted herein shall be punished with imprisonment of not less than six months or a fine of not less than Five
Thousand pesos (₱5,000.00), but not more than Fifty Thousand pesos (₱50,000.00), or both, at the discretion of the
court." Thus, concerned establishments, together with the proper government agencies, must actively participate
in monitoring compliance with the law so that only the intended beneficiaries of the law can avail of the privileges.

Indubitably, the law is clear and unequivocal, and the petitioner claim of vagueness to cast uncertainty in the
validity of the law does not stand.

WHEREFORE, in view of the foregoing disquisition, Section 4(a) of Republic Act No. 9257 and Section 32 of
Republic Act No. 9442 are hereby declared CONSTITUTIONAL.

<<page>>

SO ORDERED.
 SECOND DIVISION

November 9, 2016

G.R. No. 215957

COMMISSIONER OF INTERNAL REVENUE, Petitioner 

vs.
FITNESS BY DESIGN, INC., Respondent

DECISION

LEONEN, J.:

To avail of the extraordinary period of assessment in Section 222(a) of the National Internal Revenue Code, the
Commissioner of Internal Revenue should show that the facts upon which the fraud' is based is communicated to
the taxpayer. The burden of proving that the facts exist in any subsequent proceeding is with the Commissioner.
Furthermore, the Final Assessment Notice is not valid if it does not contain a definite due date for payment by the
taxpayer.

This resolves a Petition for Review on Certiorari1 filed by the Commissioner of Internal Revenue, which assails the
Decision2 dated July 14, 2014 and Resolution3 dated December 16, 2014 of the Court of Tax Appeals. The Court of
Tax Appeals En Banc affirmed the Decision of the First Division, which declared the assessment issued against
Fitness by Design, Inc. (Fitness) as invalid.4

On April 11, 1996, Fitness filed its Annual Income Tax Return for the taxable year of 1995.5 According to Fitness, it
was still in its pre-operating stage during the covered period.6

On June 9, 2004, Fitness received a copy of the Final Assessment Notice dated March 17, 2004.7 The Final
Assessment Notice was issued under Letter of Authority No. 00002953.8 The Final Assessment Notice assessed that
Fitness had a tax deficiency in the amount of ₱10,647,529.69.9 It provides:

FINAL ASSESSMENT NOTICE

March 17, 2004

FITNESS BY DESIGN, INC

169 Aguirre St., BF Homes,
Paranaque City

Gentlemen:
Please be informed that after investigation of your Internal revenue Tax Liabilities for the year 1995 pursuant to
Letter of Authority No. 000029353 dated May 13, 2002, there has been found due deficiency taxes as shown
hereunder:

Assessment No. _____________

Income Tax    
     
Taxable Income per return ₱  
Add: Unreported Sales   7,156,336.08
Taxable Income per audit   7,156,336.08
     
Tax Due (35%)   2,504,717.63
Add: Surcharge (50%) ₱ 1,252,358.81  
Interest (20%/annum) until 4-15-04 4,508,491. 73 5, 760,850.54
Deficiency Income Tax   ₱ 8,265,568.17
     
Value Added Tax    
     
Unreported Sales   ₱ 7,156,336.08
Output Tax (10%)   715,633.61
Add: Surcharge (50%) ₱ 357,816.80  
Interest (20%/ annum) until 4-15-04 1,303,823.60 1,661,640.41
Deficiency VAT ₱ 2,311,214.02
Documentary Stamp Tax    
     
Subscribe Capital Stock   ₱ 375,000.00
DST due (2/200)   3,750.00
Add: Surcharge (25%)   937.50
Deficiency DST   ₱ 4,687.50
     
Total Deficiency Taxes   ₱ 10,647,529.69

The complete details covering the aforementioned discrepancies established during the investigation of this case
are shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249(B) of the [National Internal Revenue Code], as amended. Please note, however,
that the interest and the total amount due will have to be adjusted if paid prior or beyond April 15, 2004.
In view thereof, you are requested to pay your aforesaid deficiency internal revenue taxes liabilities through the
duly authorized agent bank in which you are enrolled within the time shown in the enclosed assessment
notice.10 (Emphasis in the original)

Fitness filed a protest to the Final Assessment Notice on June 25, 2004. According to Fitness, the Commissioner's
period to assess had already prescribed. Further, the assessment was without basis since the company was only
incorporated on May 30, 1995.11

On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or Levy with Reference No. OCN WDL-
95-05-005 dated February 1, 2005 to Fitness.12

Fitness filed before the First Division of the Court of Tax Appeals a Petition for Review (With Motion to Suspend
Collection of Income Tax, Value Added Tax, Documentary Stamp Tax and Surcharges and Interests) on March 1,
2005.13

On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to Fitness' Petition and raised special and
affirmative defenses.14 The Commissioner posited that the Warrant of Distraint and/or Levy was issued in
accordance with law.15 The Commissioner claimed that its right to assess had not yet prescribed under Section
222(a)16 of the National Internal Revenue Code.17 Because the 1995 Income Tax ,Return filed by Fitness was false
and fraudulent for its alleged intentional failure to reflect its true sales, Fitness' respective taxes may be assessed at
any time within 10 years from the discovery of fraud or omission.18

The Commissioner asserted further that the assessment already became final and executory for Fitness' failure , to
file a protest within the reglementary period.19 The Commissioner denied that there was a protest to the Final
Assessment Notice filed by Fitness on June 25, 2004.20 According to the Commissioner, the alleged protest was
"nowhere to be found in the [Bureau of Internal Revenue] Records nor reflected in the Record Book of the Legal
Division as normally done by [its]' receiving clerk when she received [sic] any document."21 Therefore, the
Commissioner had sufficient basis to collect the tax deficiency through the Warrant of Distraint and/or Levy.22

The alleged fraudulent return was discovered through a tip from a confidential informant.23 The revenue officers'
investigation revealed that Fitness had been operating business with sales operations amounting to ₱7,156,336.08
in 1995, which it neglected toreport in its income tax return.24 Fitness' failure to report its income resulted in
deficiencies to its income tax and value-added tax of ₱8,265,568.17 and ₱2,377,274.02 respectively, as well as the
documentary stamp tax with regard to capital stock subscription.25

Through the report, the revenue officers recommended the filing of a civil case for collection of taxes and a criminal
case for failure to declare Fitness' purported sales in its 1995 Income Tax Return.26 Hence, a criminal complaint
against Fitness was filed before the Department of Justice.27

The Court of Tax Appeals First Division granted Fitness' Petition on the ground that the assessment has already
prescribed.28 It cancelled and set aside the Final Assessment Notice dated March 1 7, 2004 as well as the Warrant of
Distraint and/or Levy issued by the Commissioner.29 It ruled that the Final Assessment Notice is invalid for failure
to comply with the requirements of Section 22830 of the National Internal Revenue Code. The dispositive portion of
the Decision reads:

WHEREFORE, the Petition for Review dated February 24, 2005 filed by petitioner Fitness by Design, Inc., is
hereby GRANTED. Accordingly, the Final Assessment Notice dated 'March 17, 2004, finding petitioner liable for
deficiency income tax, documentary stamp tax and value-added tax for taxable year 1995 in the total amount of
₱10,647,529.69 is hereby CANCELLED and SET ASIDE. The Warrant of Distraint and Levy dated February 1, 2005
is 'likewise CANCELLED and SET ASIDE.

SO ORDERED.31 (Emphasis in the original)

The Commissioner's Motion for Reconsideration and its Supplemental Motion for Reconsideration were denied by
the Court of Tax Appeals First Division.32

Aggrieved, the Commissioner filed an appeal before the Court of Tax Appeals En Banc.33 The Commissioner
asserted ,that it had 10 years to make an assessment due to the fraudulent income tax return filed by Fitness.34 It
also claimed that the assessment already attained finality due to Fitness' failure to file its protest within the period
provided by law.35

Fitness argued that the Final Assessment Notice issued to it could not be claimed as a valid deficiency assessment
that could justify the issuance of a warrant of distraint and/or levy.36 It asserted that it was a mere request for
payment as it did not provide the period within which to pay the alleged liabilities.37

The Court of Tax Appeals En Banc ruled in favor of Fitness. It affirmed the Decision of the Court of Tax Appeals
First Division, thus:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit. Accordingly, both the Decision and
Resolution in CTA Case No. 7160 dated July 10, 2012 and November 21, 2012 respectively are AFFIRMED in
toto.38 (Emphasis in the original)

The Commissioner's Motion for Reconsideration was denied by the Court of Tax Appeals En Banc in the
Resolution39 dated December 16, 2014.

Hence, the Commissioner of Internal Revenue filed before this Court a Petition for Review.

Petitioner Commissioner of Internal Revenue raises the sole issue of whether the Final Assessment Notice issued
against respondent Fitness by Design, Inc. is a valid assessment under Section 228 of the National Internal Revenue
Code and Revenue Regulations No. 12-99.40

Petitioner argues that the Final Assessment Notice issued to respondent is valid since it complies with Section 228
of the National Internal Revenue Code and Revenue Regulations No. 12-99.41 The law states that the taxpayer shall
be informed in writing of the facts, jurisprudence, and law on which the assessment is based.42 Nothing in the law
provides that due date for payment is a substantive requirement for the validity of a final assessment notice.43

Petitioner further claims that a perusal of the Final Assessment Notice shows that April 15, 2004 is the due date for
payment.44 The pertinent portion of the assessment reads:

The complete details covering the aforementioned discrepancies established during the investigation of this case
are shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249(B) of the [National Internal Revenue Code], as amended. Please note, however,
that the interest and the total amount due will have to be adjusted if paid prior or beyond April 15,
2004.45 (Emphasis supplied)

This Court, through the Resolution46 dated July 22, 2015, required respondent to comment on the Petition for
Review.

In its Comment,47 respondent argues that the Final Assessment Notice issued was merely a request and not a
demand for payment of tax liabilities.48 The Final Assessment Notice cannot be considered as a final deficiency
assessment because it deprived respondent of due process when it failed to reflect its fixed tax
liabilities.49Moreover, it also gave respondent an indefinite period to pay its tax liabilities.50

Respondent points out that an assessment should strictly comply with the law for its validity.51 Jurisprudence
provides that "not all documents coming from the [Bureau of Internal Revenue] containing a computation of the
tax liability can be deemed assessments[,] which can attain finality."52 Therefore, the Warrant of Distraint and/or
Levy cannot be enforced since it is based on an invalid assessment.53
Respondent likewise claims that since the Final Assessment Notice was allegedly based on fraud, it must show the
details of the fraudulent acts imputed to it as part of due process.54

The Petition has no merit.

An assessment "refers to the determination of amounts due from a person obligated to make payments."55 "In the
context of national internal revenue collection, it refers to the determination of the taxes due from a taxpayer
under the National Internal Revenue Code of 1997."56

The assessment process starts with the filing of tax return and payment of tax by the taxpayer.57 The initial
assessment evidenced by the tax return is a self-assessment of the taxpayer.58 The tax is primarily computed and
voluntarily paid by the taxpayer without need of any demand from government.59 If tax obligations are properly
paid, the Bureau of Internal Revenue may dispense with its own assessment.60

After filing a return, the Commissioner or his or her representative may allow the examination of any taxpayer for
assessment of proper tax liability.61 The failure of a taxpayer to file his or her return will not hinder the
Commissioner from permitting the taxpayer's examination.62 The Commissioner can examine records or other data
relevant to his or her inquiry in order to verify the correctness of any return, or to make a return in case of
noncompliance, as well as to determine and collect tax liability.63

The indispensability of affording taxpayers sufficient written notice of his or her tax liability is a clear definite
requirement.64 Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99, as amended,
transparently outline the procedure in tax assessment.65

Section 3 of Revenue Regulations No. 12-99,66 the then prevailing regulation regarding the due process
requirement in the issuance of a deficiency tax assessment, requires a notice for informal conference.67 The
revenue officer who audited the taxpayer's records shall state in his or her report whether the taxpayer concurs
with his or her findings of liability for deficiency taxes.68 If the taxpayer does not agree, based on the revenue
officer's report, the taxpayer shall be informed in writing69 of the discrepancies in his or her payment of internal
revenue taxes for "Informal Conference."70 The informal conference gives the taxpayer an opportunity to present
his or her side of the case.71

The taxpayer is given 15 days from receipt of the notice of informal conference to respond.72 If the taxpayer fails to
respond, he or she will be considered in default.73 The revenue officer74 endorses the case with the least possible
delay to the Assessment Division of the Revenue Regional Office or the Commissioner or his or her authorized
representative.75 The Assessment Division of the Revenue Regional Office or the Commissioner or his or her
authorized representative is responsible for the "appropriate review and issuance of a deficiency tax assessment, if
warranted."76

If, after the review conducted, there exists sufficient basis to assess the taxpayer with deficiency taxes, the officer
'shall issue a preliminary assessment notice showing in detail the facts, jurisprudence, and law on which the
assessment is based.77 The taxpayer is given 15 days from receipt of the pre-assessment notice to respond.78 If the
taxpayer fails to respond, he or she will be considered in default, and a formal letter of demand and assessment
notice will be issued.79

The formal letter of demand and assessment notice shall state the facts, jurisprudence, and law on which the
assessment was based; otherwise, these shall be void.80 The taxpayer or the authorized representative may
administratively protest the formal letter of demand and assessment notice within 30 days from receipt of the
notice.81

II
The word "shall" in Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99 means
the act of informing the taxpayer of both the legal and factual bases of the assessment is mandatory.82 The law
requires that the bases be reflected in the formal letter of demand and assessment notice.83 This cannot be
presumed.84 Otherwise, the express mandate of Section 228 and Revenue Regulations No. 12-99 would be
nugatory.85 The requirement enables the taxpayer to make an effective protest or appeal of the assessment or
decision.86

The rationale behind the requirement that taxpayers should be informed of the facts and the law on which the
assessments are based conforms with the constitutional mandate that no person shall be deprived of his or her
property without due process of law.87 Between the power of the State to tax and an individual's right to due
process, the scale favors the right of the taxpayer to due process.88

The purpose of the written notice requirement is to aid the taxpayer in making a reasonable protest, if
necessary.89Merely notifying the taxpayer of his or her tax liabilities without details or particulars is not enough.90

Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc.91 held that a final assessment notice
that only contained a table of taxes with no other details was insufficient:

In the present case, a mere perusal of the [Final Assessment Notice] for the deficiency EWT for taxable year
1994 will show that other than a tabulation of the alleged deficiency taxes due, no further detail regarding the
assessment was provided by petitioner. Only the resulting interest, surcharge and penalty were anchored with legal
basis. Petitioner should have at least attached a detailed notice of discrepancy or stated an explanation why the
amount of P48,461.76 is collectible against respondent and how the same was arrived at.92

Any deficiency to the mandated content of the assessment or its process will not be tolerated.93 In Commissioner of
Internal Revenue v. Enron,94 an advice of tax deficiency from the Commissioner of Internal Revenue to an employee
of Enron, including the preliminary five (5)-day letter, were not considered valid substitutes for the mandatory
written notice of the legal and factual basis of the assessment.95 The required issuance of deficiency tax assessment
notice to the taxpayer is different from the required contents of the notice.96 Thus:

The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and
assessment notice.1âwphi1 Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the
[National Internal Revenue Code] and [Revenue Regulations] No. 12-99 would be rendered nugatory. The alleged
"factual bases" in the advice, preliminary letter and "audit working papers" did not suffice. There was no going
around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal
letter of demand accompanying the assessment notice.97 (Emphasis supplied)

However, the mandate of giving the taxpayer a notice of the facts and laws on which the assessments are based
should not be mechanically applied.98 To emphasize, the purpose of this requirement is to sufficiently inform the
taxpayer of the bases for the assessment to enable him or her to make an intelligent protest.99

In Samar-I Electric Cooperative v. Commissioner of Internal Revenue,100 substantial compliance with Section 228 of
the National Internal Revenue Code is allowed, provided that the taxpayer would be later apprised in writing of the
factual and legal bases of the assessment to enable him or her to prepare for an effective protest.101 Thus:

Although the [Final Assessment Notice] and demand letter issued to petitioner were not accompanied by a written
explanation of the legal and factual bases of the deficiency taxes assessed against the petitioner, the records
showed that respondent in its letter dated April 10, 2003 responded to petitioner's October 14, 2002 letter-
protest, explaining at length the factual and legal bases of the deficiency tax assessments and denying the protest.

Considering the foregoing exchange of correspondence and documents between the parties, we find that the
requirement of Section 228 was substantially complied with. Respondent had fully informed petitioner in writing
of the factual and legal bases of the deficiency taxes assessment, which enabled the latter to file an "effective"
protest, much unlike the taxpayer's situation in Enron. Petitioner's right to due process was thus not violated.102
A final assessment notice provides for the amount of tax due with a demand for payment.103 This is to determine
the amount of tax due to a taxpayer.104 However, due process requires that taxpayers be informed in writing of the
facts and law on which the assessment is based in order to aid the taxpayer in making a reasonable protest.105 To
immediately ensue with tax collection without initially substantiating a valid assessment contravenes the principle
in administrative investigations "that taxpayers should be able to present their case and adduce supporting
evidence."106

Respondent filed its income tax return in 1995.107 Almost eight (8) years passed before the disputed final
assessment notice was issued. Respondent pleaded prescription as its defense when it filed a protest to the Final
Assessment Notice. Petitioner claimed fraud assessment to justify the belated assessment made on respondent.108If
fraud was indeed present, the period of assessment should be within 10 years.109 It is incumbent upon petitioner to
clearly state the allegations of fraud committed by respondent to serve the purpose of an assessment notice to aid
respondent in filing an effective protest.

III

The prescriptive period in making an assessment depends upon whether a tax return was filed or whether the tax
return filed was either false or fraudulent.1âwphi1 When a tax return that is neither false nor fraudulent has been
filed, the Bureau of Internal Revenue may assess within three (3) years, reckoned from the date of actual filing or
from the last day prescribed by law for filing.110 However, in case of a false or fraudulent return with intent to
evade tax, Section 222(a) provides:

Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. –

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within
ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for
the collection thereof. (Emphasis supplied)

In Aznar v. Court of Tax Appeals,111 this Court interpreted Section 332112 (now Section 222[a] of the National
Internal Revenue Code) by dividing it in three (3) different cases: first, in case of false return; second, in case of a
fraudulent return with intent to evade; and third, in case of failure to file a return.113 Thus:

Our stand that the law should be interpreted to mean a separation of the three different situations of false return,
fraudulent return with intent to evade tax and failure to file a return is strengthened immeasurably by the last
portion of the provision which aggregates the situations into three different classes, namely "falsity'', "fraud" and
"omission."114

This Court held that there is a difference between "false return" and a "fraudulent return."115 A false return simply
involves a "deviation from the truth, whether intentional or not" while a fraudulent return "implies intentional or
deceitful entry with intent to evade the taxes due."116

Fraud is a question of fact that should be alleged and duly proven.117 "The willful neglect to file the required tax
return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal
consequences, cannot be presumed."118 Fraud entails corresponding sanctions under the tax law. Therefore, it is
indispensable for the Commissioner of Internal Revenue to include the basis for its allegations of fraud in the
assessment notice.

During the proceedings in the Court of Tax Appeals First Division, respondent presented its President, Domingo C.
Juan Jr. (Juan, Jr.), as witness.119 Juan, Jr. testified that respondent was, in its pre-operating stage in 1995.120During
that period, respondent "imported equipment and distributed them for market testing in the Philippines without
earning any profit."121 He also confirmed that the Final Assessment Notice and its attachments failed to
substantiate the Commissioner's allegations of fraud against respondent, thus:
More than three (3) years from the time petitioner filed its 1995 annual income tax return on April 11, 1996,
respondent issued to petitioner a [Final Assessment Notice] dated March 17, 2004 for the year 1995, pursuant to
the Letter of Authority No. 00002953 dated May 13, 2002. The attached Details of discrepancy containing the
assessment for income tax (IT), value-added tax (VAT) and documentary stamp tax (DST) as well as the Audit
Result/ Assessment Notice do not impute fraud on the part of petitioner. Moreover, it was obtained on information
and documents illegally obtained by a [Bureau of Internal Revenue] informant from petitioner's accountant Elnora
Carpio in 1996.122 (Emphasis supplied)

Petitioner did not refute respondent's allegations. For its defense, it presented Socrates Regala (Regala), the Group
Supervisor of the team, who examined respondent's tax liabilities.123 Regala confirmed that the investigation was
prompted by a tip from an informant who provided them with respondent's list of sales.124 He admitted125 that the
gathered information did not show that respondent deliberately failed to reflect its true income in 1995.126

IV

The issuance of a valid formal assessment is a substantive prerequisite for collection of taxes.127 Neither the
National Internal Revenue Code nor the revenue regulations provide for a "specific definition or form of an
assessment." However, the National Internal Revenue Code defines its explicit functions and effects."128 An
assessment does not only include a computation of tax liabilities; it also includes a demand for payment within a
period prescribed.129 Its main purpose is to determine the amount that a taxpayer is liable to pay.130

A pre-assessment notice "do[es] not bear the gravity of a formal assessment notice."131 A pre-assessment notice
merely gives a tip regarding the Bureau of Internal Revenue's findings against a taxpayer for an informal
conference or a clarificatory meeting.132

A final assessment is a notice "to the effect that the amount therein stated is due as tax and a demand for payment
thereof."133 This demand for payment signals the time "when penalties and interests begin to accrue against the
taxpayer and enabling the latter to determine his remedies[.]"134 Thus, it must be "sent to and received by the
taxpayer, and must demand payment of the taxes described therein within a specific period."135

The disputed Final Assessment Notice is not a valid assessment.

First, it lacks the definite amount of tax liability for which respondent is accountable. It does not purport to be a
demand for payment of tax due, which a final assessment notice should supposedly be. An assessment, in the
context of the National Internal Revenue Code, is a "written notice and demand made by the [Bureau of Internal
Revenue] on the taxpayer for the settlement of a due tax liability that is there: definitely set and fixed."136 Although
the disputed notice provides for the computations of respondent's tax liability, the amount remains indefinite. It
only provides that the tax due is still subject to modification, depending on the date of payment. Thus:

The complete details covering the aforementioned discrepancies established during the investigation of this case
are shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249 (B) of the [National Internal Revenue Code], as amended. Please note, however,
that the interest and the total amount due will have to be adjusted if prior or beyond April 15, 2004.137 (Emphasis
Supplied)

Second, there are no due dates in the Final Assessment Notice. This negates petitioner's demand for
payment.138Petitioner's contention that April 15, 2004 should be regarded as the actual due date cannot be
accepted. The last paragraph of the Final Assessment Notice states that the due dates for payment were supposedly
reflected in the attached assessment:

In view thereof, you are requested to pay your aforesaid deficiency internal revenue tax liabilities through the duly
authorized agent bank in which you are enrolled within the time shown in the enclosed assessment
notice.139 (Emphasis in the original)
However, based on the findings of the Court of Tax Appeals First Division, the enclosed assessment pertained to
remained unaccomplished.140

Contrary to petitioner's view, April 15, 2004 was the reckoning date of accrual of penalties and surcharges and not
the due date for payment of tax liabilities.1avvphi1 The total amount depended upon when respondent decides to
pay. The notice, therefore, did not contain a definite and actual demand to pay.

Compliance with Section 228 of the National Internal Revenue Code is a substantative requirement.141 It is not a
mere formality.142 Providing the taxpayer with the factual and legal bases for the assessment is crucial before
proceeding with tax collection. Tax collection should be premised on a valid assessment, which would allow the
taxpayer to present his or her case and produce evidence for substantiation.143

The Court of Tax Appeals did not err in cancelling the Final Assessment Notice as well as the Audit
Result/Assessment Notice issued by petitioner to respondent for the year 1995 covering the "alleged deficiency
income tax, value-added tax and documentary stamp tax amounting to ₱10,647,529.69, inclusive of surcharges and
interest"144 for lack of due process. Thus, the Warrant of Distraint and/or Levy is void since an invalid assessment
bears no valid effect.145

Taxes are the lifeblood of government and should be collected without hindrance.146 However, the collection of
taxes should be exercised "reasonably and in accordance with the prescribed procedure."147

The essential nature of taxes for the existence of the State grants government with vast remedies to ensure its
collection. However, taxpayers are guaranteed their fundamental right to due process of law, as articulated in
various ways in the process of tax assessment. After all, the State's purpose is to ensure the well-being of its
citizens, not simply to deprive them of their fundamental rights.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Tax Appeals En Banc dated July 14, 2014 and
Resolution dated December 16, 2014 in CTA EB Case No. 970 (CTA Case No. 7160) are hereby AFFIRMED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other
hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The
corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal
Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total
amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959.1 On January 18, 1965, Algue flied
a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of
the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private respondent,
through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A
search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a
photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was
finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the
warrant of distraint and levy earlier sought to be served.5 Sixteen days later, on April 23, 1965, Algue filed a
petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals.6

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

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

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with
Algue, it held that the said amount had been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in
the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be
personal holding company income 12 but later conformed to the decision of the respondent court rejecting this
assertion.13 In fact, as the said court found, the amount was earned through the joint efforts of the persons among
whom it was distributed It has been established that the Philippine Sugar Estate Development Company had
earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant
to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez,
worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in
it.14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation
purchased the PSEDC properties.15 For this sale, Algue received as agent a commission of P126,000.00, and it was
from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals.16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and
paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after examining the evidence, that no
distribution of dividends was involved.18

The petitioner claims that these payments are fictitious because most of the payees are members of the same
family in control of Algue. It is argued that no indication was made as to how such payments were made, whether
by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax
dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara,
and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically
and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts was not required. Even so,
at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received
by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This
arrangement was understandable, however, in view of the close relationship among the persons in the family
corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion,
considering that it was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent
court is in accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22

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

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or
incurred in carrying on any trade or business may be included a reasonable allowance for salaries
or other compensation for personal services actually rendered. The test of deductibility in the case
of compensation payments is whether they are reasonable and are, in fact, payments purely for
service. This test and deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its practical application may
be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, is
not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of
whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or bear a close relationship to the stockholdings of
the officers of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted
by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and
involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for
lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's
hard earned income to the taxing authorities, every person who is able to must contribute his share in the running
of the government. The government for its part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not
been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the
petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.SO ORDERED.

Republic of the Philippines

SUPREME COURT

EN BANC

G.R. No. 168056 September 1, 2005

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S.
ALBANO, Petitioners, 
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondent.

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

G.R. No. 168207

AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON, ALFREDO
S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEÑ A III, Petitioners, 
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE, GUILLERMO L.
PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Respondent.

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

G.R. No. 168461

ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO; PETRON
DEALERS’ ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF CALTEX DEALERS’ OF
THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing business
under the name and style of "ANB NORTH SHELL SERVICE STATION"; LOURDES MARTINEZ doing business under
the name and style of "SHELL GATE – N. DOMINGO"; BETHZAIDA TAN doing business under the name and style of
"ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing business under the name and style of "NEW
LAMUAN SHELL SERVICE STATION"; EFREN SOTTO doing business under the name and style of "RED FIELD
SHELL SERVICE STATION"; DONICA CORPORATION represented by its President, DESI TOMACRUZ; RUTH E.
MARBIBI doing business under the name and style of "R&R PETRON STATION"; PETER M. UNGSON doing business
under the name and style of "CLASSIC STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE doing business
under the name and style of "NTE GASOLINE & SERVICE STATION"; JULIAN CESAR P. POSADAS doing business
under the name and style of "STARCARGA ENTERPRISES"; ADORACION MAÑ EBO doing business under the name
and style of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA doing business under the name and style of
"LEONA’S GASOLINE STATION and SERVICE CENTER"; CARMELITA BALDONADO doing business under the name
and style of "FIRST CHOICE SERVICE CENTER"; MERCEDITAS A. GARCIA doing business under the name and style
of "LORPED SERVICE CENTER"; RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT GAS
STATION"; MA. ISABEL VIOLAGO doing business under the name and style of "VIOLAGO-PTT SERVICE CENTER";
MOTORISTS’ HEART CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA;
MOTORISTS’ HARVARD CORPORATION represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS’ HERITAGE CORPORATION represented by its Vice-President for Operations, JOSELITO
F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; ROMEO MANUEL doing business under the name and style of "ROMMAN GASOLINE
STATION"; ANTHONY ALBERT CRUZ III doing business under the name and style of "TRUE SERVICE STATION",
Petitioners, 
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, Respondent.

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

G.R. No. 168463

FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA, RODOLFO G. PLAZA,
DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN EDGARDO M. ANGARA,
JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A.
SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A. CASIÑ O,
Petitioners, 
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his capacity as
Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as Executive
Secretary,Respondent.

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

G.R. No. 168730

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner, 

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

DECISION

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest of all, should be borne by everyone, and the more
man enjoys the advantages of society, the more he ought to hold himself honored in contributing to those
expenses.

-Anne Robert Jacques Turgot (1727-1781)

French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments for
health workers, and wider coverage for full value-added tax benefits … these are the reasons why Republic Act No.
9337 (R.A. No. 9337)1 was enacted. Reasons, the wisdom of which, the Court even with its extensive constitutional
power of review, cannot probe. The petitioners in these cases, however, question not only the wisdom of the law,
but also perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners
failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

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

House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on Ways and
Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson
introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate enactment. On
January 27, 2005, the House of Representatives approved the bill on second and third reading.

House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F. Baterina,
and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No. 3555. The House
Committee on Ways and Means approved the bill on February 2, 2005. The President also certified it as urgent on
February 8, 2005. The House of Representatives approved the bill on second and third reading on February 28,
2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March 7, 2005, "in
substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and 3705."
Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both sponsored
by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill on March 11,
2005, and was approved by the Senate on second and third reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a committee
conference on the disagreeing provisions of the proposed bills.

Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No. 3705,
and Senate Bill No. 1950, "after having met and discussed in full free and conference," recommended the approval
of its report, which the Senate did on May 10, 2005, and with the House of Representatives agreeing thereto the
next day, May 11, 2005.

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

July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court issued a temporary restraining
order, effective immediately and continuing until further orders, enjoining respondents from enforcing and
implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr.
Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining order on July 1,
2005, to wit:

J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little background.
You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5 o’clock in the afternoon. But
before that, there was a lot of complaints aired on television and on radio. Some people in a gas station were
complaining that the gas prices went up by 10%. Some people were complaining that their electric bill will go up
by 10%. Other times people riding in domestic air carrier were complaining that the prices that they’ll have to pay
would have to go up by 10%. While all that was being aired, per your presentation and per our own understanding
of the law, that’s not true. It’s not true that the e-vat law necessarily increased prices by 10% uniformly isn’t it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : It’s not, because, Your Honor, there is an Executive Order that granted the Petroleum
companies some subsidy . . . interrupted

J. PANGANIBAN : That’s correct . . .

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

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

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise Tax
and the import duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased prices by
10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-Vat
tax. If you consider the excise tax and the import duties, the Net Tax would probably be in the neighborhood of
7%? We are not going into exact figures I am just trying to deliver a point that different industries, different
products, different services are hit differently. So it’s not correct to say that all prices must go up by 10%.

ATTY. BANIQUED : You’re right, Your Honor.

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

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

J. PANGANIBAN : There are other products that the people were complaining on that first day, were being
increased arbitrarily by 10%. And that’s one reason among many others this Court had to issue TRO because of the
confusion in the implementation. That’s why we added as an issue in this case, even if it’s tangentially taken up by
the pleadings of the parties, the confusion in the implementation of the E-vat. Our people were subjected to the
mercy of that confusion of an across the board increase of 10%, which you yourself now admit and I think even the
Government will admit is incorrect. In some cases, it should be 3% only, in some cases it should be 6% depending
on these mitigating measures and the location and situation of each product, of each service, of each company, isn’t
it?

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So that’s one reason why we had to issue a TRO pending the clarification of all these and
we wish the government will take time to clarify all these by means of a more detailed implementing rules, in case
the law is upheld by this Court. . . .6

The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

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

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

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½
%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive
authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.

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

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral
Conference Committee is a violation of the "no-amendment rule" upon last reading of a bill laid down in Article VI,
Section 26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers,
Inc., et al., assailing the following provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall be
amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million Pesos
(₱1, 000,000.00);

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

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

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

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

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

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition
for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of Article VI,
Section 28(2) of the Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions present in
Senate Bill No. 1950 and House Bill No. 3705; and

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

G.R. No. 168730

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

RESPONDENTS’ COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents
contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt on its
validity.

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

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral
proceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto, have
already been settled. With regard to the issue of undue delegation of legislative power to the President,
respondents contend that the law is complete and leaves no discretion to the President but to increase the rate to
12% once any of the two conditions provided therein arise.

Respondents also refute petitioners’ argument that the increase to 12%, as well as the 70% limitation on the
creditable input tax, the 60-month amortization on the purchase or importation of capital goods exceeding
₱1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and
confiscatory, and that it violates the constitutional principle on progressive taxation, among others.

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

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

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

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

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

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

b. Article VI, Section 28(2)

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

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

b. Article III, Section 1

RULING OF THE COURT

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

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or
properties and services.8 Being an indirect tax on expenditure, the seller of goods or services may pass on the
amount of tax paid to the buyer,9 with the seller acting merely as a tax collector.10 The burden of VAT is intended to
fall on the immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in,
without transferring the burden to someone else.11 Examples are individual and corporate income taxes, transfer
taxes, and residence taxes.12

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode.
Prior to 1978, the system was a single-stage tax computed under the "cost deduction method" and was payable
only by the original sellers. The single-stage system was subsequently modified, and a mixture of the "cost
deduction method" and "tax credit method" was used to determine the value-added tax payable.13 Under the "tax
credit method," an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid
on its purchases, inputs and imports.14

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system was
rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit method."15

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

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

I.

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

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded its
authority by:

1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;

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

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

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

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

It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative body
for, as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be utterly impracticable to
transact the business of the nation, either at all, or at least with decency, deliberation, and order."19 Thus,
Article VI, Section 16 (3) of the Constitution provides that "each House may determine the rules of its proceedings."
Pursuant to this inherent constitutional power to promulgate and implement its own rules of procedure, the
respective rules of each house of Congress provided for the creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:

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

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

Sec. 89. Conference Committee Reports. – . . . Each report shall contain a detailed, sufficiently explicit statement of
the changes in or amendments to the subject measure.

...

The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the voting
thereon. The House shall vote on the Conference Committee Report in the same manner and procedure as it votes
on a bill on third and final reading.

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

Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any bill
or joint resolution, the differences shall be settled by a conference committee of both Houses which shall meet
within ten (10) days after their composition. The President shall designate the members of the Senate Panel in the
conference committee with the approval of the Senate.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in, or
amendments to the subject measure, and shall be signed by a majority of the members of each House panel, voting
separately.

A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof with
the explanatory statement of the conference committee shall be attached to the report.

...

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

In the recent case of Fariñas vs. The Executive Secretary,20 the Court En Banc, unanimously reiterated and
emphasized its adherence to the "enrolled bill doctrine," thus, declining therein petitioners’ plea for the Court to go
behind the enrolled copy of the bill. Assailed in said case was Congress’s creation of two sets of bicameral
conference committees, the lack of records of said committees’ proceedings, the alleged violation of said
committees of the rules of both houses, and the disappearance or deletion of one of the provisions in the
compromise bill submitted by the bicameral conference committee. It was argued that such irregularities in the
passage of the law nullified R.A. No. 9006, or the Fair Election Act.

Striking down such argument, the Court held thus:

Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate President and the
certification of the Secretaries of both Houses of Congress that it was passed are conclusive of its due enactment. A
review of cases reveals the Court’s consistent adherence to the rule. The Court finds no reason to deviate from
the salutary rule in this case where the irregularities alleged by the petitioners mostly involved the
internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference Committee by the
House. This Court is not the proper forum for the enforcement of these internal rules of Congress, whether
House or Senate. Parliamentary rules are merely procedural and with their observance the courts have no
concern. Whatever doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in
its favor.The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:

But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power to
inquire into allegations that, in enacting a law, a House of Congress failed to comply with its own rules, in
the absence of showing that there was a violation of a constitutional provision or the rights of private
individuals. In Osmeña v. Pendatun, it was held: "At any rate, courts have declared that ‘the rules adopted by
deliberative bodies are subject to revocation, modification or waiver at the pleasure of the body adopting
them.’ And it has been said that "Parliamentary rules are merely procedural, and with their observance, the
courts have no concern. They may be waived or disregarded by the legislative body." Consequently, "mere
failure to conform to parliamentary usage will not invalidate the action (taken by a deliberative body)
when the requisite number of members have agreed to a particular measure."21 (Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities
committed by the conference committee in introducing changes or deleting provisions in the House and Senate
bills. Akin to the Fariñas case,22 the present petitions also raise an issue regarding the actions taken by the
conference committee on matters regarding Congress’ compliance with its own internal rules. As stated earlier,
one of the most basic and inherent power of the legislature is the power to formulate rules for its proceedings and
the discipline of its members. Congress is the best judge of how it should conduct its own business expeditiously
and in the most orderly manner. It is also the sole

concern of Congress to instill discipline among the members of its conference committee if it believes that said
members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to
questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the internal
proceedings of a co-equal branch of government.

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,23 the
Court already made the pronouncement that "[i]f a change is desired in the practice [of the Bicameral
Conference Committee] it must be sought in Congress since this question is not covered by any
constitutional provision but is only an internal rule of each house." 24 To date, Congress has not seen it fit to
make such changes adverted to by the Court. It seems, therefore, that Congress finds the practices of the bicameral
conference committee to be very useful for purposes of prompt and efficient legislative action.

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

House Bill No. 3555   House Bill No.3705   Senate Bill No. 1950
With regard to "Stand-By Authority" in favor of President
Provides for 12% VAT on every   Provides for 12% VAT in general on   Provides for a single rate of 10%
sale of goods or properties sales of goods or properties and VAT on sale of goods or
(amending Sec. 106 of NIRC); reduced rates for sale of certain properties (amending Sec. 106 of
12% VAT on importation of locally manufactured goods and NIRC), 10% VAT on sale of
goods (amending Sec. 107 of petroleum products and raw services including sale of
NIRC); and 12% VAT on sale of materials to be used in the electricity by generation
services and use or lease of
properties (amending Sec. 108 of
NIRC)
With regard to the "no pass-on" provision
No similar provision  
manufacture thereof (amending Sec.
106 of NIRC); 12% VAT on
importation of goods and reduced
rates for certain imported products
including petroleum products
(amending Sec. 107 of NIRC); and
12% VAT on sale of services and use
or lease of properties and a reduced
rate for certain services including
power generation (amending Sec.
108 of NIRC)
Provides that the VAT imposed on  
power generation and on the sale of
petroleum products shall be
absorbed by generation companies
or sellers, respectively, and shall not
be passed on to consumers
companies, transmission and
distribution companies, and use
or lease of properties (amending
Sec. 108 of NIRC)
Provides that the VAT imposed on
sales of electricity by generation
companies and services of
transmission companies and
distribution companies, as well as
those of franchise grantees of
electric utilities shall not apply to
residential

end-users. VAT shall be absorbed

by generation, transmission, and
distribution companies.
With regard to 70% limit on input tax credit
Provides that the input tax credit   No similar provision   Provides that the input tax credit
for capital goods on which a VAT for capital goods on which a VAT
has been paid shall be equally has been paid shall be equally
distributed over 5 years or the distributed over 5 years or the
depreciable life of such capital depreciable life of such capital
goods; the input tax credit for goods; the input tax credit for
goods and services other than goods and services other than
capital goods shall not exceed capital goods shall not exceed
5% of the total amount of such 90% of the output VAT.
goods and services; and for
persons engaged in retail trading
of goods, the allowable input tax
credit shall not exceed 11% of
the total amount of goods
purchased.
With regard to amendments to be made to NIRC provisions regarding income and excise taxes
No similar provision   No similar provision   Provided for amendments to
several NIRC provisions
regarding corporate income,
percentage, franchise and
excise taxes

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

1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference
Committee Report that the Bicameral Conference Committee tried to bridge the gap in the difference between the
10% VAT rate proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed by the
House, by striking a compromise whereby the present 10% VAT rate would be retained until certain conditions
arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of the previous year
exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year exceeds 1½%, when
the President, upon recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective
January 1, 2006.

2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission and
distribution companies should not be passed on to consumers or whether both the VAT imposed on electricity
generation, transmission and distribution companies and the VAT imposed on sale of petroleum products may be
passed on to consumers, the Bicameral Conference Committee chose to settle such disagreement by altogether
deleting from its Report any no pass-on provision.

3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral Conference
Committee decided to adopt the position of the House by putting a limitation on the amount of input tax that may
be credited against the output tax, although it crafted its own language as to the amount of the limitation on input
tax credits and the manner of computing the same by providing thus:

(A) Creditable Input Tax. – . . .

...

Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the
fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component
thereof, exceeds one million Pesos (₱1,000,000.00): PROVIDED, however, that if the estimated useful life of the
capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over
such shorter period: . . .

(B) Excess Output or Input Tax. – If at the end of any taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters: PROVIDED that the input tax inclusive of input VAT carried
over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of
the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales by a VAT-registered
person may at his option be refunded or credited against other internal revenue taxes, . . .

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

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

In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions
were meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent that
is wholly foreign to the subject embraced by the original provisions.

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

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

. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector should be
a beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an indirect tax. It is a
pass on-tax. And let’s keep it plain and simple. Let’s not confuse the bill and put a no pass-on provision. Two-
thirds of the world have a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no pass-
though provision. So, the thinking of the Senate is basically simple, let’s keep the VAT simple.26 (Emphasis
supplied)

Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really enjoyed the
support of either House."27

With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee
came to a compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the change
introduced by the Bicameral Conference Committee was totally within the intent of both houses to put a cap on
input tax that may be

credited against the output tax. From the inception of the subject revenue bill in the House of Representatives, one
of the major objectives was to "plug a glaring loophole in the tax policy and administration by creating vital
restrictions on the claiming of input VAT tax credits . . ." and "[b]y introducing limitations on the claiming of tax
credit, we are capping a major leakage that has placed our collection efforts at an apparent disadvantage."28

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No.
1950, since said provisions were among those referred to it, the conference committee had to act on the same and
it basically adopted the version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to subjects of
the provisions referred

to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack
or excess of jurisdiction committed by the Bicameral Conference Committee. In the earlier cases of Philippine
Judges Association vs. Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized the long-standing
legislative practice of giving said conference committee ample latitude for compromising differences between the
Senate and the House. Thus, in the Tolentino case, it was held that:

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

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

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

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

Petitioners’ argument that the practice where a bicameral conference committee is allowed to add or delete
provisions in the House bill and the Senate bill after these had passed three readings is in effect a circumvention of
the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate from
its ruling in the Tolentino case that:

Nor is there any reason for requiring that the Committee’s Report in these cases must have undergone three
readings in each of the two houses. If that be the case, there would be no end to negotiation since each house may
seek modification of the compromise bill. . . .

Art. VI. § 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in
either house of Congress, not to the conference committee report.32 (Emphasis supplied)

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

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of Revenue Bills

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

Section 27 Rates of Income Tax on Domestic Corporation

28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue
Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House. They
aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114 of the
NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the
NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments were not found in the
House bills are not intended to be amended by the House of Representatives. Hence, they argue that since the
proposed amendments did not originate from the House, such amendments are a violation of Article VI, Section 24
of the Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives but the Senate may
propose or concur with amendments.

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

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

. . . To begin with, it is not the law – but the revenue bill – which is required by the Constitution to "originate
exclusively" in the House of Representatives. It is important to emphasize this, because a bill originating in the
House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At this
point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist
that a revenue statute – and not only the bill which initiated the legislative process culminating in the
enactment of the law – must substantially be the same as the House bill would be to deny the Senate’s
power not only to "concur with amendments" but also to "propose amendments." It would be to violate the
coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.

…Given, then, the power of the Senate to propose amendments, the Senate can propose its own version
even with respect to bills which are required by the Constitution to originate in the House.

...

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the districts, the members of the House can be
expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are
elected at large, are expected to approach the same problems from the national perspective. Both views
are thereby made to bear on the enactment of such laws.33 (Emphasis supplied)

Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate
was acting within its

constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No.
1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the
Constitution does not contain any prohibition or limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the
House bills are still in furtherance of the intent of the House in initiating the subject revenue bills. The Explanatory
Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later substituted by House
Bill No. 3555, stated:

One of the challenges faced by the present administration is the urgent and daunting task of solving the country’s
serious financial problems. To do this, government expenditures must be strictly monitored and controlled and
revenues must be significantly increased. This may be easier said than done, but our fiscal authorities are still
optimistic the government will be operating on a balanced budget by the year 2009. In fact, several measures that
will result to significant expenditure savings have been identified by the administration. It is supported with a
credible package of revenue measures that include measures to improve tax administration and control
the leakages in revenues from income taxes and the value-added tax (VAT). (Emphasis supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:

In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of our
agenda must be the restoration of the health of our fiscal system.

In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget by
the year 2009, we need to seize windows of opportunities which might seem poignant in the beginning, but
in the long run prove effective and beneficial to the overall status of our economy. One such opportunity is
a review of existing tax rates, evaluating the relevance given our present conditions.34 (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in
sizeable revenues for the government

to supplement our country’s serious financial problems, and improve tax administration and control of the
leakages in revenues from income taxes and value-added taxes. As these house bills were transmitted to the
Senate, the latter, approaching the measures from the point of national perspective, can introduce amendments
within the purposes of those bills. It can provide for ways that would soften the impact of the VAT measure on the
consumer, i.e., by distributing the burden across all sectors instead of putting it entirely on the shoulders of the
consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation were
included is worth quoting:

All in all, the proposal of the Senate Committee on Ways and Means will raise ₱64.3 billion in additional revenues
annually even while by mitigating prices of power, services and petroleum products.

However, not all of this will be wrung out of VAT. In fact, only ₱48.7 billion amount is from the VAT on twelve
goods and services. The rest of the tab – ₱10.5 billion- will be picked by corporations.

What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should the
latter bear all the pain? Why should the fiscal salvation be only on the burden of the consumer?

The corporate world’s equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up to
2008 only. This will raise ₱10.5 billion a year. After that, the rate will slide back, not to its old rate of 32 percent,
but two notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that will
be in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief. We
would like to assure them that not because there is a light at the end of the tunnel, this government will keep on
making the tunnel long.

The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to share
the burden.35

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

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

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

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

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

...

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

The other sections amended by the Senate pertained to matters of tax administration which are necessary for the
implementation of the changes in the VAT system.

To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the house
bills, which is to supplement our country’s fiscal deficit, among others. Thus, the Senate acted within its power to
propose those amendments.

SUBSTANTIVE ISSUES

I.

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

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

b. Article VI, Section 28(2)

A. No Undue Delegation of Legislative Power

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

The assailed provisions read as follows:

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

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

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

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%).

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 107. Value-Added Tax on Importation of Goods. –

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

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%).

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:

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

(A) Rate and Base of Tax. – There shall be levied, assessed and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or exchange of services: provided, that the President,
upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%). (Emphasis supplied)

Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual
abdication by Congress of its exclusive power to tax because such delegation is not within the purview of Section
28 (2), Article VI of the Constitution, which provides:

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

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the
sale or exchange of services, which cannot be included within the purview of tariffs under the exempted delegation
as the latter refers to customs duties, tolls or tribute payable upon merchandise to the government and usually
imposed on goods or merchandise imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative power
to tax is contrary to republicanism. They insist that accountability, responsibility and transparency should dictate
the actions of Congress and they should not pass to the President the decision to impose taxes. They also argue that
the law also effectively nullified the President’s power of control, which includes the authority to set aside and
nullify the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by the
President upon the recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the conditions
provided by the law to bring about either or both the conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the
12% rate would be subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the
principle of no taxation without representation. They submit that the Secretary of Finance is not mandated to give
a favorable recommendation and he may not even give his recommendation. Moreover, they allege that no guiding
standards are provided in the law on what basis and as to how he will make his recommendation. They claim,
nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by the President
since the former is a mere alter ego of the latter, such that, ultimately, it is the President who decides whether to
impose the increased tax rate or not.

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

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

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

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative power shall
be vested in the Congress of the Philippines which shall consist of a Senate and a House of Representatives." The
powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively,
legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a
complete law – complete as to the time when it shall take effect and as to whom it shall be applicable – and
to determine the expediency of its enactment.40 Thus, the rule is that in order that a court may be justified in
holding a statute unconstitutional as a delegation of legislative power, it must appear that the power involved is
purely legislative in nature – that is, one appertaining exclusively to the legislative department. It is the nature of
the power, and not the liability of its use or the manner of its exercise, which determines the validity of its
delegation.

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

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;

(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

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

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

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

...

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

...

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

In Edu vs. Ericta,47 the Court reiterated:

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

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

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

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

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

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

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½
%).

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts
upon which enforcement and administration of the increase rate under the law is contingent. The legislature has
made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It
leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the
executive.

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

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

The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law effectively
nullified the President’s power of control over the Secretary of Finance by mandating the fixing of the tax rate by
the President upon the recommendation of the Secretary of Finance. The Court cannot also subscribe to the
position of petitioners

Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the
recommendation of the Secretary of Finance." Neither does the Court find persuasive the submission of petitioners
Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed aside by the President
since the former is a mere alter ego of the latter.

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

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

Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether
by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a percentage of
GDP of the previous year exceeds one and one-half percent (1½%). If either of these two instances has occurred,
the Secretary of Finance, by legislative mandate, must submit such information to the President. Then the 12% VAT
rate must be imposed by the President effective January 1, 2006. There is no undue delegation of legislative
power but only of the discretion as to the execution of a law. This is constitutionally permissible.57 Congress
does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it,
and what is the scope of his authority; in our complex economy that is frequently the only way in which the
legislative process can go forward.58

As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the legislative
power to tax is contrary to the principle of republicanism, the same deserves scant consideration. Congress did not
delegate the power to tax but the mere implementation of the law. The intent and will to increase the VAT rate to
12% came from Congress and the task of the President is to simply execute the legislative policy. That Congress
chose to do so in such a manner is not within the province of the Court to inquire into, its task being to interpret
the law.59

The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the
conditions to bring about either or both the conditions precedent does not deserve any merit as this argument is
highly speculative. The Court does not rule on allegations which are manifestly conjectural, as these may not exist
at all. The Court deals with facts, not fancies; on realities, not appearances. When the Court acts on appearances
instead of realities, justice and law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax
burden on the people. Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set forth
in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned to the original
10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair and unreasonable, as the
people are unsure of the applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth therein are
satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It does not provide
for a return to the 10% rate nor does it empower the President to so revert if, after the rate is increased to 12%,
the VAT collection goes below the 24/5 of the GDP of the previous year or that the national government deficit as a
percentage of GDP of the previous year does not exceed 1½%.

Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be

introduced where none is provided for. Rewriting the law is a forbidden ground that only Congress may tread
upon.60

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds
none, petitioners’ argument is, at best, purely speculative. There is no basis for petitioners’ fear of a fluctuating VAT
rate because the law itself does not provide that the rate should go back to 10% if the conditions provided in
Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the law is clear and unambiguous,
so that there is no occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid of
judicial addition or subtraction.61

Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to
raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another
condition, i.e., the national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 ½%).
Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

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

2. Nat’l Gov’t Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government
has reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, there
is no need to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the
ratio is more than 1.5%, there is indeed a need to increase the VAT rate.62

That the first condition amounts to an incentive to the President to increase the VAT collection does not render it
unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is mainly to
raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in
his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as
possible over and above what it brings into the public treasury of the state.63

It simply means that sources of revenues must be adequate to meet government expenditures and their
variations.64

The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the Bicameral
Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the country’s gloomy state of
economic affairs, thus:

First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90
percent of our revenue is used for debt service. So, for every peso of revenue that we currently raise, 90 goes to
debt service. That’s interest plus amortization of our debt. So clearly, this is not a sustainable situation. That’s the
first fact.

The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow
money from that international financial markets. Our debt to GDP is approximately equal to our GDP. Again, that
shows you that this is not a sustainable situation.

The third thing that I’d like to point out is the environment that we are presently operating in is not as benign as
what it used to be the past five years.

What do I mean by that?

In the past five years, we’ve been lucky because we were operating in a period of basically global growth and low
interest rates. The past few months, we have seen an inching up, in fact, a rapid increase in the interest rates in the
leading economies of the world. And, therefore, our ability to borrow at reasonable prices is going to be challenged.
In fact, ultimately, the question is our ability to access the financial markets.

When the President made her speech in July last year, the environment was not as bad as it is now, at least based
on the forecast of most financial institutions. So, we were assuming that raising 80 billion would put us in a
position where we can then convince them to improve our ability to borrow at lower rates. But conditions have
changed on us because the interest rates have gone up. In fact, just within this room, we tried to access the market
for a billion dollars because for this year alone, the Philippines will have to borrow 4 billion dollars. Of that amount,
we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We were trying to access
last week and the market was not as favorable and up to now we have not accessed and we might pull back
because the conditions are not very good.

So given this situation, we at the Department of Finance believe that we really need to front-end our deficit
reduction. Because it is deficit that is causing the increase of the debt and we are in what we call a debt spiral. The
more debt you have, the more deficit you have because interest and debt service eats and eats more of your
revenue. We need to get out of this debt spiral. And the only way, I think, we can get out of this debt spiral is really
have a front-end adjustment in our revenue base.65

The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe.
Whether the law is indeed sufficient to answer the state’s economic dilemma is not for the Court to judge. In
the Fariñas case, the Court refused to consider the various arguments raised therein that dwelt on the wisdom of
Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:

. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the
political branches of the government. It is not for this Court to look into the wisdom or propriety of legislative
determination. Indeed, whether an enactment is wise or unwise, whether it is based on sound economic theory,
whether it is the best means to achieve the desired results, whether, in short, the legislative discretion within its
prescribed limits should be exercised in a particular manner are matters for the judgment of the legislature, and
the serious conflict of opinions does not suffice to bring them within the range of judicial cognizance.66

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy, given
that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of legislation."67

II.

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

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

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

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

Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law.

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

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

Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In
effect, a portion of the input tax that has already been paid cannot now be credited against the output tax.

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

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

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

Therefore, petitioners’ argument must be rejected.

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

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

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

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

Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the
output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the
taxpayer’s option.70

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input
tax only up to the extent of 70% of the output tax. In layman’s term, the value-added taxes that a person/taxpayer
paid and passed on to him by a seller can only be credited up to 70% of the value-added taxes that is due to him on
a taxable transaction. There is no retention of any tax collection because the person/taxpayer has already
previously paid the input tax to a seller, and the seller will subsequently remit such input tax to the BIR. The party
directly liable for the payment of the tax is the seller.71 What only needs to be done is for the person/taxpayer to
apply or credit these input taxes, as evidenced by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a
property that may not be confiscated, appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional purview of the due process clause. A
VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested
rights in statutory privileges. The state may change or take away rights, which were created by the law of the state,
although it may not take away property, which was vested by virtue of such rights.72

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable
from the taxes payable, although it becomes part of the cost, which is deductible from the gross revenue. When
Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of the
input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax
was introduced.73 This was adopted by the Expanded VAT Law (R.A. No. 7716),74 and The Tax Reform Act of 1997
(R.A. No. 8424).75 The right to credit input tax as against the output tax is clearly a privilege created by law, a
privilege that also the law can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending
Section 110(A) of the NIRC, which provides:

SEC. 110. Tax Credits. –

(A) Creditable Input Tax. – …

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for
which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition
and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT
component thereof, exceeds One million pesos (₱1,000,000.00): Provided, however, That if the estimated useful life
of the capital goods is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread
over such a shorter period: Provided, finally, That in the case of purchase of services, lease or use of properties, the
input tax shall be creditable to the purchaser, lessee or license upon payment of the compensation, rental, royalty
or fee.

The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or
importation of capital goods with acquisition cost of ₱1 Million pesos, exclusive of the VAT component. Such
spread out only poses a delay in the crediting of the input tax. Petitioners’ argument is without basis because the
taxpayer is not permanently deprived of his privilege to credit the input tax.

It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts
to a 4-year interest-free loan to the government.76 In the same breath, Congress also justified its move by saying
that the provision was designed to raise an annual revenue of 22.6 billion.77 The legislature also dispelled the fear
that the provision will fend off foreign investments, saying that foreign investors have other tax incentives
provided by law, and citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments were
not deterred.78 Again, for whatever is the purpose of the 60-month amortization, this involves executive economic
policy and legislative wisdom in which the Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable
transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:

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

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

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

Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT
withholding system. The government in this case is constituted as a withholding agent with respect to their
payments for goods and services.

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

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

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

SECTION 2.57. Withholding of Tax at Source

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

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

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

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

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

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

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

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

As amended, the use of the word final and the deletion of the word creditable exhibits Congress’s intention to treat
transactions with the government differently. Since it has not been shown that the class subject to the 5% final
withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as
petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to all those who deal
with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No.
14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the actual
input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should the actual input tax be
less than 5%, the difference is treated as income.81

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a profit
or value-added even if there is no profit or value-added.

Petitioners’ stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a legal
joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the Court on this
point will only be, as Shakespeare describes life in Macbeth,82 "full of sound and fury, signifying nothing."

What’s more, petitioners’ contention assumes the proposition that there is no profit or value-added. It need not
take an astute businessman to know that it is a matter of exception that a business will sell goods or services
without profit or value-added. It cannot be overstressed that a business is created precisely for profit.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of
the same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances."83

The power of the State to make reasonable and natural classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts
to be raised, the methods of assessment, valuation and collection, the State’s power is entitled to presumption of
validity. As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness,
discrimination, or arbitrariness.84

Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or
invests in capital equipment, or has several transactions with the government, is not based on real and substantial
differences to meet a valid classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of
taxation, the kind of property, the rates to be levied or the amounts to be raised, the methods of assessment,
valuation and collection. Petitioners’ alleged distinctions are based on variables that bear different consequences.
While the implementation of the law may yield varying end results depending on one’s profit margin and value-
added, the Court cannot go beyond what the legislature has laid down and interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws on all persons or things without
distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality among
equals as determined according to a valid classification. By classification is meant the grouping of persons or things
similar to each other in certain particulars and different from all others in these same particulars.85

Petitioners brought to the Court’s attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmeñ a III and
Ma. Ana Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed
legislation seeks to amend the 70% limitation by increasing the same to 90%. This, according to petitioners,
supports their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to say that these
are still proposed legislations. Until Congress amends the law, and absent any unequivocal basis for its
unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

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

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

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the
same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class
everywhere with all people at all times.86

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services.
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a
rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use or lease of
properties. These same sections also provide for a 0% rate on certain sales and transaction.

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

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%)
does not apply to sales of goods or services with gross annual sales or receipts not exceeding ₱1,500,000.00.88Also,
basic marine and agricultural food products in their original state are still not subject to the tax,89 thus ensuring
that prices at the grassroots level will remain accessible. As was stated in Kapatiran ng mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. vs. Tan:90

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in
business with an aggregate gross annual sales exceeding ₱200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, so
that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are expected to
be relatively lower and within the reach of the general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those
with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law entails,
the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e.,
transactions with gross annual sales and/or receipts not exceeding ₱1.5 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 products91 and natural gas92 were reduced. Percentage tax on
domestic carriers was removed.93 Power producers are now exempt from paying franchise tax.94
Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden of
taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate, from a
previous 32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to 15% final
withholding tax but the tax credit allowed on the corporation’s domicile was increased to 20%.96 The Philippine
Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore.97 Even the sale by an
artist of his works or services performed for the production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest largely
on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller
business with higher input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the 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.98

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

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

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply
provides is that Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino case,
thus:

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

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

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

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should
stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for instance, those
involving political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all political
or social ills; We should not forget that the Constitution has judiciously allocated the powers of government to
three distinct and separate compartments; and that judicial interpretation has tended to the preservation of the
independence of the three, and a zealous regard of the prerogatives of each, knowing full well that one is not the
guardian of the others and that, for official wrong-doing, each may be brought to account, either by impeachment,
trial or by the ballot box.100

The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered, there is
no raison d'être for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207,
168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the
temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.

SO ORDERED.
 EN BANC

January 24, 2017

G.R. No. 184450

JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES, MARAH SHARYN M. DE CASTRO
and CRIS P. TENORIO, Petitioners, 
vs.
SECRETARY OF FINANCE and the COMMISSIONER OF INTERNAL REVENUE, Respondents.

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

G.R. No. 184508

SENATOR MANUEL A. ROXAS, Petitioner, 

vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and LILIAN B. HEFTI, in
her capacity as Commissioner of the Bureau of Internal Revenue, Respondents.

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

G.R. No. 184538

TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), represented by its President, DEMOCRITO T.
MENDOZA, Petitioner, 
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and LILIAN B. HEFTI, in
her capacity as Commissioner of the Bureau of Internal Revenue, Respondents.

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

G.R. No. 185234

SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC. and
ERNESTO G. EBRO, Petitioners, 
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and SIXTO S. ESQUIVIAS IV,
in his capacity as Commissioner of the Bureau of Internal Revenue, Respondents.

DECISION

SERENO, CJ.:

Before us are consolidated Petitions for Certiorari, Prohibition and Mandamus, under Rule 65 of the 1997 Revised
Rules of Court. These Petitions seek to nullify certain provisions of Revenue Regulation No. (RR) 10-2008. The RR
was issued by the Bureau of Internal Revenue (BIR) on 24 September 2008 to implement the provisions of
Republic Act No. (R.A.) 9504. The law granted, among others, income tax exemption for minimum wage earners
(MWEs), as well as an increase in personal and additional exemptions for individual taxpayers.

Petitioners assail the subject RR as an unauthorized departure from the legislative intent of R.A. 9504. The
regulation allegedly restricts the implementation of the MWEs income tax exemption only to the period starting
from 6 July 2008, instead of applying the exemption to the entire year 2008. They further challenge the BIR's
adoption of the prorated application of the new set of personal and additional exemptions for taxable year 2008.
They also contest the validity of the RR's alleged imposition of a condition for the availment by MWEs of the
exemption provided by R.A. 9504. Supposedly, in the event they receive other benefits in excess of ₱30,000, they
can no longer avail themselves of that exemption. Petitioners contend that the law provides for the unconditional
exemption of MWEs from income tax and, thus, pray that the RR be nullified.

ANTECEDENT FACTS

R.A. 9504

On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill No. (S.B.) 2293. On 21 May
2008, former President Gloria M. Arroyo certified the passage of the bill as urgent through a letter addressed to
then Senate President Manuel Villar. On the same day, the bill was passed on second reading IN the Senate and, on
27 May 2008, on third reading. The following day, 28 May 2008, the Senate sent S.B. 2293 to the House of
Representatives for the latter's concurrence.

On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an amendment to House Bill No. (H.B.)
3971.

On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424,
as Amended, Otherwise Known as the National Internal Revenue Code of 1997," was approved and signed into law
by President Arroyo. The following are the salient features of the new law:

1. It increased the basic personal exemption from ₱20,000 for a single individual, ₱25,000 for the head of
the family, and ₱32,000 for a married individual to P50,000 for each individual.

2. It increased the additional exemption for each dependent not exceeding four from ₱8,000 to ₱25,000.

3. It raised the Optional Standard Deduction (OSD) for individual taxpayers from 10% of gross income to
40% of the gross receipts or gross sales.

4. It introduced the OSD to corporate taxpayers at no more than 40% of their gross income.

5. It granted MWEs exemption from payment of income tax on their minimum wage, holiday pay, overtime
pay, night shift differential pay and hazard pay. 1
Section 9 of the law provides that it shall take effect 15 days following its publication in the Official Gazette or in at
least two newspapers of general circulation. Accordingly, R.A. 9504 was published in the Manila
Bulletin and Malaya on 21 June 2008. On 6 July 2008, the end of the 15-day period, the law took effect.

RR 10-2008

On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008, implementing the provisions of R.A. 9504.
The relevant portions of the said RR read as follows:

SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as follows:

Sec. 2.78.1. Withholding of Income Tax on Compensation Income.

xxxx

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be considered in
determining the ₱30,000.00 ceiling of 'other benefits' excluded from gross income under Section 32 (b) (7) (e) of
the Code. Provided that, the excess of the 'de minimis' benefits over their respective ceilings prescribed by these
regulations shall be considered as part of 'other benefits' and the employee receiving it will be subject to tax only
on the excess over the ₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding
the ₱30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and
allowances, just like an employee receiving compensation income beyond the SMW.

xxxx

(B) Exemptions from Withholding Tax on Compensation. - The following income payments are exempted from the
requirements of withholding tax on compensation:

xxxx

(13) Compensation income of MWEs who work in the private sector and being paid the Statutory Minimum Wage
(SMW), as fixed by Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity
Commission (NWPC), applicable to the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity
Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor
and Employment (DOLE). The RTWPB of each region shall determine the wage rates in the different regions based
on established criteria and shall be the basis of exemption from income tax for this purpose.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall
likewise be covered by the above exemption. Provided, however, that an employee who receives/earns
additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of ₱30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of
being a MWE and, therefore, his/her entire earnings are not exempt from income tax, and consequently,
from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession,
except income subject to final tax, in addition to compensation income are not exempted from income tax on their
entire income earned during the taxable year. This rule, notwithstanding, the SMW, holiday pay, overtime pay,
night shift differential pay and hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the employer to MWEs who were
actually assigned to danger or strife-torn areas, disease-infested places, or in distressed or isolated stations and
camps, which expose them to great danger of contagion or peril to life. Any hazard pay paid to MWEs which does
not satisfy the above criteria is deemed subject to income tax and consequently, to withholding tax.

xxxx

SECTION 3. Section 2. 79 of RR 2-98, as amended, is hereby further amended to read as follows:

Sec. 2.79. Income Tax Collected at Source on Compensation Income. --

(A) Requirement of Withholding. - Every employer must withhold from compensation paid an amount computed in
accordance with these Regulations. Provided, that no withholding of tax shall be required on the SMW, including
holiday pay, overtime pay, night shift differential and hazard pay of MWEs in the private/public sectors as defined
in these Regulations. Provided, further, that an employee who receives additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay,
hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore,
his/her entire earnings are not exempt from income tax and, consequently, shall be subject to withholding
tax.

xxxx

For the year 2008, however, being the initial year of implementation of R.A. 9504, there shall be a transitory
withholding tax table for the period from July 6 to December 31, 2008 (Annex "D") determined by prorating the
annual personal and additional exemptions under R.A. 9504 over a period of six months. Thus, for individuals,
regardless of personal status, the prorated personal exemption is ₱25,000, and for each qualified dependent child
(QDC), ₱12,500.

xxxx

SECTION 9. Effectivity. -

These Regulations shall take effect beginning July 6, 2008. (Emphases supplied)

The issuance and effectivity of RR 10-2008 implementing R.A. 9504 spawned the present Petitions.1âwphi1

G.R. No. 184450

Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing for the prorated application of
the personal and additional exemptions for taxable year 2008 to begin only effective 6 July 2008 for being contrary
to Section 4 of Republic Act No. 9504.2

Petitioners argue that the prorated application of the personal and additional exemptions under RR 10-2008 is not
"the legislative intendment in this jurisdiction."3 They stress that Congress has always maintained a policy of "full
taxable year treatment"4 as regards the application of tax exemption laws. They allege further that R.A. 9504 did
not provide for a prorated application of the new set of personal and additional exemptions. 5

G.R. No. 184508

Then Senator Manuel Roxas, as principal author of R.A. 9504, also argues for a full taxable year treatment of the
income tax benefits of the new law. He relies on what he says is clear legislative intent. In his "Explanatory Note of
Senate Bill No. 103," he stresses "the very spirit of enacting the subject tax exemption law"6 as follows:
With the poor, every little bit counts, and by lifting their burden of paying income tax, we give them opportunities
to put their money to daily essentials as well as savings. Minimum wage earners can no longer afford to be
taxed and to be placed in the cumbersome income tax process in the same manner as higher-earning
employees. It is our obligation to ease their burdens in any way we can.7(Emphasis Supplied)

Apart from raising the issue of legislative intent, Senator Roxas brings up the following legal points to support his
case for the full-year application of R.A. 9504's income tax benefits. He says that the pro rata application of the
assailed RR deprives MWEs of the financial relief extended to them by the law;8 that Umali v. Estanislao9serves as
jurisprudential basis for his position that R.A. 9504 should be applied on a full-year basis to taxable year
2008; 10and that the social justice provisions of the 1987 Constitution, particularly Articles II and XIII, mandate a
full application of the law according to the spirit of R.A. 9504. 11

On the scope of exemption of MWEs under R.A. 9504, Senator Roxas argues that the exemption of MWEs is
absolute, regardless of the amount of the other benefits they receive. Thus, he posits that the Department of
Finance (DOF) and the BIR committed grave abuse of discretion amounting to lack and/or excess of jurisdiction.
They supposedly did so when they provided in Section l of RR 10-2008 the condition that an MWE who receives
"other benefits" exceeding the ₱30,000 limit would lose the tax exemption. 12 He further contends that the real
intent of the law is to grant income tax exemption to the MWE without any limitation or qualification, and that
while it would be reasonable to tax the benefits in excess of ₱30,000, it is unreasonable and unlawful to tax both
the excess benefits and the salaries, wages and allowances. 13

G.R. No. 184538

Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A. 9504 provide for the
application of the tax exemption for the full calendar year 2008. It also espouses the interpretation that R.A. 9504
provides for the unqualified tax exemption of the income of MWEs regardless of the other benefits they
receive. 14 In conclusion, it says that RR 10-2008, which is only an implementing rule, amends the original intent of
R.A. 9504, which is the substantive law, and is thus null and void.

G.R. No. 185234

Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the Philippines, Inc., and Ernesto
Ebro allege that R.A. 9504 unconditionally grants MWEs exemption from income tax on their taxable income, as
well as increased personal and additional exemptions for other individual taxpayers, for the whole year 2008. They
note that the assailed RR 10-2008 restricts the start of the exemptions to 6 July 2008 and provides that those
MWEs who received "other benefits" in excess of ₱30,000 are not exempt from income taxation. Petitioners believe
this RR is a "patent nullity" 15 and therefore void.

Comment of the OSG

The Office of the Solicitor General (OSG) filed a Consolidated Comment16 and took the position that the application
of R.A. 9504 was intended to be prospective, and not retroactive. This was supposedly the general 1ule under the
rules of statutory construction: law will only be applied retroactively if it clearly provides for retroactivity, which is
not provided in this instance. 17

The OSG contends that Umali v. Estanislao is not applicable to the present case.1âwphi1 It explains that R.A. 7167,
the subject of that case, was intended to adjust the personal exemption levels to the poverty threshold prevailing in
1991. Hence, the Court in that case held that R.A. 7167 had been given a retroactive effect. The OSG believes that
the grant of personal exemptions no longer took into account the poverty threshold level under R.A. 9504, because
the amounts of personal exemption far exceeded the poverty threshold levels. 18

The OSG further argues that the legislative intent of non-retroactivity was effectively confirmed by the "Conforme"
of Senator Escudero, Chairperson of the Senate Committee on Ways and Means, on the draft revenue regulation
that became RR 10-2008.
ISSUES

Assailing the validity of RR 10-2008, all four Petitions raise common issues, which may be distilled into three major
ones:

First, whether the increased personal and additional exemptions provided by R.A. 9504 should be applied to the
entire taxable year 2008 or prorated, considering that R.A. 9504 took effect only on 6 July 2008.

Second, whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008 only.

Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the law in providing that an MWE who receives
other benefits in excess of the statutory limit of ₱30,000 19 is no longer entitled to the exemption provided by R.A.
9504.

THE COURT'S RULING

I.

Whether the increased personal and additional exemptions provided by R.A. 9504 should be applied to the
entire taxable year 2008 or prorated, considering that the law took effect only on 6 July 2008

The personal and additional exemptions established by R.A. 9504 should be applied to the entire taxable year
2008.

Umali is applicable.

Umali v. Estanislao20supports this Comi's stance that R.A. 9504 should be applied on a full-year basis for the entire
taxable year 2008.21 In Umali, Congress enacted R.A. 7167 amending the 1977 National Internal Revenue Code
(NIRC). The amounts of basic personal and additional exemptions given to individual income taxpayers were
adjusted to the poverty threshold level. R.A. 7167 came into law on 30 January 1992. Controversy arose when the
Commission of Internal Revenue (CIR) promulgated RR 1-92 stating that the regulation shall take effect on
compensation income earned beginning 1 January 1992. The issue posed was whether the increased personal and
additional exemptions could be applied to compensation income earned or received during calendar year 1991,
given that R.A. 7167 came into law only on 30 January 1992, when taxable year 1991 had already closed.

This Court ruled in the affirmative, considering that the increased exemptions were already available on or before
15 April 1992, the date for the filing of individual income tax returns. Further, the law itself provided that the new
set of personal and additional exemptions would be immediately available upon its effectivity. While R.A. 7167 had
not yet become effective during calendar year 1991, the Court found that it was a piece of social legislation that
was in part intended to alleviate the economic plight of the lower-income taxpayers. For that purpose, the new law
provided for adjustments "to the poverty threshold level" prevailing at the time of the enactment of the law. The
relevant discussion is quoted below:

[T]he Court is of the considered view that Rep. Act 7167 should cover or extend to compensation income earned or
received during calendar year 1991.

Sec. 29, par.(L), Item No. 4 of the National Internal Revenue Code, as amended, provides:

Upon the recommendation of the Secretary of Finance, the President shall automatically adjust not more often than
once every three years, the personal and additional exemptions taking into account, among others, the movement
in consumer price indices, levels of minimum wages, and bare subsistence levels.
As the personal and additional exemptions of individual taxpayers were last adjusted in 1986, the President, upon
the recommendation of the Secretary of Finance, could have adjusted the personal and additional exemptions in
1989 by increasing the same even without any legislation providing for such adjustment. But the President did not.

However, House Bill 28970, which was subsequently enacted by Congress as Rep. Act 7167, was introduced in the
House of Representatives in 1989 although its passage was delayed and it did not become effective law until 30
January 1992. A perusal, however, of the sponsorship remarks of Congressman Hernando B. Perez, Chairman of the
House Committee on Ways and Means, on House Bill 28970, provides an indication of the intent of Congress in
enacting Rep. Act 716 7. The pertinent legislative journal contains the following:

At the outset, Mr. Perez explained that the Bill Provides for increased personal additional exemptions to
individuals in view of the higher standard of living.

The Bill, he stated, limits the amount of income of individuals subject to income tax to enable them to spend for
basic necessities and have more disposable income.

xxxx

Mr. Perez added that inflation has raised the basic necessities and that it had been three years since the last
exemption adjustment in 1986.

xxxx

Subsequently, Mr. Perez stressed the necessity of passing the measure to mitigate the effects of the current
inflation and of the implementation of the salary standardization law. Stating that it is imperative for the
government to take measures to ease the burden of the individual income tax filers, Mr. Perez then cited specific
examples of how the measure can help assuage the burden to the taxpayers.

He then reiterated that the increase in the prices of commodities has eroded the purchasing power of the peso
despite the recent salary increases and emphasized that the Bill will serve to compensate the adverse effects of
inflation on the taxpayers. x x x (Journal of the House of Representatives, May 23, 1990, pp. 32-33).

It will also be observed that Rep. Act 7167 speaks of the adjustments that it provides for, as adjustments "to the
poverty threshold level." Certainly, "the poverty threshold level" is the poverty threshold level at the time Rep. Act
7167 was enacted by Congress, not poverty threshold levels in futuro, at which time there may be need of further
adjustments in personal exemptions. Moreover, the Court can not lose sight of the fact that these personal and
additional exemptions are fixed amounts to which an individual taxpayer is entitled, as a means to cushion
the devastating effects of high prices and a depreciated purchasing power ofthe currency. In the end, it is
the lower-income and the middle-income groups of taxpayers (not the high-income taxpayers) who stand
to benefit most from the increase of personal and additional exemptions provided for by Rep. Act 7167. To
that extent, the act is a social legislation intended to alleviate in part the present economic plight of the
lower income taxpayers. It is intended to remedy the inadequacy of the heretofore existing personal and
additional exemptions for individual taxpayers.

And then, Rep. Act 7167 says that the increased personal exemptions that it provides for shall be available
thenceforth, that is, after Rep. Act 7167 shall have become effective. In other words, these exemptions are
available upon the filing of personal income tax returns which is, under the National Internal Revenue
Code, done not later than the 15th day of April after the end of a calendar year. Thus, under Rep. Act 7167,
which became effective, as aforestated, on 30 January 1992, the increased exemptions are literally
available on or before 15 April 1992 (though not before 30 January 1992). But these increased exemptions
can be available on 15 April 1992 only in respect of compensation income earned or received during the calendar
year 1991.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available in respect of
compensation income received during the 1990 calendar year; the tax due in respect of said income had already
accrued, and been presumably paid, by 15 April 1991 and by 15 July 1991, at which time Rep. Act 7167 had not
been enacted. To make Rep. Act 7167 refer back to income received during 1990 would require language explicitly
retroactive in purport and effect, language that would have to authorize the payment of refunds of taxes paid on 15
April 1991 and 15 July 1991: such language is simply not found in Rep. Act 7167.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available only in respect of
compensation income received during 1992, as the implementing Revenue Regulations No. 1-92 purport to
provide. Revenue Regulations No. 1-92 would in effect postpone the availability of the increased
exemptions to 1 January-15 April 1993, and thus literally defer the effectivity of Rep. Act 7167 to 1 January
1993. Thus, the implementing regulations collide frontally with Section 3 of Rep. Act 7167 which states that the
statute "shall take effect upon its approval." The objective of the Secretary of Finance and the Commissioner of
Internal Revenue in postponing through Revenue Regulations No. 1-92 the legal effectivity of Rep. Act 7167 is, of
course, entirely understandable - to defer to 1993 the reduction of governmental tax revenues which irresistibly
follows from the application of Rep. Act 7167. But the law-making authority has spoken and the Court can not
refuse to apply the law-maker's words. Whether or not the government can afford the drop in tax revenues
resulting from such increased exemptions was for Congress (not this Court) to decide.22 (Emphases supplied)

In this case, Senator Francis Escudero's sponsorship speech for Senate Bill No. 2293 reveals two important points
about R.A. 9504: (1) it is a piece of social legislation; and (2) its intent is to make the proposed law immediately
applicable, that is, to taxable year 2008:

Mr. President, distinguished colleagues, Senate Bill No. 2293 seeks, among others, to exempt minimum wage
earners from the payment of income and/or withholding tax. It is an attempt to help our people cope with the
rising costs of commodities that seem to be going up unhampered these past few months.

Mr. President, a few days ago, the Regional Tripartite and Wages Productivity Board granted an increase of ₱20 per
day as far as minimum wage earners are concerned. By way of impact, Senate Bill No. 2293 would grant our
workers an additional salary or take-home pay of approximately ₱34 per day, given the exemption that will be
granted to all minimum wage earners. It might be also worthy of note that on the part of the public sector, the
Senate Committee on Ways and Means included, as amongst those who will be exempted from the payment of
income tax and/or withholding tax, government workers receiving Salary Grade V. We did not make any
distinction so as to include Steps 1 to 8 of Salary Grade V as long as one is employed in the public sector or in
government.

In contradistinction with House Bill No. 3971 approved by the House of Representatives pertaining to a similar
subject matter, the House of Representatives, very much like the Senate, adopted the same levels of exemptions
which are:

From an allowable personal exemption for a single individual of ₱20,000, to a head of family of ₱25,000, to a
married individual of ₱32,000, both the House and the Senate versions contain a higher personal exemption of
₱50,000.

Also, by way of personal additional exemption as far as dependents are concerned, up to four, the House, very
much like the Senate, recommended a higher ceiling of ₱25,000 for each dependent not exceeding four, thereby
increasing the maximum additional exemptions and personal additional exemptions to as high as ₱200,000,
depending on one's status in life.

The House also, very much like the Senate, recommended by way of trying to address the revenue loss on the part
of the government, an optional standard deduction (OSD) on gross sales, and/or gross receipts as far as individual
taxpayers are concerned. However, the House, unlike the Senate, recommended a Simplified Net Income Tax
Scheme (SNITS) in order to address the remaining balance of the revenue loss.
By way of contrast, the Senate Committee on Ways and Means recommended, in lieu of SNITS, an optional standard
deduction of 40% for corporations as far as their gross income is concerned.

Mr. President, if we total the revenue loss as well as the gain

brought about by the 40% OSD on individuals on gross sales and receipts and 40% on gross income as far as
corporations are concerned, with a conservative availment rate as computed by the Department of Finance, the
government would still enjoy a gain of ₱.78 billion or ₱780 million if we use the high side of the computation
however improbable it may be.

For the record, we would like to state that if the availment rate is computed at 15% for individuals and 10% for
corporations, the potential high side of a revenue gain would amount to approximately ₱18.08 billion.

Mr. President, we have received many suggestions increasing the rate of personal exemptions and personal
additional exemptions. We have likewise received various suggestions pertaining to the expansion of the coverage
of the tax exemption granted to minimum wage earners to encompass as well other income brackets.

However, the only suggestion other than or outside the provisions contained in House Bill No. 3971 that the Senate
Committee on Ways and Means adopted, was an expansion of the exemption to cover overtime, holiday, nightshift
differential, and hazard pay also being enjoyed by minimum wage earners. It entailed an additional revenue loss of
₱l billion approximately on the part of the government. However, Mr. President, that was taken into account when I
stated earlier that there will still be a revenue gain on the conservative side on the part of government of ₱780
million.

Mr. President, [my distinguished colleagues in the Senate, we wish to provide a higher exemption for our
countrymen because of the incessant and constant increase in the price of goods.Nonetheless, not only Our
Committee, but also the Senate and Congress, must act responsibly in recognizing that much as we would like to give
all forms of help that we can and must provide to our people, we also need to recognize the need of the government to
defray its expenses in providing services to the public. This is the most that we can give at this time because the
government operates on a tight budget and is short on funds when it comes to the discharge of its main expenses.]23

Mr. President, time will perhaps come and we can improve on this version, but at present, this is the best, I
believe, that we can give our people. But by way of comparison, it is still ₱10 higher than what the wage boards
were able to give minimum wage earners. Given that, we were able to increase their take-home pay by the
amount equivalent to the tax exemption we have granted.

We urge our colleagues, Mr. President, to pass this bill in earnest so that we can immediately grant relief to
our people.

Thank you, Mr. President. (Emphases Supplied)24

Clearly, Senator Escudero expressed a sense of urgency for passing what would subsequently become R.A. 9504.
He was candid enough to admit that the bill needed improvement, but because time was of the essence, he urged
the Senate to pass the bill immediately. The idea was immediate tax relief to the individual taxpayers, particularly
low-compensation earners, and an increase in their take-home pay.25

Senator Miriam Defensor-Santiago also remarked during the deliberations that "the increase in personal
exemption from ₱20,000 to ₱50,000 is timely and appropriate given the increased cost of living. Also, the increase
in the additional exemption for dependent children is necessary and timely."26

Finally, we consider the President's certification of the necessity of the immediate enactment of Senate Bill No.
2293. That certification became the basis for the Senate to dispense with the three-day rule27 for passing a bill. It
evinced the intent of the President to afford wage earners immediate tax relief from the impact of a worldwide
increase in the prices of commodities. Specifically, the certification stated that the purpose was to "address the
urgent need to cushion the adverse impact of the global escalation of commodity prices upon the most vulnerable
within the low income group by providing expanded income tax relief."28

In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly intended to afford immediate tax
relief to individual taxpayers, particularly low-income compensation earners. Indeed, if R.A. 9504 was to take effect
beginning taxable year 2009 or half of the year 2008 only, then the intent of Congress to address the increase in the
cost of living in 2008 would have been negated.

Therefore, following Umali, the test is whether the new set of personal and additional exemptions was available at
the time of the filing of the income tax return. In other words, while the status of the individual taxpayers is
determined at the close of the taxable year, 29 their personal and additional exemptions - and consequently the
computation of their taxable income - are reckoned when the tax becomes due, and not while the income is being
earned or received.

The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be computed on the basis of
the calendar year.30 The taxpayer is required to file an income tax return on the 15th of April of each year covering
income of the preceding taxable year. 31 The tax due thereon shall be paid at the time the return is filed. 32

It stands to reason that the new set of personal and additional exemptions, adjusted as a form of social legislation
to address the prevailing poverty threshold, should be given effect at the most opportune time as the Court ruled
in Umali.

The test provided by Umali is consistent with Ingalls v. Trinidad,  33 in which the Court dealt with the matter of a
married person's reduced exemption. As early as 1923, the Court already provided the reference point for
determining the taxable income:

[T]hese statutes dealing with the manner of collecting the income tax and with the deductions to be made in favor
of the taxpayer have reference to the time when the return is filed and the tax assessed. If Act No. 2926 took, as it
did take, effect on January 1, 1921, its provisions must be applied to income tax returns filed, and assessments
made from that date. This is the reason why Act No. 2833, and Act No. 2926, in their respective first sections, refer
to income received during the preceding civil year. (Italics in the original)

There, the exemption was reduced, not increased, and the Court effectively ruled that income tax due from the
individual taxpayer is properly determined upon the filing of the return. This is done after the end of the taxable
year, when all the incomes for the immediately preceding taxable year and the corresponding personal exemptions
and/or deductions therefor have been considered. Therefore, the taxpayer was made to pay a higher tax for his
income earned during 1920, even if the reduced exemption took effect on 1 January 1921.

In the present case, the increased exemptions were already available much earlier than the required time of filing
of the return on 15 April 2009. R.A. 9504 came into law on 6 July 2008, more than nine months before the deadline
for the filing of the income tax return for taxable year 2008. Hence, individual taxpayers were entitled to claim the
increased amounts for the entire year 2008. This was true despite the fact that incomes were already earned or
received prior to the law's effectivity on 6 July 2008.

Even more compelling is the fact that R.A. 9504 became effective during the taxable year in question. In Umali, the
Court ruled that the application of the law was prospective, even if the amending law took effect after the close of
the taxable year in question, but before the deadline for the filing of the return and payment of the taxes due for
that year. Here, not only did R.A. 9504 take effect before the deadline for the filing of the return and payment for
the taxes due for taxable year 2008, it took effect way before the close of that taxable year. Therefore, the operation
of the new set of personal and additional exemption in the present case was all the more prospective.

Additionally, as will be discussed later, the rule of full taxable year treatment for the availment of personal and
additional exemptions was established, not by the amendments introduced by R.A. 9504, but by the provisions of
the 1997 Tax Code itself. The new law merely introduced a change in the amounts of the basic and additional
personal exemptions. Hence, the fact that R.A. 9504 took effect only on 6 July 2008 is irrelevant.

The present case issubstantially

identical with Umali and not with
Pansacola.

Respondents argue that Umali is not applicable to the present case. They contend that the increase in personal and
additional exemptions were necessary in that case to conform to the 1991 poverty threshold level; but that in the
present case, the amounts under R.A. 9504 far exceed the poverty threshold level. To support their case,
respondents cite figures allegedly coming from the National Statistical Coordination Board. According to those
figures, in 2007, or one year before the effectivity of R.A. 9504, the poverty threshold per capita was ₱14,866 or
₱89,196 for a family of six. 34

We are not persuaded.

The variance raised by respondents borders on the superficial. The message of Umali is that there must be an
event recognized by Congress that occasions the immediate application of the increased amounts of personal and
additional exemptions. In Umali, that event was the failure to adjust the personal and additional exemptions to the
prevailing poverty threshold level. In this case, the legislators specified the increase in the price of commodities as
the basis for the immediate availability of the new amounts of personal and additional exemptions.

We find the facts of this case to be substantially identical to those of Umali.

First, both cases involve an amendment to the prevailing tax code. The present petitions call for the interpretation
of the effective date of the increase in personal and additional exemptions. Otherwise stated, the present case deals
with an amendment (R.A. 9504) to the prevailing tax code (R.A. 8424 or the 1997 Tax Code). Like the present
case, Umali involved an amendment to the then prevailing tax code - it interpreted the effective date of R.A. 7167,
an amendment to the 1977 NIRC, which also increased personal and additional exemptions.

Second, the amending law in both cases reflects an intent to make the new set of personal and additional
exemptions immediately available after the effectivity of the law. As already pointed out, in Umali, R.A. 7167
involved social legislation intended to adjust personal and additional exemptions. The adjustment was made in
keeping with the poverty threshold level prevailing at the time.

Third, both cases involve social legislation intended to cure a social evil - R.A. 7167 was meant to adjust personal
and additional exemptions in relation to the poverty threshold level, while R.A. 9504 was geared towards
addressing the impact of the global increase in the price of goods.

Fourth, in both cases, it was clear that the intent of the legislature was to hasten the enactment of the law to make
its beneficial relief immediately available.

Pansacola is not applicable.

In lieu of Umali, the OSG relies on our ruling in Pansacola v.Commissioner of Internal Revenue.  35 In that case, the
1997 Tax Code (R.A. 8424) took effect on 1 January 1998, and the petitioner therein pleaded for the application of
the new set of personal and additional exemptions provided thereunder to taxable year 1997. R.A. 8424 explicitly
provided for its effectivity on 1 January 1998, but it did not provide for any retroactive application.

We ruled against the application of the new set of personal and additional exemptions to the previous taxable year
1997, in which the filing and payment of the income tax was due on 15 April 1998, even if the NIRC had already
taken effect on 1 January 1998. This court explained that the NIRC could not be given retroactive application, given
the specific mandate of the law that it shall take effect on 1 January 1998; and given the absence of any reference to
the application of personal and additional exemptions to income earned prior to 1January 1998. We further stated
that what the law considers for the purpose of determining the income tax due is the status at the close of the
taxable year, as opposed to the time of filing of the return and payment of the corresponding tax.

The facts of this case are not identical with those of Pansacola.

First, Pansacola interpreted the effectivity of an entirely new tax code - R.A. 8424, the Tax Reform Act of 1997. The
present case, like Umali, involves a mere amendment of some specific provisions of the prevailing tax code: R.A.
7167 amending then P.D. 1158 (the 1977 NIRC) in Umali and R.A. 9504 amending R.A. 8424 herein.

Second, in Pansacola, the new tax code specifically provided for an effective date - the beginning of the following
year - that was to apply to all its provisions, including new tax rates, new taxes, new requirements, as well as new
exemptions. The tax code did not make any exception to the effectivity of the subject exemptions, even if transitory
provisions36 specifically provided for different effectivity dates for certain provisions.

Hence, the Court did not find any legislative intent to make the new rates of personal and additional exemptions
available to the income earned in the year previous to R.A. 8424's effectivity. In the present case, as previously
discussed, there was a clear intent on the part of Congress to make the new amounts of personal and additional
exemptions immediately available for the entire taxable year 2008. R.A. 9504 does not even need a provision
providing for retroactive application because, as mentioned above, it is actually prospective - the new law took
effect during the taxable year in question.

Third, in Pansacola, the retroactive application of the new rates of personal and additional exemptions would
result in an absurdity - new tax rates under the new law would not apply, but a new set of personal and additional
exemptions could be availed of. This situation does not obtain in this case, however, precisely because the new law
does not involve an entirely new tax code. The new law is merely an amendment to the rates of personal and
additional exemptions.

Nonetheless, R.A. 9504 can still be made applicable to taxable year 2008, even if we apply the Pansacola test. We
stress that Pansacola considers the close of the taxable year as the reckoning date for the effectivity of the new
exemptions. In that case, the Court refused the application of the new set of personal exemptions, since they were
not yet available at the close of the taxable year. In this case, however, at the close of the taxable year, the new set
of exemptions was already available. In fact, it was already available during the taxable year - as early as 6 July
2008 - when the new law took effect.

There may appear to be some dissonance between the Court's declarations in Umali and those in Pansacola, which
held:

Clearly from the abovequoted provisions, what the law should consider for the purpose of determining the tax due
from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the
time the return is filed and the tax due thereon is paid. Now comes Section 35(C) of the NIRC which provides,

xxxx

Emphasis must be made that Section 35(C) of the NIRC allows a taxpayer to still claim the corresponding full
amount of exemption for a taxable year, e.g. if he marries; have additional dependents; he, his spouse, or any of his
dependents die; and if any of his dependents marry, turn 21 years old; or become gainfully employed. It is as if the
changes in his or his dependents status took place at the close of the taxable year.

Consequently, his correct taxable income and his corresponding allowable deductions e.g. personal and
additional deductions, if any, had already been determined as of the end of the calendar year.

x x x. Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions
under Section 35, can only be allowed as deductions from the individual taxpayers gross or net income, as the case
maybe, for the taxable year 1998 to be filed in 1999. The NIRC made no reference that the personal and additional
exemptions shall apply on income earned before January 1, 1998.37

It must be remembered, however, that the Court therein emphasized that Umali was interpreting a social
legislation:

In Umali, we noted that despite being given authority by Section 29(1)(4) of the National Internal Revenue Code of
1977 to adjust these exemptions, no adjustments were made to cover 1989. Note that Rep. Act No. 7167 is
entitled "An Act Adjusting the Basic Personal and Additional Exemptions Allowable to Individuals for Income Tax
Purposes to the Poverty Threshold Level, Amending for the Purpose Section 29, Paragraph (L), Items (1) and (2) (A),
of the National Internal Revenue Code, As Amended, and For Other Purposes." Thus, we said in Umali, that the
adjustment provided by Rep. Act No. 7167 effective 1992, should consider the poverty threshold level in 1991, the
time it was enacted. And we observed therein that since the exemptions would especially benefit lower and
middle-income taxpayers, the exemption should be made to cover the past year 1991. To such an extent, Rep. Act
No. 7167 was a social legislation intended to remedy the non-adjustment in 1989. And as cited in Umali, this
legislative intent is also clear in the records of the House of Representatives' Journal.

This is not so in the case at bar. There is nothing in the NIRC that expresses any such intent. The policy
declarations in its enactment do not indicate it was a social legislation that adjusted personal and
additional exemptions according to the poverty threshold level nor is there any indication that its
application should retroact. x x x.38 (Emphasis Supplied)

Therefore, the seemingly inconsistent pronouncements in Umali and Pansacola are more apparent than real. The
circumstances of the cases and the laws interpreted, as well as the legislative intents thereof, were different.

The policy in this jurisdiction is full

taxable year treatment.

We have perused R.A. 9504, and we see nothing that expressly provides or even suggests a prorated application of
the exemptions for taxable year 2008. On the other hand, the policy of full taxable year treatment, especially of the
personal and additional exemptions, is clear under Section 35, particularly paragraph C of R.A. 8424 or the 1997
Tax Code:

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -

(A) In General. - For purposes of determining the tax provided in Section 24(A) of this Title, there shall be allowed
a basic personal exemption as follows:

xxxx

(B) Additional Exemption for Dependents.-There shall be allowed an additional exemption of... for each dependent
not exceeding four (4).

x x xx

(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above during the
taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such
year.

If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for
himself and his dependent(s) as if he died at the close of such year.

If the spouse or any of the dependents dies or if any of such

dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year,
the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such
dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year.
(Emphases supplied)

Note that paragraph C does not allow the prorating of the personal and additional exemptions provided in
paragraphs A and B, even in case a status-changing event occurs during the taxable year. Rather, it allows the
fullest benefit to the individual taxpayer. This manner of reckoning the taxpayer's status for purposes of the
personal and additional exemptions clearly demonstrates the legislative intention; that is, for the state to give the
taxpayer the maximum exemptions that can be availed, notwithstanding the fact that the latter's actual status
would qualify only for a lower exemption if prorating were employed.

We therefore see no reason why we should make any distinction between the income earned prior to the
effectivity of the amendment (from 1 January 2008 to 5 July 2008) and that earned thereafter (from 6 July 2008 to
31 December 2008) as none is indicated in the law. The principle that the courts should not distinguish when the
law itself does not distinguish squarely app1ies to this case. 39

We note that the prorating of personal and additional exemptions was employed in the 1939 Tax Code. Section
23(d) of that law states:

Change of status. - - If the status of the taxpayer insofar as it affects the personal and additional exemptions for
himself or his dependents, changes during the taxable year, the amount of the personal and additional
exemptions shall be apportioned, under rules and regulations prescribed by the Secretary of Finance, in
accordance with the number of months before and after such change. For the purpose of such apportionment
a fractional part of a month shall be disregarded unless it amounts to more than half a month, in which case it shall
be considered as a month.40 (Emphasis supplied)

On 22 September 1950, R.A. 590 amended Section 23(d) of the 1939 Tax Code by restricting the operation of the
prorating of personal exemptions. As amended, Section 23(d) reads:

(d) Change of status. - If the status of the taxpayer insofar as it affects the personal and additional exemption for
himself or his dependents, changes during the taxable year by reason of his death, the amount of the personal and
additional exemptions shall be apportioned, under rules and regulations prescribed by the Secretary of Finance, in
accordance with the number of months before and after such change. For the purpose of such apportionment a
fractional part of a month shall be disregarded unless it amounts to more than half a month, in which case it shall
be considered as a month.41(Emphasis supplied)

Nevertheless, in 1969, R. A. 6110 ended the operation of the prorating scheme in our jurisdiction when it amended
Section 23(d) of the 1939 Tax Code and adopted a full taxable year treatment of the personal and additional
exemptions. Section 23(d), as amended, reads:

(d) Change of status. -

If the taxpayer married or should have additional dependents as defined in subsection (c) above during the taxable
year the taxpayer may claim the corresponding personal exemptions in full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and additional deductions
for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die during the year, the taxpayer may still claim the same deductions
as if they died at the close of such year.

P.D. 69 followed in 1972, and it retained the full taxable year scheme. Section 23(d) thereof reads as follows:
(d) Change of status. - If the taxpayer marries or should have additional dependents as defined in subsection (c)
above during the taxable year the taxpayer may claim the corresponding personal exemptions in full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and additional deductions
for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die or become twenty-one years old during the taxable year, the
taxpayer may still claim the same exemptions as if they died, or as if such dependents became twenty-one years old
at the close of such year.

The 1977 Tax Code continued the policy of full taxable year treatment. Section 23(d) thereof states:

(d) Change of status.- If the taxpayer married or should have additional dependents as defined in subsection (c)
above during the taxable year, the taxpayer may claim the corresponding personal exemption in full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and additional exemptions
for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die or become

twenty-one years old during the taxable year, the taxpayer may still claim the same exemptions as if they died, or
as if such dependents became twenty-one years old at the close of such year.

While Section 23 of the 1977 Tax Code underwent changes, the provision on full taxable year treatment in case of
the taxpayer's change of status was left untouched.42 Executive Order No. 37, issued on 31 July 1986, retained
the change of status provision verbatim. The provision appeared under Section 30(1)(3) of the NIRC, as amended:

(3) Change of status.- If the taxpayer married or should have additional dependents as defined above during the
taxable year, the taxpayer may claim the corresponding personal and additional exemptions, as the case may be, in
full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and additional exemptions
for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die or if any of such

dependents becomes twenty-one years old during the taxable year, the taxpayer may still claim the same
exemptions as if they died, or if such dependents become twenty-one years old at the close of such year.

Therefore, the legislative policy of full taxable year treatment of the personal and additional exemptions has been
in our jurisdiction continuously since 1969. The prorating approach has long since been abandoned. Had Congress
intended to revert to that scheme, then it should have so stated in clear and unmistakeable terms. There is nothing,
however, in R.A. 9504 that provides for the reinstatement of the prorating scheme. On the contrary, the change-of-
status provision utilizing the full-year scheme in the 1997 Tax Code was left untouched by R.A. 9504.

We now arrive at this important point: the policy of full taxable year treatment is established, not by the
amendments introduced by R.A. 9504, but by the provisions of the 1997 Tax Code, which adopted the policy from
as early as 1969.

There is, of course, nothing to prevent Congress from again adopting a policy that prorates the effectivity of basic
personal and additional exemptions. This policy, however, must be explicitly provided for by law - to amend the
prevailing law, which provides for full-year treatment. As already pointed out, R.A. 9504 is totally silent on the
matter. This silence cannot be presumed by the BIR as providing for a half-year application of the new exemption
levels. Such presumption is unjust, as incomes do not remain the same from month to month, especially for the
MWEs.

Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new personal and additional
exemptions. In so doing, respondents overstepped the bounds of their rule-making power. It is an established rule
that administrative regulations are valid only when these are consistent with the law. 43 Respondents cannot
amend, by mere regulation, the laws they administer.44 To do so would violate the principle of non-delegability of
legislative powers.45

The prorated application of the new set of personal and additional exemptions for the year 2008, which was
introduced by respondents, cannot even be justified under the exception to the canon of non-delegability; that is,
when Congress makes a delegation to the executive branch.46 The delegation would fail the two accepted tests for a
valid delegation of legislative power; the completeness test and the sufficient standard test.47 The first test requires
the law to be complete in all its terms and conditions, such that the only thing the delegate will have to do is to
enforce it.48 The sufficient standard test requires adequate guidelines or limitations in the law that map out the
boundaries of the delegate's authority and canalize the delegation.49

In this case, respondents went beyond enforcement of the law, given the absence of a provision in R.A. 9504
mandating the prorated application of the new amounts of personal and additional exemptions for 2008. Further,
even assuming that the law intended a prorated application, there are no parameters set forth in R.A. 9504 that
would delimit the legislative power surrendered by Congress to the delegate. In contrast, Section 23(d) of the 1939
Tax Code authorized not only the prorating of the exemptions in case of change of status of the taxpayer, but also
authorized the Secretary of Finance to prescribe the corresponding rules and regulations.

II.

Whether an MWE is exempt for the entire taxable

year 2008 or from 6 July 2008 only

The MWE is exempt for the entire taxable year 2008.

As in the case of the adjusted personal and additional exemptions, the MWE exemption should apply to the entire
taxable year 2008, and not only from 6 July 2008 onwards. We see no reason why Umali cannot be made
applicable to the MWE exemption, which is undoubtedly a piece of social legislation. It was intended to alleviate
the plight of the working class, especially the low-income earners. In concrete terms, the exemption translates to a
₱34 per day benefit, as pointed out by Senator Escudero in his sponsorship speech.50

As it stands, the calendar year 2008 remained as one taxable year for an individual taxpayer. Therefore, RR 10-
2008 cannot declare the income earned by a minimum wage earner from 1 January 2008 to 5 July 2008 to be
taxable and those earned by him for the rest of that year to be tax-exempt. To do so would be to contradict the
NIRC and jurisprudence, as taxable income would then cease to be determined on a yearly basis.

Respondents point to the letter of former Commissioner of Internal Revenue Lilia B. Hefti dated 5 July 2008 and
petitioner Sen. Escudero's signature on the Conforme portion thereof. This letter and the conforme supposedly
establish the legislative intent not to make the benefits of R.A. 9504 effective as of 1 January 2008.

We are not convinced. The conforme is irrelevant in the determination of legislative intent.

We quote below the relevant portion of former Commissioner Hefti's letter:

Attached herewith are salient features of the proposed regulations to implement RA 9504 x x x. We have tabulated
critical issues raised during the public hearing and comments received from the public which we need immediate
written resolution based on the inten[t]ion of the law more particularly the effectivity clause. Due to the
expediency and clamor of the public for its immediate implementation, may we request your confirmation on the
proposed recommendation within five (5) days from receipt hereof. Otherwise, we shall construe your
affirmation. 51

We observe that a Matrix of Salient Features of Proposed Revenue Regulations per R.A. 9504 was attached to the
letter.52 The Matrix had a column entitled "Remarks" opposite the Recommended Resolution. In that column, noted
was a suggestion coming from petitioner TMAP:

TMAP suggested that it should be retroactive considering that it was [for] the benefit of the majority and to alleviate
the plight of workers. Exemption should be applied for the whole taxable year as provided in the NIRC. x x x Umali
v. Estanislao [ruled] that the increase[d] exemption in 1992 [was applicable] [to] 1991.

Majority issues raised during the public hearing last July 1, 2008 and emails received suggested [a] retroactive
implementation.  53(Italics in the original)

The above remarks belie the claim that the conforme is evidence of the legislative intent to make the benefits
available only from 6 July 2008 onwards. There would have been no need to make the remarks if the BIR had
merely wanted to confirm was the availability of the law's benefits to income earned starting 6 July 2008. Rather,
the implication is that the BIR was requesting the conformity of petitioner Senator Escudero to the proposed
implementing rules, subject to the remarks contained in the Matrix. Certainly, it cannot be said that Senator
Escudero's conforme is evidence of legislative intent to the effect that the benefits of the law would not apply to
income earned from 1 January 2008 to 5 July 2008.

Senator Escudero himself states in G.R. No. 185234:

In his bid to ensure that the BIR would observe the effectivity dates of the grant of tax exemptions and increased
basic personal and additional exemptions under Republic Act No. 9504, Petitioner Escudero, as Co-Chairperson of
the Congressional Oversight Committee on Comprehensive Tax Reform Program, and his counterpart in the House
of Representatives, Hon. Exequiel B. Javier, conveyed through a letter, dated 16 September 2008, to Respondent
Teves the legislative intent that "Republic Act (RA) No. 9504 must be made applicable to the entire taxable year
2008" considering that it was "a social legislation intended to somehow alleviate the plight of minimum wage
earners or low income taxpayers". They also jointly expressed their "fervent hope that the corresponding Revenue
Regulations that will be issued reflect the true legislative intent and rightful statutory interpretation of R.A. No.
9504." 54

Senator Escudero repeats in his Memorandum:

On 16 September 2008, the Chairpersons (one of them being herein Petitioner Sen. Escudero) of the Congressional
Oversight Committee on Comprehensive Tax Reform Program of both House of Congress wrote Respondent DOF
Sec. Margarito Teves, and requested that the revenue regulations (then yet still to be issued)55 to implement
Republic Act No. 9504 reflect the true intent and rightful statutory interpretation thereof, specifically that the grant
of tax exemption and increased basic personal and additional exemptions be made available for the entire taxable
year 2008. Yet, the DOF promulgated Rev. Reg. No. 10-2008 in contravention of such legislative intent.x x x.56

We have gone through the records and we do not see anything that would to suggest that respondents deny the
senator's assertion.

Clearly, Senator Escudero's assertion is that the legislative intent is to make the MWE' s tax exemption and the
increased basic personal and additional exemptions available for the entire year 2008. In the face of his assertions,
respondents' claim that his conforme to Commissioner Hefti's letter was evidence of legislative intent becomes
baseless and specious. The remarks described above and the subsequent letter sent to DOF Secretary Teves, by no
less than the Chairpersons of the Bi-camera! Congressional Oversight Committee on Comprehensive Tax Reform
Program, should have settled for respondents the matter of what the legislature intended for R.A. 9504's
exemptions.
Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the availment of the MWE's tax
exemption and the increased personal and additional exemptions beginning only on 6 July 2008 is in contravention
of the law it purports to implement.

A clarification is proper at this point. Our ruling that the MWE exemption is available for the entire taxable year
2008 is premised on the fact of one's status as an MWE; that is, whether the employee during the entire year of
2008 was an MWE as defined by R.A. 9504. When the wages received exceed the minimum wage anytime during
the taxable year, the employee necessarily loses the MWE qualification. Therefore, wages become taxable as the
employee ceased to be an MWE. But the exemption of the employee from tax on the income previously earned
as an MWE remains.

This rule reflects the understanding of the Senate as gleaned from the exchange between Senator Miriam Defensor-
Santiago and Senator Escudero:

Asked by Senator Defensor-Santiago on how a person would be taxed if, during the year, he is promoted from
Salary Grade 5 to Salary Grade 6 in July and ceases to be a minimum wage employee, Senator Escudero said that
the tax computation would be based starting on the new salary in July. 57

As the exemption is based on the employee's status as an MWE, the operative phrase is "when the employee ceases
to be an MWE. Even beyond 2008, it is therefore possible for one employee to be exempt early in the year for being
an MWE for that period, and subsequently become taxable in the middle of the same year with respect to the
compensation income, as when the pay is increased higher than the minimum wage. The improvement of one's lot,
however, cannot justly operate to make the employee liable for tax on the income earned as an MWE.

Additionally, on the question of whether one who ceases to be an MWE may still be entitled to the personal and
additional exemptions, the answer must necessarily be yes. The MWE exemption is separate and distinct from the
personal and additional exemptions. One's status as an MWE does not preclude enjoyment of the personal and
additional exemptions. Thus, when one is an MWE during a part of the year and later earns higher than the
minimum wage and becomes a non-MWE, only earnings for that period when one is a non-MWE is subject to tax. It
also necessarily follows that such an employee is entitled to the personal and additional exemptions that any
individual taxpayer with taxable gross income is entitled.

A different interpretation will actually render the MWE exemption a totally oppressive legislation. It would be a
total absurdity to disqualify an MWE from enjoying as much as ₱150,00058 in personal and additional exemptions
just because sometime in the year, he or she ceases to be an MWE by earning a little more in wages. Laws cannot be
interpreted with such absurd and unjust outcome. It is axiomatic that the legislature is assumed to intend right and
equity in the laws it passes.59

Critical, therefore, is how an employee ceases to become an MWE and thus ceases to be entitled to an MWE's
exemption.

III.

Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in

declaring that an MWE who receives other benefits in excess of the

statutory limit of ₱30,000 is no longer entitled to the exemption provided

by R.A. 9504, is consistent with the law.

Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively declaring that an MWE who
receives other benefits in excess of the statutory limit of ₱30,000 is no longer entitled to the exemption provided
by R.A. 9504.
The BIR added a requirement not
found in the law.

The assailed Sections 1 and 3 of RR 10-2008 are reproduced hereunder for easier reference.

SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as follows:

Sec. 2.78.1. Withholding of Income Tax on Compensation Income. -

(A) Compensation Income Defined. – x x x

xxxx

(3) Facilities and privileges of relatively small value. - Ordinarily, facilities, and privileges (such as entertainment,
medical services, or so-called "courtesy" discounts on purchases), otherwise known as "de minimis benefits,"
furnished or offered by an employer to his employees, are not considered as compensation subject to income tax
and consequently to withholding tax, if such facilities or privileges are of relatively small value and are offered or
furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his
employees.

The following shall be considered as "de minimis" benefits not subject to income tax, hence, not subject to
withholding tax on compensation income of both managerial and rank and file employees:

(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year and the
monetized value of leave credits paid to government officials and employees;

(b) Medical cash allowance to dependents of employees not exceeding ₱750.00 per employee per semester or ₱125
per month;

(c) Rice subsidy of ₱l,500.00 or one (1) sack of 50-kg. rice per month amounting to not more than ₱l,500.00;

(d) Uniforms and clothing allowance not exceeding ₱4,000.00 per annum;

(e) Actual yearly medical benefits not exceeding ₱10,000.00 per annum;

(f) Laundry allowance not exceeding ₱300.00 per month;

(g) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a
tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding
₱10,000.00 received by the employee under an established written plan which does not discriminate in favor of
highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding ₱5,000.00per employee per
annum;

(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of
illness, marriage, birth of a baby, etc.; and

(j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage.60

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be considered in
determining the ₱30,000.00 ceiling of 'other benefits' excluded from gross income under Section 32(b)(7)(e) of the
Code. Provided that, the excess of the 'de minimis' benefits over their respective ceilings prescribed by these
regulations shall be considered as part of 'other benefits' and the employee receiving it will be subject to tax only
on the excess over the ₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding
the P30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and
allowances, just like an employee receiving compensation income beyond the SMW.

Any amount given by the employer as benefits to its employees, whether classified as 'de minimis' benefits or
fringe benefits, shall constitute [a] deductible expense upon such employer.

Where compensation is paid in property other than money, the employer shall make necessary arrangements to
ensure that the amount of the tax required to be withheld is available for payment to the Bureau of Internal
Revenue.

xxxx

(B) Exemptions from Withholding Tax on Compensation. - The following income payments are exempted from
the requirements of withholding tax on compensation:

xxxx

(13) Compensation income of MWEs who work

in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite
Wage and Productivity Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the
place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity
Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor
and Employment (DOLE). The RTWPB of each region shall determine the wage rates in the different regions based
on established criteria and shall be the basis of exemption from income tax for this purpose.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall
likewise be covered by the above exemption. Provided, however, that an employee who receives/earns
additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of ₱30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of
being a MWE and, therefore, his/her entire earnings are not exempt form income tax, and consequently,
from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or practice of
profession, except income subject to final tax, in addition to compensation income are not exempted from income
tax on their entire income earned during the taxable year. This rule, notwithstanding, the [statutory minimum
wage], [h]oliday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.

For purposes of these regulations, hazard pay shall mean x x x.

In case of hazardous employment, x x x

The NWPC shall officially submit a Matrix of Wage Order by region x x x

Any reduction or diminution of wages for purposes of exemption from income tax shall constitute
misrepresentation and therefore, shall result to the automatic disallowance of expense, i.e. compensation and
benefits account, on the part of the employer. The offenders may be criminally prosecuted under existing laws.
(14) Compensation income of employees in the public sector with compensation income of not more than the
SMW in the non-agricultural sector, as fixed by RTWPB/NWPC, applicable to the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

The basic salary of MWEs in the public sector shall be equated to the SMW in the non-agricultural sector applicable
to the place where he/she is assigned. The determination of the SMW in the public sector shall likewise adopt the
same procedures and consideration as those of the private sector.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE in the
public sector shall likewise be covered by the above exemption. Provided, however, that a public sector
employee who receives additional compensation such as commissions, honoraria, fringe benefits, benefits
in excess of the allowable statutory amount of ₱30,000.00, taxable allowances and other taxable income other
than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay shall not enjoy the privilege
of being a MWE and, therefore, his/her entire earnings are not exempt from income tax and, consequently,
from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or practice of
profession, except income subject to final tax, in addition to compensation income are not exempted from income
tax on their entire income earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay,
overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean xxx

In case of hazardous employment, x x x

xxxx

SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read as follows:

Sec. 2.79. Income Tax Collected at Source on Compensation Income. -

(A) Requirement of Withholding. - Every employer must withhold from compensation paid an amount computed in
accordance with these Regulations. Provided, that no withholding of tax shall be required on the SMW, including
holiday pay, overtime pay, night shift differential and hazard pay of MWEs in the private/public sectors as defined
in these Regulations. Provided, further, that an employee who receives additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount
of₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay,
hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore,
his/her entire earnings are not exempt from income tax and, consequently, shall be subject to withholding
tax.

xxxx

For the year 2008, however, being the initial year of implementation of R.A. 9504, there shall be a transitory
withholding tax table for the period from July 6 to December 31, 2008 (Annex "D") determined by prorating the
annual personal and additional exemptions under R.A. 9504 over a period of six months. Thus, for individuals,
regardless of personal status, the prorated personal exemption is ₱25,000, and for each qualified dependent child
(QDC), ₱12,500.

On the other hand, the pertinent provisions of law, which are supposed to be implemented by the above-quoted
sections of RR10-2008, read as follows:
SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the National Internal Revenue
Code of 1997, is hereby further amended by adding the following definitions after Subsection (FF) to read as
follows:

Section 22. Definitions.- when used in this Title:61

(A) x x x

(FF) x x x

(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of
Labor and Employment (DOLE).

(HH) The term 'minimum wage earner' shall refer to a worker in the private sector paid the statutory
minimum wage, or to an employee in the public sector with compensation income of not more than the
statutory minimum wage in the non-agricultural sector where he/she is assigned.

SECTION 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the National Internal
Revenue Code of 1997, is hereby further amended to read as follows:

SEC. 24. Income Tax Rates. -

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. -

(l)x x x

x x x x; and

(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections
(B), (C) and (D)of this Section, derived for each taxable year from all sources within the Philippines by an
individual alien who is a resident of the Philippines.

(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates
established in the following schedule:

xxxx

For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute
separately their individual income tax based on their respective total taxable income: Provided, That if any income
cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses,
the same shall be divided equally between the spouses for the purpose of determining their respective taxable
income.

Provided, That mm1mum wage earners as defined in Section 22(HH) of this Code shall be exempt from the
payment of income tax on their taxable income: Provided, further, That the holiday pay, ovr.rtime pay,
night shift differential pay and hazard pay received by such minimum wage earners shall likewise be
exempt from income tax.

xxxx

SECTION 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise known as the National Internal
Revenue Code of 1997, is hereby further amended to read as follows:
SEC. 51. Individual Return. -

(A) Requirements. -

(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income
tax return:

(a) x x x

xxxx

(2) The following individuals shall not be required to file an income tax return:

(a) x x x

(b) An individual with respect to pure compensation income, as defined in Section 32(A)(l), derived from sources
within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of
this Code:

Provided, That an individual deriving compensation concurrently from two or more employers at any time during
the taxable year shall file an income tax return;

(c) x x x; and

(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who is exempt from
income tax pursuant to the provisions of this Code and other laws, general or special.

xxxx

SECTION 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as the National Internal
Revenue Code of 1997, is hereby further amended to read as follows:

SEC. 79. Income Tax Collected at Source. –

(A) Requirement of Withholding. - Except in the case of a minimum wage earner as defined in Section
22(HH) of this Code, every employer making payment of wages shall deduct and withhold upon such wages a tax
determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. (Emphases supplied)

Nowhere in the above provisions of R.A. 9504 would one find the qualifications prescribed by the assailed
provisions of RR 10-2008. The provisions of the law are clear and precise; they leave no room for interpretation -
they do not provide or require any other qualification as to who are MWEs.

To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says he/she must be one who is
paid the statutory minimum wage if he/she works in the private sector, or not more than the statutory minimum
wage in the non-agricultural sector where he/she is assigned, if he/she is a government employee. Thus, one is
either an MWE or he/she is not. Simply put, MWE is the status acquired upon passing the litmus test - whether one
receives wages not exceeding the prescribed minimum wage.

The minimum wage referred to in the definition has itself a clear and definite meaning. The law explicitly refers to
the rate fixed by the Regional Tripartite Wage and Productivity Board, which is a creation of the Labor Code.62 The
Labor Code clearly describes wages and Minimum Wage under Title II of the Labor Code. Specifically, Article 97
defines "wage" as follows:
(f) "Wage" paid to any employee shall mean the remuneration or earnings, however designated, capable of being
expressed in terms of money, whether fixed or ascertained on a time, task, piece, or commission basis, or other
method of calculating the same, which is payable by an employer to an employee under a written or unwritten
contract of employment for work done or to be done, or for services rendered or to be rendered and includes the
fair and reasonable value, as determined by the Secretary of Labor and Employment, of board, lodging, or other
facilities customarily furnished by the employer to the employee. "Fair and reasonable value" shall not include any
profit to the employer, or to any person affiliated with the employer.

While the Labor Code's definition of "wage" appears to encompass any payments of any designation that an
employer pays his or her employees, the concept of minimum wage is distinct.63 "Minimum wage" is wage
mandated; one that employers may not freely choose on their own to designate in any which way.

In Article 99, minimum wage rates are to be prescribed by the

Regional Tripartite Wages and Productivity Boards. In Articles 102 to 105, specific instructions are given in
relation to the payment of wages. They must be paid in legal tender at least once every two weeks, or twice a
month, at intervals not exceeding 16 days, directly to the worker, except in case of force majeure or death of the
worker.

These are the wages for which a minimum is prescribed. Thus, the minimum wage exempted by R.A. 9504 is that
which is referred to in the Labor Code. It is distinct and different from other payments including allowances,
honoraria, commissions, allowances or benefits that an employer may pay or provide an employee.

Likewise, the other compensation incomes an MWE receives that are also exempted by R.A. 9504 are all mandated
by law and are based on this minimum wage. Additional compensation in the form of overtime pay is mandated for
work beyond the normal hours based on the employee's regular wage.64 Those working between ten o'clock in the
evening and six o'clock in the morning are required to be paid a night shift differential based on their regular
wage.65Holiday/premium pay is mandated whether one works on regular holidays or on one's scheduled rest days
and special holidays. In all of these cases, additional compensation is mandated, and computed based on the
employee's regular wage.66

R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess of the minimum wage as
determined by the wage boards, including the corresponding holiday, overtime, night differential and hazard pays.

In other words, the law exempts from income taxation the most basic compensation an employee receives - the
amount afforded to the lowest paid employees by the mandate of law. In a way, the legislature grants to these
lowest paid employees additional income by no longer demanding from them a contribution for the operations of
government. This is the essence of R.A. 9504 as a social legislation. The government, by way of the tax exemption,
affords increased purchasing power to this sector of the working class.

This intent is reflected in the Explanatory Note to Senate Bill No. 103 of Senator Roxas:

This bill seeks to exempt minimum wage earners in the private sector and government workers in Salary Grades 1
to 3, amending certain provisions of Republic Act 8424, otherwise known as the National Internal Revenue Code of
1997, as amended.

As per estimates by the National Wages and Productivity Board, there are 7 million workers earning the
minimum wage and even below. While these workers are in the verge of poverty, it is unfair and unjust
that the Government, under the law, is taking away a portion of their already subsistence-level income.

Despite this narrow margin from poverty, the Government would still be mandated to take a slice away
from that family's meager resources. Even if the Government has recently exempted minimum wage
earners from withholding taxes, they are still liable to pay income taxes at the end of the year. The law
must be amended to correct this injustice. (Emphases supplied)
The increased purchasing power is estimated at about ₱9,500 a year.67 RR 10-2008, however, takes this away. In
declaring that once an MWE receives other forms of taxable income like commissions, honoraria, and fringe
benefits in excess of the non-taxable statutory amount of ₱30,000, RR 10-2008 declared that the MWE immediately
becomes ineligible for tax exemption; and otherwise non-taxable minimum wage, along with the other taxable
incomes of the MWE, becomes taxable again.

Respondents acknowledge that R.A.9504 is a social legislation meant for social justice,68 but they insist that it is too
generous, and that consideration must be given to the fiscal position and financial capability of the
government.69While they acknowledge that the intent of the income tax exemption of MWEs is to free low-income
earners from the burden of taxation, respondents, in the guise of clarification, proceed to redefine which incomes
may or may not be granted exemption. These respondents cannot do without encroaching on purely legislative
prerogatives.

By way of review, this ₱30,000 statutory ceiling on benefits has its beginning in 1994 under R. A. 7833, which
amended then Section 28(b )(8) of the 1977 NIRC. It is substantially carried over as Section 32(B) (Exclusion from
Gross Income) of Chapter VI (Computation of Gross Income) of Title II (Tax on Income) in the 1997 NIRC (R.A.
8424). R.A. 9504 does not amend that provision of R.A. 8424, which reads:

SEC. 32. Gross Income.-

(A) General Definition.- x x x

(B) Exclusions from Gross Income.- The following items shall not be included in gross income and shall be exempt
from taxation under this title:

(1) x x x

xxxx

(7) Miscellaneous Items. -

(a) x x x

xxxx

(e) 13th Month Pay and Other Benefits.- Gross benefits received by officials and employees of public and private
entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand
pesos (₱30,000) which shall cover:

(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No.
668670;

(ii) Benefits received by employees pursuant to Presidential Decree No. 85171, as amended by Memorandum Order
No. 28, dated August 13, 1986;

(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;and

(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of
Thirty thousand pesos (₱30,000) may be increased through rules and regulations issued by the Secretary of
Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the
inflation rate at the end of the taxable year.

(f) x x x
The exemption granted to MWEs by R.A. 9504 reads:

Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be exempt from the
payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift
differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.

"Taxable income" is defined as follows:

SEC. 31. Taxable Income Defined.- The term taxable income means the pertinent items of gross income specified
in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of
income by this Code or other special laws.

A careful reading of these provisions will show at least two distinct groups of items of compensation. On one hand
are those that are further exempted from tax by R.A. 9504; on the other hand are items of compensation that R.A.
9504 does not amend and are thus unchanged and in no need to be disturbed.

First are the different items of compensation subject to tax prior to R.A. 9504. These are included in the pertinent
items of gross income in Section 31. "Gross income" in Section 32 includes, among many other items,
"compensation for services in whatever form paid, including, but not limited to salaries, wages, commissions, and
similar items." R.A. 9504 particularly exempts the minimum wage and its incidents; it does not provide exemption
for the many other forms of compensation.

Second are the other items of income that, prior to R.A. 9504, were excluded from gross income and were therefore
not subject to tax. Among these are other payments that employees may receive from employers pursuant to their
employer-employee relationship, such as bonuses and other benefits. These are either mandated by law (such as
the 13th month pay) or granted upon the employer's prerogative or are pursuant to collective bargaining
agreements (as productivity incentives). These items were not changed by R.A. 9504.

It becomes evident that the exemption on benefits granted by law in 1994 are now extended to wages of the least
paid workers under R.A. 9504. Benefits not beyond ₱30,000 were exempted; wages not beyond the SMW are now
exempted as well. Conversely, benefits in excess of ₱30,000 are subject to tax and now, wages in excess of the SMW
are still subject to tax.

What the legislature is exempting is the MWE's minimum wage and other forms statutory compensation like
holiday pay, overtime pay, night shift differential pay, and hazard pay. These are not bonuses or other benefits;
these are wages. Respondents seek to frustrate this exemption granted by the legislature.

In respondents' view, anyone receiving 13th month pay and other benefits in excess of ₱30,000 cannot be an MWE.
They seek to impose their own definition of "MWE" by arguing thus:

It should be noted that the intent of the income tax exemption of MWEs is to free the low-income earner from the
burden of tax. R.A. No. 9504 and R.R. No. 10-2008 define who are the low-income earners. Someone who earns
beyond the incomes and benefits above-enumerated is definitely not a low-income earner. 72

We do not agree.

As stated before, nothing to this effect can be read from R.A. 9504. The amendment is silent on whether
compensation-related benefits exceeding the ₱30,000 threshold would make an MWE lose exemption. R.A. 9504
has given definite criteria for what constitutes an MWE, and R.R. 10-2008 cannot change this.

An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to the requirements
provided by law. To do so constitutes lawmaking, which is generally reserved for Congress. 73 In CIR v. Fortune
Tobacco,  74 we applied the plain meaning rule when the Commissioner of Internal Revenue ventured into
unauthorized administrative lawmaking:
[A]n administrative agency issuing regulations may not enlarge, alter or restrict the provisions of the law it
administers, and it cannot engraft additional requirements not contemplated by the legislature. The Court
emphasized that tax administrators are not allowed to expand or contract the legislative mandate and that
the "plain meaning rule" or verba legis in statutory construction should be applied such that where the
words of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied
without attempted interpretation.

As we have previously declared, rule-making power must be confined to details for regulating the mode or
proceedings in order to carry into effect the law as it has been enacted, and it cannot be extended to amend or
expand the statutory requirements or to embrace matters not covered by the statute. Administrative regulations
must always be in harmony with the provisions of the law because any resulting discrepancy between the two will
always be resolved in favor of the basic law. 75 (Emphases supplied)

We are not persuaded that RR 10-2008 merely clarifies the law. The CIR' s clarification is not warranted when the
language of the law is plain and clear. 76

The deliberations of the Senate reflect its understanding of the outworking of this MWE exemption in relation to
the treatment of benefits, both those for the ₱30,000 threshold and the de minimis benefits:

Senator Defensor Santiago. Thank you. Next question: How about employees who are only receiving a minimum
wage as base pay, but are earning significant amounts of income from sales, commissions which may be even
higher than their base pay? Is their entire income from commissions also tax-free? Because strictly speaking,
they are minimum wage earners. For purposes of ascertaining entitlement to tax exemption, is the basis only the
base pay or should it be the aggregate compensation that is being received, that is, inclusive of commissions, for
example?

Senator Escudero. Mr. President, what is included would be only the base pay and, if any, the hazard pay, holiday
pay, overtime pay and night shift differential received by a minimum wage earner. As far as commissions are
concerned, only to the extent of ₱30,000 would be exempted. Anything in excess of ₱30,000 would already
be taxable if it is being received by way of commissions. Add to that de minimis benefits being received by an
employee, such as rice subsidy or clothing allowance or transportation allowance would also be exempted; but
they are exempted already under the existing law.

Senator Defensor Santiago. I would like to thank the sponsor. That makes it clear. 77 (Emphases supplied)

Given the foregoing, the treatment of bonuses and other benefits that an employee receives from the employer in
excess of the ₱30,000 ceiling cannot but be the same as the prevailing treatment prior to R.A. 9504 - anything in
excess of ₱30,000 is taxable; no more, no less.

The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the exemption explicitly
granted by R.A. 9504.

The government's argument that the

RR avoids a tax distortion has no
merit.

The government further contends that the "clarification" avoids a situation akin to wage distortion and discourages
tax evasion. They claim that MWE must be treated equally as other individual compensation income earners "when
their compensation does not warrant exemption under R.A. No. 9504. Otherwise, there would be gross inequity
between and among individual income taxpayers."78 For illustrative purposes, respondents present three
scenarios:

37.1. In the first scenario, a minimum wage earner in the National Ca[ital Region receiving ₱382.00 per day has an
annual salary of ₱119,566.00, while a non-minimum wage earner with a basic pay of ₱385.00 per day has an
annual salary of ₱120,505.00. The difference in their annual salaries amounts to only ₱939.00, but the non-
minimum wage earner is liable for a tax of ₱8,601.00, while the minimum wage earner is tax-exempt?

37.2. In the second scenario, the minimum wage earner's "other benefits" exceed the threshold of ₱30,000.00 by
₱20,000.00. The non-minimum wage earner is liable for ₱8,601.00, while the minimum wage earner is still tax-
exempt.

37.3. In the third scenario, both workers earn "other benefits" at ₱50,000.00 more than the ₱30,000 threshold. The
non-minimum wage earner is liable for the tax of ₱l8,601.00, while the minimum wage earner is still tax-
exempt.79 (Underscoring in the original)

Again, respondents are venturing into policy-making, a function that properly belongs to Congress. In British
American Tobacco v. Camacho, we explained:80

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.

Concededly, the finding that the assailed law seems to derogate, to a limited extent, one of its avowed objectives
(i.e. promoting fair competition among the players in the industry) would suggest that, by Congress's own
standards, the current excise tax system on sin products is imperfect. But, certainly, we cannot declare a statute
unconstitutional merely because it can be improved or that it does not tend to achieve all of its stated objectives.
This is especially true for tax legislation which simultaneously addresses and impacts multiple state interests.
Absent a clear showing of breach of constitutional limitations, Congress, owing to its vast experience and expertise
in the field of taxation, must be given sufficient leeway to formulate and experiment with different tax systems to
address the complex issues and problems related to tax administration. Whatever imperfections that may occur,
the same should be addressed to the democratic process to refine and evolve a taxation system which
ideally will achieve most, if not all, of the state's objectives.

In fine, petitioner may have valid reasons to disagree with the policy decision of Congress and the method
by which the latter sought to achieve the same. But its remedy is with Congress and not this
Court. (Emphases supplied and citations deleted)

Respondents cannot interfere with the wisdom of R.A. 9504. They must respect and implement it as enacted.

Besides, the supposed undesirable "income distortion" has been addressed in the Senate deliberations. The
following exchange between Senators Santiago and Escudero reveals the view that the distortion impacts only a
few - taxpayers who are single and have no dependents:

Senator Santiago.... It seems to me awkward that a person is earning just Pl above the minimum wage is already
taxable to the full extent simply because he is earning ₱l more each day, or o more than P30 a month, or ₱350 per
annum. Thus, a single individual earning ₱362 daily in Metro Manila pays no tax but the same individual if he earns
₱363 a day will be subject to tax, under the proposed amended provisions, in the amount of ₱4,875 - I no longer
took into account the deductions of SSS, e cetera- although that worker is just ₱360 higher than the minimum
wage.

xxxx
I repeat, I am raising respectfully the point that a person who is earning just Pl above the minimum wage is already
taxable to the full extent just for a mere Pl. May I please have the Sponsor's comment. Senator Escudero...I fully
subscribe and accept the analysis and computation of the distinguished Senator, Mr. President, because this was
the very concern of this representation when we were discussing the bill. It will create wage distortions up to the
extent wherein a person is paying or rather receiving a salary which is only higher by ₱6,000 approximately from
that of a minimum wage earner. So anywhere between P1 to approximately ₱6,000 higher, there will be a wage
distortion, although distortions disappears as the salary goes up.

However, Mr. President, as computed by the distinguished Senator, the distortion is only made apparent if the
taxpayer is single or is not married and has no dependents. Because at two dependents, the distortion
would already disappear; at three dependents, it would not make a difference anymore because the
exemption would already cover approximately the wage distortion that would be created as far as
individual or single taxpayers are concerned.81(Emphases in the original)

Indeed, there is a distortion, one that RR 10-2008 actually engenders. While respondents insist that MWEs who are
earning purely compensation income will lose their MWE exemption the moment they receive benefits in excess of
₱30,000, RR 10-2008 does not withdraw the MWE exemption from those who are earning other income outside of
their employer-employee relationship. Consider the following provisions of RR 10-2008:

Section 2.78.l (B):

(B) Exemptions from Withholding Tax on Compensation. -

The following income payments are exempted from the requirements of withholding tax on compensation:

xxxx

(13) Compensation income of MWEs who work in the private sector and being paid the Statutory Minimum
Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and
Productivity Commission (NWPC), applicable to the place where he/she is assigned.

xxxx

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall
likewise be covered by the above exemption. Provided, however, that an employee who receives/earns additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount
of ₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard
pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire
earnings are not exempt from income tax, and consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or practice of
profession, except income subject to final tax, in addition to compensation income are not exempted from income
tax on their entire income earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay,
overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax.

xxxx

(14) Compensation income of employees in the public sector with compensation income of not more than the
SMW in the nonagricultural sector, as fixed by RTWPB/NWPC, applicable to the place where he/she is assigned.

xxxx

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE in the
public sector shall likewise be covered by the above exemption. Provided, however, that a public sector employee
who receives additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of ₱30,000.00, taxable allowances and other taxable income other than the SMW,
holiday pay, overtime pay, night shift differential pay and hazard pay shall not enjoy the privilege of being a MWE
and, therefore, his/her entire earnings are not exempt from income tax and, consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or practice of
profession, except income subject to final tax, in addition to compensation income are not exempted from income
tax on their entire income earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay,
overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax.

These provisions of RR 10-2008 reveal a bias against those who are purely compensation earners. In their
consolidated comment, respondents reason:

Verily, the interpretation as to who is a minimum wage earner as petitioners advance will open the
opportunity for tax evasion by the mere expedient of pegging the salary or wage of a worker at the minimum and
reflecting a worker's other incomes as some other benefits. This situation will not only encourage tax evasion,
it will likewise discourage able employers from paying salaries or wages higher than the statutory
minimum. This should never be countenanced. 82

Again, respondents are delving into policy-making they presume bad faith on the part of the employers, and then
shift the burden of this presumption and lay it on the backs of the lowest paid workers. This presumption of bad
faith does not even reflect pragmatic reality. It must be remembered that a worker's holiday, overtime and night
differential pays are all based on the worker's regular wage. Thus, there will always be pressure from the workers
to increase, not decrease, their basic pay.

What is not acceptable is the blatant inequity between the treatment that RR 10-2008 gives to those who earn
purely compensation income and that given to those who have other sources of income. Respondents want to tax
the MWEs who serve their employer well and thus receive higher bonuses or performance incentives; but exempts
the MWEs who serve, in addition to their employer, their other business or professional interests.

We cannot sustain respondent’s position.

In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable income received in excess
of the minimum wage, but the MWEs will not lose their exemption as such. Workers who receive the statutory
minimum wage their basic pay remain MWEs. The receipt of any other income during the year does not disqualify
them as MWEs. They remain MWEs, entitled to exemption as such, but the taxable income they receive other than
as MWEs may be subjected to appropriate taxes.

R.A. 9504 must be liberally construed.

We are mindful of the strict construction rule when it comes to the interpretation of tax exemption laws. 83 The
canon, however, is tempered by several exceptions, one of which is when the taxpayer falls within the purview of
the exemption by clear legislative intent. In this situation, the rule of liberal interpretation applies in favor of the
grantee and against the government. 84

In this case, there is a clear legislative intent to exempt the minimum wage received by an MWE who earns
additional income on top of the minimum wage. As previously discussed, this intent can be seen from both the law
and the deliberations.

Accordingly, we see no reason why we should not liberally interpret R.A. 9504 in favor of the taxpayers.

R.A. 9504 is a grant of tax relief long overdue.

We do not lose sight of the fact that R.A. 9504 is a tax relief that is long overdue.
Table 1 below shows the tax burden of an MWE over the years. We use as example one who is a married individual
without dependents and is working in the National Capital Region (NCR). For illustration purposes, R.A. 9504 is
applied as if the worker being paid the statutory minimum wage is not tax exempt:

Table 1 -Tax Burden of MWE over the years

Law Effective NCR Minimum Daily Taxable Tax Due Tax

Wage85 Income86 Burden87
(Annual)

RA 1992 WO 3 (1993 ₱135.00 ₱24,255 ₱1,343.05 3.2%

716788 Dec)

RA WO 5 (1997 ₱185.00 ₱39,905 ₱3,064.55 5.3%

749689 May)

RA 1998 WO 6 (1998 ₱198.00 ₱29,974 ₱2,497.40 40.%

842490 Feb)

(1997 WO 13 (2007 ₱362.00 ₱81,306 ₱10,761.20 9.5%

NIRC) Aug)

WO 14 (2008 ₱382.00 ₱87,566 ₱12,013.20 10.0%

June)

RA 2008 WO 14 (2008 ₱382.00 ₱69,566 ₱8,434.90 7.1%

950491 Aug)

WO 20 (2016 ₱491.00 ₱103,683 ₱15,236.60 9.9%

June)

As shown on Table 1, we note that in 1992, the tax burden upon an MWE was just about 3.2%, when Congress
passed R.A. 7167, which increased the personal exemptions for a married individual without dependents from
₱12,000 to ₱18,000; and R.A. 7496, which revised the table of graduated tax rates (tax table).

Over the years, as the minimum wage increased, the tax burden of the MWE likewise increased. In 1997, the MWE's
tax burden was about 5.3%. When R.A. 8424 became effective in 1998, some relief in the MWE's tax burden was
seen as it was reduced to 4.0%. This was mostly due to the increase in personal exemptions, which were increased
from ₱18,000 to ₱32,000 for a married individual without dependents. It may be noted that while the tax table was
revised, a closer scrutiny of Table 3 below would show that the rates actually increased for those who were
earning less.

As the minimum wage continued to increase, the MWE's tax burden likewise did - by August 2007, it was 9.5%.
This means that in 2007, of the ₱362 minimum wage, the MWE's take-home pay was only ₱327.62, after a tax of
₱34.38.

This scenario does not augur well for the wage earners. Over the years, even with the occasional increase in the
basic personal and additional exemptions, the contribution the government exacts from its MWEs continues to
increase as a portion of their income. This is a serious social issue, which R.A. 9504 partly addresses. With the ₱20
increase in minimum wage from ₱362 to ₱382 in 2008, the tax due thereon would be about ₱30. As seen in their
deliberations, the lawmakers wanted all of this amount to become additional take-home pay for the MWEs in
2008.92
The foregoing demonstrates the effect of inflation. When tax tables do not get adjusted, inflation has a profound
impact in terms of tax burden. "Bracket creep," "the process by which inflation pushes individuals into higher tax
brackets,"93 occurs, and its deleterious results may be explained as follows:

[A]n individual whose dollar income increases from one year to the next might be obliged to pay tax at a higher
marginal rate (say 25% instead of 15%) on the increase, this being a natural consequence of rate progression. If,
however, due to inflation the benefit of the increase is wiped out by a corresponding increase in the cost of
living, the effect would be a heavier tax burden with no real improvement in the taxpayer's economic
position. Wage and salary-earners are especially vulnerable. Even if a worker gets a raise in wages this
year, the raise will be illusory if the prices of consumer goods rise in the same proportion. If her marginal
tax rate also increased, the result would actually be a decrease in the taxpayer's real disposable income.94

Table 2 shows how MWEs get pushed to higher tax brackets with higher tax rates due only to the periodic
increases in the minimum wage. This unfortunate development illustrates how "bracket creep" comes about and
how inflation alone increases their tax burden:

Table 2

Highest
Applicable
NCR Minimum Daily Tax Due Tax
Law Effective Tax Rate
Wage95 (Annual) Burden96
(Bracket
Creep)

RA WO 3 (1993 11%
1992 ₱135.00 ₱1,343.05 3.2%
716797 Dec)

RA WO 5 (1997 11%
  ₱185.00 ₱3,064.55 5.3%
749698 May)

RA WO 6 (1998 10%
1998 ₱198.00 ₱2,497.40 4.0%
842499 Feb)

(1997 WO 13 20%
₱362.00 ₱10,761.20 9.5%
NIRC) (2007 Aug)
 
WO 14 20%
₱382.00 ₱12,013.20 10.0%
(2008 June)

RA 2008 WO 14 15%
₱382.00 ₱8,434.90 7.1%
9504100 (2008 Aug)

WO 20 20%
₱491.00 ₱15,236.60 9.9%
(2016 June)

The overall effect is the diminution, if not elimination, of the progressivity of the rate structure under the present
Tax Code. We emphasize that the graduated tax rate schedule for individual taxpayers, which takes into account
the ability to pay, is intended to breathe life into the constitutional requirement of equity. 101

R.A. 9504 provides relief by declaring that an MWE, one who is paid the statutory minimum wage (SMW), is
exempt from tax on that income, as well as on the associated statutory payments for hazardous, holiday, overtime
and night work.
R.R. 10-2008, however, unjustly removes this tax relief. While R.A. 9504 grants MWEs zero tax rights from the
beginning or for the whole year 2008, RR 10-2008 declares that certain workers - even if they are being paid the
SMW, "shall not enjoy the privilege."

Following RR10-2008's "disqualification" injunction, the MWE will continue to be pushed towards the higher tax
brackets and higher rates. As Table 2 shows, as of June 2016, an MWE would already belong to the 4th highest tax
bracket of 20% (see also Table 3), resulting in a tax burden of 9.9%. This means that for every ₱100 the MWE
earns, the government takes back ₱9.90.

Further, a comparative view of the tax tables over the years (Table 3) shows that while the highest tax rate was
reduced from as high as 70% under the 1977 NTRC, to 35% in 1992, and 32% presently, the lower income group
actually gets charged higher taxes. Before R.A. 8424, one who had taxable income of less than ₱2,500 did not have
to pay any income tax; under R.A. 8424, he paid 5% thereof. The MWEs now pay 20% or even more, depending on
the other benefits they receive including overtime, holiday, night shift, and hazard pays.

Table 3 – Tax Tables: Comparison of Tax Brackets and Rates

Taxable Income Bracket Rates under R. A. Rates under R. A. Rates under R.

7496 (1992) 8424 (1998) A. 9504 (2008)

Not Over ₱2,500 0%

Over ₱2,500 but not over

1%
₱5,000 5% 5%

Over ₱5,000 but not over

3%
₱10,000

Over ₱10,000 but not over

7%
₱20,000
10% 10%
Over ₱20,000 but not over
11%
₱30,000

Over ₱30,000 but not over  

₱40,000

Over ₱40,000 but not over

15% 15% 15%
₱60,000

Over ₱60,000 but not over

₱70,000
19%
Over ₱70,000 but not over
₱100,000
20% 20%
Over ₱100,000 but not over
₱140,000
24%
Over ₱140,000 but not over
25% 25%
₱250,000

Over ₱250,000 but not over

29% 30% 30%
₱500,000
 Over ₱500,00 35% 34% 32%

The relief afforded by R.A.9504 is thus long overdue. The law must be now given full effect for the entire taxable
year 2008, and without the qualification introduced by RR 10-2008. The latter cannot disqualify MWEs from
exemption from taxes on SMW and on their on his SMW, holiday, overtime, night shift differential, and hazard pay.

CONCLUSION

The foregoing considered, we find that respondents committed grave abuse of discretion in promulgating Sections
1 and 3 of RR 10-2008, insofar as they provide for (a) the prorated application of the personal and additional
exemptions for taxable year 2008 and for the period of applicability of the MWE exemption for taxable year 2008
to begin only on 6 July 2008; and (b) the disqualification of MWEs who earn purely compensation income, whether
in the private or public sector, from the privilege of availing themselves of the MWE exemption in case they receive
compensation-related benefits exceeding the statutory ceiling of ₱30,000.

As an aside, we stress that the progressivity of the rate structure under the present Tax Code has lost its strength.
In the main, it has not been updated since its revision in 1997, or for a period of almost 20 years. The phenomenon
of "bracket creep" could be prevented through the inclusion of an indexation provision, in which the graduated tax
rates are adjusted periodically without need of amending the tax law. The 1997 Tax Code, however, has no such
indexation provision. It should be emphasized that indexation to inflation is now a standard feature of a modern
tax code. 102

We note, however, that R.A. 8424 imposes upon respondent Secretary of Finance and Commissioner of Internal
Revenue the positive duty to periodically review the other benefits, in consideration of the effect of inflation
thereon, as provided under Section 32(B)(7)(e) entitled" 13th Month Pay and Other Benefits":

(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of
Thirty thousand pesos (₱30,000) may be increased through rules and regulations issued by the Secretary of
Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the
inflation rate at the end of the taxable year.

This same positive duty, which is also imposed upon the same officials regarding the de minimis benefits provided
under Section 33(C)(4), is a duty that has been exercised several times. The provision reads:

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:

(l) x x x

xxxx

(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.

WHEREFORE, the Court resolves to

(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and

(b) DECLARE NULL and VOID the following provisions of Revenue Regulations No. 10-2008:

(i) Sections 1 and 3, insofar as they disqualify MWEs who earn purely compensation income from the privilege of
the MWE exemption in case they receive bonuses and other compensation-related benefits exceeding the statutory
ceiling of ₱30,000;
(ii) Section 3 insofar as it provides for the prorated application of the personal and additional exemptions under
R.A. 9504 for taxable year 2008, and for the period of applicability of the MWE exemption to begin only on 6 July
2008.

(c) DIRECT respondents Secretary of Finance and Commissioner of Internal Revenue to grant a refund, or allow
the application of the refund by way of withholding tax adjustments, or allow a claim for tax credits by (i) all
individual taxpayers whose incomes for taxable year 2008 were the subject of the prorated increase in personal
and additional tax exemption; and (ii) all MWEs whose minimum wage incomes were subjected to tax for their
receipt of the 13thmonth pay and other bonuses and benefits exceeding the threshold amount under Section 32(B)
(7)(e) of the 1997 Tax Code.

SO ORDERED.

Republic of the Philippines

Supreme Court
Manila
 
THIRD DIVISION
 
 
PLANTERS PRODUCTS, INC., G.R. No. 166006
Petitioner,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
 
 
Promulgated:
FERTIPHIL CORPORATION,
Respondent. March 14, 2008
 
x--------------------------------------------------x
 
DECISION
 
 
REYES, R.T., J.:
 
 
THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality of statutes,
executive orders, presidential decrees and other issuances. The Constitution vests that power not only in the
Supreme Court but in all Regional Trial Courts.
 
The principle is relevant in this petition for review on certiorari of the Decision[1] of the Court of Appeals
(CA) affirming with modification that of 
[2]
the RTC in Makati City,  finding petitioner Planters Products, Inc. (PPI) liable to private respondent Fertiphil
Corporation (Fertiphil) for the levies it paid under Letter of Instruction (LOI) No. 1465.
 
The Facts
 
Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine
[3]
laws.  They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural
chemicals.
 
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465
which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all
grades of fertilizers in the Philippines.[4] The LOI provides:
 
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
a capital contribution component of not less than P10 per bag. This capital contribution shall
be collected until adequate capital is raised to make PPI viable. Such capital contribution shall
be applied by FPA to all domestic sales of fertilizers in the Philippines.[5] (Underscoring
supplied)
 
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the
Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust
Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.[6]
 
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of
democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to
accede to the demand.[7]
 
Fertiphil filed a complaint for collection and damages[8] against FPA and PPI with the RTC in Makati. It
questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an
unlawful imposition that amounted to a denial of due process of law. [9] Fertiphil alleged that the LOI solely favored
PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of the fertilizer industry.
 
In its Answer,[10] FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid
exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country. It also
averred that Fertiphil did not sustain any damage from the LOI because the burden imposed by the levy fell on the
ultimate consumer, not the seller.
 
RTC Disposition
 
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:
 
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the
plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay the former:
 
1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.
 
SO ORDERED.[11]
 
 
 
 
Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of taxation,
the RTC invalidated the levy for violating the basic principle that taxes can only be levied for public purpose, viz.:
 
It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is
purportedly in the exercise of the power of taxation. It is a settled principle that the power of
taxation by the state is plenary. Comprehensive and supreme, the principal check upon its abuse
resting in the responsibility of the members of the legislature to their constituents. However, there
are two kinds of limitations on the power of taxation: the inherent limitations and the
constitutional limitations.
 
One of the inherent limitations is that a tax may be levied only for public purposes:
 
The power to tax can be resorted to only for a constitutionally valid public
purpose. By the same token, taxes may not be levied for purely private purposes, for
building up of private fortunes, or for the redress of private wrongs. They cannot be
levied for the improvement of private property, or for the benefit, and promotion of
private enterprises, except where the aid is incident to the public benefit. It is well-
settled principle of constitutional law that no general tax can be levied except for the
purpose of raising money which is to be expended for public use. Funds cannot be
exacted under the guise of taxation to promote a purpose that is not of public
interest. Without such limitation, the power to tax could be exercised or employed
as an authority to destroy the economy of the people. A tax, however, is not held
void on the ground of want of public interest unless the want of such interest is
clear. (71 Am. Jur. pp. 371-372)
 
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and Pesticide
Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465 which, in turn,
remitted the amount to the defendant Planters Products, Inc. thru the latters depository bank, Far
East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a
private domestic corporation, became poorer by the amount of P6,698,144.00 and the defendant,
 Planters Product, Inc., another private domestic corporation, became richer by the amount
of P6,698,144.00.
 
Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is
quite evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the
country and orders that the said amount should go to the defendant Planters Product, Inc. is
unlawful because it violates the mandate that a tax can be levied only for a public purpose and not
to benefit, aid and promote a private enterprise such as Planters Product, Inc.[12]
 
PPI moved for reconsideration but its motion was denied. [13] PPI then filed a notice of appeal with the RTC but it
failed to pay the requisite appeal docket fee. In a separate but related proceeding, this Court [14] allowed the appeal
of PPI and remanded the case to the CA for proper disposition.
 
CA Decision
 
On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC, with the
following fallo:
 
IN VIEW OF ALL THE FOREGOING, the decision appealed from is
hereby AFFIRMED, subject to the MODIFICATION that the award of attorneys fees is
hereby DELETED.[15]
 
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the constitutionality
of LOI No. 1465, thus:
 
The question then is whether it was proper for the trial court to exercise its power to judicially
determine the constitutionality of the subject statute in the instant case.
 
As a rule, where the controversy can be settled on other grounds, the courts will not resolve the
constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to
avoid ruling on constitutional questions and to presume that the acts of political departments are
valid, absent a clear and unmistakable showing to the contrary.
 
However, the courts are not precluded from exercising such power when the following requisites
are obtaining in a controversy before it: First, there must be before the court an actual case calling
for the exercise of judicial review. Second, the question must be ripe for adjudication. Third, the
person challenging the validity of the act must have standing to challenge. Fourth, the question of
constitutionality must have been raised at the earliest opportunity; and lastly, the issue of
constitutionality must be the very lis mota of the case (Integrated Bar of the Philippines v.
Zamora, 338 SCRA 81 [2000]).
 
Indisputably, the present case was primarily instituted for collection and damages. However, a
perusal of the complaint also reveals 
that the instant action is founded on the claim that the levy imposed was an unlawful and
unconstitutional special assessment. Consequently, the requisite that the constitutionality of the
law in question be the very lis mota of the case is present, making it proper for the trial court to rule
on the constitutionality of LOI 1465.[16]
 
The CA held that even on the assumption that LOI No. 1465 was issued under the police power of the state, it is still
unconstitutional because it did not promote public welfare. The CA explained:
 
In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the
said law was an invalid exercise of the States power of taxation inasmuch as it violated the inherent
and constitutional prescription that taxes be levied only for public purposes.  It reasoned out that
the amount collected under the levy was remitted to the depository bank of  PPI, which the latter
used to advance its private interest.
 
On the other hand, appellant submits that the subject statutes passage was a valid exercise of police
power. In addition, it disputes the court a quos findings arguing that the collections under LOI 1465
was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to hold
in trust for millions of farmers, the stock ownership of PPI.
 
Of the three fundamental powers of the State, the exercise of police power has been characterized
as the most essential, insistent and the least limitable of powers, extending as it does to all the great
public needs. It may be exercised as long as the activity or the property sought to be regulated has
some relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).
 
Vast as the power is, however, it must be exercised within the limits set by the Constitution, which
requires the concurrence of a lawful subject and a lawful method. Thus, our courts have laid down
the test to determine the validity of a police measure as follows: (1) the interests of the public
generally, as distinguished from those of a particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals (National Development Company v. Philippine Veterans Bank, 192 SCRA
257 [1990]).
 
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the
country is an undertaking imbued with public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will promote the public welfare. The
governments commitment to support the successful rehabilitation and continued viability of PPI, a
private corporation, is an unmistakable attempt to mask the subject statutes impartiality. There is
no way to treat the self-interest of a favored entity, 
like PPI, as identical with the general interest of the countrys farmers or even the Filipino people in
general. Well to stress, substantive due process exacts fairness and equal protection disallows
distinction where none is needed. When a statutes public purpose is spoiled by private interest, the
use of police power becomes a travesty which must be struck down for being an arbitrary exercise
of government power. To rule in favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit
of private individuals.[17]
 
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefit of Planters
Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CA stated:
 
Appellant next claims that the collections under LOI 1465 was for the benefit of Planters
Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers,
the stock ownership of PFIon the strength of Letter of Undertaking (LOU) issued by then Prime
Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion
dated October 12, 1987, to wit:
 
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA
to include in its fertilizer pricing formula a capital recovery component, the
 proceeds of which will be used initially for the purpose of funding the unpaid
portion of the outstanding capital stock of Planters presently held in trust by
Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimated
at approximately P206 million (subject to validation by Planters and Planters
Foundation) (such unpaid portion of the outstanding capital stock of Planters being
hereafter referred to as the Unpaid Capital), and subsequently for such capital
increases as may be required for the continuing viability of Planters.
 
The capital recovery component shall be in the minimum amount of P10 per bag,
which will be added to the price of all domestic sales of fertilizer in
the Philippines by any importer and/or fertilizer mother company. In this
connection, the Republic hereby acknowledges that the advances by Planters to
Planters Foundation which were applied to the payment of the Planters shares now
held in trust by Planters Foundation, have been assigned to, among others, the
Creditors. Accordingly, the Republic, through FPA, hereby agrees to deposit the
proceeds of the capital recovery component in the special trust account designated
in the notice dated April 2, 1985, addressed by counsel for the Creditors to Planters
Foundation. Such proceeds shall be deposited by FPA on or before the 15th day of
each month.
 
 
 
The capital recovery component shall continue to be charged and collected until
payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of
the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the
amounts which may be outstanding from time to time of the Unpaid Capital and/or
the Subsidy Receivables and (d) the capital increases contemplated in paragraph 2
hereof. For the purpose of the foregoing clause (c), the carrying cost shall be at such
rate as will represent the full and reasonable cost to Planters of servicing its debts,
taking into account both its peso and foreign currency-denominated obligations.
(Records, pp. 42-43)
 
Appellants proposition is open to question, to say the least. The LOU issued by then Prime Minister
Virata taken together with the Justice Secretarys Opinion does not preponderantly demonstrate
that the collections made were held in trust in favor of millions of farmers. Unfortunately for
appellant, in the absence of sufficient evidence to establish its claims, this Court is constrained to
rely on what is explicitly provided in LOI 1465 that one of the primary aims in imposing the levy is
to support the successful rehabilitation and continued viability of PPI.[18]
 
PPI moved for reconsideration but its motion was denied.[19] It then filed the present petition with this
Court.
 
Issues
 
Petitioner PPI raises four issues for Our consideration, viz.:
 
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE
DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES WHERE
THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE. NEITHER CAN LOI
1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO STANDING TO DO SO.
 
 II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER
SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED
BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN
PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OF
TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.
 
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO
THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN
EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY
VIRTUE OF THE PRINCIPLE OF OPERATIVE FACT PRIOR TO ANY DECLARATION OF
UNCONSTITUTIONALITY OF LOI 1465.
 
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN
THE INSTANT CASE.[20] (Underscoring supplied)
 
Our Ruling
 
We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve constitutional
issues.
 
Fertiphil has locus standi because it suffered direct injury;
doctrine of standing is a mere procedural technicality which may
be waived.
 
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it
does not have a personal and substantial interest in the case or will sustain direct injury as a result of its
enforcement.[21] It asserts that Fertiphil did not suffer any damage from the CRC imposition because incidence of
the levy fell on the ultimate consumer or the farmers themselves, not on the seller fertilizer company.[22]
 
We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has been
adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires a litigant to have a
material interest in the outcome of a case. In private suits, locus standi requires a litigant to be a real party in
interest, which is defined as the 
party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit.
[23]

 
In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts
a public right on behalf of the general public because of conflicting public policy issues.  [24] On one end, there is the
right of the ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal
official action. At the other end, there is the public policy precluding excessive judicial interference in official acts,
which may unnecessarily hinder the delivery of basic public services.
 
 In this jurisdiction, We have adopted the direct injury test to determine locus standi in public
suits. In People v. Vera,[25] it was held that a person who impugns the validity of a statute must have a personal and
substantial interest in the case such that he has sustained, or will sustain direct injury as a result. The direct injury
test in public suits is similar to the real party in interest rule for private suits under Section 2, Rule 3 of the 1997
Rules of Civil Procedure.[26]
 
Recognizing that a strict application of the direct injury test may hamper public interest, this Court relaxed
the requirement in cases of transcendental importance or with far reaching implications. Being a mere procedural
technicality, it has also been held that locus standi may be waived in the public interest.[27]
 
 
 
 
Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus
standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it did
pay, the P10 levy imposed for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has
passed some or all of the levy to the ultimate consumer, but that does not disqualify it from attacking the
constitutionality of the LOI or from seeking a refund. As seller, it bore the ultimate burden of paying the levy. It
faced the possibility of severe sanctions for failure to pay the levy. The fact of payment is sufficient injury to
Fertiphil.
 
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in its
product the levy. The levy certainly rendered the fertilizer products of Fertiphil and other domestic sellers much
more expensive. The harm to their business consists not only in fewer clients because of the increased price, but
also in adopting alternative corporate strategies to meet the demands of LOI No. 1465. Fertiphil and other fertilizer
sellers may have shouldered all or part of the levy just to be competitive in the market. The harm occasioned on the
business of Fertiphil is sufficient injury for purposes of locus standi.
 
Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted
by this Court on locus standi must apply. The issues raised by Fertiphil are of paramount public importance. It
involves not only the constitutionality of a tax law but, more importantly, the use of taxes for public
purpose. Former President Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private
company. This is clear from the text of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the
levy. Worse, the levy was made dependent and conditional upon PPI becoming financially viable. The LOI provided
that the capital contribution shall be collected until adequate capital is raised to make PPI viable.
 
The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional duty to
squarely resolve the issue as the final arbiter of all justiciable controversies. The doctrine of standing, being a mere
procedural technicality, should be waived, if at all, to adequately thresh out an important constitutional issue.
 
RTC may resolve constitutional issues; the constitutional issue
was adequately raised in the complaint; it is the lis mota of the
case.
 
PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that the
constitutionality of the LOI cannot be collaterally attacked in a complaint for collection. [28] Alternatively, the
resolution of the constitutional issue is not necessary for a determination of the complaint for collection.[29]
 
Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It claims
that the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot determine
its claim without resolving the issue.[30]
 
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential decree or
an executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, which provides:
 
 
 
 
SECTION 5. The Supreme Court shall have the following powers:
 
xxxx
 
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules
of Court may provide, final judgments and orders of lower courts in:
 
(a) All cases in which the constitutionality or validity of any treaty,
international or executive agreement, law, presidential decree, proclamation, order,
instruction, ordinance, or regulation is in question. (Underscoring supplied)
 
In Mirasol v. Court of Appeals,[31] this Court recognized the power of the RTC to resolve constitutional issues,
thus:
 
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction
to consider the constitutionality of a statute, presidential decree, or executive order. The
Constitution vests the power of judicial review or the power to declare a law, treaty, international
or executive agreement, presidential decree, order, instruction, ordinance, or regulation not only in
this Court, but in all Regional Trial Courts.[32]
 
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,[33] this Court reiterated:
 
There is no denying that regular courts have jurisdiction over cases involving the validity or
constitutionality of a rule or regulation issued by administrative agencies. Such jurisdiction,
however, is not limited to the Court of Appeals or to this Court alone for even the regional trial
courts can take cognizance of actions assailing a specific rule or set of rules promulgated by
administrative bodies. Indeed, the Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential decree, order, instruction,
ordinance, or regulation in the courts, including the regional trial courts.[34]
 
Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through any
of the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such review may be had
in criminal actions, as in People v. Ferrer[35] involving the constitutionality of the now defunct Anti-Subversion law,
or in ordinary actions, as in Krivenko v. Register of Deeds[36] involving the constitutionality of laws prohibiting aliens
from acquiring public lands. The constitutional issue, however, (a) must be properly raised and presented in the
case, and (b) its resolution is necessary to a determination of the case, i.e., the issue of constitutionality must be the
very lis mota presented.[37]
 
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and adequately raised in the
complaint for collection filed with the RTC. The pertinent portions of the complaint allege:
 
6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer
in the Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and
oppressive because:
xxxx
 
(c) It favors only one private domestic corporation, i.e., defendant PPPI, and
imposed at the expense and disadvantage of the other fertilizer
importers/distributors who were themselves in tight business situation and were
then exerting all efforts and maximizing management and marketing skills to
remain viable;
 
xxxx
 
(e) It was a glaring example of crony capitalism, a forced program through
which the PPI, having been presumptuously masqueraded as the fertilizer industry
itself, was the sole and anointed beneficiary;
 
7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is
tantamount to illegal exaction amounting to a denial of due process since the persons of entities
which had to bear the burden of paying the  CRC derived no benefit therefrom; that on the contrary
it was used by PPI in trying to regain its former despicable monopoly of the fertilizer industry to the
detriment of other distributors and importers.[38] (Underscoring supplied)
 
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphil filed
the complaint to compel PPI to refund the levies paid under the statute on the ground that the law imposing the
levy is unconstitutional. The thesis is that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil
had no legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an unconstitutional law should
be refunded under the civil code principle against unjust enrichment. The refund is a mere consequence of the law
being declared unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not declare the LOI
unconstitutional. It is the unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is
the very lis mota of the complaint with the RTC.
 
The P10 levy under LOI No. 1465 is an exercise of the power of
taxation.
 
At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality of the LOI.
 
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It claims
that the LOI was implemented for the purpose of assuring the fertilizer supply and distribution in the country and
for benefiting a foundation created by law to hold in trust for millions of farmers their stock ownership in PPI.
 
Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private
company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI is
enacted under the police power, it is still unconstitutional because it did not promote the general welfare of the
people or public interest.
 
Police power and the power of taxation are inherent powers of the State. These powers are distinct and
have different tests for validity. Police power is the power of the State to enact legislation that may interfere with
personal liberty or property in order to promote the general welfare,[39] while the power of taxation is the power to
levy taxes to be used for public purpose. The main purpose of police power is the regulation of a behavior or
conduct, while taxation is revenue generation. The lawful subjects and lawful means tests are used to determine
the validity of a law enacted under the police power.[40] The power of taxation, on the other hand, is circumscribed
by inherent and constitutional limitations.
 
We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation
power. While it is true that the power of taxation can be used as an implement of police power,[41] the primary
purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the
real and substantial purposes, then the exaction is properly called a tax.[42]
 
In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a vehicle registration fee is not an
exercise by the State of its police power, but of its taxation power, thus:
 
It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the
Land Transportation and Traffic Code that the legislative intent and purpose behind the law
requiring owners of vehicles to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much lesser degree, pay for the operating
expenses of the administering agency. x x x Fees may be properly regarded as taxes even though
they also serve as an instrument of regulation.
 
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration
fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent
therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a tax or fee. x x x Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need
not be an additional tax. Rep. Act 4136 also speaks of other fees such as the special permit fees for
certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec.
 11). These are not to be understood as taxes because such fees are very minimal to be revenue-
raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle
registration fee and chauffeurs license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of Sec. 61. [44] (Underscoring
supplied)
 
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt,
was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as
five percent.[45] A plain reading of the LOI also supports the conclusion that the levy was for revenue
generation. The LOI expressly provided that the levy was imposed until adequate capital is raised to make PPI
viable.
 
Taxes are exacted only for a public purpose. The P10 levy is
unconstitutional because it was not for a public purpose. The levy
was imposed to give undue benefit to PPI.
 
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public
purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons. [46] The
reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the
limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and
use the funds generated for a private purpose. As an old United States case bluntly put it: To lay with one hand, the
power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to
aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms
of law and is called taxation.[47]
 
The term public purpose is not defined. It is an elastic concept that can be hammered to fit modern
standards. Jurisprudence states that public purpose should be given a broad interpretation. It does not only pertain
to those purposes which are traditionally viewed as essentially government functions, such as building roads and
delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money
may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.
 
While the categories of what may constitute a public purpose are continually expanding in light of the
expansion of government functions, the inherent requirement that taxes can only be exacted for a public purpose
still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public
when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the
requirement of public purpose.
 
The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree
with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose.
 
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is
explicit from Clause 3 of the law, thus:
 
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
a capital contribution component of not less than P10 per bag. This capital contribution shall
be collected until adequate capital is raised to make PPI viable. Such capital contribution shall
be applied by FPA to all domestic sales of fertilizers in the Philippines.[48] (Underscoring
supplied)
 
 
 
It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. In this
case, the text of the LOI is plain that the levy was imposed in order to raise capital for PPI. The framers of the LOI
did not even hide the insidious purpose of the law. They were cavalier enough to name PPI as the ultimate
beneficiary of the taxes levied under the LOI. We find it utterly repulsive that a tax law would expressly name a
private company as the ultimate beneficiary of the taxes to be levied from the public. This is a clear case of crony
capitalism.
 
Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI
becoming financially viable. This suggests that the levy was actually imposed to benefit PPI. The LOI notably does
not fix a maximum amount when PPI is deemed financially viable. Worse, the liability of Fertiphil and other
domestic sellers of fertilizer to pay the levy is made indefinite. They are required to continuously pay the levy until
adequate capital is raised for PPI.
 
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by
FPA to Far East Bank and Trust Company, the depositary bank of PPI. [49] This proves that PPI benefited from the
LOI. It is also proves that the main purpose of the law was to give undue benefit and advantage to PPI.
 
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
Understanding[50] dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI was in deep
financial problem because of its huge corporate debts. There were pending petitions for rehabilitation against PPI
before the Securities and Exchange Commission. The government guaranteed payment of PPIs debts to its foreign
creditors. To fund the payment, President Marcos issued LOI No. 1465. The pertinent portions of the letter of
understanding read:
 
Republic of the Philippines
Office of the Prime Minister
Manila
 
LETTER OF UNDERTAKING
 
May 18, 1985
 
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
 OF PLANTERS PRODUCTS, INC. (PLANTERS)
 
Gentlemen:
 
This has reference to Planters which is the principal importer and distributor of fertilizer,
pesticides and agricultural chemicals in the Philippines. As regards Planters, the Philippine
Government confirms its awareness of the following: (1) that Planters has outstanding obligations
in foreign currency and/or pesos, to the Creditors, (2) that Planters is currently experiencing
financial difficulties, and (3) that there are presently pending with the Securities and Exchange
Commission of the Philippines a petition filed at Planters own behest for the suspension of payment
of all its obligations, and a separate petition filed by Manufacturers Hanover Trust Company, Manila
Offshore Branch for the appointment of a rehabilitation receiver for Planters.
 
In connection with the foregoing, the Republic of the Philippines (the Republic) confirms that it
considers and continues to consider Planters as a major fertilizer distributor. Accordingly, for and
in consideration of your expressed willingness to consider and participate in the effort to
rehabilitate Planters, the Republic hereby manifests its full and unqualified support of the
successful rehabilitation and continuing viability of Planters, and to that end, hereby binds and
obligates itself to the creditors and Planters, as follows:
 
xxxx
 
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA
to include in its fertilizer pricing formula a capital recovery component, the proceeds of which will
be used initially for the purpose of funding the unpaid portion of the outstanding capital stock of
Planters presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid
capital is estimated at approximately P206 million (subject to validation by Planters and Planters
Foundation) such unpaid portion of the outstanding capital stock of Planters being hereafter
referred to as the Unpaid Capital), and subsequently for such capital increases as may be required
for the continuing viability of Planters.
 
xxxx
 
The capital recovery component shall continue to be charged and collected until payment in
full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c)
any carrying cost accruing from the date hereof on the amounts which may be outstanding from
time to time of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increases
contemplated in paragraph 2 hereof.For the purpose of the foregoing clause (c), the carrying cost
shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts,
taking into account both its peso and foreign currency-denominated obligations.
 
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance[51]
 
It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts
of PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the fertilizer industry in the
country. The letter of understanding and the plain text of the LOI clearly indicate that the levy was exacted for the
benefit of a private corporation.
 
 All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not for a
public purpose. LOI No. 1465 failed to comply with the public purpose requirement for tax laws.
 
The LOI is still unconstitutional even if enacted under the police
power; it did not promote public interest.
 
Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid for failing to
comply with the test of lawful subjects and lawful means. Jurisprudence states the test as follows: (1) the interest
of the public generally, as distinguished from those of particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon
individuals.[52]
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest. The law was
enacted to give undue advantage to a private corporation. We quote with approval the CA ratiocination on this
point, thus:
 
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the
country is an undertaking imbued with public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will promote the public welfare. The
governments commitment to support the successful rehabilitation and continued viability of PPI, a
private corporation, is an unmistakable attempt to mask the subject statutes impartiality. There is
no way to treat the self-interest of a favored entity, like PPI, as identical with the general interest of
the countrys farmers or even the Filipino people in general. Well to stress, substantive due process
exacts fairness and equal protection disallows distinction where none is needed. When a statutes
public purpose is spoiled by private interest, the use of police power becomes a travesty which
must be struck down for being an arbitrary exercise of government power. To rule in favor of
appellant would contravene the general principle that revenues derived from taxes cannot be used
for purely private purposes or for the exclusive benefit of private individuals. (Underscoring
supplied)
 
The general rule is that an unconstitutional law is void; the
doctrine of operative fact is inapplicable.
 
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional. It
banks on the doctrine of operative fact, which provides that an unconstitutional law has an effect before being
declared unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if it is subsequently
declared to be unconstitutional.
 
We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless it
has been raised in the court a quo.[53] PPI did not raise the applicability of the doctrine of operative fact with
the RTC and the CA. It cannot belatedly raise the issue with Us in order to extricate itself from the dire effects of an
unconstitutional law.
 
At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void. It
produces no rights, imposes no duties and affords no protection. It has no legal effect. It is, in legal contemplation,
inoperative as if it has not been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies paid
should be refunded in accordance with the general civil code principle against unjust enrichment. The general rule
is supported by Article 7 of the Civil Code, which provides:
 
ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance
shall not be excused by disuse or custom or practice to the contrary.
 
When the courts declare a law to be inconsistent with the Constitution, the former shall be
void and the latter shall govern.
 
The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair
[55]
play.  It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a
determination of unconstitutionality is an operative fact and may have consequences which cannot always be
ignored. The past cannot always be erased by a new judicial declaration.[56]
 
The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those
who have relied on the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality
would put the accused in double jeopardy[57] or would put in limbo the acts done by a municipality in reliance upon
a law creating it.[58]
 
Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil under LOI
No. 1465. It unduly benefited from the levy. It was proven during the trial that the levies paid were remitted and
deposited to its bank account. Quite the reverse, it would be inequitable and unjust not to order a refund. To do so
would unjustly enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code explicitly provides that every
person who, through an act of performance by another comes into possession of something at the expense of the
latter without just or legal ground shall return the same to him. We cannot allow PPI to profit from an
unconstitutional law. Justice and equity dictate that PPI must refund the amounts paid by Fertiphil.
 
WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is AFFIRMED.
 
SO ORDERED.
 SECOND DIVISION

November 9, 2016

G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner 

vs.
DE LA SALLE UNIVERSITY, INC., Respondent

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

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner, 

vs.
DE LA SALLE UNIVERSITY, INC., Respondent.

DECISION
BRION, J.:

Before the Court are consolidated petitions for review on certiorari:1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the December 10, 2010
decision and March 29, 2011 resolution of the Court of Tax Appeals (CTA) in En Banc Case No. 622;2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision and October 4,
2011 resolution in CTA En Banc Case No. 671;3 and

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4, 2011 resolution in
CTA En Banc Case No. 671.4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA Division) Case No.
7303. G.R. No. 196596 stemmed from CTA En Banc Case No. 622 filed by the Commissioner to challenge CTA Case
No. 7303. G.R. No. 198841 and 198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to also
challenge CTA Case No. 7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) No. 2794
authorizing its revenue officers to examine the latter's books of accounts and other accounting records for all
internal revenue taxes for the period Fiscal Year Ending 2003 and Unverified Prior Years.5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the following
deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and bookstores operating within the
campus; (2) value-added tax (VAI) on business income; and (3) documentary stamp tax (DSI) on loans and lease
contracts. The BIR demanded the payment of ₱17,303,001.12, inclusive of surcharge, interest and penalty
for taxable years 2001, 2002 and 2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on August 3, 2005
a petition for review with the CTA Division.8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV, Section 4
(3)of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively
for educational purposes shall be exempt from taxes and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive portion of the
decision reads:

WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan transactions of
[DLSU] in the amount of ₱1,1681,774.00 is hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency
income tax, VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the
total amount of ₱18,421,363.53 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due computed from
September 30, 2004 until full payment thereof pursuant to Section 249(C)(3) of the [National Internal Revenue
Code]. Further, the compromise penalties imposed by [the Commissioner] were excluded, there being no
compromise agreement between the parties.
SO ORDERED.9

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010 decision.10 On April 6,
2010, the CTA Division denied the Commissioner's motion for reconsideration while it held in abeyance the
resolution on DLSU's motion for reconsideration.11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622) arguing that
DLSU's use of its revenues and assets for non-educational or commercial purposes removed these items from the
exemption coverage under the Constitution.12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary evidence to
prove that its rental income was used actually, directly and exclusively for educational purposes.13 The
Commissioner did not promptly object to the formal offer of supplemental evidence despite notice.14

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the amount of DLSU's
tax deficiencies. The dispositive portion of the amended decision reads:

WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED. [DLSU] is

hereby ORDERED TO PAY for deficiency income tax, VAT and DST plus 25% surcharge for the fiscal years 2001,
2002 and 2003 in the total adjusted amount of ₱5,506,456.71 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the ... basic deficiency taxes ...
until full payment thereof pursuant to Section 249(B) of the [National Internal Revenue Code] ... xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency taxes, surcharge
and deficiency interest which have accrued ... from September 30, 2004 until fully paid.15

Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that the CTA Division
erred in admitting DLSU's additional evidence.16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review with the
CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) the entire assessment should have been
cancelled because it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA Division should still
have cancelled the entire assessment because DLSU submitted evidence similar to those submitted by Ateneo De
Manila University (Ateneo) in a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the CTA
Division erred in finding that a portion of DLSU's rental income was not proved to have been used actually, directly
and exclusively for educational purposes.18

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of the CTA
Division.19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant (Independent CPA),
the CTA En Banc found that DLSU was able to prove that a portion of the assessed rental income was used actually,
directly and exclusively for educational purposes; hence, exempt from tax.20 The CTA En Banc was satisfied with
DLSU's supporting evidence confirming that part of its rental income had indeed been used to pay the loan it
obtained to build the university's Physical Education – Sports Complex.21
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not shown by
supporting documents to have been actually, directly and exclusively used for educational purposes, must be
subjected to income tax and VAT.22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU froved its remittance of the DST due on its loan and mortgage
documents.23 The CTA En Banc found that DLSU's DST payments had been remitted to the BIR, evidenced by the
stamp on the documents made by a DST imprinting machine, which is allowed under Section 200 (D) of the
National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations (RR) No. 15-2001.25

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible even if DLSU
formally offered them only when it moved for reconsideration of the CTA Division's original decision. Notably, the
law creating the CTA provides that proceedings before it shall not be governed strictly by the technical rules of
evidence.26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10, 2010
decision.27 Thus, she came to this court for relief through a petition for review on certiorari (G.R. No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities
to ₱2,554,825.47inclusive of surcharge.28

On the validity of the Letter of Authority

The issue of the LOA' s validity was raised during trial;29 hence, the issue was deemed properly submitted for
decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and that the practice of
issuing a LOA covering audit of unverified prior years is prohibited.30 The prohibition is consistent with Revenue
Memorandum Order (RMO) No. 43-90, which provides that if the audit includes more than one taxable period, the
other periods or years shall be specifically indicated in the LOA.31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. Hence, the
assessments for deficiency income tax, VAT and DST for taxable years 2001 and 2002 are void, but the assessment
for taxable year 2003 is valid.32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different parties, factual
settings, bases of assessments, sets of evidence, and defenses.33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It held that while DLSU successfully
proved that a portion of its rental income was transmitted and used to pay the loan obtained to fund the
construction of the Sports Complex, the rental income from other sources were not shown to have been actually,
directly and exclusively used for educational purposes.34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner (G.R. No. 198941)
came to this Court for relief.
The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed of.35 DLSU's
operations of canteens and bookstores within its campus even though exclusively serving the university
community do not negate income tax liability.36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized with Section 30
(H) of the Tax Code, which states among others, that the income of whatever kind and character of [a non-stock
and non-profit educational institution] from any of [its] properties, real or personal, or from any of [its] activities
conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed by this
Code.37

The Commissioner argues that the CTA En Banc misread and misapplied the case of Commissioner of Internal
Revenue v. YMCA38 to support its conclusion that revenues however generated are covered by the constitutional
exemption, provided that, the revenues will be used for educational purposes or will be held in reserve for such
purposes.39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only from property
tax but not from income tax on the rentals earned from property.40 Thus, DLSU's income from the leases of its real
properties is not exempt from taxation even if the income would be used for educational purposes.41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment42 and that it is not qualified to
use the On-Line Electronic DST Imprinting Machine, which is available only to certain classes of taxpayers under RR
No. 9-2000.43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The belated
submission of supplemental evidence reopened the case for trial, and worse, DLSU offered the supplemental
evidence only after it received the unfavorable CTA Division's original decision.44 In any case, DLSU's submission of
supplemental documentary evidence was unnecessary since its rental income was taxable regardless of its
disposition.45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior years. A LOA
issued contrary to RMO No. 43-90 is void, thus, an assessment issued based on such defective LOA must also be
void.46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior Years. On the
basis of this defective LOA, the Commissioner assessed DLSU for deficiency income tax, VAT and DST for taxable
years 2001, 2002 and 2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year
2003. According to DLSU, when RMO No. 43-90 provides that:

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.

it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA issued to DLSU
follows this format, then any assessment arising from it must be entirely voided.48
Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly situated parties,
the same set of evidence should be appreciated and weighed in the same manner.49 The CTA En Banc erred when it
did not similarly appreciate DLSU' s evidence as it did to the pieces of evidence submitted by Ateneo, also a non-
stock, non-profit educational institution.50

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the same as those
she raised in her: (1) petition docketed as G.R. No. 196596 and (2) comment on DLSU's petition docketed as G.R.
No. 198841.51

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition.52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of non-
stock, non-profit educational institutions used actually, directly and exclusively for educational purposes are
exempt from taxes and duties.53

On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit educational institutions is novel to
the 1987 Constitution and that Section 30 (H) of the 1997 Tax Code cannot amend the 1987 Constitution;54 (2)
Section 30 of the 1997 Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code -with the addition of
non-stock, non-profit educational institutions to the list of tax-exempt entities; and (3) that the 1977 Tax
Code was promulgated when the 1973 Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational institution under the 1973 Constitution
was only for real property tax. Back then, the special tax treatment on income of private educational institutions
only emanates from statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that exemption from tax of
all the assets and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively
for educational purposes, was expressly and categorically enshrined.55

DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that is contrary to
the Constitution void and without any force and effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects
to tax the income of whatever kind and character of a non-stock and non-profit educational institution from any of
its properties, real or personal, or from any of its activities conducted for profit regardless of the disposition made
of such income, should be declared without force and effect in view of the constitutionally granted tax exemption on
"all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes."57

DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for an exemption
to be granted under Article XIV, Section 4 (3) of the Constitution, the taxpayer must prove 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.58 Unlike YMCA, which is not an
educational institution, DLSU is undisputedly a non-stock, non-profit educational institution. It had also submitted
evidence to prove that it actually, directly and exclusively used its income for educational purposes.59

DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that the tax
exemption was granted "to incentivize private educational institutions to share with the State the responsibility of
educating the youth."60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled DLSU' s loan and
mortgage transactions had remitted to the BIR the DST through an imprinting machine, a method allowed under
RR No. 15-2001.61 In any case, DLSU argues that it cannot be held liable for DST owing to the exemption granted
under the Constitution.62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of supplemental
evidence. Because of the Commissioner's failure to timely object, she became bound by the results of the
submission of such supplemental evidence.63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it failed to raise this
issue in both the administrative and judicial proceedings.64 That it was asked on cross-examination during the trial
does not make it an issue that the CTA could resolve.65 The Commissioner also maintains that DLSU's rental income
is not tax-exempt because an educational institution is only exempt from property tax but not from tax on the
income earned from the property.66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.67 In addition, DLSU prays that the Court award
attorney's fees in its favor because it was constrained to unnecessarily retain the services of counsel in this
separate petition.68

Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which we summarize
as follows:

I. Whether DLSU' s income and revenues proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes;

II. Whether the entire assessment should be voided because of the defective LOA;

III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and

IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence may be disturbed by the Court.

Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational institutions proved to have been
used actually, directly and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have manifestly overlooked
certain relevant facts not disputed by the parties and which, if properly considered, would justify a
different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts. We thus
sustain the CTA En Banc's findings that:
 a. DLSU proved that a portion of its rental income was used actually, directly and exclusively for
educational purposes; and

b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and

exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation
of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such

exemptions subject to the limitations provided by law including restrictions on dividends and provisions for
reinvestment. [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-profit
educational institutions and (2) proprietary educational institutions.69

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a non-stock, non-
profit educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the Constitution, in the
same provision, also imposes certain conditions to avail of the exemption. We discuss below the import of the
constitutional text vis-a-vis the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of non-stock, non-profit educational institutions and
proprietary educational institutions. The tax exemption granted to non-stock, non-profit educational institutions is
conditioned only on the actual, direct and exclusive use of their revenues and assets for educational purposes.
While tax exemptions may also be granted to proprietary educational institutions, these exemptions may be
subject to limitations imposed by Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary educational
institution is crucial in determining the nature and extent of the tax exemption granted to non-stock, non-profit
educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the Tax Code. The
relevant text reads:

The following organizations shall not be taxed under this Title [Tax on

Income] in respect to income received by them as such:

xxxx

(H) A non-stock and non-profit educational institution

 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. [underscoring and emphasis supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock, non-profit
educational institutions such that the revenues and income they derived from their assets, or from any of their
activities conducted for profit, are taxable even if these revenues and income are used for educational purposes.

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock, non-profit educational
institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,71 the Court in the YMCA case had in fact already
analyzed and explained the meaning of Article XIV, Section 4 (3) of the Constitution. The Court in that case made
doctrinal pronouncements that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the YMCA, established
as a "welfare, educational and charitable non-profit corporation," was subject to income tax under the Tax Code
and the Constitution.72

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling under Article
VI, Section 28 (3) of the Constitution,73 the YMCA is not tax-exempt per se; " 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."74

The Court held that the exemption claimed by the YMCA is expressly disallowed by the last paragraph of then
Section 27 (now Section 30) of the Tax Code, which mandates that the income of exempt organizations from any of
their properties, real or personal, are subject to the same tax imposed by the Tax Code, regardless of how that
income is used. The Court ruled that the last paragraph of Section 27 unequivocally subjects to tax the rent income
of the YMCA from its property.75

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax privilege granted
under Article XIV, Section 4 (3) of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution holding that the
term educational institution, when used in laws granting tax exemptions, refers to the school system (synonymous
with formal education); it includes a college or an educational establishment; it refers to the hierarchically
structured and chronologically graded learnings organized and provided by the formal school system.76

The Court then significantly laid down the requisites for availing the tax exemption under Article XIV, Section 4 (3),
namely: (1) the taxpayer 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.77

We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-stock, non-profit
educational institutions, provided, that the non-stock, non-profit educational institutions prove that its assets and
revenues are used actually, directly and exclusively for educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not subject to

limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income78 for
educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions, churches,
parsonages or convents, mosques, and non-profit cemeteries), which exempts from tax only the assets,
i.e., "all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes ... ," Article XIV, Section 4 (3) categorically states that "[a]ll revenues and assets ... used
actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is not without
significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of the 1986
Constitutional Commission79 to provide broader tax privilege to non-stock, non-profit educational institutions as
recognition of their role in assisting the State provide a public good. The tax exemption was seen as beneficial to
students who may otherwise be charged unreasonable tuition fees if not for the tax exemption extended
to all revenues and assets of non-stock, non-profit educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the
revenues and income must have also been sourced from educational activities or activities related to the purposes
of an educational institution. The phrase all revenues is unqualified by any reference to the source of revenues.
Thus, so long as the revenues and income are used actually, directly and exclusively for educational purposes, then
said revenues and income shall be exempt from taxes and duties.81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business operations.82 It may
refer to the sale of goods, rendition of services, or the return of an investment. Revenue is a component of the tax
base in income tax,83 VAT,84 and local business tax (LBT).85

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity.86 It may refer to
real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory of goods, or any property
from which the person or entity may derive income or use to generate the same. In Philippine taxation, the fair
market value of real property is a component of the tax base in real property tax (RPT).87 Also, the landed cost of
imported goods is a component of the tax base in VAT on importation88 and tariff duties.89

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and
exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand, when
it also shows that it uses its assets in the form of real property for educational purposes, it shall be exempted from
RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax from which
the entity shall be exempted from shall depend on whether the item is an item of revenue or asset.
To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the leased portion
is not actually, directly and exclusively used for educational purposes, even if the bookstore or canteen caters only
to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley College, Inc. v.
Aquino.90 We ruled in that case that the test of exemption from taxation is the use of the property for purposes
mentioned in the Constitution. We also held that the exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes such asset from
the property tax exemption granted under the Constitution.91 There is no exemption because the asset is not used
actually, directly and exclusively for educational purposes. The commercial use of the property is also not incidental
to and reasonably necessary for the accomplishment of the main purpose of a university, which is to educate its
students.

However, if the university actually, directly and exclusively uses for educational purposes the revenues earned from
the lease of its school building, such revenues shall be exempt from taxes and duties. The tax exemption no longer
hinges on the use of the asset from which the revenues were earned, but on the actual, direct and exclusive use of
the revenues for educational purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used actually, directly
and exclusively for educational purposes are not exempt from duties and taxes. To avail of the exemption, the
taxpayer must factually prove that it used actually, directly and exclusively for educational purposes the revenues
or income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are two things
that must be viewed and treated separately. But so long as the assets or revenues are used actually, directly and
exclusively for educational purposes, they are exempt from duties and taxes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary educational
institutions cannot be doubted. As discussed, the privilege granted to the former is conditioned only on the actual,
direct and exclusive use of their revenues and assets for educational purposes. In clear contrast, the tax privilege
granted to the latter may be subject to limitations imposed by law.

We spell out below the difference in treatment if only to highlight the privileged status of non-stock, non-profit
educational institutions compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section
30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational institution is covered by
Section 27 (Rates of Income Tax on Domestic Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational institutions
shall not be taxed on income received by them as such.

Section 27 (B), on the other hand, states that "[p]roprietary educational institutions ... which are nonprofit shall
pay a tax of ten percent (10%) on their taxable income .. . 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 ... [the regular corporate income tax of 30%] shall be imposed on the entire taxable income ... "92

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced rate of 10%
corporate income tax. The reduced rate is applicable only if: (1) the proprietary educational institution is nonprofit
and (2) its gross income from unrelated trade, business or activity does not exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-stock, non-profit
educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the
Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational institutions
used actually, directly and exclusively for educational purpose. We make this declaration in the exercise of and
consistent with our duty93 to uphold the primacy of the Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions and does not
cover the other exempt organizations under Section 30 of the Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually, directly
and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is

not entirely void. The
assessment for taxable year
2003 is valid.

DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year 2003 and insists that the entire
LOA should be voided for being contrary to RMO No. 43-90, which provides that if tax audit includes more than one
taxable period, the other periods or years shall be specifically indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and other
accounting records of the taxpayer in order to determine the taxpayer's correct internal revenue liabilities95 and
for the purpose of collecting the correct amount of tax,96 in accordance with Section 5 of the Tax Code, which gives
the CIR the power to obtain information, to summon/examine, and take testimony of persons. The LOA commences
the audit process97 and informs the taxpayer that it is under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and consequently,
disregard the BIR and the CTA's findings of tax deficiency for taxable year 2003?

We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The practice of issuing
[LO As] covering audit of unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more
than one taxable period, the other periods or years shall be specifically indicated in the [LOA].98

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior years. RMO
43-90 does not say that a LOA which contains unverified prior years is void. It merely prescribes that if the audit
includes more than one taxable period, the other periods or years must be specified. The provision read as a whole
requires that if a taxpayer is audited for more than one taxable year, the BIR must specify each taxable year or
taxable period on separate LOAs.
Read in this light, the requirement to specify the taxable period covered by the LOA is simply to inform the
taxpayer of the extent of the audit and the scope of the revenue officer's authority. Without this rule, a revenue
officer can unduly burden the taxpayer by demanding random accounting records from random unverified
years, which may include documents from as far back as ten years in cases of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. The LOA does
not strictly comply with RMO 43-90 because it includes unverified prior years. This does not mean, however, that
the entire LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period is specified in
the LOA. DLSU was fully apprised that it was being audited for taxable year 2003. Corollarily, the assessments for
taxable years 2001 and 2002 are void for having been unspecified on separate LOAs as required under RMO No. 43-
90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s validity at the CTA Division, and
thus, should not have been entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the trial.100 DLSU then
raised the issue in its memorandum and motion for partial reconsideration with the CTA Division. DLSU raised it
again on appeal to the CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of the
LOA.101Besides, the Commissioner had the opportunity to argue for the validity of the LOA at the CTA En Banc but
she chose not to file her comment and memorandum despite notice.102

III.The CTA correctly admitted

the supplemental evidence
formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of documentary
evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration with the CTA
Division.103 The CTA Division admitted the supplemental evidence, which proved that a portion of DLSU's rental
income was used actually, directly and exclusively for educational purposes. Consequently, the CTA Division
reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually reinforcing
grounds, to wit: (1) the Commissioner failed to timely object to the formal offer of supplemental evidence; and (2) the
CTA is not governed strictly by the technical rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard
such evidence.104

The Court has held that if a party desires the court to reject the evidence offered, it must so state in the form of a
timely objection and it cannot raise the objection to the evidence for the first time on appeal.105 Because of a party's
failure to timely object, the evidence offered becomes part of the evidence in the case. As a consequence, all the
parties are considered bound by any outcome arising from the offer of evidence properly presented.106

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence despite
notice.107 The Commissioner objected to the admission of the supplemental evidence only when the case was on
appeal to the CTA En Banc. By the time the Commissioner raised her objection, it was too late; the formal offer,
admission and evaluation of the supplemental evidence were all fait accompli.
We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality or sufficiency
of the supplemental evidence admitted, she was bound by the outcome of the CTA Division's assessment of the
evidence.108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's admission of the
formal offer of supplemental evidence, without prompt objection from the Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers' motion for
reconsideration.1âwphi1

In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant attached to its motion for
reconsideration with the CT A its Final Adjustment Return. The Commissioner, as in the present case, did not
oppose the taxpayer's motion for reconsideration and the admission of the Final Adjustment Return.110 We thus
admitted and gave weight to the Final Adjustment Return although it was only submitted upon motion for
reconsideration.

We held that while it is true that strict procedural rules generally frown upon the submission of documents after
the trial, the law creating the CTA specifically provides that proceedings before it shall not be governed strictly by
the technical rules of evidence111 and that the paramount consideration remains the ascertainment of truth. We
ruled that procedural rules should not bar courts from considering undisputed facts to arrive at a just
determination of a controversy.112

We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v. Commissioner of
Internal Revenue113 and Commissioner of Internal Revenue v. PERF Realty Corporation,114 where the taxpayers also
submitted the supplemental supporting document only upon filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict application of the
technical rules of evidence in the present tax assessment case. If anything, the liberal application of the rules
assumes greater force and significance in the case of a taxpayer who claims a constitutionally granted tax
exemption. While the taxpayers in the cited cases claimed refund of excess tax payments based on the Tax
Code,115 DLSU is claiming tax exemption based on the Constitution. If liberality is afforded to taxpayers who paid
more than they should have under a statute, then with more reason that we should allow a taxpayer to prove its
exemption from tax based on the Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because the
Commissioner failed to promptly object, but more so because the strict application of the technical rules of
evidence may defeat the intent of the Constitution.

IV. The CTA's appreciation of

evidence is generally binding on
the Court unless compelling
reasons justify otherwise.

It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature
of its function of being dedicated exclusively to the resolution of tax problems, has developed an expertise on the
subject, unless there has been an abuse or improvident exercise of authority.116 We thus accord the findings of
fact by the CTA with the highest respect. These findings of facts can only be disturbed on appeal if they are not
supported by substantial evidence or there is a showing of gross error or abuse on the part of the CTA. In the
absence of any clear and convincing proof to the contrary, this Court must presume that the CTA rendered a
decision which is valid in every respect.117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used actually, directly
and exclusively for educational purposes a portion of its assessed income and that it had remitted the DST
payments though an online imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed income.

To see how the CTA arrived at its factual findings, we review the process undertaken, from which it deduced that
DLSU successfully proved that it used actually, directly and exclusively for educational purposes a portion of its
rental income.

The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the submission of the supplemental
evidence, which consisted of statement of receipts, statement of disbursement and fund balance and statement of
fund changes.118

These documents showed that DLSU borrowed ₱93.86 Million,119 which was used to build the university's Sports
Complex. Based on these pieces of evidence, the CTA found that DLSU' s rental income from its concessionaires
were indeed transmitted and used for the payment of this loan. The CTA held that the degree of preponderance of
evidence was sufficiently met to prove actual, direct and exclusive use for educational purposes.

The CTA also found that DLSU's rental income from other concessionaires, which were allegedly deposited to
a fund (CF-CPA Account),120 intended for the university's capital projects, was not proved to have been used
actually, directly and exclusively for educational purposes. The CTA observed that "[DLSU] ... failed to fully
account for and substantiate all the disbursements from the [fund]." Thus, the CTA "cannot ascertain whether
rental income from the [other] concessionaires was indeed used for educational purposes."121

To stress, the CTA's factual findings were based on and supported by the report of the Independent CPA who
reviewed, audited and examined the voluminous documents submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and verification of receipts,
invoices, vouchers and other long accounts; (b) reproduction of, and comparison of such reproduction with, and
certification that the same are faithful copies of original documents, and pre-marking of documentary exhibits
consisting of voluminous documents; (c) preparation of schedules or summaries containing a chronological listing
of the numbers, dates and amounts covered by receipts or invoices or other relevant documents and the amount(s)
of taxes paid; (d) making findings as to compliance with substantiation requirements under pertinent tax
laws, regulations and jurisprudence; (e) submission of a formal report with certification of authenticity and
veracity of findings and conclusions in the performance of the audit; (f) testifying on such formal report; and (g)
performing such other functions as the CTA may direct.122

Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held that only
the portion of the rental income pertaining to the substantiated disbursements (i.e., proved by receipts, vouchers,
etc.) from the CF-CPA Account was considered as used actually, directly and exclusively for educational purposes.
Consequently, the unaccounted and unsubstantiated disbursements must be subjected to income tax and VAT.123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years 2001 and 2002
due to the defective LOA.124

The Court finds that the above fact-finding process undertaken by the CTA shows that it based its ruling on the
evidence on record, which we reiterate, were examined and verified by the Independent CPA. Thus, we see no
persuasive reason to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not mean that we are bound by
its conclusions. In the present case, we do not agree with the method used by the CTA to arrive at DLSU' s
unsubstantiated rental income (i.e., income not proved to have been actually, directly and exclusively used for
educational purposes).
To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in taxable year 2003.125 DLSU earned
this income from leasing a portion of its premises to: 1) MTG-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide
Food Corp., 5) Capri International, and 6) MTO Bookstore.126

To prove that its rental income was used for educational purposes, DLSU identified the transactions where the
rental income was expended, viz.: 1) ₱4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports
Complex; and 2) ₱6,602,655.00 transferred to the CF-CPA Account.128

DLSU also submitted documents to the Independent CPA to prove that the ₱6,602,655.00 transferred to the CF-CPA
Account was used actually, directly and exclusively for educational purposes. According to the Independent CPA'
findings, DLSU was able to substantiate disbursements from the CF-CPA Account amounting to ₱6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of the ₱l0,610,379.00 rental
income, ₱4,841,066.65 was unsubstantiated, and thus, subject to income tax and VAT.129

The CTA then concluded that the ratio of substantiated disbursements to the total disbursements from the CF-CPA
Account for taxable year 2003 is only 26.68%.130 The CTA held as follows:

However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri International and MTO
Bookstore, which were transmitted to the CF-CPA Account, petitioner again failed to fully account for and
substantiate all the disbursements from the CF-CPA Account; thus failing to prove that the rental income derived
therein were actually, directly and exclusively used for educational purposes. Likewise, the findings of the Court-
Commissioned Independent CPA show that the disbursements from the CF-CPA Account for fiscal year 2003
amounts to ₱6,259,078.30 only. Hence, this portion of the rental income, being the substantiated disbursements of
the CF-CPA Account, was considered by the Special First Division as used actually, directly and exclusively for
educational purposes. Since for fiscal year 2003, the total disbursements per voucher is ₱6,259,078.3 (Exhibit "LL-
25-C"), and the total disbursements per subsidiary ledger amounts to ₱23,463,543.02 (Exhibit "LL-29-C"), the ratio
of substantiated disbursements for fiscal year 2003 is 26.68% (₱6,259,078.30/₱23,463,543.02). Thus, the
substantiated portion of CF-CPA Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68%
with the total rent income added to and used in the CF-CPA Account in the amount of ₱6,602,655.00 is
₱1,761,588.35.131 (emphasis supplied)

For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex (₱4,007,724.00) from the
rental income (₱10,610,379.00) earned from the abovementioned concessionaries. The difference (₱6,602,655.00)
was the portion claimed to have been deposited to the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements (₱1,761,308.37) from the
₱6,602,655.00 to arrive at the supposed unsubstantiated portion of the rental income (₱4,841,066.65).132

3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)133 was derived by multiplying the rental

income claimed to have been added to the CF-CPA Account (₱6,602,655.00) by 26.68% or the ratio
of substantiated disbursements to total disbursements (₱23,463,543.02).

4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from the CF-CPA Account as
found by the Independent CPA (₱6,259,078.30) by the total disbursements (₱23,463,543.02) from the same
account.

We find that this system of calculation is incorrect and does not truly give effect to the constitutional grant of tax
exemption to non-stock, non-profit educational institutions. The CTA's reasoning is flawed because it required
DLSU to substantiate an amount that is greater than the rental income deposited in the CF-CPA Account in 2003.
To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental income (which
amounted to a total of ₱10.61 million)135 were used for educational purposes. This amount was divided into two
parts: (a) the ₱4.0l million, which was used to pay the loan obtained for the construction of the Sports Complex;
and (b) the ₱6.60 million,136 which was transferred to the CF-CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46 million.137 These figures, read
in light of the constitutional exemption, raises the question: does DLSU claim that the whole total CF-CPA
disbursement of ₱23.46 million is tax-exempt so that it is required to prove that all these disbursements
had been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of ₱23.46 million had been for
educational purposes and should thus be tax-exempt; DLSU only claimed ₱10.61 million for tax-exemption and
should thus be required to prove that this amount had been used as claimed.

Of this amount, ₱4.01 had been proven to have been used for educational purposes, as confirmed by the
Independent CPA. The amount in issue is therefore the balance of ₱6.60 million which was transferred to the CF-
CPA which in turn made disbursements of ₱23.46 million for various general purposes, among them the ₱6.60
million transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational purposes in
year 2003 in the amount ₱6.26 million. Based on these given figures, the CT A concluded that the expenses for
educational purposes that had been coursed through the CF-CPA should be prorated so that only the portion that
₱6.26 million bears to the total CF-CPA disbursements should be credited to DLSU for tax exemption.

This approach, in our view, is flawed given the constitutional requirement that revenues actually and directly
used for educational purposes should be tax-exempt. As already mentioned above, DLSU is not claiming that the
whole ₱23.46 million CF-CPA disbursement had been used for educational purposes; it only claims that ₱6.60
million transferred to CF-CPA had been used for educational purposes. This was what DLSU needed to prove to
have actually and directly used for educational purposes.

That this fund had been first deposited into a separate fund (the CF -CPA established to fund capital projects) lends
peculiarity to the facts of this case, but does not detract from the fact that the deposited funds were DLSU revenue
funds that had been confirmed and proven to have been actually and directly used for educational purposes via the
CF-CPA. That the CF-CPA might have had other sources of funding is irrelevant because the assessment in the
present case pertains only to the rental income which DLSU indisputably earned as revenue in 2003. That the
proven CF-CPA funds used for educational purposes should not be prorated as part of its total CF-CPA
disbursements for purposes of crediting to DLSU is also logical because no claim whatsoever had been made that
the totality of the CF-CPA disbursements had been for educational purposes. No prorating is necessary; to state the
obvious, exemption is based on actual and direct use and this DLSU has indisputably proven.

Based on these considerations, DLSU should therefore be liable only for the difference between what it claimed and
what it has proven. In more concrete terms, DLSU only had to prove that its rental income for taxable year 2003
(₱10,610,379.00) was used for educational purposes. Hence, while the total disbursements from the CF-CPA
Account amounted to ₱23,463,543.02, DLSU only had to substantiate its Pl0.6 million rental income, part of which
was the ₱6,602,655.00 transferred to the CF-CPA account. Of this latter amount, ₱6.259 million was substantiated
to have been used for educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003 as follows:

  CTA
Decision138 Revised
 Rental income 10,610,379.00 10,610,379.00

Less: Rent income used in construction of the Sports 4,007,724.00 4,007,724.00

Complex

     
Rental income deposited to the CF-CPA Account 6,602,655.00 6,602,655.00
     

Less: Substantiated portion of CF-CPA 1,761,588.35 6,259,078.30

disbursements

     
Tax base for deficiency income tax and VAT 4,841,066.65 343.576.70

On DLSU' s argument that the CTA should have appreciated its evidence in the same way as it did with the evidence
submitted by Ateneo in another separate case, the CTA explained that the issue in the Ateneo case was not the
same as the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes and VAT under
certain BIR and Department of Finance issuances139 that required the educational institution to own and
operate the canteens, or other commercial enterprises within its campus, as condition for tax exemption. The CTA
held that the Constitution does not require the educational institution to own or operate these commercial
establishments to avail of the exemption.140

Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the separate sets of
evidence differently. The CTA likewise stressed that DLSU and Ateneo gave distinct defenses and that its wisdom
"cannot be equated on its decision on two different cases with two different issues."141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it submitted similar,
if not stronger sets of evidence, as Ateneo. We reject DLSU's argument for being non sequitur. Its reliance on the
concept of uniformity of taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and materiality of the
evidence supporting their respective claims for tax exemption would necessarily differ because their
attendant issues and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable years they were
assessed varied. The amount of tax assessment also varied. The amount of income proven to have been used for
educational purposes also varied because the amount substantiated varied.142 Thus, the amount of tax assessment
cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for taxable years 2001, 2002 and
2003. On the other hand, the BIR assessed Ateneo a total deficiency tax of ₱8,864,042.35 for the same period.
Notably, DLSU was assessed deficiency DST, while Ateneo was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly and exclusively
for educational purposes by submitting similar evidence, e.g., the testimony of their employees on the use of
university revenues, the report of the Independent CPA, their income summaries, financial statements, vouchers,
etc., the fact remains that DLSU failed to prove that a portion of its income and revenues had indeed been used for
educational purposes.
The CTA significantly found that some documents that could have fully supported DLSU's claim were not produced in
court. Indeed, the Independent CPA testified that some disbursements had not been proven to have been used
actually, directly and exclusively for educational purposes.144

The final nail on the question of evidence is DLSU's own admission that the original of these documents had not in
fact been produced before the CTA although it claimed that there was no bad faith on its part.145 To our mind, this
admission is a good indicator of how the Ateneo and the DLSU cases varied, resulting in DLSU's failure to
substantiate a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised

Rules on Evidence, that the contents of the missing supporting documents were proven by its recital in some other
authentic documents on record,146 can no longer be entertained at this late stage of the proceeding. The CTA did not
rule on this particular claim. The CTA also made no finding on DLSU' s assertion of lack of bad faith. Besides, it is
not our duty to go over these documents to test the truthfulness of their contents, this Court not being a trier of
facts.

Second, DLSU misunderstands the concept of uniformity of taxation.

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate.147 A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found.148 The concept requires that all subjects of taxation similarly situated should be treated alike
and placed in equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because their
income proved to have been used actually, directly and exclusively for educational purposes were exempted from
taxes. The CTA equally applied the requirements in the YMCA case to test if they indeed used their revenues for
educational purposes.

DLSU can only assert that the CTA violated the rule on uniformity if it can show that, despite proving that it used
actually, directly and exclusively for educational purposes its income and revenues, the CTA still affirmed the
imposition of taxes. That the DLSU secured a different result happened because it failed to fully prove that it used
actually, directly and exclusively for educational purposes its revenues and income.

On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of taxation
similarly situated are treated in literally the same way in all and every occasion. The fact that the Ateneo and DLSU
are both non-stock, non-profit educational institutions, does not mean that the CTA or this Court would similarly
decide every case for (or against) both universities. Success in tax litigation, like in any other litigation, depends to
a large extent on the sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA was correct in not fully
cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid and remitted
through its bank's On-Line Electronic DST Imprinting Machine. The Commissioner argues that DLSU is not allowed
to use this method of payment because an educational institution is excluded from the class of taxpayers who can
use the On-Line Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code and the relevant
revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the person making,
signing, issuing, accepting, or transferring the same.150 The Tax Code provides that whenever one party to the
document enjoys exemption from DST, the other party not exempt from DST shall be directly liable for the tax.
Thus, it is clear that DST shall be payable by any party to the document, such that the payment and compliance by
one shall mean the full settlement of the DST due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These agreements are subject to
DST.151 For the purpose of showing that the DST on the loan agreement has been paid, DLSU presented its
agreements bearing the imprint showing that DST on the document has been paid by the bank, its counterparty.
The imprint should be sufficient proof that DST has been paid. Thus, DLSU cannot be further assessed for
deficiency DST on the said documents.

Finally, it is true that educational institutions are not included in the class of taxpayers who can pay and remit DST
through the On-Line Electronic DST Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is
irrelevant because it was not DLSU who used the On-Line Electronic DST Imprinting Machine but the bank that
handled its mortgage and loan transactions. RR No. 9-2000 expressly includes banks in the class of taxpayers that
can use the On-Line Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the

payment of the assessed DST deficiency, except for the unpaid balance of

₱13,265.48.152

WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal Revenue in G.R. No.
196596 and AFFIRM the December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax
Appeals En Banc in CTA En Banc Case No. 622, except for the total amount of deficiency tax liabilities of De La Salle
University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of the
Commissioner of Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011 decision and October 4,
2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 671, with the MODIFICATION that
the base for the deficiency income tax and VAT for taxable year 2003 is ₱343,576.70.

EN BANC
 
Petitioner-Organizations, namely: G.R. Nos. 147036-37
PAMBANSANG KOALISYON NG MGA
SAMAHANG MAGSASAKA AT MANGGAGAWA
SA NIYUGAN (PKSMMN), COCONUT INDUSTRY
REFORM MOVEMENT (COIR), BUKLOD NG
MALAYANG MAGBUBUKID, PAMBANSANG
KILUSAN NG MGA SAMAHANG MAGSASAKA
(PAKISAMA), CENTER FOR AGRARIAN REFORM,
EMPOWERMENT AND TRANSFORMATION
(CARET), PAMBANSANG KATIPUNAN NG MGA
SAMAHAN SA KANAYUNAN (PKSK); Petitioner-
Legislator: REPRESENTATIVE LORETA ANN
ROSALES; and Petitioner-Individuals, namely:
VIRGILIO V. DAVID, JOSE MARIE FAUSTINO,
JOSE CONCEPCION, ROMEO ROYANDOYAN,
JOSE V. ROMERO, JR., ATTY. CAMILO L.
SABIO, and ATTY. ANTONIO T. CARPIO,
Petitioners, Present:
CORONA, C.J.,

CARPIO,

VELASCO, JR.,

LEONARDO-DE CASTRO,

BRION,

- versus - PERALTA,

BERSAMIN,

DEL CASTILLO,

ABAD,

VILLARAMA, JR.,

PEREZ,

MENDOZA,

SERENO,

REYES, and

PERLAS-BERNABE, JJ.

EXECUTIVE SECRETARY, SECRETARY OF

AGRICULTURE, SECRETARY OF AGRARIAN

REFORM, PRESIDENTIAL COMMISSION ON

GOOD GOVERNMENT, THE SOLICITOR

GENERAL, PHILIPPINE COCONUT PRODUCERS

FEDERATION, INC. (COCOFED), and UNITED

COCONUT PLANTERS BANK (UCPB),

Respondents.

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

TEODORO J. AMOR, representing the Peasant G.R. No. 147811

Alliance of Samar and Leyte (PASALEY),

DOMINGO C. ENCALLADO, representing

Aniban ng Magsasaka at Manggagawa sa Niyugan

(AMMANI), and VIDAL M. PILIIN, representing

the Laguna Coalition,

Petitioners,

- versus -

EXECUTIVE SECRETARY, SECRETARY OF

AGRICULTURE, SECRETARY OF AGRARIAN

REFORM, PRESIDENTIAL COMMISSION ON

GOOD GOVERNMENT, THE SOLICITOR

GENERAL, PHILIPPINE COCONUT

PRODUCERS FEDERATION, UNITED Promulgated:

COCONUT PLANTERS BANK,

Respondents. April 10, 2012

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

DECISION
 

ABAD, J.:

These are consolidated petitions to declare unconstitutional certain presidential decrees and executive orders of
the martial law era relating to the raising and use of coco-levy funds.

The Facts and the Case

 
On June 19, 1971 Congress enacted Republic Act (R.A.) 6260 [1] that established a Coconut Investment Fund (CI
Fund) for the development of the coconut industry through capital financing.[2]Coconut farmers were to capitalize
and administer the Fund through the Coconut Investment Company (CIC)[3] whose objective was, among others, to
advance the coconut farmers interests. For this purpose, the law imposed a levy of P0.55 on the coconut
farmers first domestic sale of every 100 kilograms of copra, or its equivalent, for which levy he was to get a receipt
convertible into CIC shares of stock.[4]

About a year following his proclamation of martial law in the country or on August 20, 1973 President Ferdinand E.
Marcos issued Presidential Decree (P.D.) 276,[5] which established a Coconut Consumers Stabilization Fund (CCS
Fund), to address the crisis at that time in the domestic market for coconut-based consumer goods. The CCS Fund
was to be built up through the imposition of a P15.00-levy for every first sale of 100 kilograms of copra resecada.
[6]
 The levy was to cease after a year or earlier provided the crisis was over. Any remaining balance of the Fund was
to revert to the CI Fund established under R.A. 6260.[7]

A year later or on November 14, 1974 President Marcos issued P.D. 582,[8] creating a permanent fund called the
Coconut Industry Development Fund (CID Fund) to channel for the ultimate direct benefit of coconut farmers part
of the levies that they were already paying. The Philippine Coconut Authority (PCA) was to provide P100 million as
initial capital of the CID Fund and, thereafter, give the Fund at least P0.20 per kilogram of copra resecada out of the
PCAs collection of coconut consumers stabilization levy. In case of the lifting of this levy, the PCA was then to
impose a permanent levy of P0.20 on the first sale of every kilogram of copra to form part of the CID Fund. [9] Also,
under P.D. 582, the Philippine National Bank (PNB), then owned by the Government, was to receive on deposit,
administer, and use the CID Fund.[10] P.D. 582 authorized the PNB to invest the unused portion of the CID Fund in
easily convertible investments, the earnings of which were to form part of the Fund.[11]

In 1975 President Marcos enacted P.D. 755[12] which approved the acquisition of a commercial bank for the benefit
of the coconut farmers to enable such bank to promptly and efficiently realize the industrys credit policy.[13] Thus,
the PCA bought 72.2% of the shares of stock of First United Bank, headed by Pedro Cojuangco.[14] Due to changes in
its corporate identity and purpose, the banks articles of incorporation were amended in July 1975, resulting in a
change in the banks name from First United Bank to United Coconut Planters Bank (UCPB).[15]
 

On July 14, 1976 President Marcos enacted P.D. 961, [16] the Coconut Industry Code, which consolidated and codified
existing laws relating to the coconut industry. The Code provided that surpluses from the CCS Fund and the CID
Fund collections, not used for replanting and other authorized purposes, were to be invested by acquiring shares of
stock of corporations, including the San Miguel Corporation (SMC), engaged in undertakings related to the coconut
and palm oil industries.[17] UCPB was to make such investments and equitably distribute these for free to coconut
farmers.[18] These investments constituted the Coconut Industry Investment Fund (CIIF). P.D. 961 also provided
that the coconut levy funds (coco-levy funds) shall be owned by the coconut farmers in their private capacities.
[19]
 This was reiterated in the PD 1468[20] amendment of June 11, 1978.

In 1980, President Marcos issued P.D. 1699,[21] suspending the collections of the CCS Fund and the CID Fund. But in
1981 he issued P.D. 1841[22] which revived the collection of coconut levies.P.D. 1841 renamed the CCS Fund into the
Coconut Industry Stabilization Fund (CIS Fund).[23] This Fund was to be earmarked proportionately among several
development programs, such as coconut hybrid replanting program, insurance coverage for the coconut farmers,
and scholarship program for their children.[24]

In November 2000 then President Joseph Estrada issued Executive Order (E.O.) 312,[25] establishing a Sagip
Niyugan Program which sought to provide immediate income supplement to coconut farmers and encourage the
creation of a sustainable local market demand for coconut oil and other coconut products. [26] The Executive Order
sought to establish a P1-billion fund by disposing of assets acquired using coco-levy funds or assets of entities
supported by those funds.[27] A committee was created to manage the fund under this program. [28] A majority vote
of its members could engage the services of a reputable auditing firm to conduct periodic audits.[29]

At about the same time, President Estrada issued E.O. 313,[30] which created an irrevocable trust fund known as the
Coconut Trust Fund (the Trust Fund). This aimed to provide financial assistance to coconut farmers, to the coconut
industry, and to other agri-related programs.[31] The shares of stock of SMC were to serve as the Trust Funds initial
capital.[32] These shares were acquired with CII Funds and constituted approximately 27% of the outstanding
capital stock of SMC. E.O. 313 designated UCPB, through its Trust Department, as the Trust Funds trustee bank. The
Trust Fund Committee would administer, manage, and supervise the operations of the Trust Fund.[33] The
Committee would designate an external auditor to do an annual audit or as often as needed but it may also request
the Commission on Audit (COA) to intervene.[34]

To implement its mandate, E.O. 313 directed the Presidential Commission on Good Government, the Office of the
Solicitor General, and other government agencies to exclude the 27% CIIF SMC shares from Civil Case 0033,
entitled Republic of the Philippines v. Eduardo Cojuangco, Jr., et al., which was then pending before the
Sandiganbayan and to lift the sequestration over those shares.[35]

On January 26, 2001, however, former President Gloria Macapagal-Arroyo ordered the suspension of E.O.s 312 and
313.[36] This notwithstanding, on March 1, 2001 petitioner organizations and individuals brought the present action
in G.R. 147036-37 to declare E.O.s 312 and 313 as well as Article III, Section 5 of P.D. 1468 unconstitutional. On
April 24, 2001 the other sets of petitioner organizations and individuals instituted G.R. 147811 to nullify Section 2
of P.D. 755 and Article III, Section 5 of P.D.s 961 and 1468 also for being unconstitutional.
 

The Issues Presented

The parties submit the following issues for adjudication:

Procedurally

1. Whether or not petitioners special civil actions of certiorari under Rule 65 constituted the proper
remedy for their actions; and

2. Whether or not petitioners have legal standing to bring the same to court.

On the substance

3. Whether or not the coco-levy funds are public funds; and

4. Whether or not (a) Section 2 of P.D. 755, (b) Article III, Section 5 of P.D.s 961 and 1468, (c) E.O. 312, and
(d) E.O. 313 are unconstitutional.

The Rulings of the Court

First. UCPB questions the propriety of the present petitions for certiorari and mandamus under Rule 65 on

the ground that there are no ongoing proceedings in any tribunal or board or before a government official
exercising judicial, quasi-judicial, or ministerial functions.[37] UCPB insists that the Court exercises appellate
jurisdiction with respect to issues of constitutionality or validity of laws and presidential orders.[38]

But, as the Court previously held, where there are serious allegations that a law has infringed the
Constitution, it becomes not only the right but the duty of the Court to look into such allegations and, when
warranted, uphold the supremacy of the Constitution. [39] Moreover, where the issues raised are of paramount
importance to the public, as in this case, the Court has the discretion to brush aside technicalities of procedure.[40]

 
 Second. The Court has to uphold petitioners right to institute these petitions. The petitioner organizations
in these cases represent coconut farmers on whom the burden of the coco-levies attaches. It is also primarily for
their benefit that the levies were imposed.
 
The individual petitioners, on the other hand, join the petitions as taxpayers. The Court recognizes
their right to restrain officials from wasting public funds through the enforcement of an unconstitutional statute.
[41]
 This so-called taxpayers suit is based on the theory that expenditure of public funds for the purpose of
executing an unconstitutional act is a misapplication of such funds.[42]
 
Besides, the 1987 Constitution accords to the citizens a greater participation in the affairs of government.
Indeed, it provides for people's initiative, the right to information on matters of public concern (including the right
to know the state of health of their President), as well as the right to file cases questioning the factual bases for the
suspension of the privilege of writ of habeas corpus or declaration of martial law. These provisions enlarge the
peoples right in the political as well as the judicial field. It grants them the right to interfere in the affairs of
government and challenge any act tending to prejudice their interest.
 

Third. For some time, different and conflicting notions had been formed as to the nature and ownership of
the coco-levy funds. The Court, however, finally put an end to the dispute when it categorically ruled in Republic of
the Philippines v. COCOFED[43] that these funds are not only affected with public interest; they are, in fact, prima
facie public funds. Prima facie means a fact presumed to be true unless disproved by some evidence to the
contrary.[44]

The Court was satisfied that the coco-levy funds were raised pursuant to law to support a proper
governmental purpose. They were raised with the use of the police and taxing powers of the State for the benefit of
the coconut industry and its farmers in general. The COA reviewed the use of the funds. The Bureau of Internal
Revenue (BIR) treated them as public funds and the very laws governing coconut levies recognize their public
character.[45]

The Court has also recently declared that the coco-levy funds are in the nature of taxes and can only be
used for public purpose.[46] Taxes are enforced proportional contributions from persons and property, levied by the
State by virtue of its sovereignty for the support of the government and for all its public needs.[47] Here, the coco-
levy funds were imposed pursuant to law, namely, R.A. 6260 and P.D. 276. The funds were collected and managed
by the PCA, an independent government corporation directly under the President.[48] And, as the respondent public
officials pointed out, the pertinent laws used the term levy,[49] which means to tax,[50] in describing the exaction.

 
 Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise money to boost the
governments general funds but to provide means for the rehabilitation and stabilization of a threatened industry,
the coconut industry, which is so affected with public interest as to be within the police power of the State. [51] The
funds sought to support the coconut industry, one of the main economic backbones of the country, and to secure
economic benefits for the coconut farmers and farm workers. The subject laws are akin to the sugar liens imposed
by Sec. 7(b) of P.D. 388,[52] and the oil price stabilization funds under P.D. 1956,[53] as amended by E.O. 137.[54]

Respondent UCPB suggests that the coco-levy funds are closely similar to the Social Security System (SSS)
funds, which have been declared to be not public funds but properties of the SSS members and held merely in trust
by the government.[55] But the SSS Law[56] collects premium contributions. It does not collect taxes from members
for a specific public purpose. They pay contributions in exchange for insurance protection and benefits like loans,
medical or health services, and retirement packages. The benefits accrue to every SSS member, not to the public, in
general.[57]
 
Furthermore, SSS members do not lose ownership of their contributions. The government merely holds
these in trust, together with his employers contribution, to answer for his future benefits.[58] The coco-levy funds,
on the other hand, belong to the government and are subject to its administration and disposition. Thus, these
funds, including its incomes, interests, proceeds, or profits, as well as all its assets, properties, and shares of stocks
procured with such funds must be treated, used, administered, and managed as public funds.[59]
 
Lastly, the coco-levy funds are evidently special funds. In Gaston v. Republic Planters Bank,[60] the Court held
that the State collected stabilization fees from sugar millers, planters, and producers for a special purpose: to
finance the growth and development of the sugar industry and all its components. The fees were levied for a
special purpose and, therefore, constituted special fund when collected. Its character as such fund was made clear
by the fact that they were deposited in the PNB (then a wholly owned government bank) and not in the Philippine
Treasury. In Osmea v. Orbos,[61] the Court held that the oil price stabilization fund was a special fund mainly because
this was segregated from the general fund and placed in what the law referred to as a trust account.Yet it remained
subject to COA scrutiny and review. The Court finds no substantial distinction between these funds and the coco-
levy funds, except as to the industry they each support.

 
Fourth. Petitioners in G.R. 147811 assert that Section 2 of P.D. 755 above is void and unconstitutional for
disregarding the public character of coco-levy funds. The subject section provides:

 
Section 2.  Financial Assistance. x x x and since the operations, and activities of the
Philippine Coconut Authority are all in accord with the present social economic plans and programs
of the Government, all collections and levies which the Philippine Coconut Authority is authorized
to levy and collect such as but not limited to the Coconut Consumers Stabilization Levy, and the
Coconut Industry Development Fund as prescribed by Presidential Decree No. 582 shall not be
considered or construed, under any law or regulation, special and/or fiduciary funds and do
 not form part of the general funds of the national government within the contemplation of
Presidential Decree No. 711. (Emphasis ours)
 

The Court has, however, already passed upon this question in Philippine Coconut Producers Federation, Inc.
(COCOFED) v. Republic of the Philippines.[62] It held as unconstitutional Section 2 of P.D. 755 for effectively
authorizing the PCA to utilize portions of the CCS Fund to pay the financial commitment of the farmers to acquire
UCPB and to deposit portions of the CCS Fund levies with UCPB interest free. And as there also provided, the CCS
Fund, CID Fund and like levies that PCA is authorized to collect shall be considered as non-special or fiduciary
funds to be transferred to the general fund of the Government, meaning they shall be deemed private funds.

 
Identical provisions of subsequent presidential decrees likewise declared coco-levy funds private
properties of coconut farmers. Article III, Section 5 of P.D. 961 reads:

Section 5.  Exemptions.  The Coconut Consumers Stabilization Fund and the Coconut

Industry Development Fund as well as all disbursements of said funds for the benefit of the coconut
farmers as herein authorized shall not be construed or interpreted, under any law or
regulation, as special and/or fiduciary funds, or as part of the general funds of the national
government within the contemplation of P.D. No. 711; nor as a subsidy, donation, levy,
government funded investment, or government share within the contemplation of P.D.
898, the intention being that said Fund and the disbursements thereof as herein authorized
for the benefit of the coconut farmers shall be owned by them in their own private
capacities. (Emphasis ours)
 
Section 5 of P.D. 1468 basically reproduces the above provision, thus
 
Section 5.  Exemption. The Coconut Consumers Stabilization Fund and the Coconut
Industry Development Fund, as well as all disbursements as herein authorized, shall not be
construed or interpreted, under any law or regulation, as special and/or fiduciary funds, or
as part of the general funds of the national government within the contemplation of P.D.
711; nor as subsidy, donation, levy government funded investment, or government share
within the contemplation of P.D. 898, the intention being that said Fund and the
disbursements thereof as herein authorized for the benefit of the coconut farmers shall be
owned by them in their private capacities: Provided, however, That the President may at any
time authorize the Commission on Audit or any other officer of the government to audit the
business affairs, administration, and condition of persons and entities who receive subsidy for
coconut-based consumer products x x x. (Emphasis ours) 
 

Notably, the raising of money by levy on coconut farm production, a form of taxation as already stated,
began in 1971 for the purpose of developing the coconut industry and promoting the interest of coconut
farmers. The use of the fund was expanded in 1973 to include the stabilization of the domestic market for coconut-
based consumer goods and in 1974 to divert part of the funds for obtaining direct benefit to coconut farmers. After
five years or in 1976, however, P.D. 961 declared the coco-levy funds private property of the farmers. P.D. 1468
reiterated this declaration in 1978. But neither presidential decree actually turned over possession or control of
the funds to the farmers in their private capacity. The government continued to wield undiminished authority over
the management and disposition of those funds.

In any event, such declaration is void. There is ownership when a thing pertaining to a person is completely
subjected to his will in everything that is not prohibited by law or the concurrence with the rights of another.[63]  An
owner is free to exercise all attributes of ownership: the right, among others, to possess, use and enjoy, abuse or
consume, and dispose or alienate the thing owned. [64] The owner is of course free to waive all or some of these
rights in favor of others. But in the case of the coconut farmers, they could not, individually or collectively, waive
what have not been and could not be legally imparted to them.

Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III, Section 5 of P.D. 1468 completely
ignore the fact that coco-levy funds are public funds raised through taxation. And since taxes could be exacted only
for a public purpose, they cannot be declared private properties of individuals although such individuals fall within
a distinct group of persons.[65]  

The Court of course grants that there is no hard-and-fast rule for determining what constitutes public
purpose.  It is an elastic concept that could be made to fit into modern standards.  Public purpose, for instance, is
no longer restricted to traditional government functions like building roads and school houses or safeguarding
public health and safety. Public purpose has been construed as including the promotion of social justice.  Thus,
public funds may be used for relocating illegal settlers, building low-cost housing for them, and financing both
urban and agrarian reforms that benefit certain poor individuals. Still, these uses relieve volatile iniquities in
society and, therefore, impact on public order and welfare as a whole.

But the assailed provisions, which removed the coco-levy funds from the general funds of the government
and declared them private properties of coconut farmers, do not appear to have a color of social justice for their
purpose. The levy on copra that farmers produce appears, in the first place, to be a business tax judging by its tax
base. The concept of farmers-businessmen is incompatible with the idea that coconut farmers are victims of social
injustice and so should be beneficiaries of the taxes raised from their earnings.

It would altogether be different of course if the laws mentioned set apart a portion of the coco-levy fund for
improving the lives of destitute coconut farm owners or workers for their social amelioration to establish a proper
government purpose. The support for the poor is generally recognized as a public duty and has long been an
accepted exercise of police power in the promotion of the common good.[66] But the declarations do not distinguish
between wealthy coconut farmers and the impoverished ones. And even if they did, the Government cannot just
embark on a philanthropic orgy of inordinate dole-outs for motives political or otherwise.[67] Consequently, such
declarations are void since they appropriate public funds for private purpose and, therefore, violate the citizens
right to substantive due process.[68]

On another point, in stating that the coco-levy fund shall not be construed or interpreted, under any law or
regulation, as special and/or fiduciary funds, or as part of the general funds of the national government, P.D.s 961
and 1468 seek to remove such fund from COA scrutiny.

This is also the fault of President Estradas E.O. 312 which deals with P1 billion to be generated out of the
sale of coco-fund acquired assets. Thus

Section 5.  Audit of Fund and Submission of Report.  The Committee, by a majority vote, shall
engage the services of a reputable auditing firm to conduct periodic audits of the fund.  It
shall render a quarterly report on all pertinent transactions and availments of the fund to the Office
of the President within the first three (3) working days of the succeeding quarter. (Emphasis ours)

E.O. 313 has a substantially identical provision governing the management and disposition of the Coconut
Trust Fund capitalized with the substantial SMC shares of stock that the coco-fund acquired. Thus

Section 13.  Accounting. x x x

The Fund shall be audited annually or as often as necessary by an external auditor

designated by the Committee. The Committee may also request the Commission on Audit to
conduct an audit of the Fund. (Emphasis ours)

But, since coco-levy funds are taxes, the provisions of P.D.s 755, 961 and 1468 as well as those of E.O.s 312
and 313 that remove such funds and the assets acquired through them from the jurisdiction of the
COA violate Article IX-D, Section 2(1)[69] of the 1987 Constitution. Section 2(1) vests in the COA the power and
authority to examine uses of government money and property.The cited P.D.s and E.O.s also contravene Section
2[70] of P.D. 898 (Providing for the Restructuring of the Commission on Audit), which has the force of a statute.
 

And there is no legitimate reason why such funds should be shielded from COA review and audit. The PCA,
which implements the coco-levy laws and collects the coco-levy funds, is a government-owned and controlled
corporation subject to COA review and audit.
  

E.O. 313 suffers from an additional infirmity. Its title, Rationalizing the Use of the Coconut Levy Funds by
Constituting a Fund for Assistance to Coconut Farmers as an Irrevocable Trust Fund and Creating a Coconut Trust
Fund Committee for the Management thereof tends to mislead. Apparently, it intends to create a trust fund out of
the coco-levy funds to provide economic assistance to the coconut farmers and, ultimately, benefit the coconut
industry.[71] But on closer look, E.O. 313 strays from the special purpose for which the law raises coco-levy funds in
that it permits the use of coco-levy funds for improving productivity in other food areas. Thus:

Section 2.  Purpose of the Fund. The Fund shall be established for the purpose of financing
programs of assistance for the benefit of the coconut farmers, the coconut industry, and other agri-
related programs intended to maximize food productivity, develop business opportunities in
the countryside, provide livelihood alternatives, and promote anti-poverty
programs. (Emphasis ours)

xxxx

Section 9.  Use and Disposition of the Trust Income. The Coconut Trust Fund Committee, on
an annual basis, shall determine and establish the amount comprising the Trust Income. After such
determination, the Committee shall earmark, allocate and disburse the Trust Income for the
following purposes, namely:

xxxx

(d) Thirty percent (30%) of the Trust Income shall be used to assist and fund
agriculturally-related programs for the Government, as reasonably determined by the Trust
Fund Committee, implemented for the purpose of: (i) maximizing food productivity in the
agriculture areas of the country, (ii) enhancing the upliftment and well-being of the living
conditions of farmers and agricultural workers, (iii) developing viable industries and business
opportunities in the countryside, (iv) providing alternative means of livelihood to the direct
dependents of agriculture businesses and enterprises, and (v) providing financial assistance and
support to coconut farmers in times of economic hardship due to extremely low prices of copra and
other coconut products, natural calamities, world market dislocation and similar occurrences,
including financial support to the ERAPs Sagip Niyugan Program established under Executive Order
No. 312 dated November 3, 2000; x x x. (Emphasis ours)

Clearly, E.O. 313 above runs counter to the constitutional provision which directs that all money collected
on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only.
[72]
 Assisting other agriculturally-related programs is way off the coco-funds objective of promoting the general
interests of the coconut industry and its farmers.

A final point, the E.O.s also transgress P.D. 1445,[73] Section 84(2),[74] the first part by the previously
mentioned sections of E.O. 313 and the second part by Section 4 of E.O. 312 and Sections 6 and 7 of E.O. 313. E.O.
313 vests the power to administer, manage, and supervise the operations and disbursements of the Trust Fund it
established (capitalized with SMC shares bought out of coco-levy funds) in a Coconut Trust Fund Committee. Thus
 
Section 6.  Creation of the Coconut Trust Fund Committee. A Committee is hereby
created to administer, manage and supervise the operations of the Trust Fund, chaired by the
President with ten (10) members, as follows:

(a) four (4) representatives from the government sector, two of whom shall be the
Secretary of Agriculture and the Secretary of Agrarian Reform who shall act as Vice
Chairmen;

(b) four (4) representatives from coconut farmers organizations, one of whom shall
come from a list of nominees from the Philippine Coconut Producers Federation Inc.
(COCOFED); 

(c) a representative from the CIIF; and

(d) a representative from a non-government organization (NGO) involved in

agricultural and rural development.

All decisions of the Coconut Trust Fund Committee shall be determined by a majority vote of all the
members.  
 
The Coconut Trust Fund Committee shall perform the functions and duties set forth in Section 7
hereof, with the skill, care, prudence and diligence necessary under the circumstances then
prevailing that a prudent man acting in like capacity would exercise.

The members of the Coconut Trust Fund Committee shall be appointed by the President and shall
hold office at his pleasure.

The Coconut Trust Fund Committee is authorized to hire administrative, technical and/or support
staff as may be required to enable it to effectively perform its functions and
responsibilities. (Emphasis ours)
 
Section 7.  Functions and Responsibilities of the Committee. The Coconut Trust Fund
Committee shall have the following functions and responsibilities:

(a) set the investment policy of the Trust Fund;

(b) establish priorities for assistance giving preference to small coconut farmers and
farmworkers which shall be reviewed periodically and revised as necessary in accordance
 with changing conditions; 
(c) receive, process and approve project proposals for financing by the Trust Fund;

(d) decide on the use of the Trust Funds income or net earnings including final action
on applications for assistance, grants and/or loans;

(e) avail of professional counsel and services by retaining an investment and financial

manager, if desired;

(f) formulate the rules and regulations governing the allocation, utilization and
disbursement of the Fund; and

(g) perform such other acts and things as may be necessary proper or conducive to attain
the purposes of the Fund. (Emphasis ours)

 
Section 4 of E.O. 312 does essentially the same thing. It vests the management and disposition of the
assistance fund generated from the sale of coco-levy fund-acquired assets into a Committee of five members. Thus,
Section 4 of E.O. 312 provides
 
Section 4.  Funding.  Assets acquired through the coconut levy funds or by entities financed
by the coconut levy funds identified by the President for appropriate disposal or sale, shall be sold
or disposed to generate a maximum fund of ONE BILLION PESOS (P1,000,000,000.00) which shall
be managed by a Committee composed of a Chairman and four (4) members to be appointed
by the President whose term shall be co-terminus with the Program.  x x x (Emphasis ours)
 

In effect, the above transfers the power to allocate, use, and disburse coco-levy funds that P.D. 232 vested
in the PCA and transferred the same, without legislative authorization and in violation of P.D. 232, to the
Committees mentioned above. An executive order cannot repeal a presidential decree which has the same standing
as a statute enacted by Congress.
UCPB invokes the principle of separability to save the assailed laws from being struck down. The general
rule is that where part of a statute is void as repugnant to the Constitution, while another part is valid, the valid
portion, if susceptible to being separated from the invalid, may stand and be enforced. When the parts of a statute,
however, are so mutually dependent and connected, as conditions, considerations, or compensations for each
other, as to warrant a belief that the legislature intended them as a whole, the nullity of one part will vitiate the
rest. In which case, if some parts are unconstitutional, all the other provisions which are thus dependent,
conditional, or connected must consequently fall with them.[75]
 
But, given that the provisions of E.O.s 312 and 313, which as already stated invalidly transferred powers
over the funds to two committees that President Estrada created, the rest of their provisions became non-
operational. It is evident that President Estrada would not have created the new funding programs if they were to
be managed by some other entity. Indeed, he made himself Chairman of the Coconut Trust Fund and left to his
discretion the appointment of the members of the other committee.

 
 WHEREFORE, the Court GRANTS the petition in G.R. 147036-37, PARTLY GRANTS the petition in G.R.
147811, and declares the following VOID:

a) E.O. 312, for being repugnant to Section 84(2) of P.D. 1445, and Article IX-D, Section 2(1)
of the Constitution; and

b) E.O. 313, for being in contravention of Section 84(2) of P.D. 1445, and Article IX-D,
Section 2(1) and Article VI, Section 29(3) of the Constitution.

The Court has previously declared Section 2 of P.D. 755 and Article III, Section 5 of P.D.s 961 and 1468
unconstitutional.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 115455 October 30, 1995

ARTURO M. TOLENTINO, petitioner, 
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115525 October 30, 1995

JUAN T. DAVID, petitioner, 
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance;
LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR
REPRESENTATIVES, respondents.

G.R. No. 115543 October 30, 1995

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

vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE BUREAU OF INTERNAL
REVENUE AND BUREAU OF CUSTOMS, respondents.

G.R. No. 115544 October 30, 1995

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING CORPORATION;
PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners, 
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON. TEOFISTO T.
GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as
Secretary of Finance, respondents.

G.R. No. 115754 October 30, 1995

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner, 

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. 115781 October 30, 1995

KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T.
APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON,
RAFAEL G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF
ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT
COALITION, INC., and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAÑADA, petitioners, 
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE
and THE COMMISSIONER OF CUSTOMS, respondents.

G.R. No. 115852 October 30, 1995

PHILIPPINE AIRLINES, INC., petitioner, 

vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115873 October 30, 1995

COOPERATIVE UNION OF THE PHILIPPINES, petitioner, 

vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T.
GUINGONA, JR., in his capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as
Secretary of Finance, respondents.

G.R. No. 115931 October 30, 1995

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF PHILIPPINE BOOK
SELLERS, petitioners, 
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the
Commissioner of Internal Revenue; and HON. GUILLERMO PARAYNO, JR., in his capacity as the
Commissioner of Customs, respondents.

RESOLUTION

MENDOZA, J.:

These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for the
declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law. The
motions, of which there are 10 in all, have been filed by the several petitioners in these cases, with the exception of
the Philippine Educational Publishers Association, Inc. and the Association of Philippine Booksellers, petitioners in
G.R. No. 115931.

The Solicitor General, representing the respondents, filed a consolidated comment, to which the Philippine
Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc., petitioner in G.R. No. 115544,
and Juan T. David, petitioner in G.R. No. 115525, each filed a reply. In turn the Solicitor General filed on June 1,
1995 a rejoinder to the PPI's reply.

On June 27, 1995 the matter was submitted for resolution.

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

The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment to a House
revenue bill by enacting its own version of a revenue bill. On at least two occasions during the Eighth Congress, the
Senate passed its own version of revenue bills, which, in consolidation with House bills earlier passed, became the
enrolled bills. These were:

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY EXTENDING FROM FIVE (5)
YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL
EQUIPMENT) which was approved by the President on April 10, 1992. This Act is actually a consolidation of H. No.
34254, which was approved by the House on January 29, 1992, and S. No. 1920, which was approved by the Senate
on February 3, 1992.

R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD TO ANY FILIPINO
ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by the President on May 22, 1992. This
Act is a consolidation of H. No. 22232, which was approved by the House of Representatives on August 2, 1989, and
S. No. 807, which was approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result of the consolidation of
House and Senate bills. These are the following, with indications of the dates on which the laws were approved by
the President and dates the separate bills of the two chambers of Congress were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS PURPOSE THE
PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE THE PAYMENT

OF THE VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT UNITS TO
SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF THE NATIONAL
INTERNAL REVENUE CODE (December 28, 1992)

House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE THE PLACE

FOR PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING FOR THIS
PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED
(February 24, 1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS,

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

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO DECLARE

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

House Bill No. 11024, November 3, 1993

 Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF THE

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

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993

7. R.A. NO. 7717

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

House Bill No. 9187, November 3, 1993

Senate Bill No. 1127, March 23, 1994

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

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

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

RULE XXIX

AMENDMENTS

xxx xxx xxx

§68. Not more than one amendment to the original amendment shall be considered.

No amendment by substitution shall be entertained unless the text thereof is submitted in writing.

Any of said amendments may be withdrawn before a vote is taken thereon.

§69. No amendment which seeks the inclusion of a legislative provision foreign to the subject
matter of a bill (rider) shall be entertained.

xxx xxx xxx

 §70-A. A bill or resolution shall not be amended by substituting it with another which covers a
subject distinct from that proposed in the original bill or resolution. (emphasis added).

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

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" 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.

That this is also the understanding of book authors of the scope of the Senate's power to concur is clear from the
following commentaries:

The power of the Senate to propose or concur with amendments is apparently without restriction.
It would seem that by virtue of this power, the Senate can practically re-write a bill required to
come from the House and leave only a trace of the original bill. For example, a general revenue bill
passed by the lower house of the United States Congress contained provisions for the imposition of
an inheritance tax . This was changed by the Senate into a corporation tax. The amending authority
of the Senate was declared by the United States Supreme Court to be sufficiently broad to enable it
to make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55 L. ed. 389].

(L. TAÑ ADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 (1961))

The above-mentioned bills are supposed to be initiated by the House of Representatives because it
is more numerous in membership and therefore also more representative of the people. Moreover,
its members are presumed to be more familiar with the needs of the country in regard to the
enactment of the legislation involved.

The Senate is, however, allowed much leeway in the exercise of its power to propose or concur with
amendments to the bills initiated by the House of Representatives. Thus, in one case, a bill
introduced in the U.S. House of Representatives was changed by the Senate to make a proposed
inheritance tax a corporation tax. It is also accepted practice for the Senate to introduce what is
known as an amendment by substitution, which may entirely replace the bill initiated in the House
of Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills must "originate exclusively in the House of Representatives,"
it also adds, "but the Senate may propose or concur with amendments." In the exercise of this power, the Senate may
propose an entirely new bill as a substitute measure. As petitioner Tolentino states in a high school text, a
committee to which a bill is referred may do any of the following:

(1) to endorse the bill without changes; (2) to make changes in the bill omitting or adding sections
or altering its language; (3) to make and endorse an entirely new bill as a substitute, in which case
it will be known as a committee bill; or (4) to make no report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))

To except from this procedure the amendment of bills which are required to originate in the House by prescribing
that the number of the House bill and its other parts up to the enacting clause must be preserved although the text
of the Senate amendment may be incorporated in place of the original body of the bill is to insist on a mere
technicality. At any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is therefore as
much an amendment of H. No. 11197 as any which the Senate could have made.

II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that S. No. 1630 is
an independent and distinct bill. Hence their repeated references to its certification that it was passed by the Senate
"in substitution of S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197," implying that there
is something substantially different between the reference to S. No. 1129 and the reference to H. No. 11197. From
this premise, they conclude that R.A. No. 7716 originated both in the House and in the Senate and that it is the
product of two "half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both houses of
Congress."

In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere amendments of the
corresponding provisions of H. No. 11197. The very tabular comparison of the provisions of H. No. 11197 and S.
No. 1630 attached as Supplement A to the basic petition of petitioner Tolentino, while showing differences
between the two bills, at the same time indicates that the provisions of the Senate bill were precisely intended to
be amendments to the House bill.

Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was a mere
amendment of the House bill, H. No. 11197 in its original form did not have to pass the Senate on second and three
readings. It was enough that after it was passed on first reading it was referred to the Senate Committee on Ways
and Means. Neither was it required that S. No. 1630 be passed by the House of Representatives before the two bills
could be referred to the Conference Committee.

There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When the House bill
and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank deposits), were referred to a
conference committee, the question was raised whether the two bills could be the subject of such conference,
considering that the bill from one house had not been passed by the other and vice versa. As Congressman Duran
put the question:

MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is passed by the
House but not passed by the Senate, and a Senate bill of a similar nature is passed in the Senate but
never passed in the House, can the two bills be the subject of a conference, and can a law be enacted
from these two bills? I understand that the Senate bill in this particular instance does not refer to
investments in government securities, whereas the bill in the House, which was introduced by the
Speaker, covers two subject matters: not only investigation of deposits in banks but also
investigation of investments in government securities. Now, since the two bills differ in their
subject matter, I believe that no law can be enacted.

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

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

(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct and unrelated
measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that because the President
separately certified to the need for the immediate enactment of these measures, his certification was ineffectual
and void. The certification had to be made of the version of the same revenue bill which at the moment was being
considered. Otherwise, to follow petitioners' theory, it would be necessary for the President to certify as many bills
as are presented in a house of Congress even though the bills are merely versions of the bill he has already
certified. It is enough that he certifies the bill which, at the time he makes the certification, is under consideration.
Since on March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had to be certified. For that
matter on June 1, 1993 the President had earlier certified H. No. 9210 for immediate enactment because it was the
one which at that time was being considered by the House. This bill was later substituted, together with other bills,
by H. No. 11197.

As to what Presidential certification can accomplish, we have already explained in the main decision that the
phrase "except when the President certifies to the necessity of its immediate enactment, etc." in Art. VI, §26 (2)
qualifies not only the requirement that "printed copies [of a bill] in its final form [must be] distributed to the
members three days before its passage" but also the requirement that before a bill can become a law it must have
passed "three readings on separate days." There is not only textual support for such construction but historical
basis as well.

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

(2) No bill shall be passed by either House unless it shall have been printed and copies thereof in its
final form furnished its Members at least three calendar days prior to its passage, except when the
President shall have certified to the necessity of its immediate enactment. Upon the last reading of a
bill, no amendment thereof shall be allowed and the question upon its passage shall be taken
immediately thereafter, and the yeas and nays entered on the Journal.

When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2):

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

This provision of the 1973 document, with slight modification, was adopted in Art. VI, §26 (2) of the present
Constitution, thus:

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

The exception is based on the prudential consideration that if in all cases three readings on separate days are
required and a bill has to be printed in final form before it can be passed, the need for a law may be rendered
academic by the occurrence of the very emergency or public calamity which it is meant to address.

Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a country like the
Philippines where budget deficit is a chronic condition. Even if this were the case, an enormous budget deficit does
not make the need for R.A. No. 7716 any less urgent or the situation calling for its enactment any less an
emergency.

Apparently, the members of the Senate (including some of the petitioners in these cases) believed that there was
an urgent need for consideration of S. No. 1630, because they responded to the call of the President by voting on
the bill on second and third readings on the same day. While the judicial department is not bound by the Senate's
acceptance of the President's certification, the respect due coequal departments of the government in matters
committed to them by the Constitution and the absence of a clear showing of grave abuse of discretion caution a
stay of the judicial hand.

At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it was discussed
for six days. Only its distribution in advance in its final printed form was actually dispensed with by holding the
voting on second and third readings on the same day (March 24, 1994). Otherwise, sufficient time between the
submission of the bill on February 8, 1994 on second reading and its approval on March 24, 1994 elapsed before it
was finally voted on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-fold: (1) to inform the
members of Congress of what they must vote on and (2) to give them notice that a measure is progressing through
the enacting process, thus enabling them and others interested in the measure to prepare their positions with
reference to it. (1 J. G. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION §10.04, p. 282 (1972)). These
purposes were substantially achieved in the case of R.A. No. 7716.

IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the Movement of Attorneys
for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of the constitutional policy of full
public disclosure and the people's right to know (Art. II, §28 and Art. III, §7) the Conference Committee met for two
days in executive session with only the conferees present.

As pointed out in our main decision, even in the United States it was customary to hold such sessions with only the
conferees and their staffs in attendance and it was only in 1975 when a new rule was adopted requiring open
sessions. Unlike its American counterpart, the Philippine Congress has not adopted a rule prescribing open
hearings for conference committees.

It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least staff members
were present. These were staff members of the Senators and Congressmen, however, who may be presumed to be
their confidential men, not stenographers as in this case who on the last two days of the conference were excluded.
There is no showing that the conferees themselves did not take notes of their proceedings so as to give petitioner
Kilosbayan basis for claiming that even in secret diplomatic negotiations involving state interests, conferees keep
notes of their meetings. Above all, the public's right to know was fully served because the Conference Committee in
this case submitted a report showing the changes made on the differing versions of the House and the Senate.

Petitioners cite the rules of both houses which provide that conference committee reports must contain "a detailed,
sufficiently explicit statement of the changes in or other amendments." These changes are shown in the bill
attached to the Conference Committee Report. The members of both houses could thus ascertain what changes had
been made in the original bills without the need of a statement detailing the changes.

The same question now presented was raised when the bill which became R.A. No. 1400 (Land Reform Act of
1955) was reported by the Conference Committee. Congressman Bengzon raised a point of order. He said:

MR. BENGZON. My point of order is that it is out of order to consider the report of the conference
committee regarding House Bill No. 2557 by reason of the provision of Section 11, Article XII, of the
Rules of this House which provides specifically that the conference report must be accompanied by
a detailed statement of the effects of the amendment on the bill of the House. This conference
committee report is not accompanied by that detailed statement, Mr. Speaker. Therefore it is out of
order to consider it.

Petitioner Tolentino, then the Majority Floor Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the point of
order raised by the gentleman from Pangasinan.

There is no question about the provision of the Rule cited by the gentleman from Pangasinan,
but this provision applies to those cases where only portions of the bill have been amended. In this
case before us an entire bill is presented; therefore, it can be easily seen from the reading of the bill
what the provisions are. Besides, this procedure has been an established practice.

After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the provisions of
the Rules, and the reason for the requirement in the provision cited by the gentleman from
Pangasinan is when there are only certain words or phrases inserted in or deleted from the
 provisions of the bill included in the conference report, and we cannot understand what those
words and phrases mean and their relation to the bill. In that case, it is necessary to make a detailed
statement on how those words and phrases will affect the bill as a whole; but when the entire bill itself
is copied verbatim in the conference report, that is not necessary. So when the reason for the Rule
does not exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

Congressman Tolentino was sustained by the chair. The record shows that when the ruling was appealed, it was
upheld by viva voce and when a division of the House was called, it was sustained by a vote of 48 to 5. (Id., 
p. 4058)

Nor is there any doubt about the power of a conference committee to insert new provisions as long as these are
germane to the subject of the conference. As this Court held in Philippine Judges Association v. Prado, 227 SCRA 703
(1993), in an opinion written by then Justice Cruz, the jurisdiction of the conference committee is not limited to
resolving differences between the Senate and the House. It may propose an entirely new provision. What is
important is that its report is subsequently approved by the respective houses of Congress. This Court ruled that it
would not entertain allegations that, because new provisions had been added by the conference committee, there
was thereby a violation of the constitutional injunction that "upon the last reading of a bill, no amendment thereto
shall be allowed."

Applying these principles, we shall decline to look into the petitioners' charges that an amendment
was made upon the last reading of the bill that eventually became R.A. No. 7354 and
that copies thereof in its final form were not distributed among the members of each House. Both the
enrolled bill and the legislative journals certify that the measure was duly enacted i.e., in
accordance with Article VI, Sec. 26 (2) of the Constitution. We are bound by such official assurances
from a coordinate department of the government, to which we owe, at the very least, a becoming
courtesy.

(Id. at 710. (emphasis added))

It is interesting to note the following description of conference committees in the Philippines in a 1979 study:

Conference committees may be of two types: free or instructed. These committees may be given
instructions by their parent bodies or they may be left without instructions. Normally the
conference committees are without instructions, and this is why they are often critically referred to
as "the little legislatures." Once bills have been sent to them, the conferees have almost unlimited
authority to change the clauses of the bills and in fact sometimes introduce new measures that were
not in the original legislation. No minutes are kept, and members' activities on conference
committees are difficult to determine. One congressman known for his idealism put it this way: "I
killed a bill on export incentives for my interest group [copra] in the conference committee but I
could not have done so anywhere else." The conference committee submits a report to both houses,
and usually it is accepted. If the report is not accepted, then the committee is discharged and new
members are appointed.

(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND LEGISLATURES: A

COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).

In citing this study, we pass no judgment on the methods of conference committees. We cite it only to say that
conference committees here are no different from their counterparts in the United States whose vast powers we
noted in Philippine Judges Association v. Prado, supra. At all events, under Art. VI, §16(3) each house has the power
"to determine the rules of its proceedings," including those of its committees. Any meaningful change in the
method and procedures of Congress or its committees must therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, §26 (1) of the
Constitution which provides that "Every bill passed by Congress shall embrace only one subject which shall be
expressed in the title thereof." PAL contends that the amendment of its franchise by the withdrawal of its
exemption from the VAT is not expressed in the title of the law.

Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all other taxes,
duties, royalties, registration, license and other fees and charges of any kind, nature, or description, imposed,
levied, established, assessed or collected by any municipal, city, provincial or national authority or government
agency, now or in the future."

PAL was exempted from the payment of the VAT along with other entities by §103 of the National Internal
Revenue Code, which provides as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws or international agreements to which the
Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending §103, as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws, except those granted under Presidential
Decree Nos. 66, 529, 972, 1491, 1590. . . .

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

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND
ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR
OTHER PURPOSES.

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE 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. (Southern Pac.
Co. v. Bartine, 170 Fed. 725)

(227 SCRA at 707-708)

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

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

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

Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other
businesses have long ago been subject. It is thus different from the tax involved in the cases invoked by the PPI. The
license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be discriminatory
because it was laid on the gross advertising receipts only of newspapers whose weekly circulation was over
20,000, with the result that the tax applied only to 13 out of 124 publishers in Louisiana. These large papers were
critical of Senator Huey Long who controlled the state legislature which enacted the license tax. The censorial
motivation for the law was thus evident.

On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 75 L. Ed. 2d 295
(1983), the tax was found to be discriminatory because although it could have been made liable for the sales tax or,
in lieu thereof, for the use tax on the privilege of using, storing or consuming tangible goods, the press was not.
Instead, the press was exempted from both taxes. It was, however, later made to pay a special use tax on the cost of
paper and ink which made these items "the only items subject to the use tax that were component of goods to be
sold at retail." The U.S. Supreme Court held that the differential treatment of the press "suggests that the goal of
regulation is not related to suppression of expression, and such goal is presumptively unconstitutional." It would
therefore appear that even a law that favors the press is constitutionally suspect. (See the dissent of Rehnquist, J. in
that case)

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

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

(a) Goods for consumption or use which are in their original state (agricultural, marine and forest
products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn,
sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture
of feeds).

(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) or for professional use, like professional instruments and implements,
by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and services rendered
under employer-employee relationship.

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

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

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)

The PPI asserts that it does not really matter that the law does not discriminate against the press because "even
nondiscriminatory taxation on constitutionally guaranteed freedom is unconstitutional." PPI cites in support of this
assertion the following statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):

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

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. Hence,
although its application to others, such those selling goods, is valid, its application to the press or to religious
groups, such as the Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets, is
unconstitutional. As the U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of a
preacher. It is quite another thing to exact a tax on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386 (1957) which
invalidated a city ordinance requiring a business license fee on those engaged in the sale of general merchandise. It
was held that the tax could not be imposed on the sale of bibles by the American Bible Society without restraining
the free exercise of its right to propagate.

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

Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the
sales are used to subsidize the cost of printing copies which are given free to those who cannot afford to pay so that
to tax the sales would be to increase the price, while reducing the volume of sale. Granting that to be the case, the
resulting burden on the exercise of religious freedom is so incidental as to make it difficult to differentiate it from
any other economic imposition that might make the right to disseminate religious doctrines costly. Otherwise, to
follow the petitioner's argument, to increase the tax on the sale of vestments would be to lay an impermissible
burden on the right of the preacher to make a sermon.

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

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

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." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not
only existing laws but also "the reservation of the essential attributes of sovereignty, is . . . read into contracts as a
postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968))
Contracts must be understood as having been made in reference to the possible exercise of the rightful authority of
the government and no obligation of contract can extend to the defeat of that authority. (Norman v. Baltimore and
Ohio R.R., 79 L. Ed. 885 (1935)).

It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale of agricultural products,
food items, petroleum, and medical and veterinary services, it grants no exemption on the sale of real property
which is equally essential. The sale of real property for socialized and low-cost housing is exempted from the tax,
but CREBA claims that real estate transactions of "the less poor," i.e., the middle class, who are equally homeless,
should likewise be exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods and services was
already exempt under §103, pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716. Petitioner is in
error in claiming that R.A. No. 7716 granted exemption to these transactions, while subjecting those of petitioner
to the payment of the VAT. Moreover, there is a difference between the "homeless poor" and the "homeless less
poor" in the example given by petitioner, because the second group or middle class can afford to rent houses in the
meantime that they cannot yet buy their own homes. The two social classes are thus differently situated in life. "It
is inherent in the power to tax that the State be free to select the subjects of taxation, and it has been repeatedly
held that 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no
constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil.
912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod sa Pamahalaan ng
Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).

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

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

Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A. No. 7716 merely
expands the base of the tax. The validity of the original VAT Law was questioned in Kapatiran ng Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on grounds similar to those made in these cases,
namely, that the law was "oppressive, discriminatory, unjust and regressive in violation of Art. VI, §28(1) of the
Constitution." (At 382) Rejecting the challenge to the law, this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .

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

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

(At 382-383)

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

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What
it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has
been interpreted to mean simply that "direct taxes are . . . to be preferred [and] as much as possible, indirect taxes
should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed,
the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which
perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII, §17(1)
of the 1973 Constitution from which the present Art. VI, §28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to
avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law
minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No.
7716, §3, amending §102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, §4,
amending §103 of the NIRC).

Thus, the following transactions involving basic and essential goods and services are exempted from the VAT:

(a) Goods for consumption or use which are in their original state (agricultural, marine and forest
products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn
sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture
of feeds).

(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) and or professional use, like professional instruments and
implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and services rendered
under employer-employee relationship.

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

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

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)

On the other hand, the transactions which are subject to the VAT are those which involve goods and services which
are used or availed of mainly by higher income groups. These include real properties held primarily for sale to
customers or for lease in the ordinary course of trade or business, the right or privilege to use patent, copyright,
and other similar property or right, the right or privilege to use industrial, commercial or scientific equipment,
motion picture films, tapes and discs, radio, television, satellite transmission and cable television time, hotels,
restaurants and similar places, securities, lending investments, taxicabs, utility cars for rent, tourist buses, and
other common carriers, services of franchise grantees of telephone and telegraph.

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

The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as
here, does not suffice. There must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as void on its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that where the due process
and equal protection clauses are invoked, considering that they are not fixed rules but rather broad
 standards, there is a need for proof of such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must prevail.

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

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

Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues. Otherwise,
adjudication would be no different from the giving of advisory opinion that does not really settle legal issues.

We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is made that "there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of
the government." This duty can only arise if an actual case or controversy is before us. Under Art . VIII, §5 our
jurisdiction is defined in terms of "cases" and all that Art. VIII, §1, ¶2 can plausibly mean is that in the exercise of
that jurisdiction we have the judicial power to determine questions of grave abuse of discretion by any branch or
instrumentality of the government.

Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the power of a court to hear
and decide cases pending between parties who have the right to sue and be sued in the courts of law and equity"
(Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from legislative and executive power. This power
cannot be directly appropriated until it is apportioned among several courts either by the Constitution, as in the
case of Art. VIII, §5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary
Reorganization Act of 1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's "jurisdiction,"
defined as "the power conferred by law upon a court or judge to take cognizance of a case, to the exclusion of all
others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its jurisdiction, this Court
cannot inquire into any allegation of grave abuse of discretion by the other departments of the government.

VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of the Philippines
(CUP), after briefly surveying the course of legislation, argues that it was to adopt a definite policy of granting tax
exemption to cooperatives that the present Constitution embodies provisions on cooperatives. To subject
cooperatives to the VAT would therefore be to infringe a constitutional policy. Petitioner claims that in 1973, P.D.
No. 175 was promulgated exempting cooperatives from the payment of income taxes and sales taxes but in 1984,
because of the crisis which menaced the national economy, this exemption was withdrawn by P.D. No. 1955; that in
1986, P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until December 31, 1991,
but, in the same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the framers of the Constitution
"repudiated the previous actions of the government adverse to the interests of the cooperatives, that is, the
repeated revocation of the tax exemption to cooperatives and instead upheld the policy of strengthening the
cooperatives by way of the grant of tax exemptions," by providing the following in Art. XII:

§1. The goals of the national economy are a more equitable distribution of opportunities, income,
and wealth; a sustained increase in the amount of goods and services produced by the nation for
the benefit of the people; and an expanding productivity as the key to raising the quality of life for
all, especially the underprivileged.

The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of human and
natural resources, and which are competitive in both domestic and foreign markets. However, the
State shall protect Filipino enterprises against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given
optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and
similar collective organizations, shall be encouraged to broaden the base of their ownership.
 §15. The Congress shall create an agency to promote the viability and growth of cooperatives as
instruments for social justice and economic development.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out cooperatives by
withdrawing their exemption from income and sales taxes under P.D. No. 175, §5. What P.D. No. 1955, §1 did was
to withdraw the exemptions and preferential treatments theretofore granted to private business enterprises in
general, in view of the economic crisis which then beset the nation. It is true that after P.D. No. 2008, §2 had
restored the tax exemptions of cooperatives in 1986, the exemption was again repealed by E.O. No. 93, §1, but then
again cooperatives were not the only ones whose exemptions were withdrawn. The withdrawal of tax incentives
applied to all, including government and private entities. In the second place, the Constitution does not really
require that cooperatives be granted tax exemptions in order to promote their growth and viability. Hence, there is
no basis for petitioner's assertion that the government's policy toward cooperatives had been one of vacillation, as
far as the grant of tax privileges was concerned, and that it was to put an end to this indecision that the
constitutional provisions cited were adopted. Perhaps as a matter of policy cooperatives should be granted tax
exemptions, but that is left to the discretion of Congress. If Congress does not grant exemption and there is no
discrimination to cooperatives, no violation of any constitutional policy can be charged.

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

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

We have carefully read the various arguments raised against the constitutional validity of R.A. No. 7716. We have
in fact taken the extraordinary step of enjoining its enforcement pending resolution of these cases. We have now
come to the conclusion that the law suffers from none of the infirmities attributed to it by petitioners and that its
enactment by the other branches of the government does not constitute a grave abuse of discretion. Any question
as to its necessity, desirability or expediency must be addressed to Congress as the body which is electorally
responsible, remembering that, as Justice Holmes has said, "legislators are the ultimate guardians of the liberties
and welfare of the people in quite as great a degree as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May,
194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in arguing that
we should enforce the public accountability of legislators, that those who took part in passing the law in question
by voting for it in Congress should later thrust to the courts the burden of reviewing measures in the flush of
enactment. This Court does not sit as a third branch of the legislature, much less exercise a veto power over
legislation.

WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining order
previously issued is hereby lifted.

SO ORDERED.
 FIRST DIVISION

February 13, 2017

G.R. No. 203514

COMMISSIONER OF INTERNAL REVENUE, Petitioner 

vs.
ST. LUKE’S MEDICAL CENTER, INC., Respondent

DECISION
DEL CASTILLO, J.:

The doctrine of stare decisis dictates that "absent any powerful countervailing considerations, like cases ought to
be decided alike."1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the May 9, 2012 Decision3 and
the September 17, 2012 Resolution4 of the Court of Tax Appeals (CTA) in CTA EB Case No. 716.

Factual Antecedents

On December 14, 2007, respondent St. Luke’s Medical Center, Inc. (SLMC) received from the Large Taxpayers
Service-Documents Processing and Quality Assurance Division of the Bureau of Internal Revenue (BIR) Audit
Results/Assessment Notice Nos. QA-07-0000965 and QA-07-000097,6 assessing respondent SLMC deficiency
income tax under Section 27(B)7 of the 1997 National Internal Revenue Code (NIRC), as amended, for taxable year
2005 in the amount of ₱78,617,434.54 and for taxable year 2006 in the amount of ₱57,119,867.33.

On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR) an administrative
protest8assailing the assessments. SLMC claimed that as a non-stock, non-profit charitable and social welfare
organization under Section 30(E) and (G)9 of the 1997 NIRC, as amended, it is exempt from paying income tax.

On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed Assessment10 dated April 9, 2008
increasing the deficiency income for the taxable year 2005 tax to ₱82,419,522.21 and for the taxable year 2006 to
₱60,259,885.94, computed as follows:

For Taxable Year 2005:

ASSESSMENT NO. QA-07-000096

PARTICULARS AMOUNT
Sales/Revenues/Receipts/Fees ?3,623,511,616.00
Less: Cost of Sales/Services 2,643,049, 769.00
Gross Income From Operation 980,461,847.00
Add: Non-Operating & Other Income -
Total Gross Income 980,461,847.00
Less: Deductions 481,266,883 .00
Net Income Subject to Tax 499, 194,964.00
XTaxRate 10%
Tax Due 49,919,496.40
Less: Tax Credits -
Deficiency Income Tax 49,919,496.40
Add: Increments  
25% Surcharge 12,479,874.10
20% Interest Per Annum (4115/06-4/15/08) 19,995,151.71
Compromise Penalty for Late Payment 25,000.00
Total increments 32,500,025.81
 Total Amount Due ?82,419,522.21

For Taxable Year 2006:

ASSESSMENT NO. QA-07-000097

PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees ?3,8 l 5,922,240.00
Less: Cost of Sales/Services 2,760,518,437.00
Gross Income From Operation 1,055,403,803.00
Add: Non-Operating & Other Income -
Total Gross Income 1,055,403,803.00
Less: Deductions 640,147,719.00
Net Income Subject to Tax 415,256,084.00
XTaxRate 10%
Tax.Due 41,525,608.40
Less: Tax Credits -
Deficiency Income Tax 41,525,608.40
Add: Increments -
25% Surcharge 10,381,402.10
20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44
Compromise Penalty for Late Payment 25,000.00
Total increments 18,734,277.54
Total Amount Due ?60,259,885.9411

Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,12 docketed as CTA Case No. 7789.

Ruling of the Court of Tax Appeals Division

On August 26, 2010, the CTA Division rendered a Decision13 finding SLMC not liable for deficiency income tax
under Section 27(B) of the 1997 NIRC, as amended, since it is exempt from paying income tax under Section 30(E)
and (G) of the same Code. Thus:

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, Audit
Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097, assessing petitioner for alleged deficiency
income taxes for the taxable years 2005 and 2006, respectively, are hereby CANCELLED and SET ASIDE.

SO ORDERED.14

CIR moved for reconsideration but the CTA Division denied the same in its December 28, 2010 Resolution.15

This prompted CIR to file a Petition for Review16 before the CTA En Banc.
Ruling of the Court of Tax Appeals En Banc

On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the Audit Results/Assessment
Notices issued against SLMC. It sustained the findings of the CTA Division that SLMC complies with all the
requisites under Section 30(E) and (G) of the 1997 NIRC and thus, entitled to the tax exemption provided therein.17

On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.

Issue

Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that the CTA erred in
exempting SLMC from the payment of income tax.

Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and 195960,
entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.,18 finding SLMC not entitled to the tax
exemption under Section 30(E) and (G) of the NIRC of 1997 as it does not operate exclusively for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. Thus, the Court disposed of the
case in this manner:

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909is PARTLY GRANTED. The
Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in
CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in
1998 based on the 10% preferential income tax rate under Section 27(B) of the National Internal Revenue Code.
However, it is not liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of
the National Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section I, Rule 45 of the
Rules of Court.

SO ORDERED.19

Considering the foregoing, SLMC then filed a Manifestation and Motion20 informing the Court that on April 30,
2013, it paid the BIR the amount of basic taxes due for taxable years 1998, 2000-2002, and 2004-2007, as
evidenced by the payment confirmation21 from the BIR, and that it did not pay any surcharge, interest, and
compromise penalty in accordance with the above-mentioned Decision of the Court. In view of the payment it
made, SLMC moved for the dismissal of the instant case on the ground of mootness.

CIR opposed the motion claiming that the payment confirmation submitted by SLMC is not a competent proof of
payment as it is a mere photocopy and does not even indicate the quarter/sand/or year/s said payment covers.22

In reply,23 SLMC submitted a copy of the Certification24 issued by the Large Taxpayers Service of the BIR dated May
27, 2013, certifying that, "[a]s far as the basic deficiency income tax for taxable years 2000, 2001, 2002, 2004,
2005, 2006, 2007 are concen1ed, this Office considers the cases closed due to the payment made on April 30,
2013." SLMC likewise submitted a letter25 from the BIR dated November 26, 2013 with attached Certification of
Payment26and application for abatement,27 which it earlier submitted to the Court in a related case, G.R. No.
200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.28

Thereafter, the parties submitted their respective memorandum.

CIR 's Arguments

CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax under Section 27(B) of the
1997 NIRC.29 It likewise asserts that SLMC is liable to pay compromise penalty pursuant to Section 248(A)30 of the
1997 NIRC for failing to file its quarterly income tax returns.31

As to the alleged payment of the basic tax, CIR contends that this does not render the instant case moot as the
payment confirmation submitted by SLMC is not a competent proof of payment of its tax liabilities.32

SLMC's Arguments

SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.)33 positing that earning a profit by a
charitable, benevolent hospital or educational institution does not result in the withdrawal of its tax exempt
privilege.34 SLMC further claims that the income it derives from operating a hospital is not income from "activities
conducted for profit."35 Also, it maintains that in accordance with the ruling of the Court in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),36 it is not liable for compromise
penalties.37

In any case, SLMC insists that the instant case should be dismissed in view of its payment of the basic taxes due for
taxable years 1998, 2000-2002, and 2004-2007 to the BIR on April 30, 2013.38

Our Ruling

SLMC is liable for income tax under

Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned

The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its revenues
from paying patients are concerned has been settled in G.R. Nos. 195909 and 195960 (Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.),39 where the Court ruled that:

x x x 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)(l).

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 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. Tue 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 nonprofit 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 outpatient, 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 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 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 . . . charitable . . . purposes . . . . ' 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 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 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying patients. It cannot be disputed that
a hospital which receives approximately ₱l.73 billion from paying patients is not an institution 'operated
exclusively' for charitable purposes. Clearly, revenues from paying patients are income received from 'activities
conducted for profit.' Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's declared
₱l,730,367,965 as 'Revenues from Services to Patients' in contrast to its 'Free Services' expenditure of
₱218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following 'calculation' to support its claim
that 65.20% of its 'income after expenses was allocated to free or charitable services' in 1998.

x x xx

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.' . . . The words
'dominant use' or 'principal use' cannot be substituted for the words 'used exclusively' without doing violence to
the Constitution and thelaw. Solely is synonymous with exclusively.

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 ₱l.73 billion total revenues from paying patients is not even
incidental to St. Luke's charity expenditure of ₱2l8,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 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.'

P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree V d que es una actividad
esencial dicho hospital para el funcionamiento def colegio de medicina

de dicha universidad?

x x x x x x xxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa; pero considerando que el
hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posicion social economica, lo que
se paga por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las
palabras o frase 'or from any activity conducted for profit.'

The question was whether having a hospital is essential to an educational institution like the College of Medicine of
the University of Santo Tomas.1awp++i1 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.

The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for charitable or social welfare
purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be 'operated exclusively' for charitable or social
welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose
its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the
last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at
the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from
sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions
should therefore be lin1ited to institutions beneficial to the public and those which improve social welfare. A
profit-making entity should not be allowed to exploit this subsidy to the detriment of the government and other
taxpayers.

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.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke's
has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is 'a corporation
for purely charitable and social welfare purposes' and thus exempt from income tax. In Michael J Lhuillier, Inc. v.
Commissioner of Internal Revenue, the Court said that 'good faith and honest belief that one is not subject to tax on
the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient
justification to delete the imposition of surcharges and interest.'40

A careful review of the pleadings reveals that there is no countervailing consideration for the Court to revisit its
aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.). Thus, under the doctrine of stare decisis, which states that "[o]nce a case has been decided in one way, any
other case involving exactly the same point at issue x x x should be decided in the same manner,"41 the Court finds
that SLMC is subject to 10% income tax insofar as its revenues from paying patients are concerned.

To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G) of the 1997 NIRC
requires said institution to operate exclusively for charitable or social welfare purpose. But in case an exempt
institution under Section 30(E) or (G) of the said Code earns income from its for-profit activities, it will not lose its
tax exemption. However, its income from for-profit activities will be subject to income tax at the preferential 10%
rate pursuant to Section 27(B) thereof.

SLMC is not liable for Compromise

Penalty.

As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997 NIRC for its alleged failure
to file its quarterly income tax returns, this has also been resolved in G.R Nos. 195909 and 195960 (Commissioner
of Internal Revenue v. St. Luke's Medical Center, Inc.),42 where the imposition of surcharges and interest under
Sections 24843 and 24944 of the 1997 NIRC were deleted on the basis of good faith and honest belief on the part of
SLMC that it is not subject to tax. Thus, following the ruling of the Court in the said case, SLMC is not liable to pay
compromise penalty under Section 248(A) of the 1997 NIRC.
The Petition is rendered moot by the
payment made by SLMC on April 30,
2013.

However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the instant Petition has
become moot.1avvphi1

While the Court agrees with the CIR that the payment confirmation from the BIR presented by SLMC is not a
competent proof of payment as it does not indicate the specific taxable period the said payment covers, the Court
finds that the Certification issued by the Large Taxpayers Service of the BIR dated May 27, 2013, and the letter
from the BIR dated November 26, 2013 with attached Certification of Payment and application for abatement are
sufficient to prove payment especially since CIR never questioned the authenticity of these documents. In fact, in a
related case, G.R. No. 200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, lnc.,45 the Court
dismissed the petition based on a letter issued by CIR confirming SLMC's payment of taxes, which is the same letter
submitted by SLMC in the instant case.

In fine, the Court resolves to dismiss the instant Petition as the same has been rendered moot by the payment
made by SLMC of the basic taxes for the taxable years 2005 and 2006, in the amounts of ₱49,919,496.40 and ₱4
l,525,608.40, respectively.46

WHEREFORE, the Petition is hereby DISMISSED.

SO ORDERED.