THIRD DIVISION

[G.R. No. 120082. September 11, 1996]

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. HON. FERDINAND J. MARCOS,
in his capacity as the Presiding Judge of the Regional Trial Court, Branch 20, Cebu City, THE
CITY OF CEBU, represented by its Mayor, HON. TOMAS R. OSMEA, and EUSTAQUIO B.
CESA,respondents.
DECISION
DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of 22 March
1995[1] of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition for declaratory relief in
Civil Case No. CEB-16900, entitled Mactan Cebu International Airport Authority vs. City of Cebu, and its order
of 4 May 1995[2]denying the motion to reconsider the decision.
We resolved to give due course to this petition for it raises issues dwelling on the scope of the taxing
power of local government units and the limits of tax exemption privileges of government-owned and controlled
corporations.
The uncontradicted factual antecedents are summarized in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of Republic Act No. 6958,
mandated to principally undertake the economical, efficient and effective control, management and supervision of the
Mactan International Airport in the Province of Cebu and the Lahug Airport in Cebu City, x x x and such other airports as
may be established in the Province of Cebu x x x (Sec. 3, RA 6958). It is also mandated to:
a) encourage, promote and develop international and domestic air traffic in the Central Visayas and Mindanao regions as a
means of making the regions centers of international trade and tourism, and accelerating the development of the means of
transportation and communication in the country; and,
b) upgrade the services and facilities of the airports and to formulate internationally acceptable standards of airport
accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of realty taxes in
accordance with Section 14 of its Charter:
Sec. 14. Tax Exemptions. -- The Authority shall be exempt from realty taxes imposed by the National Government or any
of its political subdivisions, agencies and instrumentalities x x x.
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of the City of Cebu,
demanded payment for realty taxes on several parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO,
948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A), located at Barrio Apas and
Barrio Kasambagan, Lahug, Cebu City, in the total amount of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor the aforecited Section 14
of RA 6958 which exempts it from payment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing Section 133 of the Local Government Code of 1991 which puts
limitations on the taxing powers of local government units:

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) x x x
xxx
o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local
government units. (underscoring supplied)
Respondent City refused to cancel and set aside petitioners realty tax account, insisting that the MCIAA is a governmentcontrolled corporation whose tax exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the Local
Government Code that took effect on January 1, 1992:
Section 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons whether natural or juridical,including government-owned or
controlled corporations, except local water districts, cooperatives duly registered under RA No. 6938, non-stock and nonprofit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (underscoring
supplied)
xxx
Section 234. Exemptions from Real Property Taxes. x x x
(a) x x x
xxx
(e) x x x
Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed
by all persons, whether natural or juridical, including government-owned or controlled corporations are hereby withdrawn
upon the effectivity of this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of petitioner, the latter was compelled to
pay its tax account under protest and thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of
Cebu, Branch 20, on December 29, 1994. MCIAA basically contended that the taxing powers of local government units
do not extend to the levy of taxes or fees of any kind on an instrumentality of the national government. Petitioner insisted
that while it is indeed a government-owned corporation, it nonetheless stands on the same footing as an agency or
instrumentality of the national government by the very nature of its powers and functions.
Respondent City, however, asserted that MCIAA is not an instrumentality of the government but merely a governmentowned corporation performing proprietary functions. As such, all exemptions previously granted to it were deemed
withdrawn by operation of law, as provided under Sections 193 and 234 of the Local Government Code when it took
effect on January 1, 1992.[3]
The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995,[4] the trial court dismissed the petition in light of its findings, to wit:

A close reading of the New Local Government Code of 1991 or RA 7160 provides the express cancellation and
withdrawal of exemption of taxes by government-owned and controlled corporation per Sections after the effectivity of
said Code on January 1, 1992, to wit: [proceeds to quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent City Government of Cebu are exempted from paying
realty taxes in view of the exemption granted under RA 6958 to pay the same (citing Section 14 of RA 6958).
However, RA 7160 expressly provides that All general and special laws, acts, city charters, decrees [sic], executive orders,
proclamations and administrative regulations, or part of parts thereof which are inconsistent with any of the provisions of
this Code are hereby repealed or modified accordingly. (/f/, Section 534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided for in RA 6958 creating
petitioner had been expressly repealed by the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties effective after January 1, 1992 until the
present.
This Courts ruling finds expression to give impetus and meaning to the overall objectives of the New Local Government
Code of 1991, RA 7160. It is hereby declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them more effective partners in the attainment of national goals. Toward this end, the State shall
provide for a more responsive and accountable local government structure instituted through a system of decentralization
whereby local government units shall be given more powers, authority, responsibilities, and resources. The process of
decentralization shall proceed from the national government to the local government units. x x x[5]
Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the petitioner
filed the instant petition based on the following assignment of errors:
I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS VESTED WITH GOVERNMENT
POWERS AND FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN INSTRUMENTALITY OR AGENCY
OF THE GOVERNMENT.
II. RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY REAL PROPERTY TAXES TO THE
CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a government-owned or controlled
corporation, it is mandated to perform functions in the same category as an instrumentality of Government. An
instrumentality of Government is one created to perform governmental functions primarily to promote certain
aspects of the economic life of the people.[6]Considering its task not merely to efficiently operate and manage
the Mactan-Cebu International Airport, but more importantly, to carry out the Government policies of promoting
and developing the Central Visayas and Mindanao regions as centers of international trade and tourism, and
accelerating the development of the means of transportation and communication in the country,[7] and that it is
an attached agency of the Department of Transportation and Communication (DOTC), [8] the petitioner may
stand in [sic] the same footing as an agency or instrumentality of the national government. Hence, its tax
exemption privilege under Section 14 of its Charter cannot be considered withdrawn with the passage of the
Local Government Code of 1991 (hereinafter LGC) because Section 133 thereof specifically states that the
`taxing powers of local government units shall not extend to the levy of taxes or fees or charges of any kind on
the national government, its agencies and instrumentalities.
As to the second assigned error, the petitioner contends that being an instrumentality of the National
Government, respondent City of Cebu has no power nor authority to impose realty taxes upon it in accordance
with the aforesaid Section 133 of the LGC, as explained in Basco vs. Philippine Amusement and Gaming
Corporation:[9]

Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a government owned
or controlled corporation with an original charter, PD 1869. All of its shares of stock are owned by the National
Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is governmental, which places it in the
category of an agency or instrumentality of the Government. Being an instrumentality of the Government, PAGCOR
should be and actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to
control by a mere Local government.
The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control the operation of
constitutional laws enacted by Congress to carry into execution the powers vested in the federal
government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the supremacy of the National Government over local governments.
Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on the part of the States to
touch, in that way (taxation) at least, the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal instrumentality in such a way as to prevent it
from consummating its federal responsibilities, or even to seriously burden it in the accomplishment of them. (Antieau,
Modern Constitutional Law, Vol. 2, p. 140)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what local authorities may
perceive to be undesirable activities or enterprise using the power to tax as a tool for regulation (U.S. v. Sanchez, 340 US
42). The power to tax which was called by Justice Marshall as the power to destroy (Mc Culloch v. Maryland, supra)
cannot be allowed to defeat an instrumentality or creation of the very entity which has the inherent power to wield
it. (underscoring supplied)
It then concludes that the respondent Judge cannot therefore correctly say that the questioned provisions
of the Code do not contain any distinction between a government corporation performing governmental
functions as against one performing merely proprietary ones such that the exemption privilege withdrawn
under the said Code would apply to all government corporations. For it is clear from Section 133, in relation to
Section 234, of the LGC that the legislature meant to exclude instrumentalities of the national government from
the taxing powers of the local government units.
In its comment, respondent City of Cebu alleges that as a local government unit and a political subdivision,
it has the power to impose, levy, assess, and collect taxes within its jurisdiction. Such power is guaranteed by
the Constitution[10] and enhanced further by the LGC. While it may be true that under its Charter the petitioner
was exempt from the payment of realty taxes, [11] this exemption was withdrawn by Section 234 of the LGC. In
response to the petitioners claim that such exemption was not repealed because being an instrumentality of
the National Government, Section 133 of the LGC prohibits local government units from imposing taxes, fees,
or charges of any kind on it, respondent City of Cebu points out that the petitioner is likewise a governmentowned corporation, and Section 234 thereof does not distinguish between government-owned or controlled
corporations performing governmental and purely proprietary functions. Respondent City of Cebu urges this
Court to apply by analogy its ruling that the Manila International Airport Authority is a government-owned
corporation,[12]and to reject the application of Basco because it was promulgated . . . before the enactment and
the signing into law of R.A. No. 7160, and was not, therefore, decided in the light of the spirit and intention of
the framers of the said law.
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who are to pay it. Nevertheless,
effective limitations thereon may be imposed by the people through their Constitutions. [13] Our Constitution, for

instance, provides that the rule of taxation shall be uniform and equitable and Congress shall evolve a
progressive system of taxation.[14] So potent indeed is the power that it was once opined that the power to tax
involves the power to destroy.[15] Verily, taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their property for the support of the
government. Accordingly, tax statutes must be construed strictly against the government and liberally in favor
of the taxpayer.[16] But since taxes are what we pay for civilized society,[17] or are the lifeblood of the nation, the
law frowns against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. [18] A claim of
exemption from tax payments must be clearly shown and based on language in the law too plain to be
mistaken.[19] Elsewise stated, taxation is the rule, exemption therefrom is the exception. [20] However, if the
grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not
apply because the practical effect of the exemption is merely to reduce the amount of money that has to be
handled by the government in the course of its operations.[21]
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by
local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct
authority conferred by Section 5, Article X of the Constitution. [22] Under the latter, the exercise of the power may
be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent
with the basic policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the
payment of realty taxes imposed by the National Government or any of its political subdivisions, agencies, and
instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom the exception, the
exemption may thus be withdrawn at the pleasure of the taxing authority. The only exception to this rule is
where the exemption was granted to private parties based on material consideration of a mutual nature, which
then becomes contractual and is thus covered by the non-impairment clause of the Constitution.[23]
The LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for the exercise by local
government units of their power to tax, the scope thereof or its limitations, and the exemptions from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of local government units
as follows:
SEC. 133. Common Limitations on the Taxing Power of Local Government Units. Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:
(a) Income tax, except when levied on banks and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees,
charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned;
(e) Taxes, fees and charges and other impositions upon goods carried into or out of, or passing through, the territorial
jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes,
fees or charges in any form whatsoever upon such goods or merchandise;
(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
Cooperatives 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. (emphasis supplied)

Needless to say, the last item (item o) is pertinent to this case. The taxes, fees or charges referred to are of
any kind; hence, they include all of these, unless otherwise provided by the LGC.The term taxes is well
understood so as to need no further elaboration, especially in light of the above enumeration. The term fees
means charges fixed by law or ordinance for the regulation or inspection of business or activity,[24] while
charges are pecuniary liabilities such as rents or fees against persons or property.[25]
Among the taxes enumerated in the LGC is real property tax, which is governed by Section 232. It reads
as follows:
SEC. 232. Power to Levy Real Property Tax. A province or city or a municipality within the Metropolitan Manila Area
may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvements not
hereafter specifically exempted.
Section 234 of the LGC provides for the exemptions from payment of real property taxes and withdraws
previous exemptions therefrom granted to natural and juridical persons, including government-owned and
controlled corporations, except as provided therein. It provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use
thereof had been granted, for consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious
cemeteries and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and governmentowned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of
electric power;
(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and
(e) Machinery and equipment used for pollution control and environmental protection.

Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed
by, all persons, whether natural or juridical, including all government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.
These exemptions are based on the ownership, character, and use of the property. Thus:
(a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are real properties owned by: (i)
the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the basis of their character are: (i) charitable institutions,
(ii) houses and temples of prayer like churches, parsonages or convents appurtenant thereto, mosques, and (iii) nonprofit or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and exclusive use to which they
are devoted are: (i) all lands, buildings and improvements which are actually directly and exclusively used for religious,
charitable or educational purposes; (ii) all machineries and equipment actually, directly and exclusively used by local
water districts or by government-owned or controlled corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power; and (iii) all machinery and equipment used for pollution control and
environmental protection.

To help provide a healthy environment in the midst of the modernization of the country, all machinery and equipment for
pollution control and environmental protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously granted to natural or juridical persons including
government-owned or controlled corporations are withdrawn upon the effectivity of the Code. [26]
Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It provides:
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.
On the other hand, the LGC authorizes local government units to grant tax exemption privileges. Thus,
Section 192 thereof provides:
SEC. 192. Authority to Grant Tax Exemption Privileges.-- Local government units may, through ordinances duly
approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary.
The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers of local government
units and the exceptions to such limitations; and (b) the rule on tax exemptions and the exceptions thereto. The
use of exceptions or provisos in these sections, as shown by the following clauses:
(1) unless otherwise provided herein in the opening paragraph of Section 133;
(2) Unless otherwise provided in this Code in Section 193;
(3) not hereafter specifically exempted in Section 232; and
(4) Except as provided herein in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in Section
133 seems to be inaccurately worded. Instead of the clause unless otherwise provided herein, with
the herein to mean, of course, the section, it should have used the clause unless otherwise provided in this
Code. The former results in absurdity since the section itself enumerates what are beyond the taxing powers of

local government units and, where exceptions were intended, the exceptions are explicitly indicated in the
next. For instance, in item (a) which excepts income taxes when levied on banks and other financial
institutions; item (d) which excepts wharfage on wharves constructed and maintained by the local government
unit concerned; and item (1) which excepts taxes, fees and charges for the registration and issuance of
licenses or permits for the driving of tricycles. It may also be observed that within the body itself of the section,
there are exceptions which can be found only in other parts of the LGC, but the section interchangeably uses
therein the clause except as otherwise provided herein as in items (c) and (i), or the clause except as provided
in this Code in item (j). These clauses would be obviously unnecessary or mere surplusages if the opening
clause of the section were Unless otherwise provided in this Code instead of Unless otherwise provided
herein. In any event, even if the latter is used, since under Section 232 local government units have the power
to levy real property tax, except those exempted therefrom under Section 234, then Section 232 must be
deemed to qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as laid
down in Section 133, the taxing powers of local government units cannot extend to the levy of, inter alia, taxes,
fees and charges of any kind on the National Government, its agencies and instrumentalities, and local
government units; however, pursuant to Section 232, provinces, cities, and municipalities in the Metropolitan
Manila Area may impose the real property tax except on, inter alia, real property owned by the Republic of the
Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person, as provided in item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons, including
government-owned and controlled corporations, Section 193 of the LGC prescribes the general rule, viz., they
are withdrawn upon the effectivity of the LGC, except those granted to local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, and unless
otherwise provided in the LGC. The latter proviso could refer to Section 234 which enumerates the properties
exempt from real property tax. But the last paragraph of Section 234 further qualifies the retention of the
exemption insofar as real property taxes are concerned by limiting the retention only to those enumerated
therein; all others not included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover,
even as to real property owned by the Republic of the Philippines or any of its political subdivisions covered by
item (a) of the first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property
has been granted to a taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons, including governmentowned or controlled corporations, except as provided in the said section, and the petitioner is, undoubtedly, a
government-owned corporation, it necessarily follows that its exemption from such tax granted it in Section 14
of its Charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be justified if the
petitioner can seek refuge under any of the exceptions provided in Section 234, but not under Section 133, as
it now asserts, since, as shown above, the said section is qualified by Sections 232 and 234.
In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing powers of the
local government units cannot extend to the levy of:
(o) taxes, fees or charges of any kind on the National Government, its agencies or instrumentalities, and local government
units.
It must show that the parcels of land in question, which are real property, are any one of those enumerated in
Section 234, either by virtue of ownership, character, or use of the property.Most likely, it could only be the first,
but not under any explicit provision of the said section, for none exists. In light of the petitioners theory that it is
an instrumentality of the Government, it could only be within the first item of the first paragraph of the section

by expanding the scope of the term Republic of the Philippines to embrace its instrumentalities and agencies.
For expediency, we quote:
(a) real property owned by the Republic of the Philippines, or any of its political subdivisions except when the beneficial
use thereof has been granted, for consideration or otherwise, to a taxable person.
This view does not persuade us. In the first place, the petitioners claim that it is an instrumentality of the
Government is based on Section 133(o), which expressly mentions the word instrumentalities; and, in the
second place, it fails to consider the fact that the legislature used the phrase National Government, its
agencies and instrumentalities in Section 133(o), but only the phrase Republic of the Philippines or any of its
political subdivisions in Section 234(a).
The terms Republic of the Philippines and National Government are not interchangeable. The former is
broader and synonymous with Government of the Republic of the Philippines which the Administrative Code of
1987 defines as the corporate governmental entity through which the functions of government are exercised
throughout the Philippines, including, save as the contrary appears from the context, the various arms through
which political authority is made affective in the Philippines, whether pertaining to the autonomous regions, the
provincial, city, municipal or barangay subdivisions or other forms of local government. [27] These autonomous
regions, provincial, city, municipal or barangay subdivisions are the political subdivisions.[28]
On the other hand, National Government refers to the entire machinery of the central government, as
distinguished from the different forms of local governments. [29] The National Government then is composed of
the three great departments: the executive, the legislative and the judicial.[30]
An agency of the Government refers to any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local
government or a distinct unit therein;[31] while an instrumentality refers to any agency of the National
Government, not integrated within the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and
government-owned and controlled corporations.[32]
If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption from
payment of real property taxes under the last sentence of the said section to the agencies and instrumentalities
of the National Government mentioned in Section 133(o), then it should have restated the wording of the
latter. Yet, it did not. Moreover, that Congress did not wish to expand the scope of the exemption in Section
234(a) to include real property owned by other instrumentalities or agencies of the government including
government-owned and controlled corporations is further borne out by the fact that the source of this
exemption is Section 40(a) of P.D. No. 464, otherwise known as The Real Property Tax Code, which reads:
SEC. 40. Exemptions from Real Property Tax. The exemption shall be as follows:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions and any government-owned
or controlled corporation so exempt by its charter: Provided, however, That this exemption shall not apply to real property
of the above-mentioned entities the beneficial use of which has been granted, for consideration or otherwise, to a taxable
person.
Note that as reproduced in Section 234(a), the phrase and any government-owned or controlled corporation so
exempt by its charter was excluded. The justification for this restricted exemption in Section 234(a) seems
obvious: to limit further tax exemption privileges, especially in light of the general provision on withdrawal of tax
exemption privileges in Section 193 and the special provision on withdrawal of exemption from payment of real
property taxes in the last paragraph of Section 234. These policy considerations are consistent with the State

policy to ensure autonomy to local governments [33] and the objective of the LGC that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and
make them effective partners in the attainment of national goals. [34] The power to tax is the most effective
instrument to raise needed revenues to finance and support myriad activities of local government units for the
delivery of basic services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other
units of government were that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, and there was a need for these entities to share in the requirements
of development, fiscal or otherwise, by paying the taxes and other charges due from them.[35]
The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to the
Republic of the Philippines whose beneficial use has been granted to the petitioner, and (b) whether the
petitioner is a taxable person.
Section 15 of the petitioners Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public airport facilities, runways, lands,
buildings and other properties, movable or immovable, belonging to or presently administered by the airports, and all
assets, powers, rights, interests and privileges relating on airport works or air operations, including all equipment which
are necessary for the operations of air navigation, aerodrome control towers, crash, fire, and rescue facilities are hereby
transferred to the Authority: Provided, however, that the operations control of all equipment necessary for the operation of
radio aids to air navigation, airways communication, the approach control office, and the area control center shall be
retained by the Air Transportation Office. No equipment, however, shall be removed by the Air Transportation Office
from Mactan without the concurrence of the Authority. The Authority may assist in the maintenance of the Air
Transportation Office equipment.
The airports referred to are the Lahug Air Port in Cebu City and the Mactan International Airport in the
Province of Cebu,[36] which belonged to the Republic of the Philippines, then under the Air Transportation Office
(ATO).[37]
It may be reasonable to assume that the term lands refer to lands in Cebu City then administered by the
Lahug Air Port and includes the parcels of land the respondent City of Cebu seeks to levy on for real property
taxes. This section involves a transfer of the lands, among other things, to the petitioner and not just the
transfer of the beneficial use thereof, with the ownership being retained by the Republic of the Philippines.
This transfer is actually an absolute conveyance of the ownership thereof because the petitioners
authorized capital stock consists of, inter alia, the value of such real estate owned and/or administered by the
airports.[38] Hence, the petitioner is now the owner of the land in question and the exception in Section 234(c) of
the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a taxable person under its Charter. It was only
exempted from the payment of real property taxes. The grant of the privilege only in respect of this tax is
conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real property
tax.
Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, in light of
the foregoing disquisitions, it had already become, even if it be conceded to be an agency or instrumentality of
the Government, a taxable person for such purpose in view of the withdrawal in the last paragraph of Section
234 of exemptions from the payment of real property taxes, which, as earlier adverted to, applies to the
petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine
Amusement and Gaming Corporation[39] is unavailing since it was decided before the effectivity of the
LGC. Besides, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the
Government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and order of the Regional Trial
Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.
No pronouncement as to costs.
SO ORDEr
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 149110

April 9, 2003

NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated March 12, 2001 and
July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable to pay franchise tax to
respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under Commonwealth Act No. 120, as
amended.4 It is tasked to undertake the "development of hydroelectric generations of power and the production of
electricity from nuclear, geothermal and other sources, as well as, the transmission of electric power on a nationwide
basis."5 Concomitant to its mandated duty, petitioner has, among others, the power to construct, operate and
maintain power plants, auxiliary plants, power stations and substations for the purpose of developing hydraulic
power and supplying such power to the inhabitants.6
For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a gross income of
P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92, 8 the respondent assessed the petitioner
a franchise tax amounting to P808,606.41, representing 75% of 1% of the latter's gross receipts for the preceding
year.9
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine Government, 10 refused to pay the
tax assessment. It argued that the respondent has no authority to impose tax on government entities. Petitioner also
contended that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or
fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and
Other Charges by Government and Governmental Instrumentalities.- The Corporation shall be non-profit
and shall devote all its return from its capital investment, as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and

effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby
exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines,
its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum
products used by the Corporation in the generation, transmission, utilization, and sale of electric power." 12
The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that petitioner pay
the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and 2% monthly
interest.13Respondent alleged that petitioner's exemption from local taxes has been repealed by section 193 of Rep.
Act No. 7160,14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax exemptions
or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including
government owned or controlled corporations, except local water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn
upon the effectivity of this Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax exemption privileges
granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the following reasons: (1) Rep. Act No.
6395 is a particular law and it may not be repealed by Rep. Act No. 7160 which is a general law; (2) section 193 of
Rep. Act No. 7160 is in the nature of an implied repeal which is not favored; and (3) local governments have no
power to tax instrumentalities of the national government. Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or not by a subsequent law is a matter of
legislative intent. The lawmakers may expressly repeal a law by incorporating therein repealing provisions
which expressly and specifically cite(s) the particular law or laws, and portions thereof, that are intended to
be repealed. A declaration in a statute, usually in its repealing clause, that a particular and specific law,
identified by its number or title is repealed is an express repeal; all others are implied repeal. Sec. 193 of
R.A. No. 7160 is an implied repealing clause because it fails to identify the act or acts that are intended to be
repealed. It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored. The presumption is against inconsistency and repugnancy for the legislative is presumed to know
the existing laws on the subject and not to have enacted inconsistent or conflicting statutes. It is also a wellsettled rule that, generally, general law does not repeal a special law unless it clearly appears that the
legislative has intended by the latter general act to modify or repeal the earlier special law. Thus, despite the
passage of R.A. No. 7160 from which the questioned Ordinance No. 165-92 was based, the tax exemption
privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme Court in the case of Basco vs.
Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held that:
'Local governments have no power to tax instrumentalities of the National Government. PAGCOR is
a government owned or controlled corporation with an original charter, PD 1869. All of its shares of
stocks are owned by the National Government. xxx Being an instrumentality of the government,

PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by mere local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation with an original charter and its
shares of stocks owned by the National Government, is beyond the taxing power of the Local Government.
Corollary to this, it should be noted here that in the NPC Charter's declaration of Policy, Congress declared
that: 'xxx (2) the total electrification of the Philippines through the development of power from all services to
meet the needs of industrial development and dispersal and needs of rural electrification are primary
objectives of the nations which shall be pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions.' (underscoring supplied). To allow plaintiff to
subject defendant to its tax-ordinance would be to impede the avowed goal of this government
instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is limited to that
which is provided for in its charter or other statute. Any grant of taxing power is to be construed strictly, with
doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff could not
impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193, in relation to
sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the petitioner.18 It ordered the
petitioner to pay the respondent city government the following: (a) the sum of P808,606.41 representing the
franchise tax due based on gross receipts for the year 1992, (b) the tax due every year thereafter based in the gross
receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax due and unpaid, and (d) the sum of P
10,000.00 as litigation expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision. This was
denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated therein that the
taxing power of the province under Art. 137 (sic) of the Local Government Code refers merely to private
persons or corporations in which category it (NPC) does not belong, and that the LGC (RA 7160) which is a
general law may not impliedly repeal the NPC Charter which is a special lawfinds the answer in Section
193 of the LGC to the effect that 'tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled corporations except local
water districts xxx are hereby withdrawn.' The repeal is direct and unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-PROFIT
CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER THAT SECTION
137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131 APPLIES ONLY TO PRIVATE
PERSONS OR CORPORATIONS ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION FROM ALL
FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL GOVERNMENT CODE
AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE
CONSTRUED TO HAVE REPEALED A SPECIAL LAW.

C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE OF

POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL GOVERNMENT
CODE."21
It is beyond dispute that the respondent city government has the authority to issue Ordinance No. 165-92 and
impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in relation to section 137 of the
LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of
one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of
the capital investment. In the succeeding calendar year, regardless of when the business started to operate,
the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as
provided herein." (emphasis supplied)
x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may levy the taxes,
fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees
and charges levied and collected by highly urbanized and independent component cities shall accrue to
them and distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city government. It
contends that sections 137 and 151 of the LGC in relation to section 131, limit the taxing power of the respondent
city government to private entities that are engaged in trade or occupation for profit. 22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest which is
conferred upon private persons or corporations, under such terms and conditions as the government and its political
subdivisions may impose in the interest of the public welfare, security and safety." From the phraseology of this
provision, the petitioner claims that the word "private" modifies the terms "persons" and "corporations." Hence, when
the LGC uses the term "franchise," petitioner submits that it should refer specifically to franchises granted to private
natural persons and to private corporations.23 Ergo, its charter should not be considered a "franchise" for the
purpose of imposing the franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity regularly engaged
in as means of livelihood or with a view to profit." Petitioner claims that it is not engaged in an activity for profit, in as
much as its charter specifically provides that it is a "non-profit organization." In any case, petitioner argues that the
accumulation of profit is merely incidental to its operation; all these profits are required by law to be channeled for
expansion and improvement of its facilities and services.24
Petitioner also alleges that it is an instrumentality of the National Government, 25 and as such, may not be taxed by
the respondent city government. It cites the doctrine in Basco vs. Philippine Amusement and Gaming
Corporation26 where this Court held that local governments have no power to tax instrumentalities of the National
Government, viz:
"Local governments have no power to tax instrumentalities of the National Government.

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is governmental, which
places it in the category of an agency or instrumentality of the Government. Being an instrumentality of the
Government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by a mere local government.
'The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the powers
vested in the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government over local governments.
'Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on
the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision
can regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even seriously burden it from accomplishment of them.' (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activities or enterprise using the power to tax as ' a tool
regulation' (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch v.
Maryland,supra) cannot be allowed to defeat an instrumentality or creation of the very entity which has the
inherent power to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of government-owned or
controlled corporations, is in the nature of an implied repeal. A special law, its charter cannot be amended or
modified impliedly by the local government code which is a general law. Consequently, petitioner claims that its
exemption from all taxes, fees or charges under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by implication are not favored and as
much as possible, effect must be given to all enactments of the legislature. Moreover, it has to be conceded
that the charter of the NPC constitutes a special law. Republic Act No. 7160, is a general law. It is a basic
rule in statutory construction that the enactment of a later legislation which is a general law cannot be
construed to have repealed a special law. Where there is a conflict between a general law and a special
statute, the special statute should prevail since it evinces the legislative intent more clearly than the general
statute."28
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should prevail over the
LGC. It alleges that the power of the local government to impose franchise tax is subordinate to petitioner's
exemption from taxation; "police power being the most pervasive, the least limitable and most demanding of all
powers, including the power of taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist nor endure. A
principal attribute of sovereignty,31 the exercise of taxing power derives its source from the very existence of the
state whose social contract with its citizens obliges it to promote public interest and common good. The theory
behind the exercise of the power to tax emanates from necessity; 32 without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has
become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection

of local industries as well as public welfare and similar objectives.33 Taxation assumes even greater significance with
the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress;
local legislative bodies are now given direct authority to levy taxes, fees and other charges 34 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."35 The only way to shatter this culture of dependence is to give
the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own
sources for the purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to
enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and
limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide for a more responsive
and accountable local government structure instituted through a system of decentralization with effective
mechanisms of recall, initiative, and referendum, allocate among the different local government units their
powers, responsibilities, and resources, and provide for the qualifications, election, appointment and
removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to
the organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160, 36 also known as the Local Government Code of 1991
(LGC), various measures have been enacted to promote local autonomy. These include the Barrio Charter of
1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of 196739 and the Local Government Code of
1983.40 Despite these initiatives, however, the shackles of dependence on the national government remained. Local
government units were faced with the same problems that hamper their capabilities to participate effectively in the
national development efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external
sources of income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence on
external sources of income, and (e) limited supervisory control over personnel of national line agencies. 41
Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively deals with the
fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by previous
laws such as the imposition of taxes on forest products, forest concessionaires, mineral products, mining operations,
and the like. The LGC likewise provides enough flexibility to impose tax rates in accordance with their needs and
capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates
and leaves the determination of the actual rates to the respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and
agencies of the national government from the coverage of local taxation. Although as a general rule, LGUs cannot
impose taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, this rule
now admits an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or
charges on the aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the Local Government Units.- Unless otherwise
provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall
not extend to the levy of the following:
x

(o) Taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, and
local government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement and Gaming
Corporation44 relied upon by the petitioner to support its claim no longer applies. To emphasize, the Basco case was
decided prior to the effectivity of the LGC, when no law empowering the local government units to tax
instrumentalities of the National Government was in effect. However, as this Court ruled in the case of Mactan Cebu
International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents Congress from decreeing that even
instrumentalities or agencies of the government performing governmental functions may be subject to tax. 46 In
enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees
fit. Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an instrumentality
of the national government, was subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as laid
down in section 133, the taxing power of local governments cannot extend to the levy of inter alia, 'taxes,
fees and charges of any kind on the national government, its agencies and instrumentalities, and local
government units'; however, pursuant to section 232, provinces, cities and municipalities in the Metropolitan
Manila Area may impose the real property tax except on, inter alia, 'real property owned by the Republic of
the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted
for consideration or otherwise, to a taxable person as provided in the item (a) of the first paragraph of
section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the respondent city
government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority, which does not belong to
citizens of the country generally as a matter of common right. 48 In its specific sense, a franchise may refer to a
general or primary franchise, or to a special or secondary franchise. The former relates to the right to exist as a
corporation, by virtue of duly approved articles of incorporation, or a charter pursuant to a special law creating the
corporation.49 The right under a primary or general franchise is vested in the individuals who compose the
corporation and not in the corporation itself.50 On the other hand, the latter refers to the right or privileges conferred
upon an existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect poles
or string wires.51 The rights under a secondary or special franchise are vested in the corporation and may ordinarily
be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such
special or secondary franchises as are charged with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or special
franchise. This is to avoid any confusion when the word franchise is used in the context of taxation. As commonly
used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising corporate
franchises granted by the state."53 It is not levied on the corporation simply for existing as a corporation, upon its
property54 or its income,55 but on its exercise of the rights or privileges granted to it by the government. Hence, a
corporation need not pay franchise tax from the time it ceased to do business and exercise its franchise. 56 It is within
this context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be interpreted
and understood. Verily, to determine whether the petitioner is covered by the franchise tax in question, the following
requisites should concur: (1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and
(2) that it is exercising its rights or privileges under this franchise within the territory of the respondent city
government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395, constitutes
petitioner's primary and secondary franchises. It serves as the petitioner's charter, defining its composition,
capitalization, the appointment and the specific duties of its corporate officers, and its corporate life span. 57 As its
secondary franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following powers which are
not available to ordinary corporations, viz:

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

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

Petitioner also fulfills the second requisite. It is operating within the respondent city government's territorial
jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as amended. From its operations in
the City of Cabanatuan, petitioner realized a gross income of P107,814,187.96 in 1992. Fulfilling both requisites,
petitioner is, and ought to be, subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because its stocks are
wholly owned by the National Government, and its charter characterized it as a "non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a
privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual
stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National
Government. It can sue and be sued under its own name,61 and can exercise all the powers of a corporation under
the Corporation Code.62
To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that
petitioner is not engaged in business. Section 2 of Pres. Decree No. 2029 63 classifies government-owned or
controlled corporations (GOCCs) into those performing governmental functions and those performing proprietary
functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock corporation, whether performing
governmental or proprietary functions, which is directly chartered by special law or if organized under the
general corporation law is owned or controlled by the government directly, or indirectly through a parent
corporation or subsidiary corporation, to the extent of at least a majority of its outstanding voting capital
stock x x x." (emphases supplied)
Governmental functions are those pertaining to the administration of government, and as such, are treated as
absolute obligation on the part of the state to perform while proprietary functions are those that are undertaken only
by way of advancing the general interest of society, and are merely optional on the government. 64 Included in the
class of GOCCs performing proprietary functions are "business-like" entities such as the National Steel Corporation
(NSC), the National Development Corporation (NDC), the Social Security System (SSS), the Government Service
Insurance System (GSIS), and the National Water Sewerage Authority (NAWASA), 65 among others.
Petitioner was created to "undertake the development of hydroelectric generation of power and the production of
electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide
basis."66 Pursuant to this mandate, petitioner generates power and sells electricity in bulk. Certainly, these activities
do not partake of the sovereign functions of the government. They are purely private and commercial undertakings,
albeit imbued with public interest. The public interest involved in its activities, however, does not distract from the
true nature of the petitioner as a commercial enterprise, in the same league with similar public utilities like telephone
and telegraph companies, railroad companies, water supply and irrigation companies, gas, coal or light companies,
power plants, ice plant among others; all of which are declared by this Court as ministrant or proprietary functions of
government aimed at advancing the general interest of society.67
A closer reading of its charter reveals that even the legislature treats the character of the petitioner's enterprise as a
"business," although it limits petitioner's profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or necessary for the proper
transaction of its business or to carry out the purposes for which it was organized, to contract indebtedness
and issue bonds subject to approval of the President upon recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably necessary to carry out the business
and purposes for which it was organized, or which, from time to time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to accomplish the said purpose xxx."(emphases supplied)

It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its electricity
requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on profits. 69 The main
difference is that the petitioner is mandated to devote "all its returns from its capital investment, as well as excess
revenues from its operation, for expansion"70 while other franchise holders have the option to distribute their profits
to its stockholders by declaring dividends. We do not see why this fact can be a source of difference in tax
treatment. In both instances, the taxable entity is the corporation, which exercises the franchise, and not the
individual stockholders.
We also do not find merit in the petitioner's contention that its tax exemptions under its charter subsist despite the
passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist clearly
and categorically, and supported by clear legal provisions.71 In the case at bar, the petitioner's sole refuge is section
13 of Rep. Act No. 6395 exempting from, among others, "all income taxes, franchise taxes and realty taxes to be
paid to the National Government, its provinces, cities, municipalities and other government agencies and
instrumentalities." However, section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax
privileges previously enjoyed by private and public corporations. Contrary to the contention of petitioner, section 193
of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions from local taxes. 72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax exemptions
or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including
government-owned or controlled corporations, except local water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn
upon the effectivity of this Code." (emphases supplied)
It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence
excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius.73 Not being a local
water district, a cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital or educational
institution, petitioner clearly does not belong to the exception. It is therefore incumbent upon the petitioner to point to
some provisions of the LGC that expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can impose franchise
tax "notwithstanding any exemption granted by any law or other special law." This particular provision of the LGC
does not admit any exception. In City Government of San Pablo, Laguna v. Reyes,74 MERALCO's exemption from
the payment of franchise taxes was brought as an issue before this Court. The same issue was involved in the
subsequent case of Manila Electric Company v. Province of Laguna.75 Ruling in favor of the local government in both
instances, we ruled that the franchise tax in question is imposable despite any exemption enjoyed by MERALCO
under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to support
their position that MERALCO's tax exemption has been withdrawn. The explicit language of section 137
which authorizes the province to impose franchise tax 'notwithstanding any exemption granted by any law or
other special law' is all-encompassing and clear. The franchise tax is imposable despite any exemption
enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless otherwise
provided in this Code, tax exemptions or incentives granted to or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled corporations except (1) local water districts,
(2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit hospitals and educational
institutions, are withdrawn upon the effectivity of this code, the obvious import is to limit the exemptions to
the three enumerated entities. It is a basic precept of statutory construction that the express mention of one
person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius
est exclusio alterius. In the absence of any provision of the Code to the contrary, and we find no other

provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing law was
clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local government
unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the
preceding calendar based on the incoming receipts realized within its territorial jurisdiction. The legislative
purpose to withdraw tax privileges enjoyed under existing law or charter is clearly manifested by the
language used on (sic) Sections 137 and 193 categorically withdrawing such exemption subject only to the
exceptions enumerated. Since it would be not only tedious and impractical to attempt to enumerate all the
existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit
general, withdrawal of such exemptions or privileges. No more unequivocal language could have been
used."76 (emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly approved, to grant
tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which imposes an annual
franchise tax "notwithstanding any exemption granted by law or other special law," the respondent city government
clearly did not intend to exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support myriad
activities of the local government units for the delivery of basic services essential to the promotion of the general
welfare and the enhancement of peace, progress, and prosperity of the people. As this Court observed in
the Mactan case, "the original reasons for the withdrawal of tax exemption privileges granted to government-owned
or controlled corporations and all other units of government were that such privilege resulted in serious tax base
erosion and distortions in the tax treatment of similarly situated enterprises." 78 With the added burden of devolution,
it is even more imperative for government entities to share in the requirements of development, fiscal or otherwise,
by paying taxes or other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the Court of
Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED.
SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

SECOND DIVISION[G.R. No. 152675. April 28, 2004]

BATANGAS POWER CORPORATION, petitioner, vs. BATANGAS CITY and NATIONAL POWER
CORPORATION, respondents.
[G.R. No. 152771. April 28, 2004]
NATIONAL POWER CORPORATION, petitioner, vs. HON. RICARDO R. ROSARIO, in his
capacity as Presiding Judge, RTC, Br. 66, Makati City; BATANGAS CITY GOVERNMENT;
ATTY. TEODULFO DEGUITO, in his capacity as Chief Legal Officer, Batangas City; and
BENJAMIN PARGAS, in his capacity as City Treasurer, Batangas City, respondents.
DECISION
PUNO, J.:

Before us are two (2) consolidated petitions for review under Rule 45 of the Rules of Civil
Procedure, seeking to set aside the rulings of the Regional Trial Court of Makati in its February 27,
2002 Decision in Civil Case No. 00-205.
The facts show that in the early 1990s, the country suffered from a crippling power crisis. Power
outages lasted 8-12 hours daily and power generation was badly needed. Addressing the problem,
the government, through the National Power Corporation (NPC), sought to attract investors in power
plant operations by providing them with incentives, one of which was through the NPCs assumption
of payment of their taxes in the Build Operate and Transfer (BOT) Agreement.
On June 29, 1992, Enron Power Development Corporation (Enron) and petitioner NPC entered
into a Fast Track BOT Project. Enron agreed to supply a power station to NPC and transfer its plant
to the latter after ten (10) years of operation. Section 11.02 of the BOT Agreement provided that NPC
shall be responsible for the payment of all taxes that may be imposed on the power station, except
income taxes and permit fees. Subsequently, Enron assigned its obligation under the BOT Agreement
to petitioner Batangas Power Corporation (BPC).
On September 13, 1992, BPC registered itself with the Board of Investments (BOI) as a pioneer
enterprise. On September 23, 1992, the BOI issued a certificate of registration to BPC as a pioneer
enterprise entitled to a tax holiday for a period of six (6) years. The construction of the power station
in respondent Batangas City was then completed. BPC operated the station.
[1]

On October 12, 1998, Batangas City (the city, for brevity), thru its legal officer Teodulfo A.
Deguito, sent a letter to BPC demanding payment of business taxes and penalties, commencing from
the year 1994 as provided under Ordinance XI or the 1992 Batangas City Tax Code. BPC refused to
pay, citing its tax-exempt status as a pioneer enterprise for six (6) years under Section 133 (g) of the
Local Government Code (LGC).
[2]

[3]

On April 15, 1999, city treasurer Benjamin S. Pargas modified the citys tax claim and demanded
payment of business taxes from BPC only for the years 1998-1999. He acknowledged that BPC
enjoyed a 6-year tax holiday as a pioneer industry but its tax exemption period expired on September
22, 1998, six (6) years after its registration with the BOI on September 23, 1992. The city treasurer
held that thereafter BPC became liable to pay its business taxes.
[4]

BPC still refused to pay the tax. It insisted that its 6-year tax holiday commenced from the date of
its commercial operation on July 16, 1993, not from the date of its BOI registration in September
1992. It furnished the city with a BOI letter wherein BOI designated July 16, 1993 as the start of
BPCs income tax holiday as BPC was not able to immediately operate due to force majeure. BPC
claimed that the local tax holiday is concurrent with the income tax holiday. In the alternative, BPC
asserted that the city should collect the tax from the NPC as the latter assumed responsibility for its
payment under their BOT Agreement.
[5]

[6]

The matter was not put to rest. The city legal officer insisted that BPCs tax holiday has already
expired, while the city argued that it directed its tax claim to BPC as it is the entity doing business in
the city and hence liable to pay the taxes. The city alleged that it was not privy to NPCs assumption of
BPCs tax payment under their BOT Agreement as the only parties thereto were NPC and BPC.
[7]

BPC adamantly refused to pay the tax claims and reiterated its position. The city was likewise
unyielding on its stand. On August 26, 1999, the NPC intervened. While admitting assumption of
BPCs tax obligations under their BOT Agreement, NPC refused to pay BPCs business tax as it
allegedly constituted an indirect tax on NPC which is a tax-exempt corporation under its Charter.
[8]

[9]

[10]

[11]

In view of the deadlock, BPC filed a petition for declaratory relief with the Makati Regional Trial
Court (RTC) against Batangas City and NPC, praying for a ruling that it was not bound to pay the
business taxes imposed on it by the city. It alleged that under the BOT Agreement, NPC is
responsible for the payment of such taxes but as NPC is exempt from taxes, both the BPC and NPC
are not liable for its payment. NPC and Batangas City filed their respective answers.
[12]

On February 23, 2000, while the case was still pending, the city refused to issue a permit to BPC
for the operation of its business unless it paid the assessed business taxes amounting to close
to P29M.
In view of this supervening event, BPC, whose principal office is in Makati City, filed a
supplemental petition with the Makati RTC to convert its original petition into an action for injunction
to enjoin the city from withholding the issuance of its business permit and closing its power plant. The
city opposed on the grounds of lack of jurisdiction and lack of cause of action. The Supplemental
Petition was nonetheless admitted by the Makati RTC.
[13]

[14]

On February 27, 2002, the Makati RTC dismissed the petition for injunction. It held that: (1) BPC
is liable to pay business taxes to the city; (2) NPCs tax exemption was withdrawn with the passage of
R.A. No. 7160 (The Local Government Code); and, (3) the 6-year tax holiday granted to pioneer
business enterprises starts on the date of registration with the BOI as provided in Section 133 (g) of
R.A. No. 7160, and not on the date of its actual business operations.
[15]

BPC and NPC filed with this Court a petition for review on certiorari assailing the Makati RTC
decision. The petitions were consolidated as they impugn the same decision, involve the same
parties and raise related issues.
[16]

[17]

In G.R. No. 152771, the NPC contends:

I

RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR

EXCESS OF JURISDICTION WHEN IT ARBITRARILY AND CAPRICIOUSLY RULED THAT
PETITIONER NPC HAS LOST ITS TAX EXEMPTION PRIVILEGE BECAUSE SECTION 193 OF R.A.
7160 (LOCAL GOVERNMENT CODE) HAS WITHDRAWN SUCH PRIVILEGE DESPITE THE SETTLED
JURISPRUDENCE THAT THE ENACTMENT OF A LEGISLATION, WHICH IS A GENERAL LAW,
CANNOT REPEAL A SPECIAL LAW AND THAT SECTION 13 OF R.A. 6395 (NPC LAW) WAS NOT
SPECIFICALLY MENTIONED IN THE REPEALING CLAUSE IN SECTION 534 OF R.A. 7160, AMONG
OTHERS.
II

RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR

EXCESS OF JURISDICTION WHEN IT ARBITRARILY AND CAPRICIOUSLY OMITTED THE CLEAR
PROVISION OF SECTION 133, PARAGRAPH (O) OF R.A. 7160 WHICH EXEMPTS NATIONAL
GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES FROM THE IMPOSITION OF TAXES,
FEES OR CHARGES OF ANY KIND.
III

RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR

EXCESS OF JURISDICTION WHEN IT ERRONEOUSLY AND CAPRICIOUSLY ADMITTED BPCs
SUPPLEMENTAL PETITION FOR INJUNCTION NOTWITHSTANDING THAT IT HAD NO
JURISDICTION OVER THE PARTY (CITY GOVERNMENT OF BATANGAS) SOUGHT TO BE
ENJOINED.
In G.R. No. 152675, BPC also contends that the trial court erred: 1) in holding it liable for
payment of business taxes even if it is undisputed that NPC has already assumed payment thereof;
and, 2) in ruling that BPCs 6-year tax holiday commenced on the date of its registration with the BOI
as a pioneer enterprise.
The issues for resolution are:
1. whether BPCs 6-year tax holiday commenced on the date of its BOI registration as a pioneer enterprise or on
the date of its actual commercial operation as certified by the BOI;
2. whether the trial court had jurisdiction over the petition for injunction against Batangas City; and,
3. whether NPCs tax exemption privileges under its Charter were withdrawn by Section 193 of the Local
Government Code (LGC).

We find no merit in the petition.

On the first issue, petitioners BPC and NPC contend that contrary to the impugned decision,
BPCs 6-year tax holiday should commence on the date of its actual commercial operations as
certified to by the BOI, not on the date of its BOI registration.
We disagree. Sec. 133 (g) of the LGC, which proscribes local government units (LGUs) from
levying taxes on BOI-certified pioneer enterprises for a period of six years from the date of
registration, applies specifically to taxes imposed by the local government, like the business
tax imposed by Batangas City on BPC in the case at bar. Reliance of BPC on the provision

of Executive Order No. 226, specifically Section 1, Article 39, Title III, is clearly misplaced as
the six-year tax holiday provided therein which commences from the date of commercial
operation refers to income taxes imposed by the national government on BOI-registered pioneer
firms. Clearly, it is the provision of the Local Government Code that should apply to the tax claim of
Batangas City against the BPC. The 6-year tax exemption of BPC should thus commence from the
date of BPCs registration with the BOI on July 16, 1993 and end on July 15, 1999.
[18]

Anent the second issue, the records disclose that petitioner NPC did not oppose BPCs
conversion of the petition for declaratory relief to a petition for injunction or raise the issue of the
alleged lack of jurisdiction of the Makati RTC over the petition for injunction before said court. Hence,
NPC is estopped from raising said issue before us. The fundamental rule is that a party cannot be
allowed to participate in a judicial proceeding, submit the case for decision, accept the judgment only
if it is favorable to him but attack the jurisdiction of the court when it is adverse.
[19]

Finally, on the third issue, petitioners insist that NPCs exemption from all taxes under its Charter
had not been repealed by the LGC. They argue that NPCs Charter is a special law which cannot be
impliedly repealed by a general and later legislation like the LGC. They likewise anchor their claim of
tax-exemption on Section 133 (o) of the LGC which exempts government instrumentalities, such as
the NPC, from taxes imposed by local government units (LGUs), citing in support thereof the case
of Basco v. PAGCOR.
[20]

We find no merit in these contentions. The effect of the LGC on the tax exemption privileges of
the NPC has already been extensively discussed and settled in the recent case ofNational Power
Corporation v. City of Cabanatuan. In said case, this Court recognized the removal of the
blanket exclusion of government instrumentalities from local taxation as one of the most
significant provisions of the 1991 LGC. Specifically, we stressed that Section 193 of the LGC,
an express and general repeal of all statutes granting exemptions from local taxes, withdrew the
sweeping tax privileges previously enjoyed by the NPC under its Charter. We explained the
rationale for this provision, thus:
[21]

[22]

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 assumes even greater
significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other
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 countrys
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, x x x 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 x.
To recall, prior to the enactment of the x x x Local Government Code x x x, various measures have been enacted
to promote local autonomy. x x x Despite these initiatives, however, the shackles of dependence on the national
government remained. Local government units were faced with the same problems that hamper their
capabilities to participate effectively in the national development efforts, among which are: (a) inadequate tax
base, (b) lack of fiscal control over external sources of income, (c) limited authority to prioritize and approve
development projects, (d) heavy dependence on external sources of income, and (e) limited supervisory control
over personnel of national line agencies.
Considered as the most revolutionary piece of legislation on local autonomy, the LGC effectively deals with the
fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by
previous laws x x x.
Neither can the NPC successfully rely on the Basco case as this was decided prior to the
effectivity of the LGC, when there was still no law empowering local government units to tax
instrumentalities of the national government.
[23]

Consequently, when NPC assumed the tax liabilities of the BPC under their 1992 BOT
Agreement, the LGC which removed NPCs tax exemption privileges had already been in effect for six
(6) months. Thus, while BPC remains to be the entity doing business in said city, it is the NPC that is
ultimately liable to pay said taxes under the provisions of both the 1992 BOT Agreement and the 1991
Local Government Code.
IN VIEW WHEREOF, the petitions are DISMISSED. No costs.
SO ORDER

Republic of the Philippines

Supreme Court
Manila
THIRD DIVISION

QUEZON CITY and THE CITY G.R. No. 166408

TREASURER OF QUEZON CITY,
Petitioners,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
ABS-CBN BROADCASTING Promulgated:
CORPORATION,

Respondent. October 6, 2008

x--------------------------------------------------x
DECISION
REYES, R.T., J.:

CLAIMS for tax exemption must be based on language in law too plain to be mistaken. It cannot be made out of inference
or implication.
The principle is relevant in this petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) and
that[2] of the Regional Trial Court (RTC) ordering the refund and declaring invalid the imposition and collection of local
franchise tax by the City Treasurer of Quezon City on ABS-CBN Broadcasting Corporation (ABS-CBN).
The Facts
Petitioner City Government of Quezon City is a local government unit duly organized and existing by virtue of Republic
Act (R.A.) No. 537, otherwise known as the Revised Charter of Quezon City. Petitioner City Treasurer of Quezon City is
primarily responsible for the imposition and collection of taxes within the territorial jurisdiction of Quezon City.
Under Section 31, Article 13 of the Quezon City Revenue Code of 1993, [3] a franchise tax was imposed on
businesses operating within its jurisdiction. The provision states:
Section 31. Imposition of Tax. Any provision of special laws or grant of tax exemption to the
contrary notwithstanding, any person, corporation, partnership or association enjoying a franchise
whether issued by the national government or local government and, doing business in Quezon City, shall
pay a franchise tax at the rate of ten percent (10%) of one percent (1%) for 1993-1994, twenty percent
(20%) of one percent (1%) for 1995, and thirty percent (30%) of one percent (1%) for 1996 and the
succeeding years thereafter, of gross receipts and sales derived from the operation of the business in
Quezon City during the preceding calendar year.
On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and television broadcasting
stations in the Philippines under R.A. No. 7966.[4] Section 8 of R.A. No. 7966 provides the tax liabilities of ABSCBN which reads:
Section 8. Tax Provisions. The grantee, its successors or assigns, shall be liable to pay the same
taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or
corporations are now hereafter may be required by law to pay. In addition thereto, the grantee, its
successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts
of the radio/television business transacted under this franchise by the grantee, its successors or
assigns, and the said percentage tax shall be in lieu of all taxes on this franchise or earnings
thereof; Provided that the grantee, its successors or assigns shall continue to be liable for income taxes
under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive No. 72 unless the
latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable
thereto. (Emphasis added)

ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view of the above provision
in R.A. No. 9766 that it shall pay a franchise tax x x x in lieu of all taxes, the corporation developed the opinion that it is
not liable to pay the local franchise tax imposed by Quezon City. Consequently, ABS-CBN paid under protest the local
franchise tax imposed by Quezon City on the dates, in the amounts and under the official receipts as follows:
O.R. No. Date Amount Paid
2464274 07-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66[5]
On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax paid to Quezon City for 1996 and
for the first quarter of 1997 in the total amount of Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred
Eighty-Two and 29/100 centavos (P14,233,582.29) broken down as follows:
O.R. No Date Amount Paid
2536134 1-22-96 P 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
Total P14,233,582.29[6]

In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its claim for refund of local franchise
taxes paid.
On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer, ABS-CBN filed a complaint
before the RTC in Quezon City seeking the declaration of nullity of the imposition of local franchise tax by the City
Government of Quezon City for being unconstitutional. It likewise prayed for the refund of local franchise tax in the
amount of Nineteen Million Nine Hundred Forty-Four Thousand Six Hundred Seventy-Two and 66/100 centavos
(P19,944,672.66) broken down as follows:
O.R. No. Date Amount Paid
2464274 7-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66[7]
Quezon City argued that the in lieu of all taxes provision in R.A. No. 9766 could not have been intended to
prevail over a constitutional mandate which ensures the viability and self-sufficiency of local government units. Further,

that taxes collectible by and payable to the local government were distinct from taxes collectible by and payable to the
national government, considering that the Constitution specifically declared that the taxes imposed by local government
units shall accrue exclusively to the local governments. Lastly, the City contended that the exemption claimed by ABSCBN under R.A. No. 7966 was withdrawn by Congress when the Local Government Code (LGC) was passed. [8] Section
193 of the LGC provides:
Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government-owned or -controlled corporations, except local water
districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis added)
On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for refund the local franchise tax paid
for the third quarter of 1997 in the amount of Two Million Seven Hundred Thirty-One Thousand One Hundred ThirtyFive and 81/100 centavos (P2,731,135.81) and of other amounts of local franchise tax as may have been and will be paid
by ABS-CBN until the resolution of the case.
Quezon City insisted that the claim for refund must fail because of the absence of a prior written claim for it.
RTC and CA Dispositions
On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition on and collection from ABS-CBN of
local franchise tax paid pursuant to Quezon City Ordinance No. SP-91, S-93, after the enactment of R.A. No. 7966, and
ordered the refund of all payments made. The dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered declaring the imposition on and collection from
plaintiff ABS-CBN BROADCASTING CORPORATION of local franchise taxes pursuant to Quezon
City Ordinance No. SP-91, S-93 after the enactment of Republic Act No. 7966 to be invalid, and,
accordingly, the Court hereby orders the defendants to refund all its payments made after the effectivity of
its legislative franchise on May 3, 1995.
SO ORDERED.[9]
In its decision, the RTC ruled that the in lieu of all taxes provision contained in Section 8 of R.A. No. 7966 absolutely
excused ABS-CBN from the payment of local franchise tax imposed under Quezon City Ordinance No. SP-91, S-93. The
intent of the legislature to excuse ABS-CBN from payment of local franchise tax could be discerned from the usage of the
in lieu of all taxes provision and from the absence of any qualification except income taxes. Had Congress intended to
exclude taxes imposed from the exemption, it would have expressly mentioned so in a fashion similar to the proviso on
income taxes.
The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v. Cagayan Electric Power and Light
Company, Inc. (CEPALCO).[10] In said case, the exemption of respondent electric company CEPALCO from payment of
provincial franchise tax was upheld on the ground that the franchise of CEPALCO was a special law, while the Local Tax

Code, on which the provincial ordinance imposing the local franchise tax was based, was a general law. Further, it was
held that whenever there is a conflict between two laws, one special and particular and the other general, the special law
must be taken as intended to constitute an exception to the general act.
The RTC noted that the legislative franchise of ABS-CBN was granted years after the effectivity of the
LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No. 7966 was an exception since the legislature ought
to be presumed to have enacted it with the knowledge and awareness of the existence and prior enactment of Section
137[11] of the LGC.
In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan Electric Power and Light
Company, Inc. (CEPALCO),[12] ruled that the imposition of the local franchise tax was an impairment of ABS-CBNs
contract with the government. The imposition of another franchise on the corporation by the local authority would
constitute an impairment of the formers charter, which is in the nature of a private contract between it and the government.
As to the amounts to be refunded, the RTC rejected Quezon Citys position that a written claim for refund pursuant to
Section 196 of the LGC was a condition sine qua non before filing the case in court. The RTC ruled that although
Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos ( P14,233,582.29)
was the only amount stated in the letter to the Quezon City Treasurer claiming refund, ABS-CBN should nonetheless be
also refunded of all payments made after the effectivity of R.A. No. 7966. The inaction of the City Treasurer on the claim
for refund of ABS-CBN legally rendered any further claims for refund on the part of plaintiff absurd and futile in relation
to the succeeding payments.
The City of Quezon and its Treasurer filed a motion for reconsideration which was subsequently denied by the RTC. Thus,
appeal was made to the CA. On September 1, 2004, the CA dismissed the petition of Quezon City and its
Treasurer. According to the appellate court, the issues raised were purely legal questions cognizable only by the Supreme
Court. The CA ratiocinated:
For another, the issues which appellants submit for this Courts consideration are more of legal
query necessitating a legal opinion rather than a call for adjudication on the matter in dispute.
xxxx
The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan Electric
and Power Co., Inc. to be a legal one. There is no more argument to this.
The next issue although it may need the reexamination of the pertinent provisions of the local
franchise and the legislative franchise given to appellee, also needs no evaluation of facts.It suffices that
there may be a conflict which may need to be reconciled, without regard to the factual backdrop of the
case.
The last issue deals with a legal question, because whether or not there is a prior written claim for
refund is no longer in dispute. Rather, the question revolves on whether the said requirement may be
dispensed with, which obviously is not a factual issue. [13]

On September 23, 2004, petitioner moved for reconsideration. The motion was, however, denied by the CA in its
Resolution dated December 16, 2004. Hence, the present recourse.
Issues
Petitioner submits the following issues for resolution:
I.
Whether or not the phrase in lieu of all taxes indicated in the franchise of the respondent appellee (Section
8 of RA 7966) serves to exempt it from the payment of the local franchise tax imposed by the petitionersappellants.
II.
Whether or not the petitioners-appellants raised factual and legal issues before the Honorable Court of
Appeals.[14]
Our Ruling
The second issue, being procedural in nature, shall be dealt with immediately. But there are other resultant issues linked to
the first.
I. The dismissal by the CA of petitioners appeal is in order because it raised purely legal issues, namely:
1) Whether appellee, whose franchise expressly provides that its payment of franchise tax shall be in lieu
of all taxes in this franchise or earnings thereof, is absolutely excused from paying the franchise tax
imposed by appellants;
2) Whether appellants imposition of local franchise tax is a violation of appellees legislative franchise;
and

3) Whether one can do away with the requirement on prior written claim for refund. [15]
Obviously, these are purely legal questions, cognizable by this Court, to the exclusion of all other courts. There is a
question of law when the doubt or difference arises as to what the law is pertaining to a certain state of facts. [16]
Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA under Rule 41 raising only
questions of law is erroneous and shall be dismissed, issues of pure law not being within its jurisdiction. [17] Consequently,
the dismissal by the CA of petitioners appeal was in order.
In the recent case of Sevilleno v. Carilo,[18] this Court ruled that the dismissal of the appeal of petitioner was valid,
considering the issues raised there were pure questions of law, viz.:

Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being the wrong mode of
appeal. The appellate court held that since the issue being raised is whether the RTChas jurisdiction over
the subject matter of the case, which is a question of law, the appeal should have been elevated to the
Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure, as amended. Section 2, Rule 41 of
the same Rules which governs appeals from judgments and final orders of the RTC to the Court of
Appeals, provides:
SEC. 2. Modes of appeal.
(a) Ordinary appeal. The appeal to the Court of Appeals in cases decided by the Regional
Trial Court in the exercise of its original jurisdiction shall be taken by
filing a notice of appeal with the court which rendered the judgment or final order
appealed from and serving a copy thereof upon the adverse party. No record on
appeal shall be required except in special proceedings and other cases of multiple or
separate appeals where the law or these Rules so require. In such cases, the record
on appeal shall be filed and served in like manner.
(b) Petition for review. The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its appellate jurisdiction shall be by petition
for review in accordance with Rule 42.
(c) Appeal by certiorari. In all cases where only questions of law are raised or involved,
the appeal shall be to the Supreme Court by petition for review on certiorari in
accordance with Rule 45.
In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized the rule
on appeals as follows:
(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal may
be made to the Court of Appeals by mere notice of appeal where the appellant raises
questions of fact or mixed questions of fact and law;
(2) In all cases decided by the RTC in the exercise of its original jurisdiction where the
appellant raises only questions of law, the appeal must be taken to the Supreme
Court on a petition for review on certiorari under Rule 45;
(3) All appeals from judgments rendered by the RTC in the exercise of its appellate
jurisdiction, regardless of whether the appellant raises questions of fact, questions of
law, or mixed questions of fact and law, shall be brought to the Court of Appeals by
filing a petition for review under Rule 42.
It is not disputed that the issue brought by petitioners to the Court of Appeals involves the
jurisdiction of the RTC over the subject matter of the case. We have a long standing rule that a courts
jurisdiction over the subject matter of an action is conferred only by the Constitution or by
statute. Otherwise put, jurisdiction of a court over the subject matter of the action is a matter of
law. Consequently, issues which deal with the jurisdiction of a court over the subject matter of a case are
pure questions of law. As petitioners appeal solely involves a question of law, they should have directly
taken their appeal to this Court by filing a petition for review on certiorari under Rule 45, not an
ordinary appeal with the Court of Appeals under Rule 41. Clearly, the appellate court did not err in
holding that petitioners pursued the wrong mode of appeal.
Indeed, the Court of Appeals did not err in dismissing petitioners appeal. Section 2, Rule 50 of
the same Rules provides that an appeal from the RTC to the Court of Appeals raising only questions of
law shall be dismissed; and that an appeal erroneously taken to the Court of Appeals shall be dismissed
outright, x x x.[19] (Emphasis added)

However, to serve the demands of substantial justice and equity, the Court opts to relax procedural rules and rule
upon on the merits of the case. In Ong Lim Sing Jr. v. FEB Leasing and Finance Corporation,[20] this Court stated:
Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of
the duty to reconcile both the need to speedily put an end to litigation and the parties right to due
process. In numerous cases, this Court has allowed liberal construction of the rules when to do so would
serve the demands of substantial justice and equity. In Aguam v. Court of Appeals, the Court explained:
The court has the discretion to dismiss or not to dismiss an appellants appeal. It is
a power conferred on the court, not a duty. The discretion must be a sound one, to be
exercised in accordance with the tenets of justice and fair play, having in mind the
circumstances obtaining in each case. Technicalities, however, must be avoided. The law
abhors technicalities that impede the cause of justice. The courts primary duty is to render
or dispense justice. A litigation is not a game of technicalities. Lawsuits unlike duels are
not to be won by a rapiers thrust. Technicality, when it deserts its proper office as an aid
to justice and becomes its great hindrance and chief enemy, deserves scant consideration
from courts. Litigations must be decided on their merits and not on technicality. Every
party litigant must be afforded the amplest opportunity for the proper and just
determination of his cause, free from the unacceptable plea of technicalities. Thus,
dismissal of appeals purely on technical grounds is frowned upon where the policy of the
court is to encourage hearings of appeals on their merits and the rules of procedure ought
not to be applied in a very rigid, technical sense; rules of procedure are used only to help
secure, not override substantial justice. It is a far better and more prudent course of action
for the court to excuse a technical lapse and afford the parties a review of the case on
appeal to attain the ends of justice rather than dispose of the case on technicality and
cause a grave injustice to the parties, giving a false impression of speedy disposal of
cases while actually resulting in more delay, if not a miscarriage of justice. [21]
II. The in lieu of all taxes provision in its franchise does not exempt ABS-CBN from payment of local
franchise tax.
A. The present controversy essentially boils down to a dispute between the inherent taxing power of Congress and the
delegated authority to tax of local governments under the 1987 Constitution and effected under the LGC of 1991.
The power of the local government of Quezon City to impose franchise tax is based on Section 151 in relation to Section
137 of the LGC, to wit:
Section 137. Franchise Tax. Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty
percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on
the incoming receipt, or realized within its territorial jurisdiction. x x x
xxxx
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 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. (Emphasis supplied)

Such taxing power by the local government, however, is limited in the sense that Congress can enact legislation
granting exemptions. This principle was upheld in City Government of Quezon City, et al. v. Bayan Telecommunications,
Inc.[22] Said this Court:
This thus raises the question of whether or not the Citys Revenue Code pursuant to which the city
treasurer of Quezon City levied real property taxes against Bayantels real properties located within the
City effectively withdrew the tax exemption enjoyed by Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing that once again it is only liable to pay the
same taxes, as any other persons or corporations on all its real or personal properties, exclusive of its
franchise.
Bayantels posture is well-taken. While the system of local government taxation has changed with
the onset of the 1987 Constitution, the power of local government units to tax is still limited . As we
explained in Mactan Cebu International Airport Authority:
The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of
a valid delegation as before, but pursuant to direct authority conferred by Section 5,
Article X of the Constitution. Under the latter, the exercise of the power may be subject
to such guidelines and limitations as the Congress may provide which, however, must be
consistent with the basic policy of local autonomy. x x x
Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the
former doctrine of local government units delegated power to tax had been effectively modified with
Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains
essentially the same. For as the Court stressed in Mactan, the power to tax is [still] primarily vested in
the Congress.
This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner of
the 1986 Constitutional Commission which crafted the 1987 Constitution, thus:
What is the effect of Section 5 on the fiscal position of municipal
corporations? Section 5 does not change the doctrine that municipal corporations do not
possess inherent powers of taxation. What it does is to confer municipal corporations a
general power to levy taxes and otherwise create sources of revenue. They no longer have
to wait for a statutory grant of these powers. The power of the legislative authority
relative to the fiscal powers of local governments has been reduced to the authority to
impose limitations on municipal powers. Moreover, these limitations must be consistent
with the basic policy of local autonomy. The important legal effect of Section 5 is thus to
reverse the principle that doubts are resolved against municipal corporations. Henceforth,
in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in
favor of municipal corporations. It is understood, however, that taxes imposed by local
government must be for a public purpose, uniform within a locality, must not be
confiscatory, and must be within the jurisdiction of the local unit to pass.
In net effect, the controversy presently before the Court involves, at bottom, a clash between the
inherent taxing power of the legislature, which necessarily includes the power to exempt, and the local
governments delegated power to tax under the aegis of the 1987 Constitution.
Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all real
properties within the citys territory and removed exemptions theretofore previously granted to, or
presently enjoyed by all persons, whether natural or juridical [x x x] there can really be no dispute that
the power of the Quezon City Government to tax is limited by Section 232 of the LGC which expressly

provides that a province or city or municipality within the Metropolitan Manila Area may levy an
annual ad valorem tax on real property such as land, building, machinery, and other improvement not
hereinafter specifically exempted. Under this law, the Legislature highlighted its power to thereafter
exempt certain realties from the taxing power of local government units. An interpretation denying
Congress such power to exempt would reduce the phrase not hereinafter specifically exempted as a pure
jargon, without meaning whatsoever. Needless to state, such absurd situation is unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao, this
Court has upheld the power of Congress to grant exemptions over the power of local government units to
impose taxes. There, the Court wrote:
Indeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant exemptions to
certain persons, pursuant to a declared national policy. The legal effect of the
constitutional grant to local governments simply means that in interpreting statutory
provisions on municipal taxing powers, doubts must be resolved in favor of municipal
corporations.[23] (Emphasis supplied)
In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30, 1995, subsequent to the effectivity
of the LGC on January 1, 1992. Under it, ABS-CBNwas granted the franchise to install and operate radio and television
broadcasting stations in the Philippines. Likewise, Section 8 imposed on ABS-CBN the duty of paying 3% franchise
tax. It bears stressing, however, that payment of the percentage franchise tax shall be in lieu of all taxes on the said
franchise.[24]
Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the power
of Quezon City to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that
notwithstanding any exemption granted by any law or other special law, the City may impose a franchise tax. It must be
noted that Section 137 of the LGC does not prohibit grant of future exemptions. As earlier discussed, this Court in City
Government of Quezon City v. Bayan Telecommunications, Inc. [25] sustained the power of Congress to grant tax
exemptions over and above the power of the local governments delegated power to tax.
B. The more pertinent issue now to consider is whether or not by passing R.A. No. 7966, which contains the in
lieu of all taxes provision, Congress intended to exemptABS-CBN from local franchise tax.
Petitioners argue that the in lieu of all taxes provision in ABS-CBNs franchise does not expressly exempt it from payment
of local franchise tax. They contend that a tax exemption cannot be created by mere implication and that one who claims
tax exemptions must be able to justify his claim by clearest grant of organic law or statute.
Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus, statutes
granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. A
claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise stated,
taxation is the rule, exemption is the exception. [26] The burden of proof rests upon the party claiming the exemption to
prove that it is in fact covered by the exemption so claimed. [27]

The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to
minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers. [28] He who
claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him
by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They must be
expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that
exemptions are never presumed, the burden is on the claimant to establish clearly his right to exemption and cannot be
made out of inference or implications but must be laid beyond reasonable doubt. In other words, since taxation is the rule
and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms.
[29]

Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three (3) percent of all gross
receipts of the radio/television business transacted under the franchise and the franchise tax shall be in lieu of all taxes on
the franchise or earnings thereof.
The in lieu of all taxes provision in the franchise of ABS-CBN does not expressly provide what kind of
taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local, whether municipal,
city or provincial, and national tax. What is clear is that ABS-CBN shall be liable to pay three (3) percent franchise tax
and income taxes under Title II of the NIRC. But whether the in lieu of all taxes provision would include exemption from
local tax is not unequivocal.
As adverted to earlier, the right to exemption from local franchise tax must be clearly established and cannot be
made out of inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the in lieu of all
taxes provision should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered by the
exemption so claimed. ABS-CBN miserably failed in this regard.
ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal Revenue,[30] Manila Railroad v.
Rafferty,[31] Philippine Railway Co. v. Collector of Internal Revenue,[32] and Visayan Electric Co. v. David[33] to support its
claim that that the in lieu of all taxes clause includes exemption from all taxes.
However, a review of the foregoing case law reveals that the grantees respective franchises expressly exempt
them from municipal and provincial taxes. Said the Court inManila Railroad v. Rafferty:[34]
On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter was granted
to the Manila Railroad Company. Subsection 12 of Section 1 of said Act (No. 1510) provides that:
In consideration of the premises and of the granting of this concession or
franchise, there shall be paid by the grantee to the Philippine Government, annually, for
the period of thirty (30) years from the date hereof, an amount equal to one-half (1/2) of
one per cent of the gross earnings of the grantee in respect of the lines covered hereby for
the preceding year; after said period of thirty (30) years, and for the fifty (50) years
thereafter, the amount so to be paid annually shall be an amount equal to one and one-half
(1) per cent of such gross earnings for the preceding year; and after such period of eighty
(80) years, the percentage and amount so to be paid annually by the grantee shall be fixed
by the Philippine Government.

Such annual payments, when promptly and fully made by the grantee, shall be in
lieu of all taxes of every name and nature municipal, provincial or central upon its capital
stock, franchises, right of way, earnings, and all other property owned or operated by the
grantee under this concession or franchise. [35] (Underscoring supplied)
In the case under review, ABS-CBNs franchise did not embody an exemption similar to those in Carcar, Manila
Railroad, Philippine Railway, and Visayan Electric. Too, the franchise failed to specify the taxing authority from whose
jurisdiction the taxing power is withheld, whether municipal, provincial, or national. In fine, since ABS-CBNfailed to
justify its claim for exemption from local franchise tax, by a grant expressed in terms too plain to be mistaken its claim for
exemption for local franchise tax must fail.
C. The in lieu of all taxes clause in the franchise of ABS-CBN has become functus officio with the abolition of
the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos.
In its decision dated January 20, 1999, the RTC held that pursuant to the in lieu of all taxes provision contained in
Section 8 of R.A. No. 7966, ABS-CBN is exempt from the payment of the local franchise tax. The RTC further
pronounced that ABS-CBN shall instead be liable to pay a franchise tax of 3% of all gross receipts in lieu of all other
taxes.
On this score, the RTC ruling is flawed. In keeping with the laws that have been passed since the grant of ABSCBNs franchise, the corporation should now be subject to VAT, instead of the 3% franchise tax.
At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3% franchise tax under
Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as amended, viz.:
SECTION 117. Tax on franchises. Any provision of general or special laws to the contrary
notwithstanding, there shall be levied, assessed and collected in respect to all franchise, upon the gross
receipts from the business covered by the law granting the franchise, a tax in accordance with the
schedule prescribed hereunder:
(a) On electric utilities, city gas, and water supplies Two (2%) percent
(b) On telephone and/or telegraph systems, radio and/or broadcasting stations Three
(3%) percent
(c) On other franchises Five (5%) percent. (Emphasis supplied)
On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax Law, [36] took effect and
subjected to VAT those services rendered by radio and/or broadcasting stations. Section 3 of R.A. No. 7716 provides:
Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby further
amended to read as follows:
SEC. 102. 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, as value-added tax
equivalent to 10% of gross receipts derived from the sale or exchange of services,
including the use or lease of properties.

The phrase sale or exchange of services means the performance of all kinds of
services in the Philippines, for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors; x x x services of
franchise grantees of telephone and telegraph, radio and television broadcasting and all
other franchise grantees except those under Section 117 of this Code; x x x (Emphasis
supplied)
Notably, under the same law, telephone and/or telegraph systems, broadcasting stations and other franchise
grantees were omitted from the list of entities subject to franchise tax. The impression was that these entities were subject
to 10% VAT but not to franchise tax. Only the franchise tax on electric, gas and water utilities remained. Section 12 of
R.A. No. 7716 provides:
Section 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further
amended to read as follows:
SEC. 117. Tax on Franchises. Any provision of general or special law to the
contrary notwithstanding there shall be levied, assessed and collected in respect to all
franchises on electric, gas and water utilities a tax of two percent (2%) on the gross
receipts derived from the business covered by the law granting the franchise. (Emphasis
added)
Subsequently, R.A. No. 8241[37] took effect on January 1, 1997[38] containing more amendments to the NIRC.
Radio and/or television companies whose annual gross receipts do not exceed P10,000,000.00 were granted the option to
choose between paying 3% national franchise tax or 10% VAT. Section 9 of R.A. No. 8241 provides:
SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows:
Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is
hereby further amended to read as follows:
Sec. 117. Tax on franchise. Any provision of general or special law to the
contrary, notwithstanding, there shall be levied, assessed and collected in respect to
allfranchises on radio and/or television broadcasting companies whose annual gross
receipts of the preceding year does not exceed Ten million pesos (P10,000,000.00),
subject to Section 107(d) of this Code, a tax of three percent (3%) and on electric, gas and
water utilities, a tax of two percent (2%) on the gross receipts derived from the business
covered by the law granting the franchise: Provided, however, That radio and television
broadcasting companies referred to in this section, shall have an option to be registered
as a value-added tax payer and pay the tax due thereon: Provided, further, That once the
option is exercised, it shall not be revoked. (Emphasis supplied)
On the other hand, radio and/or television companies with yearly gross receipts exceeding P10,000,000.00 were subject to
10% VAT, pursuant to Section 102 of the NIRC.
On January 1, 1998, R.A. No. 8424[39] was passed confirming the 10% VAT liability of radio and/or television companies
with yearly gross receipts exceeding P10,000,000.00.

R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said law further amended the NIRC
by increasing the rate of VAT to 12%. The effectivity of the imposition of the 12% VAT was later moved from January 1,
2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on the matter, ABS-CBN is subject to the payment of
VAT. It does not have the option to choose between the payment of franchise tax or VAT since it is a broadcasting
company with yearly gross receipts exceeding Ten Million Pesos (P10,000,000.00).
VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course of trade or
business, sells, barters, exchanges, leases, goods or properties, renders services. It is also levied on every importation of
goods whether or not in the course of trade or business. The tax base of the VAT is limited only to the value added to such
goods, properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax and can be passed on to
the buyer.
The franchise tax, on the other hand, is a percentage tax imposed only on franchise holders. It is imposed under
Section 119 of the Tax Code and is a direct liability of the franchise grantee.
The clause in lieu of all taxes does not pertain to VAT or any other tax. It cannot apply when what is paid is a tax
other than a franchise tax. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten
million pesos has been abolished, the in lieu of all taxes clause has now become functus officio, rendered inoperative.
In sum, ABS-CBNs claims for exemption must fail on twin grounds. First, the in lieu of all taxes clause in its
franchise failed to specify the taxes the company is sought to be exempted from. Neither did it particularize the
jurisdiction from which the taxing power is withheld. Second, the clause has become functus officio because as the law
now stands, ABS-CBN is no longer subject to a franchise tax. It is now liable for VAT.
WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET ASIDE. The petition in
the trial court for refund of local franchise tax isDISMISSED.
SO ORDERED.

SECOND DIVISION

THE CITY GOVERNMENT OFQUEZON

CITY, AND THE CITY TREASURER
OF QUEZON CITY, DR. VICTOR B.
ENRIGA,
Petitioners,

- versus -

G.R. No. 162015

Present:
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.
Promulgated:

BAYAN TELECOMMUNICATIONS, INC.,

March 6, 2006

Respondent.

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

DECISION
GARCIA, J.:
Before the Court, on pure questions of law, is this petition for review on certiorari under Rule 45 of
the Rules of Court to nullify and set aside the following issuances of the Regional Trial Court (RTC)
of Quezon City, Branch 227, in its Civil Case No. Q-02-47292, to wit:
1)

Decision[1] dated June 6, 2003, declaring respondent Bayan Telecommunications, Inc. exempt
from real estate taxation on its real properties located in Quezon City; and

2) Order[2] dated December 30, 2003, denying petitioners motion for reconsideration.
The facts:
Respondent Bayan Telecommunications,

Inc. [3] (Bayantel) is a legislative franchise

holder under Republic Act (Rep. Act) No. 3259 [4] to establish and operate radio stations for
domestic telecommunications, radiophone, broadcasting and telecasting.

Of relevance to this controversy is the tax provision of Rep. Act No. 3259, embodied in
Section 14 thereof, which reads:
SECTION 14. (a) The grantee shall be liable to pay the same taxes on its real estate, buildings
and personal property, exclusive of the franchise, as other persons or corporations are now or hereafter
may be required by law to pay. (b) The grantee shall further pay to the Treasurer of the Philippines each
year, within ten days after the audit and approval of the accounts as prescribed in this Act, one and onehalf per centum of all gross receipts from the business transacted under this franchise by the said grantee
(Emphasis supplied).

On January 1, 1992, Rep. Act No. 7160, otherwise known as the Local Government Code
of 1991 (LGC), took effect. Section 232 of the Code grants local government units within the
Metro Manila Area the power to levy tax on real properties, thus:
SEC. 232. Power to Levy Real Property Tax. A province or city or a municipality within the
Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building,
machinery and other improvements not hereinafter specifically exempted.

Complementing the aforequoted provision is the second paragraph of Section 234 of the same
Code which withdrew any exemption from realty tax heretofore granted to or enjoyed by all
persons, natural or juridical, to wit:
SEC. 234 - Exemptions from Real Property Tax. The following are exempted from payment of the
real property tax:
xxx xxx xxx
Except as provided herein, any exemption from payment of real property tax previously granted
to, or enjoyed by, all persons, whether natural or juridical, including government-owned-or-controlled
corporations is hereby withdrawn upon effectivity of this Code (Emphasis supplied).

On July 20, 1992, barely few months after the LGC took effect, Congress enacted Rep. Act
No. 7633, amending Bayantels original franchise. The amendatory law (Rep. Act No. 7633)
contained the following tax provision:
SEC. 11. The grantee, its successors or assigns shall be liable to pay the same taxes on their real
estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are
now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns
shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other
telecommunications businesses transacted under this franchise by the grantee, its successors or assigns
and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof. Provided, That
the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of
the National Internal Revenue Code .xxx. [Emphasis supplied]

It is undisputed that within the territorial boundary of Quezon City, Bayantel owned
several real properties on which it maintained various telecommunications facilities. These real
properties, as hereunder described, are covered by the following tax declarations:
(a)

Tax Declaration Nos. D-096-04071, D-096-04074, D-096-04072 and D-096-04073 pertaining to

Bayantels Head Office and Operations Center in Roosevelt St., San Francisco del Monte, Quezon
City allegedly the nerve center of petitioners telecommunications franchise operations, said
Operation Center housing mainly petitioners Network Operations Group and switching,
transmission and related equipment;

(b)

Tax Declaration Nos. D-124-01013, D-124-00939, D-124-00920 and D-124-00941 covering

Bayantels land, building and equipment in Maginhawa St., Barangay East Teachers Village,
Quezon City which houses telecommunications facilities; and

(c)

Tax Declaration Nos. D-011-10809, D-011-10810, D-011-10811, and D-011-11540 referring to

Bayantels Exchange Center located in Proj. 8, Brgy. Bahay Toro, Tandang Sora, Quezon
City which houses the Network Operations Group and cover switching, transmission and other
related equipment.
In 1993, the government of Quezon City, pursuant to
the
taxing power vested on local government units by Section 5, Article X of the 1987
Constitution,infra, in relation to Section 232 of the LGC, supra, enacted City
Ordinance No. SP-91, S-93, otherwise known as the Quezon City Revenue
Code (QCRC),[5]imposing, under Section 5 thereof, a real property tax on all real
properties in Quezon City, and, reiterating in its Section 6, the withdrawal of
exemption from real property tax under Section 234 of the LGC, supra. Furthermore,
much like the LGC, the QCRC, under its Section 230, withdrew tax exemption
privileges in general, as follows:

SEC. 230. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government owned or controlled corporations, except local water districts,
cooperatives duly registered under RA 6938, non-stock and non-profit hospitals and educational
institutions, business enterprises certified by the Board of Investments (BOI) as pioneer or non-pioneer
for a period of six (6) and four (4) years, respectively, are hereby withdrawn effective upon approval
of this Code (Emphasis supplied).
Conformably with the Citys Revenue Code, new tax declarations for Bayantels real
properties in Quezon City were issued by the City Assessor and were received by Bayantel on
August 13, 1998, except one (Tax Declaration No. 124-01013) which was received on July 14,
1999.

Meanwhile, on March 16, 1995, Rep. Act No. 7925, [6] otherwise known as the Public
Telecommunications Policy Act of the Philippines, envisaged to level the playing field among
telecommunications companies, took effect. Section 23 of the Act provides:
SEC. 23. Equality of Treatment in the Telecommunications Industry. Any advantage, favor,
privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted,
shall ipso facto become part of previously granted telecommunications franchises and shall be accorded
immediately and unconditionally to the grantees of such franchises: Provided, however, That the
foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning
territory covered by the franchise, the life span of the franchise, or the type of service authorized by the
franchise.

On January 7, 1999, Bayantel wrote the office of the City Assessor seeking the exclusion of
its real properties in the city from the roll of taxable real properties. With its request having been
denied, Bayantel interposed an appeal with the Local Board of Assessment Appeals (LBAA). And,

evidently on its firm belief of its exempt status, Bayantel did not pay the real property taxes
assessed against it by the Quezon City government.
On account thereof, the Quezon City Treasurer sent out notices of delinquency for the total
amount of P43,878,208.18, followed by the issuance of several warrants of levy against
Bayantels properties preparatory to their sale at a public auction set on July 30, 2002.
Threatened

with

the

imminent

loss

of

its

properties,

Bayantel

immediately withdrew its appeal with the LBAA and instead filed with the RTC of Quezon City a
petition for prohibition with an urgent application for a temporary restraining order (TRO) and/or
writ of preliminary injunction, thereat docketed as Civil Case No. Q-02-47292, which was raffled
to Branch 227 of the court.
On July 29, 2002, or in the eve of the public auction scheduled the following day, the lower
court issued a TRO, followed, after due hearing, by a writ of preliminary injunction via its order
of August 20, 2002.
And, having heard the parties on the merits, the same court came out with its challenged
Decision of June 6, 2003, the dispositive portion of which reads:
WHEREFORE, premises considered, pursuant to the enabling franchise under Section 11 of
Republic Act No. 7633, the real estate properties and buildings of petitioner [now, respondent Bayantel]
which have been admitted to be used in the operation of petitioners franchise described in the following
tax declarations are hereby DECLARED exempt from real estate taxation:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)

Tax Declaration No. D-096-04071

Tax Declaration No. D-096-04074
Tax Declaration No. D-124-01013
Tax Declaration No. D-011-10810
Tax Declaration No. D-011-10811
Tax Declaration No. D-011-10809
Tax Declaration No. D-124-00941
Tax Declaration No. D-124-00940
Tax Declaration No. D-124-00939
Tax Declaration No. D-096-04072
Tax Declaration No. D-096-04073
Tax Declaration No. D-011-11540

The preliminary prohibitory injunction issued in the August 20, 2002 Order of this Court is hereby made
permanent. Since this is a resolution of a purely legal issue, there is no pronouncement as to costs.
SO ORDERED.
Their motion for reconsideration having been denied by the court in its Order
dated December 30, 2003, petitioners elevated the case directly to this Court on pure questions
of law, ascribing to the lower court the following errors:

I.

[I]n declaring the real properties of respondent exempt from real property taxes notwithstanding
the fact that the tax exemption granted to Bayantel in its original franchise had been withdrawn
by the [LGC] and that the said exemption was not restored by the enactment of RA 7633.

II.

[In] declaring the real properties of respondent exempt from real property taxes notwithstanding
the enactment of the [QCRC] which withdrew the tax exemption which may have been granted
by RA 7633.

III.

[In] declaring the real properties of respondent exempt from real property taxes notwithstanding
the vague and ambiguous grant of tax exemption provided under Section 11 of RA 7633.

IV.

[In] declaring the real properties of respondent exempt from real property taxes notwithstanding
the fact that [it] had failed to exhaust administrative remedies in its claim for real property tax
exemption. (Words in bracket added.)

As we see it, the errors assigned may ultimately be reduced to two (2) basic issues,
namely:
1.

Whether or not Bayantels real properties in Quezon City are exempt from real property taxes under
its legislative franchise; and

2.

Whether or not Bayantel is required to exhaust administrative remedies before seeking judicial
relief with the trial court.

We shall first address the second issue, the same being procedural in nature.
Petitioners argue that Bayantel had failed to avail itself of the administrative remedies
provided for under the LGC, adding that the trial court erred in giving due course to Bayantels
petition for prohibition. To petitioners, the appeal mechanics under the LGC constitute Bayantels
plain and speedy remedy in this case.
The Court does not agree.
Petitions for prohibition are governed by the following provision of Rule 65 of the Rules of
Court:
SEC. 2. Petition for prohibition. When the proceedings of any tribunal, 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 proceedings in the
action or matter specified therein, or otherwise, granting such incidental reliefs as law and justice may
require.
With the reality that Bayantels real properties were already levied upon on account
of its nonpayment of real estate taxes thereon, the Court agrees with Bayantel that
an appeal to the LBAA is not a speedy and adequate remedy within the context of

the aforequoted Section 2 of Rule 65. This is not to mention of the auction sale of
said properties already scheduled on July 30, 2002.

Moreover, one of the recognized exceptions to the exhaustion- of-administrative remedies

rule is when, as here, only legal issues are to be resolved. In fact, the Court, cognizant of the
nature of the questions presently involved, gave due course to the instant petition. As the Court
has said in Ty vs. Trampe:[7]

xxx. Although as a rule, administrative remedies must first be exhausted before resort to judicial
action can prosper, there is a well-settled exception in cases where the controversy does not involve
questions of fact but only of law. xxx.

Lest it be overlooked, an appeal to the LBAA, to be properly considered, required prior

payment under protest of the amount of P43,878,208.18, a figure which, in the light of the then
prevailing Asian financial crisis, may have been difficult to raise up. Given this reality, an appeal
to the LBAA may not be considered as a plain, speedy and adequate remedy. It is thus
understandable why Bayantel opted to withdraw its earlier appeal with the LBAA and, instead,
filed its petition for prohibition with urgent application for injunctive relief in Civil Case No. Q-0247292. The remedy availed of by Bayantel under Section 2, Rule 65 of the Rules of Court must be
upheld.

This brings the Court to the more weighty question of whether or not Bayantels real
properties in Quezon City are, under its franchise, exempt from real property tax.

The lower court resolved the issue in the affirmative, basically owing to the phrase
exclusive of this franchise found in Section 11 of Bayantels amended franchise, Rep. Act No.
7633. To petitioners, however, the language of Section 11 of Rep. Act No. 7633 is neither clear
nor

unequivocal. The

elaborate

and

extensive

discussion

devoted by the trial court on the meaning and import of

said phrase, they add, suggests as much. It is petitioners thesis that Bayantel was in no time
given any express exemption from the payment of real property tax under its amendatory
franchise.

There seems to be no issue as to Bayantels exemption from real estate taxes by virtue of
the term exclusive of the franchise qualifying the phrase same taxes on its real estate, buildings
and personal property, found in Section 14, supra, of its franchise, Rep. Act No. 3259, as
originally granted.

The legislative intent expressed in the phrase

exclusive

of

this

franchise

cannot

be

construed other than distinguishing between two (2) sets of properties, be they real or personal,
owned by the franchisee, namely, (a) those actually, directly and exclusively used in its radio or
telecommunications

business,

and (b)those properties which are not so used. It is

to note that the properties subject of the

present

controversy

worthy

are only those which are

admittedly falling under the first category.

To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively works to grant or
delegate to local governments of Congress inherent power to tax the franchisees properties
belonging to the second group of properties indicated above, that is, all properties which,
exclusive of this franchise, are not actually and directly used in the pursuit of its franchise. As
may be recalled, the taxing power of local governments under both the 1935 and the 1973
Constitutions

solely

depended

upon

an enabling

law. Absent such

enabling

law,

local

government units were without authority to impose and collect taxes on real properties within
their respective territorial jurisdictions. While Section 14 of Rep. Act No. 3259 may be validly
viewed as an implied delegation of power to tax, the delegation under that provision, as
couched, is limited to impositions over properties of the franchisee which are not actually,
directly and exclusively used in the pursuit of its franchise. Necessarily, other properties of
Bayantel directly used in the pursuit of its business are beyond the pale of the delegated taxing
power of local governments. In a very real sense, therefore, real properties of Bayantel, save
those exclusive of its franchise,

are

subject

to

realty

taxes. Ultimately,

therefore,

the

inevitable result was that all realties which are actually, directly and exclusively used in the
operation of its franchise are exempted from any property tax.
Bayantels franchise being national in character, the exemption thus granted under Section
14 of Rep. Act No. 3259 applies to all its real or personal properties found anywhere within the
Philippine archipelago.
However, with the LGCs taking effect on January 1, 1992, Bayantels exemption from real
estate taxes for properties of whatever kind located within the Metro Manila area was, by force of
Section 234 of the Code, supra, expressly withdrawn. But, not long thereafter, however, or
on July 20, 1992, Congress passed Rep. Act No. 7633 amending Bayantels original franchise.
Worthy of note is that Section 11 of Rep. Act No. 7633 is a virtual reenacment of the tax
provision, i.e., Section 14, supra, of Bayantels original franchise under Rep. Act No. 3259. Stated
otherwise, Section 14 of Rep. Act No. 3259 which was deemed impliedly repealed by Section 234
of the LGC was expressly revived under Section 14 of Rep. Act No. 7633. In concrete terms, the
realty tax exemption heretofore enjoyed by Bayantel under its original franchise, but
subsequently withdrawn by force of Section 234 of the LGC, has been restored by Section 14 of
Rep. Act No. 7633.

The Court has taken stock of the fact that by virtue of Section 5, Article X of the 1987
Constitution,[8] local governments are empowered to levy taxes. And pursuant to this
constitutional

empowerment,

juxtaposed

with Section

232[9] of

the

LGC,

the Quezon

City government enacted in 1993 its local Revenue Code, imposing real property tax on all real
properties found within its territorial jurisdiction. And as earlier stated, the Citys Revenue
Code, just like the LGC, expressly withdrew, under Section 230 thereof, supra, all tax exemption
privileges in general.
This thus raises the question of whether or not the Citys Revenue Code pursuant to which
the city treasurer of Quezon City levied real property taxes against Bayantels real properties
located within the City effectively withdrew the tax exemption enjoyed by Bayantel under its
franchise, as amended.
Bayantel answers the poser in the negative arguing that once again it is only liable to pay
the same taxes, as any other persons or corporations on all its real or personal
properties, exclusive of its franchise.
Bayantels posture is well-taken. While the system of local government taxation has
changed with the onset of the 1987 Constitution, the power of local government units to tax is
still limited. As we explained in Mactan Cebu International Airport Authority:[10]
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but
pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter,
the exercise of the power may be subject to such guidelines and limitations as the Congress may provide
which, however, must be consistent with the basic policy of local autonomy. (at p. 680; Emphasis
supplied.)

Clearly then, while a new slant on the subject of local taxation now prevails in the sense
that the former doctrine of local government units delegated power to tax had been effectively
modified with Article X, Section 5 of the 1987 Constitution now in place, .the basic doctrine on
local taxation remains essentially the same. For as the Court stressed in Mactan, the power to
tax is [still] primarily vested in the Congress.

This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a
Commissioner of the 1986 Constitutional Commission which crafted the 1987 Constitution, thus:
What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does
not change the doctrine that municipal corporations do not possess inherent powers of
taxation. What it does is to confer municipal corporations a general power to levy taxes and
otherwise create sources of revenue. They no longer have to wait for a statutory grant of these
powers. The power of the legislative authority relative to the fiscal powers of local governments has been

reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be
consistent with the basic policy of local autonomy. The important legal effect of Section 5 is thus to
reverse the principle that doubts are resolved against municipal corporations. Henceforth, in
interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal
corporations. It is understood, however, that taxes imposed by local government must be for a public
purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the
local unit to pass.[11] (Emphasis supplied).

In net effect, the controversy presently before the Court involves, at bottom, a clash
between the inherent taxing power of the legislature, which necessarily includes the power to
exempt, and the local governments delegated power to tax under the aegis of the 1987
Constitution.

Now

to

go

back

to

the

Quezon

imposed real estate taxes on all real properties within the citys

City Revenue
territory

and

Code which
removed

exemptions theretofore previously granted to, or presently enjoyed by all persons, whether
natural or juridical .,[12] there can really be no dispute that the power of the Quezon City
Government to tax is limited by Section 232 of the LGC which expressly provides that a province
or city or municipality within the Metropolitan Manila Area may levy an annual ad valorem tax on
real property such as land, building, machinery, and other improvement not hereinafter
specifically exempted. Under this law, the Legislature highlighted its power to thereafter
exempt certain realties from the taxing power of local government units. An interpretation
denying Congress such power to exempt would reduce the phrase not hereinafter specifically
exempted as a pure jargon, without meaning whatsoever. Needless to state, such absurd
situation is unacceptable.

For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao,
[13]

this Court has upheld the power of Congress to grant exemptions over the power of local

government units to impose taxes. There, the Court wrote:

Indeed, the grant of taxing powers to local
government
units under the Constitution and the LGC does not affect
the
power of Congress to grant exemptions to
certain
persons,
pursuant
to a declared national
policy. The legal effect
of
the
constitutional
grant to local governments simply means that in interpreting statutory provisions on municipal
taxing
powers, doubts must be resolved in favor of municipal corporations. (Emphasis supplied.

As we see it, then, the issue in this case no longer dwells on whether Congress has the
power to exempt Bayantels properties from realty taxes by its enactment of Rep. Act No. 7633
which amended Bayantels original franchise. The more decisive question turns on whether
Congress actually did exempt Bayantels properties at all by virtue of Section 11 of
Rep. Act No. 7633.

Admittedly, Rep. Act No. 7633 was enacted subsequent to the LGC. Perfectly aware that
the LGC has already withdrawn Bayantels former exemption from realty taxes, Congress opted to
pass Rep. Act No. 7633 using, under Section 11 thereof, exactly the same defining
phrase exclusive of this franchise which was the basis for Bayantels exemption from realty
taxes prior to the LGC. In plain language, Section 11 of Rep. Act No. 7633 states that the grantee,
its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and
personal property, exclusive of this franchise, as other persons or corporations are now or
hereafter may be required by law to pay. The Court views this subsequent piece of legislation as
an express and real intention on the part of Congress to once again remove from the
LGCs delegated taxing power, all of the franchisees (Bayantels) properties that are actually,
directly and exclusively used in the pursuit of its franchise.
WHEREFORE, the petition is DENIED.
No pronouncement as to costs.
SO ORDERED.

EN BANC

ABAKADA GURO PARTY LIST (Formerly

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

- versus -

G.R. No. 168056

Present:
DAVIDE, JR., C.J.,
PUNO,
PANGANIBAN,
QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO-MORALES,
CALLEJO, SR.,
AZCUNA,
TINGA,
CHICO-NAZARIO, and
GARCIA, JJ.

THE HONORABLE EXECUTIVE

SECRETARY EDUARDO ERMITA;
HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR
PURISIMA; and HONORABLE
COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR.,
Respondents.
x-------------------------x
AQUILINO Q. PIMENTEL, JR., LUISA P.
EJERCITO-ESTRADA, JINGGOY E.
ESTRADA, PANFILO M. LACSON,
ALFREDO S. LIM, JAMBY A.S.
MADRIGAL, AND SERGIO R. OSMEA III,
Petitioners,

G.R. No. 168207

- versus EXECUTIVE SECRETARY EDUARDO R.

ERMITA, CESAR V. PURISIMA,
SECRETARY OF FINANCE, GUILLERMO
L. PARAYNO, JR., COMMISSIONER OF
THE BUREAU OF INTERNAL REVENUE,
Respondents.
x-------------------------x
ASSOCIATION OF PILIPINAS SHELL

G.R. No. 168461

DEALERS, INC. represented by its

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

VIOLAGO-PTT SERVICE CENTER;

MOTORISTS HEART CORPORATION
represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HARVARD CORPORATION
represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HERITAGE CORPORATION
represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA;
PHILIPPINE STANDARD OIL
CORPORATION represented by its
Vice-President for Operations,
JOSELITO F. FLORDELIZA; ROMEO
MANUEL doing business under the
name and style of ROMMAN
GASOLINE STATION; ANTHONY
ALBERT CRUZ III doing business
under the name and style of TRUE
SERVICE STATION,
Petitioners,
- versus CESAR V. PURISIMA, in his capacity as
Secretary of the Department of
Finance and GUILLERMO L. PARAYNO,
JR., in his capacity as Commissioner
of Internal Revenue,
Respondents.
x-------------------------x
FRANCIS JOSEPH G. ESCUDERO,
VINCENT CRISOLOGO, EMMANUEL
JOEL J. VILLANUEVA, RODOLFO G.
PLAZA, DARLENE ANTONINOCUSTODIO, OSCAR G. MALAPITAN,
BENJAMIN C. AGARAO, JR. JUAN
EDGARDO M. ANGARA, JUSTIN MARC
SB. CHIPECO, FLORENCIO G. NOEL,
MUJIV S. HATAMAN, RENATO B.
MAGTUBO, JOSEPH A. SANTIAGO,
TEOFISTO DL. GUINGONA III, RUY
ELIAS C. LOPEZ, RODOLFO Q.
AGBAYANI and TEODORO A. CASIO,
Petitioners,
- versus CESAR V. PURISIMA, in his capacity as

G.R. No. 168463

Secretary of Finance, GUILLERMO L.

PARAYNO, JR., in his capacity as
Commissioner of Internal Revenue,
and EDUARDO R. ERMITA, in his
capacity as Executive Secretary,
Respondents.
x-------------------------x
BATAAN GOVERNOR ENRIQUE T.
GARCIA, JR.
Petitioner,

G.R. No. 168730

- versus HON. EDUARDO R. ERMITA, in his

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

Promulgated:
September 1, 2005

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

DECISION

AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of all, should be borne
by everyone, and the more man enjoys the advantages of society, the more he ought to
hold himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education,
increased emoluments for health workers, and wider coverage for full value-added tax
benefits these are the reasons why Republic Act No. 9337 (R.A. No. 9337)[1] was enacted.
Reasons, the wisdom of which, the Court even with its extensive constitutional power of
review, cannot probe. The petitioners in these cases, however, question not only the
wisdom of the law, but also perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments
notwithstanding, petitioners failed to justify their call for the invalidity of the law. Hence,
R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and
3705, and Senate Bill No. 1950.
House Bill No. 3555[2] was introduced on first reading on January 7, 2005. The House
Committee on Ways and Means approved the bill, in substitution of House Bill No. 1468,
which Representative (Rep.) Eric D. Singson introduced on August 8, 2004. The President
certified the bill on January 7, 2005 for immediate enactment. On January 27, 2005, the
House of Representatives approved the bill on second and third reading.
House Bill No. 3705[3] on the other hand, substituted House Bill No. 3105 introduced by
Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its
mother bill is House Bill No. 3555. The House Committee on Ways and Means approved
the bill on February 2, 2005. The President also certified it as urgent onFebruary 8, 2005.
The House of Representatives approved the bill on second and third reading on February
28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No.
1950[4] on March 7, 2005, in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking
into consideration House Bill Nos. 3555 and 3705. Senator Ralph G. Recto sponsored
Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens.
Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the
bill on March 11, 2005, and was approved by the Senate on second and third reading
on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the House of
Representatives for a committee conference on the disagreeing provisions of the
proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No.
3555, House Bill No. 3705, and Senate Bill No. 1950, after having met and discussed in
full free and conference, recommended the approval of its report, which the Senate did
on May 10, 2005, and with the House of Representatives agreeing thereto the next day,
May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was
transmitted to the President, who signed the same into law on May 24, 2005. Thus, came
R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.[5] When said date came, the Court
issued a temporary restraining order, effective immediately and continuing until further
orders, enjoining respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court
speaking through Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance
of the temporary restraining order on July 1, 2005, to wit:

J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a
little background. You know when the law took effect on July 1, 2005, the Court issued a TRO at
about 5 oclock in the afternoon. But before that, there was a lot of complaints aired on television

and on radio. Some people in a gas station were complaining that the gas prices went up by
10%. Some people were complaining that their electric bill will go up by 10%. Other times people
riding in domestic air carrier were complaining that the prices that theyll have to pay would have
to go up by 10%. While all that was being aired, per your presentation and per our own
understanding of the law, thats not true. Its not true that the e-vat law necessarily increased
prices by 10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the
Petroleum companies some subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of
the Excise Tax and the import duties. That is why, it is not correct to say that the VAT as to
petroleum dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to
cover the E-Vat tax. If you consider the excise tax and the import duties, the Net Tax would
probably be in the neighborhood of 7%? We are not going into exact figures I am just trying to
deliver a point that different industries, different products, different services are hit differently. So
its not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present
imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a
mitigating measure. So, therefore, there is no justification to increase the fares by 10% at best
7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first day,
were being increased arbitrarily by 10%. And thats one reason among many others this Court
had to issue TRO because of the confusion in the implementation. Thats why we added as an
issue in this case, even if its tangentially taken up by the pleadings of the parties, the confusion
in the implementation of the E-vat. Our people were subjected to the mercy of that confusion of
an across the board increase of 10%, which you yourself now admit and I think even the
Government will admit is incorrect. In some cases, it should be 3% only, in some cases it should
be 6% depending on these mitigating measures and the location and situation of each product,
of each service, of each company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.

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

The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a
petition for prohibition on May 27, 2005. They question the constitutionality of Sections
4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the
National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods
and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6
imposes a 10% VAT on sale of services and use or lease of properties. These questioned
provisions contain a uniform proviso authorizing the President, upon recommendation of
the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after
any of the following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 %).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by

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

Petitioners further claim that the inclusion of a stand-by authority granted to the
President by the Bicameral Conference Committee is a violation of the no-amendment
rule upon last reading of a bill laid down in Article VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association
of Pilipinas Shell Dealers, Inc., et al., assailing the following provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable
goods shall be amortized over a 60-month period, if the acquisition, excluding the VAT
components, exceeds One Million Pesos (P1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input
tax to be credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its
political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final
withholding tax on gross payments of goods and services, which are subject to 10% VAT under
Sections 106 (sale of goods and properties) and 108 (sale of services and use or lease of
properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being arbitrary,
oppressive, excessive, and confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation of life,
liberty or property without due process of law under Article III, Section 1 of the
Constitution. According to petitioners, the contested sections impose limitations on the
amount of input tax that may be claimed. Petitioners also argue that the input tax
partakes the nature of a property that may not be confiscated, appropriated, or limited
without due process of law. Petitioners further contend that like any other property or
property right, the input tax credit may be transferred or disposed of, and that by
limiting the same, the government gets to tax a profit or value-added even if there is no
profit or value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of
equal protection of the law under Article III, Section 1 of the Constitution, as the
limitation on the creditable input tax if: (1) the entity has a high ratio of input tax; or (2)
invests in capital equipment; or (3) has several transactions with the government, is not
based on real and substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of
Article VI, Section 28(1) of the Constitution, and that it is the smaller businesses with
higher input tax to output tax ratio that will suffer the consequences thereof for it wipes
out whatever meager margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero
filed this petition for certiorari on June 30, 2005. They question the constitutionality of
R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in
violation of Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass
on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121,
125,[7] 148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article
VI, Section 24(1) of the Constitution, which provides that all appropriation, revenue or tariff bills
shall originate exclusively in the House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and
prohibition on July 20, 2005, alleging unconstitutionality of the law on the ground that
the limitation on the creditable input tax in effect allows VAT-registered establishments to
retain a portion of the taxes they collect, thus violating the principle that tax collection
and revenue should be solely allocated for public purposes and expenditures. Petitioner
Garcia further claims that allowing these establishments to pass on the tax to the
consumers is inequitable, in violation of Article VI, Section 28(1) of the Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents.
Preliminarily, respondents contend that R.A. No. 9337 enjoys the presumption of
constitutionality and petitioners failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e.,
legality of the bicameral proceedings, exclusive origination of revenue measures and the
power of the Senate concomitant thereto, have already been settled. With regard to the
issue of undue delegation of legislative power to the President, respondents contend that
the law is complete and leaves no discretion to the President but to increase the rate to
12% once any of the two conditions provided therein arise.
Respondents also refute petitioners argument that the increase to 12%, as well as the
70% limitation on the creditable input tax, the 60-month amortization on the purchase or
importation of capital goods exceeding P1,000,000.00, and the 5% final withholding tax
by government agencies, is arbitrary, oppressive, and confiscatory, and that it violates
the constitutional principle on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal
reform agenda. A reform in the value-added system of taxation is the core revenue
measure that will tilt the balance towards a sustainable macroeconomic environment
necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the
NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of
value-added tax (VAT), as the confusion and inevitably, litigation, breeds from a
fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or
lease of goods or properties and services.[8] Being an indirect tax on expenditure, the
seller of goods or services may pass on the amount of tax paid to the buyer, [9] with the
seller acting merely as a tax collector.[10] The burden of VAT is intended to fall on the
immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction
or business it engages in, without transferring the burden to someone else.[11]Examples
are individual and corporate income taxes, transfer taxes, and residence taxes. [12]
In the Philippines, the value-added system of sales taxation has long been in existence,
albeit in a different mode. Prior to 1978, the system was a single-stage tax computed
under the cost deduction method and was payable only by the original sellers. The
single-stage system was subsequently modified, and a mixture of the cost deduction
method and tax credit method was used to determine the value-added tax payable.
[13]
Under the tax credit method, an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its purchases, inputs and imports.[14]
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273,
that the VAT system was rationalized by imposing a multi-stage tax rate of 0% or 10% on
all sales using the tax credit method.[15]
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,[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 latters
appropriate action.

Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently
explicit statement of the changes in or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the Conference Committee Report
prior to the voting thereon. The House shall vote on the Conference Committee Report in the
same manner and procedure as it votes on a bill on third and final reading.

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

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

The creation of such conference committee was apparently in response to a problem, not
addressed by any constitutional provision, where the two houses of Congress find
themselves in disagreement over changes or amendments introduced by the other
house in a legislative bill. Given that one of the most basic powers of the legislative
branch is to formulate and implement its own rules of proceedings and to discipline its
members, may the Court then delve into the details of how Congress complies with its
internal rules or how it conducts its business of passing legislation? Note that in the
present petitions, the issue is not whether provisions of the rules of both houses creating
the bicameral conference committee are unconstitutional, but whether the bicameral
conference committee has strictly complied with the rules of both houses, thereby
remaining within the jurisdiction conferred upon it by Congress.
In the recent case of Farias vs. The Executive Secretary,[20] the Court En
Banc, unanimously reiterated and emphasized its adherence to the enrolled bill doctrine,
thus, declining therein petitioners plea for the Court to go behind the enrolled copy of
the bill. Assailed in said case was Congresss creation of two sets of bicameral conference
committees, the lack of records of said committees proceedings, the alleged violation of
said committees of the rules of both houses, and the disappearance or deletion of one of
the provisions in the compromise bill submitted by the bicameral conference committee.
It was argued that such irregularities in the passage of the law nullified R.A. No. 9006, or
the Fair Election Act.
Striking down such argument, the Court held thus:

Under the enrolled bill doctrine, the signing of a bill by the Speaker of the House and the
Senate President and the certification of the Secretaries of both Houses of Congress that
it was passed are conclusive of its due enactment. A review of cases reveals the Courts
consistent adherence to the rule. The Court finds no reason to deviate from the salutary
rule in this case where the irregularities alleged by the petitioners mostly involved the
internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference
Committee by the House. This Court is not the proper forum for the enforcement of these
internal rules of Congress, whether House or Senate. Parliamentary rules are merely
procedural and with their observance the courts have no concern. Whatever doubts
there may be as to the formal validity of Rep. Act No. 9006 must be resolved in its
favor. The Court reiterates its ruling inArroyo 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. InOsmea v. Pendatun, it was held: At any rate,
courts have declared that the rules adopted by deliberative bodies are subject to revocation,
modification or waiver at the pleasure of the body adopting them. And it has been said that
Parliamentary rules are merely procedural, and with their observance, the courts have no
concern. They may be waived or disregarded by the legislative body. Consequently, mere failure
to conform to parliamentary usage will not invalidate the action (taken by a deliberative body)
when the requisite number of members have agreed to a particular measure. [21] (Emphasis
supplied)

The foregoing declaration is exactly in point with the present cases, where petitioners
allege irregularities committed by the conference committee in introducing changes or
deleting provisions in the House and Senate bills. Akin to the Farias case,[22] the present
petitions also raise an issue regarding the actions taken by the conference committee on
matters regarding Congress compliance with its own internal rules. As stated earlier, one
of the most basic and inherent power of the legislature is the power to formulate rules
for its proceedings and the discipline of its members. Congress is the best judge of how it
should conduct its own business expeditiously and in the most orderly manner. It is also
the sole
concern of Congress to instill discipline among the members of its conference committee
if it believes that said members violated any of its rules of proceedings. Even the
expanded jurisdiction of this Court cannot apply to questions regarding only the internal
operation of Congress, thus, the Court is wont to deny a review of the internal
proceedings of a co-equal branch of government.
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs.
Secretary of Finance,[23] the Court already made the pronouncement that [i]f a change is
desired in the practice [of the Bicameral Conference Committee] it must be sought in
Congress since this question is not covered by any constitutional provision but is only an
internal rule of each house. [24] To date, Congress has not seen it fit to make such
changes adverted to by the Court. It seems, therefore, that Congress finds the practices
of the bicameral conference committee to be very useful for purposes of prompt and
efficient legislative action.
Nevertheless, just to put minds at ease that no blatant irregularities tainted the
proceedings of the bicameral conference committees, the Court deems it necessary to
dwell on the issue. The Court observes that there was a necessity for a conference

committee because a comparison of the provisions of House Bill Nos. 3555 and 3705 on
one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed
disagreements. As pointed out in the petitions, said disagreements were as follows:
House Bill No. 3555

House Bill No.3705

Senate Bill No. 1950

With regard to Stand-By Authority in favor of President

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

Provides for 12% VAT in

general on sales of goods or
properties and reduced rates
for sale of certain locally
manufactured goods and
petroleum products and raw
materials to be used in the
manufacture thereof
(amending Sec. 106 of NIRC);
12% VAT on importation of
goods and reduced rates for
certain imported products
including petroleum products
(amending Sec. 107 of NIRC);
and 12% VAT on sale of
services and use or lease of
properties and a reduced rate
for certain services including
power generation (amending
Sec. 108 of NIRC)

Provides for a single rate of

10% VAT on sale of goods or
properties (amending Sec. 106
of NIRC), 10% VAT on sale of
services including sale of
electricity by generation
companies, transmission and
distribution companies, and
use or lease of properties
(amending Sec. 108 of NIRC)

With regard to the no pass-on provision

No similar provision

Provides that the VAT

imposed on power generation
and on the sale of petroleum
products shall be absorbed
by generation companies or
sellers, respectively, and
shall not be passed on to
consumers

Provides that the VAT imposed

on sales of electricity by
generation companies and
services of transmission
companies and distribution
companies, as well as those of
franchise grantees of electric
utilities shall not apply to
residential
end-users. VAT shall be
absorbed by generation,
transmission, and distribution
companies.

With regard to 70% limit on input tax credit

Provides that the input
tax credit for capital
goods on which a VAT has
been paid shall be
equally distributed over 5
years or the depreciable
life of such capital goods;
the input tax credit for
goods and services other
than capital goods shall

No similar provision

Provides that the input tax

credit for capital goods on
which a VAT has been paid
shall be equally distributed
over 5 years or the
depreciable life of such capital
goods; the input tax credit for
goods and services other than
capital goods shall not exceed
90% of the output VAT.

not exceed 5% of the

total amount of such
goods and services; and
for persons engaged in
retail trading of goods,
the allowable input tax
credit shall not exceed
11% of the total amount
of goods purchased.
With regard to amendments to be made to NIRC provisions regarding income and excise taxes
No similar provision

No similar provision

Provided for amendments to

several NIRC provisions
regarding corporate income,
percentage, franchise and
excise taxes

The disagreements between the provisions in the House bills and the Senate bill were
with regard to (1) what rate of VAT is to be imposed; (2) whether only the VAT imposed
on electricity generation, transmission and distribution companies should not be passed
on to consumers, as proposed in the Senate bill, or both the VAT imposed on electricity
generation, transmission and distribution companies and the VAT imposed on sale of
petroleum products should not be passed on to consumers, as proposed in the House
bill; (3) in what manner input tax credits should be limited; (4) and whether the NIRC
provisions on corporate income taxes, percentage, franchise and excise taxes should be
amended.
There being differences and/or disagreements on the foregoing provisions of the House
and Senate bills, the Bicameral Conference Committee was mandated by the rules of
both houses of Congress to act on the same by settling said differences and/or
disagreements. The Bicameral Conference Committee acted on the disagreeing
provisions by making the following changes:
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear
from the Conference Committee Report that the Bicameral Conference Committee tried
to bridge the gap in the difference between the 10% VAT rate proposed by the Senate,
and the various rates with 12% as the highest VAT rate proposed by the House, by
striking a compromise whereby the present 10% VAT rate would be retained until certain
conditions arise, i.e., the value-added tax collection as a percentage of gross domestic
product (GDP) of the previous year exceeds 2 4/5%, or National Government deficit as a
percentage of GDP of the previous year exceeds 1%, when the President, upon
recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective
January 1, 2006.
2. With regard to the disagreement on whether only the VAT imposed on electricity
generation, transmission and distribution companies should not be passed on to
consumers or whether both the VAT imposed on electricity generation, transmission and
distribution companies and the VAT imposed on sale of petroleum products may be
passed on to consumers, the Bicameral Conference Committee chose to settle such
disagreement by altogether deleting from its Report any no pass-on provision.

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

4. With regard to the amendments to other provisions of the NIRC on corporate income
tax, franchise, percentage and excise taxes, the conference committee decided to
include such amendments and basically adopted the provisions found in Senate Bill No.
1950, with some changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of Representatives and Senate Rules,
the Bicameral Conference Committee is mandated to settle the differences between the
disagreeing provisions in the House bill and the Senate bill. The term settle is
synonymous to reconcile and harmonize.[25] To reconcile or harmonize disagreeing
provisions, the Bicameral Conference Committee may then (a) adopt the specific
provisions of either the House bill or Senate bill, (b) decide that neither provisions in the
House bill or the provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at a compromise between
the disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on
disagreeing provisions were meant only to reconcile and harmonize the disagreeing
provisions for it did not inject any idea or intent that is wholly foreign to the subject
embraced by the original provisions.
The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT
wanted by the Senate is retained until such time that certain conditions arise when the
12% VAT wanted by the House shall be imposed, appears to be a compromise to try to
bridge the difference in the rate of VAT proposed by the two houses of Congress.

Nevertheless, such compromise is still totally within the subject of what rate of VAT
should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of
the Bicameral Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman
of the Senate Panel, explained the reason for deleting the no pass-on provision in this
wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking
that no sector should be a beneficiary of legislative grace, neither should any sector be
discriminated on. The VAT is an indirect tax. It is a pass on-tax. And lets keep it plain and
simple. Lets not confuse the bill and put a no pass-on provision. Two-thirds of the world
have a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no
pass-though provision. So, the thinking of the Senate is basically simple, lets keep the
VAT simple.[26] (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision never
really enjoyed the support of either House.[27]
With regard to the amount of input tax to be credited against output tax, the Bicameral
Conference Committee came to a compromise on the percentage rate of the limitation or
cap on such input tax credit, but again, the change introduced by the Bicameral
Conference Committee was totally within the intent of both houses to put a cap on input
tax that may be
credited against the output tax. From the inception of the subject revenue bill in the
House of Representatives, one of the major objectives was to plug a glaring loophole in
the tax policy and administration by creating vital restrictions on the claiming of input
VAT tax credits . . . and [b]y introducing limitations on the claiming of tax credit, we are
capping a major leakage that has placed our collection efforts at an apparent
disadvantage.[28]
As to the amendments to NIRC provisions on taxes other than the value-added tax
proposed in Senate Bill No. 1950, since said provisions were among those referred to it,
the conference committee had to act on the same and it basically adopted the version of
the Senate.
Thus, all the changes or modifications made by the Bicameral Conference Committee
were germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of
discretion amounting to lack or excess of jurisdiction committed by the Bicameral
Conference Committee. In the earlier cases of Philippine Judges Association vs.
Prado[29] and Tolentino vs. Secretary of Finance,[30] the Court recognized the long-standing
legislative practice of giving said conference committee ample latitude for compromising
differences between the Senate and the House. Thus, in the Tolentino case, it was held
that:
. . . it is within the power of a conference committee to include in its report an entirely new
provision that is not found either in the House bill or in the Senate bill. If the committee can
propose an amendment consisting of one or two provisions, there is no reason why it cannot
propose several provisions, collectively considered as an amendment in the nature of a
substitute, so long as such amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the approval of both houses of Congress
to become valid as an act of the legislative department. The charge that in this case the

Conference Committee acted as a third legislative chamber is thus without any basis.
[31]
(Emphasis supplied)

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the NoAmendment Rule
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed three readings on
separate days, and printed copies thereof in its final form have been distributed to its Members
three days before its passage, except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the Journal.

Petitioners argument that the practice where a bicameral conference committee is

allowed to add or delete provisions in the House bill and the Senate bill after these had
passed three readings is in effect a circumvention of the no amendment rule (Sec. 26 (2),
Art. VI of the 1987 Constitution), fails to convince the Court to deviate from its ruling in
the Tolentino case that:
Nor is there any reason for requiring that the Committees Report in these cases must have
undergone three readings in each of the two houses. If that be the case, there would be no end
to negotiation since each house may seek modification of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced for the first time
in either house of Congress, not to the conference committee report. [32](Emphasis supplied)

The Court reiterates here that the no-amendment rule refers only to the procedure to be
followed by each house of Congress with regard to bills initiated in each of said
respective houses, before said bill is transmitted to the other house for its concurrence or
amendment. Verily, to construe said provision in a way as to proscribe any further
changes to a bill after one house has voted on it would lead to absurdity as this would
mean that the other house of Congress would be deprived of its constitutional power to
amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution
cannot be taken to mean that the introduction by the Bicameral Conference Committee
of amendments and modifications to disagreeing provisions in bills that have been acted
upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive
Origination of Revenue Bills
Coming to the issue of the validity of the amendments made regarding the NIRC
provisions on corporate income taxes and percentage, excise taxes. Petitioners refer to
the following provisions, to wit:
Section 27

28(A)(1)
28(B)(1)
34(B)(1)
116
117
119
121
148
151
236
237
288

Rates of Income Tax on Domestic Corporation

Tax on Resident Foreign Corporation
Inter-corporate Dividends
Inter-corporate Dividends
Tax on Persons Exempt from VAT
Percentage Tax on domestic carriers and keepers of Garage
Tax on franchises
Tax on banks and Non-Bank Financial Intermediaries
Excise Tax on manufactured oils and other fuels
Excise Tax on mineral products
Registration requirements
Issuance of receipts or sales or commercial invoices
Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all
originate from the House. They aver that House Bill No. 3555 proposed amendments only
regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705
proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC;
thus, the other sections of the NIRC which the Senate amended but which amendments
were not found in the House bills are not intended to be amended by the House of
Representatives. Hence, they argue that since the proposed amendments did not
originate from the House, such amendments are a violation of Article VI, Section 24 of
the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills
of local application, and private bills shall originate exclusively in the House of Representatives
but the Senate may propose or concur with amendments.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705
that initiated the move for amending provisions of the NIRC dealing mainly with the
value-added tax. Upon transmittal of said House bills to the Senate, the Senate came out
with Senate Bill No. 1950 proposing amendments not only to NIRC provisions on the
value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is the
introduction by the Senate of provisions not dealing directly with the value- added tax,
which is the only kind of tax being amended in the House bills, still within the purview of
the constitutional provision authorizing the Senate to propose or concur with
amendments to a revenue bill that originated from the House?
The foregoing question had been squarely answered in the Tolentino case, wherein the
Court held, thus:
. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to
originate exclusively in the House of Representatives. It is important to emphasize this, because
a bill originating in the House may undergo such extensive changes in the Senate that the result
may be a rewriting of the whole. . . . At this point, what is important to note is that, as a result of
the Senate action, a distinct bill may be produced. To insist that a revenue statute and not only
the bill which initiated the legislative process culminating in the enactment of the law must

substantially be the same as the House bill would be to deny the Senates power not only
to concur with amendments but also to propose amendments. It would be to violate the
coequality of legislative power of the two houses of Congress and in fact make the House
superior to the Senate.
Given, then, the power of the Senate to propose amendments, the Senate can propose its own
version even with respect to bills which are required by the Constitution to originate in the
House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax
bills, bills authorizing an increase of the public debt, private bills and bills of local application
must come from the House of Representatives on the theory that, elected as they are from the
districts, the members of the House can be expected to be more sensitive to the local needs and
problems. On the other hand, the senators, who are elected at large, are expected to approach
the same problems from the national perspective. Both views are thereby made to bear on the
enactment of such laws.[33] (Emphasis supplied)

Since there is no question that the revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included
provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise
and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any
prohibition or limitation on the extent of the amendments that may be introduced by the
Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had
not been touched in the House bills are still in furtherance of the intent of the House in
initiating the subject revenue bills. The Explanatory Note of House Bill No. 1468, the very
first House bill introduced on the floor, which was later substituted by House Bill No.
3555, stated:
One of the challenges faced by the present administration is the urgent and daunting task of
solving the countrys serious financial problems. To do this, government expenditures must be
strictly monitored and controlled and revenues must be significantly increased. This may be
easier said than done, but our fiscal authorities are still optimistic the government will be
operating on a balanced budget by the year 2009. In fact, several measures that will result to
significant expenditure savings have been identified by the administration. It is supported with a
credible package of revenue measures that include measures to improve tax administration and
control the leakages in revenues from income taxes and the value-added tax (VAT). (Emphasis
supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
In the budget message of our President in the year 2005, she reiterated that we all
acknowledged that on top of our agenda must be the restoration of the health of our fiscal
system.
In order to considerably lower the consolidated public sector deficit and eventually achieve a
balanced budget by the year 2009, we need to seize windows of opportunities which might seem
poignant in the beginning, but in the long run prove effective and beneficial to the overall status

of our economy. One such opportunity is a review of existing tax rates, evaluating the relevance
given our present conditions.[34] (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of
Representatives is to bring in sizeable revenues for the government
to supplement our countrys serious financial problems, and improve tax administration
and control of the leakages in revenues from income taxes and value-added taxes. As
these house bills were transmitted to the Senate, the latter, approaching the measures
from the point of national perspective, can introduce amendments within the purposes of
those bills. It can provide for ways that would soften the impact of the VAT measure on
the consumer, i.e., by distributing the burden across all sectors instead of putting it
entirely on the shoulders of the consumers. The sponsorship speech of Sen. Ralph Recto
on why the provisions on income tax on corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in
additional revenues annually even while by mitigating prices of power, services and petroleum
products.
However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the VAT
on twelve goods and services. The rest of the tab P10.5 billion- will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the
consumer. Why should the latter bear all the pain? Why should the fiscal salvation be only on the
burden of the consumer?
The corporate worlds equity is in form of the increase in the corporate income tax from 32 to 35
percent, but up to 2008 only. This will raise P10.5 billion a year. After that, the rate will slide
back, not to its old rate of 32 percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency
provision that will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal
medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their
sacrifice brief. We would like to assure them that not because there is a light at the end of the
tunnel, this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big business will
be there to share the burden.[35]

As the Court has said, the Senate can propose amendments and in fact, the
amendments made on provisions in the tax on income of corporations are germane to
the purpose of the house bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes
germane to the reforms to the VAT system, as these sections would cushion the effects
of VAT on consumers. Considering that certain goods and services which were subject to
percentage tax and excise tax would no longer be VAT-exempt, the consumer would be
burdened more as they would be paying the VAT in addition to these taxes. Thus, there is

a need to amend these sections to soften the impact of VAT. Again, in his sponsorship
speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax
on bunker fuel, to lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the
VAT chain, we will however bring down the excise tax on socially sensitive products such as
diesel, bunker, fuel and kerosene.
...
What do all these exercises point to? These are not contortions of giving to the left hand what
was taken from the right. Rather, these sprang from our concern of softening the impact of VAT,
so that the people can cushion the blow of higher prices they will have to pay as a result of VAT.
[36]

The other sections amended by the Senate pertained to matters of tax administration
which are necessary for the implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter
and purposes of the house bills, which is to supplement our countrys fiscal deficit, among
others. Thus, the Senate acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of
the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et
al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,
107 and 108, respectively, of the NIRC giving the President the stand-by authority to
raise the VAT rate from 10% to 12% when a certain condition is met, constitutes undue
delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged,
such tax to be paid by the seller or transferor: provided, that the President, upon the

recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any of the following conditions has been satisfied.
(i)
value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 %).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as
follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and collected on every importation of goods a
value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and
other charges, such tax to be paid by the importer prior to the release of such goods from
customs custody: Provided, That where the customs duties are determined on the basis of the
quantity or volume of the goods, the value-added tax shall be based on the landed cost plus
excise taxes, if any: provided, further, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve
percent (12%) after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 %).

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read
as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
services: provided, that the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after
any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 %). (Emphasis supplied)

Petitioners allege that the grant of the stand-by authority to the President to increase the
VAT rate is a virtual abdication by Congress of its exclusive power to tax because such
delegation is not within the purview of Section 28 (2), Article VI of the Constitution, which
provides:
The Congress may, by law, authorize the President to fix within specified limits, and may
impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national development program of the
government.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and
properties as well as on the sale or exchange of services, which cannot be included
within the purview of tariffs under the exempted delegation as the latter refers to
customs duties, tolls or tribute payable upon merchandise to the government and usually
imposed on goods or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the
President the legislative power to tax is contrary to republicanism. They insist that
accountability, responsibility and transparency should dictate the actions of Congress
and they should not pass to the President the decision to impose taxes. They also argue
that the law also effectively nullified the Presidents power of control, which includes the
authority to set aside and nullify the acts of her subordinates like the Secretary of
Finance, by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence
or create the conditions provided by the law to bring about either or both the conditions
precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation
that the imposition of the 12% rate would be subject to the whim of the Secretary of
Finance, an unelected bureaucrat, contrary to the principle of no taxation without
representation. They submit that the Secretary of Finance is not mandated to give a
favorable recommendation and he may not even give his recommendation. Moreover,
they allege that no guiding standards are provided in the law on what basis and as to
how he will make his recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter, such that, ultimately, it is the
President who decides whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great branches of
government has exclusive cognizance of and is supreme in matters falling within its own
constitutionally allocated sphere.[37] A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of
powers, as expressed in the Latin maxim: potestas delegata non delegari potest which
means what has been delegated, cannot be delegated.[38] This doctrine is based on the
ethical principle that such as delegated power constitutes not only a right but a duty to
be performed by the delegate through the instrumentality of his own judgment and not
through the intervening mind of another.[39]
With respect to the Legislature, Section 1 of Article VI of the Constitution provides
that the Legislative power shall be vested in the Congress of the Philippines which shall
consist of a Senate and a House of Representatives. The powers which Congress is
prohibited from delegating are those which are strictly, or inherently and exclusively,
legislative. Purely legislative power, which can never be delegated, has been described
as the authority to make a complete law complete as to the time when it shall take effect
and as to whom it shall be applicable and to determine the expediency of its enactment.
[40]
Thus, the rule is that in order that a court may be justified in holding a statute

unconstitutional as a delegation of legislative power, it must appear that the power

involved is purely legislative in nature that is, one appertaining exclusively to the
legislative department. It is the nature of the power, and not the liability of its use or the
manner of its exercise, which determines the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the
following recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the
Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of
the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation
itself is valid. It is valid only if the law (a) is complete in itself, setting forth therein the
policy to be executed, carried out, or implemented by the delegate;[41] and (b) fixes a
standard the limits of which are sufficiently determinate and determinable to which the
delegate must conform in the performance of his functions.[42] A sufficient standard is
one which defines legislative policy, marks its limits, maps out its boundaries and
specifies the public agency to apply it. It indicates the circumstances under which the
legislative command is to be effected.[43] Both tests are intended to prevent a total
transference of legislative authority to the delegate, who is not allowed to step into the
shoes of the legislature and exercise a power essentially legislative.[44]
In People vs. Vera,[45] the Court, through eminent Justice Jose P. Laurel, expounded on the
concept and extent of delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it is
usual to inquire whether the statute was complete in all its terms and provisions when it left the
hands of the legislature so that nothing was left to the judgment of any other appointee or
delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the delegation of power to make the law,
which necessarily involves a discretion as to what it shall be, and conferring an authority or
discretion as to its execution, to be exercised under and in pursuance of the law. The first cannot
be done; to the latter no valid objection can be made.
...
It is contended, however, that a legislative act may be made to the effect as law after it leaves
the hands of the legislature. It is true that laws may be made effective on certain contingencies,
as by proclamation of the executive or the adoption by the people of a particular community. In
Wayman vs. Southard, the Supreme Court of the United States ruled that the legislature may
delegate a power not legislative which it may itself rightfully exercise. The power to ascertain
facts is such a power which may be delegated. There is nothing essentially legislative in
ascertaining the existence of facts or conditions as the basis of the taking into effect of a law.
That is a mental process common to all branches of the government.Notwithstanding the

apparent tendency, however, to relax the rule prohibiting delegation of legislative authority on
account of the complexity arising from social and economic forces at work in this modern
industrial age, the orthodox pronouncement of Judge Cooley in his work on Constitutional
Limitations finds restatement in Prof. Willoughby's treatise on the Constitution of the United
States in the following language speaking of declaration of legislative power to administrative
agencies: The principle which permits the legislature to provide that the administrative agent
may determine when the circumstances are such as require the application of a law is defended
upon the ground that at the time this authority is granted, the rule of public policy, which is the
essence of the legislative act, is determined by the legislature. In other words, the legislature, as
it is its duty to do, determines that, under given circumstances, certain executive or
administrative action is to be taken, and that, under other circumstances, different or no action
at all is to be taken. What is thus left to the administrative official is not the legislative
determination of what public policy demands, but simply the ascertainment of what the facts of
the case require to be done according to the terms of the law by which he is governed. The
efficiency of an Act as a declaration of legislative will must, of course, come from Congress, but
the ascertainment of the contingency upon which the Act shall take effect may be left to such
agencies as it may designate. The legislature, then, may provide that a law shall take effect upon
the happening of future specified contingencies leaving to some other person or body the power
to determine when the specified contingency has arisen. (Emphasis supplied).[46]

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

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

Clearly, the legislature may delegate to executive officers or bodies the power to
determine certain facts or conditions, or the happening of contingencies, on which the
operation of a statute is, by its terms, made to depend, but the legislature must
prescribe sufficient standards, policies or limitations on their authority. [49] While the
power to tax cannot be delegated to executive agencies, details as to the enforcement
and administration of an exercise of such power may be left to them, including the power
to determine the existence of facts on which its operation depends.[50]
The rationale for this is that the preliminary ascertainment of facts as basis for the
enactment of legislation is not of itself a legislative function, but is simply ancillary to
legislation. Thus, the duty of correlating information and making recommendations is the
kind of subsidiary activity which the legislature may perform through its members, or
which it may delegate to others to perform. Intelligent legislation on the complicated
problems of modern society is impossible in the absence of accurate information on the
part of the legislators, and any reasonable method of securing such information is
proper.[51] The Constitution as a continuously operative charter of government does not
require that Congress find for itself

every fact upon which it desires to base legislative action or that it make for itself
detailed determinations which it has declared to be prerequisite to application of
legislative policy to particular facts and circumstances impossible for Congress itself
properly to investigate.[52]
In the present case, the challenged section of R.A. No. 9337 is the common proviso in
Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective January
1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 %).

The case before the Court is not a delegation of legislative power. It is simply a
delegation of ascertainment of facts upon which enforcement and administration of the
increase rate under the law is contingent. The legislature has made the operation of the
12% rate effective January 1, 2006, contingent upon a specified fact or condition. It
leaves the entire operation or non-operation of the 12% rate upon factual matters
outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion
is the fact that the word shall is used in the common proviso. The use of the
word shall connotes a mandatory order. Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of discretion.[53] Where the law is clear and
unambiguous, it must be taken to mean exactly what it says, and courts have no choice
but to see to it that the mandate is obeyed.[54]
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon
the existence of any of the conditions specified by Congress. This is a duty which cannot
be evaded by the President. Inasmuch as the law specifically uses the word shall, the
exercise of discretion by the President does not come into play. It is a clear directive to
impose the 12% VAT rate when the specified conditions are present. The time of taking
into effect of the 12% VAT rate is based on the happening of a certain specified
contingency, or upon the ascertainment of certain facts or conditions by a person or
body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al.
that the law effectively nullified the Presidents power of control over the Secretary of
Finance by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance. The Court cannot also subscribe to the
position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the
phrase upon the recommendation of the Secretary of Finance. Neither does the Court
find persuasive the submission of petitioners Escudero, et al. that any recommendation
by the Secretary of Finance can easily be brushed aside by the President since the
former is a mere alter ego of the latter.

When one speaks of the Secretary of Finance as the alter ego of the President, it simply
means that as head of the Department of Finance he is the assistant and agent of the
Chief Executive. The multifarious executive and administrative functions of the Chief
Executive are performed by and through the executive departments, and the acts of the
secretaries of such departments, such as the Department of Finance, performed and
promulgated in the regular course of business, are, unless disapproved or reprobated by
the Chief Executive, presumptively the acts of the Chief Executive. The Secretary of
Finance, as such, occupies a political position and holds office in an advisory capacity,
and, in the language of Thomas Jefferson, "should be of the President's bosom
confidence" and, in the language of Attorney-General Cushing, is subject to the direction
of the President."[55]
In the present case, in making his recommendation to the President on the existence of
either of the two conditions, the Secretary of Finance is not acting as the alter ego of the
President or even her subordinate. In such instance, he is not subject to the power of
control and direction of the President. He is acting as the agent of the legislative
department, to determine and declare the event upon which its expressed will is to take
effect.[56] The Secretary of Finance becomes the means or tool by which legislative policy
is determined and implemented, considering that he possesses all the facilities to gather
data and information and has a much broader perspective to properly evaluate them. His
function is to gather and collate statistical data and other pertinent information and
verify if any of the two conditions laid out by Congress is present. His personality in such
instance is in reality but a projection of that of Congress. Thus, being the agent of
Congress and not of the President, the President cannot alter or modify or nullify, or set
aside the findings of the Secretary of Finance and to substitute the judgment of the
former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the
existence of a fact, namely, whether by December 31, 2005, the value-added tax
collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (24/5%) or the national government deficit as a percentage of
GDP of the previous year exceeds one and one-half percent (1%). If either of these two
instances has occurred, the Secretary of Finance, by legislative mandate, must submit
such information to the President. Then the 12% VAT rate must be imposed by the
President effective January 1, 2006. There is no undue delegation of legislative power but
only of the discretion as to the execution of a law. This is constitutionally permissible.
[57]
Congress does not abdicate its functions or unduly delegate power when it describes
what job must be done, who must do it, and what is the scope of his authority; in our
complex economy that is frequently the only way in which the legislative process can go
forward.[58]
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the
President the legislative power to tax is contrary to the principle of republicanism, the
same deserves scant consideration. Congress did not delegate the power to tax but the
mere implementation of the law. The intent and will to increase the VAT rate to 12%
came from Congress and the task of the President is to simply execute the legislative
policy. That Congress chose to do so in such a manner is not within the province of the
Court to inquire into, its task being to interpret the law.[59]

The insinuation by petitioners Pimentel, et al. that the President has ample powers to
cause, influence or create the conditions to bring about either or both the conditions
precedent does not deserve any merit as this argument is highly speculative. The Court
does not rule on allegations which are manifestly conjectural, as these may not exist at
all.The Court deals with facts, not fancies; on realities, not appearances. When the Court
acts on appearances instead of realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional
Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair
and additional tax burden on the people. Petitioners also argue that the 12% increase,
dependent on any of the 2 conditions set forth in the contested provisions, is ambiguous
because it does not state if the VAT rate would be returned to the original 10% if the
rates are no longer satisfied. Petitioners also argue that such rate is unfair and
unreasonable, as the people are unsure of the applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two
conditions set forth therein are satisfied, the President shall increase the VAT rate to
12%. The provisions of the law are clear. It does not provide for a return to the 10% rate
nor does it empower the President to so revert if, after the rate is increased to 12%, the
VAT collection goes below the 24/5 of the GDP of the previous year or that the national
government deficit as a percentage of GDP of the previous year does not exceed 1%.
Therefore, no statutory construction or interpretation is needed. Neither can conditions
or limitations be introduced where none is provided for. Rewriting the law is a forbidden
ground that only Congress may tread upon.[60]
Thus, in the absence of any provision providing for a return to the 10% rate, which in this
case the Court finds none, petitioners argument is, at best, purely speculative. There is
no basis for petitioners fear of a fluctuating VAT rate because the law itself does not
provide that the rate should go back to 10% if the conditions provided in Sections 4, 5
and 6 are no longer present. The rule is that where the provision of the law is clear and
unambiguous, so that there is no occasion for the court's seeking the legislative intent,
the law must be taken as it is, devoid of judicial addition or subtraction.[61]
Petitioners also contend that the increase in the VAT rate, which was allegedly an
incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the
previous year, should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only condition.
There is another condition, i.e., the national government deficit as a percentage of GDP
of the previous year exceeds one and one-half percent (1 %).
Respondents explained the philosophy behind these alternative conditions:
1.

VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is
less than 2.8%, it means that government has weak or no capability of implementing the VAT or

that VAT is not effective in the function of the tax collection. Therefore, there is no value to
increase it to 12% because such action will also be ineffectual.
2.

Natl Govt Deficit/GDP >1.5%

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

That the first condition amounts to an incentive to the President to increase the VAT
collection does not render it unconstitutional so long as there is a public purpose for
which the law was passed, which in this case, is mainly to raise revenue. In fact, fiscal
adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was originally
stated by Adam Smith in his Canons of Taxation (1776), as:

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

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

expenditures and their variations.[64]
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial
woe. During the Bicameral Conference Committee hearing, then Finance Secretary
Purisima bluntly depicted the countrys gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a position
where 90 percent of our revenue is used for debt service. So, for every peso of revenue that we
currently raise, 90 goes to debt service. Thats interest plus amortization of our debt. So clearly,
this is not a sustainable situation. Thats the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer countries
that borrow money from that international financial markets. Our debt to GDP is approximately
equal to our GDP. Again, that shows you that this is not a sustainable situation.
The third thing that Id like to point out is the environment that we are presently operating in is
not as benign as what it used to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we were operating in a period of basically global
growth and low interest rates. The past few months, we have seen an inching up, in fact, a rapid
increase in the interest rates in the leading economies of the world. And, therefore, our ability to
borrow at reasonable prices is going to be challenged. In fact, ultimately, the question is our
ability to access the financial markets.
When the President made her speech in July last year, the environment was not as bad as it is
now, at least based on the forecast of most financial institutions. So, we were assuming that
raising 80 billion would put us in a position where we can then convince them to improve our
ability to borrow at lower rates. But conditions have changed on us because the interest rates

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

The image portrayed is chilling. Congress passed the law hoping for rescue from an
inevitable catastrophe. Whether the law is indeed sufficient to answer the states
economic dilemma is not for the Court to judge. In the Farias case, the Court refused to
consider the various arguments raised therein that dwelt on the wisdom of Section 14 of
R.A. No. 9006 (The Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court. Government policy is within the exclusive
dominion of the political branches of the government. It is not for this Court to look into the
wisdom or propriety of legislative determination. Indeed, whether an enactment is wise or
unwise, whether it is based on sound economic theory, whether it is the best means to achieve
the desired results, whether, in short, the legislative discretion within its prescribed limits should
be exercised in a particular manner are matters for the judgment of the legislature, and the
serious conflict of opinions does not suffice to bring them within the range of judicial cognizance.
[66]

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the
executive policy, given that it is not for the judiciary to "pass upon questions of wisdom,
justice or expediency of legislation.[67]
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the
NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A.
No. 9337, amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337,
amending Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and
confiscatory. Their argument is premised on the constitutional right against deprivation
of life, liberty of property without due process of law, as embodied in Article III, Section 1
of the Constitution.

Petitioners also contend that these provisions violate the constitutional guarantee of
equal protection of the law.
The doctrine is that where the due process and equal protection clauses are invoked,
considering that they are not fixed rules but rather broad standards, there is a need for
proof of such persuasive character as would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail.[68]
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on
the amount of input tax that may be credited against the output tax. It states, in part:
[P]rovided, that the input tax inclusive of the input VAT carried over from the previous
quarter that may be credited in every quarter shall not exceed seventy percent (70%) of
the output VAT:
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added
tax due from or paid by a VAT-registered person on the importation of goods or local
purchase of good and services, including lease or use of property, in the course of trade
or business, from a VAT-registered person, and Output Tax is the value-added tax dueon
the sale or lease of taxable goods or properties or services by any person registered or
required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of input
tax that may be claimed. In effect, a portion of the input tax that has already been paid
cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the
output tax, and therefore, the input tax in excess of 70% remains uncredited. However,
to the extent that the input tax is less than 70% of the output tax, then 100% of such
input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a businesss books of
accounts and remains creditable in the succeeding quarter/s. This is explicitly allowed by
Section 110(B), which provides that if the input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter or quarters. In addition, Section 112(B)
allows a VAT-registered person to apply for the issuance of a tax credit certificate or
refund for any unused input taxes, to the extent that such input taxes have not been
applied against the output taxes. Such unused input tax may be used in payment of his
other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as
petitioners exaggeratedly contend. Their analysis of the effect of the 70% limitation is
incomplete and one-sided. It ends at the net effect that there will be unapplied/unutilized
inputs VAT for a given quarter. It does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the subsequent periods as allowed by
the carry-over provision of Section 110(B) or that it may later on be refunded through a
tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the operation
of the 70% limitation on the input tax. According to petitioner, the limitation on the

creditable input tax in effect allows VAT-registered establishments to retain a portion of

the taxes they collect, which violates the principle that tax collection and revenue should
be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the
seller, when he buys goods. Output tax meanwhile is the tax due to the person when he
sells goods. In computing the VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal
to the input taxes that he paid and passed on by the suppliers, then no payment is
required;
Second, when the output taxes exceed the input taxes, the person shall be liable for the
excess, which has to be paid to the Bureau of Internal Revenue (BIR);[69] and
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from zero-rated or
effectively zero-rated transactions, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue taxes, at the
taxpayers option.[70]
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a
person can credit his input tax only up to the extent of 70% of the output tax. In laymans
term, the value-added taxes that a person/taxpayer paid and passed on to him by a
seller can only be credited up to 70% of the value-added taxes that is due to him on a
taxable transaction. There is no retention of any tax collection because the
person/taxpayer has already previously paid the input tax to a seller, and the seller will
subsequently remit such input tax to the BIR. The party directly liable for the payment of
the tax is the seller.[71] What only needs to be done is for the person/taxpayer to apply or
credit these input taxes, as evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax
partakes the nature of a property that may not be confiscated, appropriated, or limited
without due process of law.
The input tax is not a property or a property right within the constitutional purview of the
due process clause. A VAT-registered persons entitlement to the creditable input tax is a
mere statutory privilege.
The distinction between statutory privileges and vested rights must be borne in mind for
persons have no vested rights in statutory privileges. The state may change or take
away rights, which were created by the law of the state, although it may not take away
property, which was vested by virtue of such rights.[72]
Under the previous system of single-stage taxation, taxes paid at every level of
distribution are not recoverable from the taxes payable, although it becomes part of the
cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No. 273
imposing a 10% multi-stage tax on all sales, it was then that the crediting of the input
tax paid on purchase or importation of goods and services by VAT-registered persons
against the output tax was introduced.[73] This was adopted by the Expanded VAT Law
(R.A. No. 7716),[74] and The Tax Reform Act of 1997 (R.A. No. 8424).[75] The right to credit

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

The foregoing section imposes a 60-month period within which to amortize the creditable
input tax on purchase or importation of capital goods with acquisition cost of P1 Million
pesos, exclusive of the VAT component. Such spread out only poses a delay in the
crediting of the input tax. Petitioners argument is without basis because the taxpayer is
not permanently deprived of his privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input
tax in this case amounts to a 4-year interest-free loan to the government.[76] In the same
breath, Congress also justified its move by saying that the provision was designed to
raise an annual revenue of 22.6 billion.[77] The legislature also dispelled the fear that the
provision will fend off foreign investments, saying that foreign investors have other tax
incentives provided by law, and citing the case of China, where despite a 17.5% noncreditable VAT, foreign investments were not deterred.[78] Again, for whatever is the
purpose of the 60-month amortization, this involves executive economic policy and
legislative wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the
government for taxable transactions, Section 12 of R.A. No. 9337, which amended
Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods and services which are
subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and
withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof:
Provided, That the payment for lease or use of properties or property rights to nonresident
owners shall be subject to ten percent (10%) withholding tax at the time of payment. For
purposes of this Section, the payor or person in control of the payment shall be considered as the
withholding agent.

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

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 valueadded tax at the rate of five percent (5%).
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of
1997), the concept of final withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system the amount of income tax
withheld by the withholding agent is constituted as full and final payment of the income tax due
from the payee on the said income. The liability for payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of
underwithholding, the deficiency tax shall be collected from the payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on
certain income payments are intended to equal or at least approximate the tax due of the payee
on said income. Taxes withheld on income payments covered by the expanded withholding tax
(referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec.
2.78 also of these regulations) are creditable in nature.

As applied to value-added tax, this means that taxable transactions with the government
are subject to a 5% rate, which constitutes as full payment of the tax payable on the
transaction. This represents the net VAT payable of the seller. The other 5% effectively
accounts for the standard input VAT (deemed input VAT), in lieu of the actual input VAT
directly or attributable to the taxable transaction.[79]
The Court need not explore the rationale behind the provision. It is clear that Congress
intended to treat differently taxable transactions with the government.[80] This is
supported by the fact that under the old provision, the 5% tax withheld by the
government remains creditable against the tax liability of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax. The Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or controlled

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

The valued-added tax withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the word creditable exhibits
Congresss intention to treat transactions with the government differently. Since it has
not been shown that the class subject to the 5% final withholding tax has been
unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as
petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It
applies to all those who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners
believe. Revenue Regulations No. 14-2005 or the Consolidated Value-Added Tax
Regulations 2005 issued by the BIR, provides that should the actual input tax exceed 5%
of gross payments, the excess may form part of the cost. Equally, should the actual input
tax be less than 5%, the difference is treated as income.[81]
Petitioners also argue that by imposing a limitation on the creditable input tax, the
government gets to tax a profit or value-added even if there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court
will not engage in a legal joust where premises are what ifs, arguments, theoretical and
facts, uncertain. Any disquisition by the Court on this point will only be, as Shakespeare
describes life in Macbeth,[82] full of sound and fury, signifying nothing.
Whats more, petitioners contention assumes the proposition that there is no profit or
value-added. It need not take an astute businessman to know that it is a matter of
exception that a business will sell goods or services without profit or value-added. It
cannot be overstressed that a business is created precisely for profit.
The equal protection clause under the Constitution means that no person or class of
persons shall be deprived of the same protection of laws which is enjoyed by other
persons or other classes in the same place and in like circumstances.[83]
The power of the State to make reasonable and natural classifications for the purposes of
taxation has long been established. Whether it relates to the subject of taxation, the kind
of property, the rates to be levied, or the amounts to be raised, the methods of
assessment, valuation and collection, the States power is entitled to presumption of
validity. As a rule, the judiciary will not interfere with such power absent a clear showing
of unreasonableness, discrimination, or arbitrariness.[84]

Petitioners point out that the limitation on the creditable input tax if the entity has a high
ratio of input tax, or invests in capital equipment, or has several transactions with the
government, is not based on real and substantial differences to meet a valid
classification.
The argument is pedantic, if not outright baseless. The law does not make any
classification in the subject of taxation, the kind of property, the rates to be levied or the
amounts to be raised, the methods of assessment, valuation and collection. Petitioners
alleged distinctions are based on variables that bear different consequences. While the
implementation of the law may yield varying end results depending on ones profit
margin and value-added, the Court cannot go beyond what the legislature has laid down
and interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws on all
persons or things without distinction. This might in fact sometimes result in unequal
protection. What the clause requires is equality among equals as determined according
to a valid classification. By classification is meant the grouping of persons or things
similar to each other in certain particulars and different from all others in these same
particulars.[85]
Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by
Sens. S.R. Osmea III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House Bill
No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the 70%
limitation by increasing the same to 90%. This, according to petitioners, supports their
stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to say
that these are still proposed legislations. Until Congress amends the law, and absent any
unequivocal basis for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.

Uniformity in taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. Different articles may be taxed at different
amounts provided that the rate is uniform on the same class everywhere with all people
at all times.[86]
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%)
on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,
107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of
goods and properties, importation of goods, and sale of services and use or lease of
properties. These same sections also provide for a 0% rate on certain sales and
transaction.
Neither does the law make any distinction as to the type of industry or trade that will
bear the 70% limitation on the creditable input tax, 5-year amortization of input tax paid

on purchase of capital goods or the 5% final withholding tax by the government. It must
be stressed that the rule of uniform taxation does not deprive Congress of the power to
classify subjects of taxation, and only demands uniformity within the particular class.[87]
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT
rate of 0% or 10% (or 12%) does not apply to sales of goods or services with gross
annual sales or receipts not exceeding P1,500,000.00.[88] Also, basic marine and
agricultural food products in their original state are still not subject to the tax,[89] thus
ensuring that prices at the grassroots level will remain accessible. As was stated
in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by
persons engaged in business with an aggregate gross annual sales exceeding P200,000.00.
Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from
the tax are sales of farm and marine products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower
and within the reach of the general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins,
and unduly favors those with high profit margins. Congress was not oblivious to this.
Thus, to equalize the weighty burden the law entails, the law, under Section 116,
imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e.,
transactions with gross annual sales and/or receipts not exceeding P1.5 Million. This acts
as a equalizer because in effect, bigger businesses that qualify for VAT coverage and
VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the
imposition of the tax on those previously exempt. Excise taxes on petroleum
products[91]and natural gas[92] were reduced. Percentage tax on domestic carriers was
removed.[93] Power producers are now exempt from paying franchise tax.[94]
Aside from these, Congress also increased the income tax rates of corporations, in order
to distribute the burden of taxation. Domestic, foreign, and non-resident corporations are
now subject to a 35% income tax rate, from a previous 32%.[95] Intercorporate dividends
of non-resident foreign corporations are still subject to 15% final withholding tax but the
tax credit allowed on the corporations domicile was increased to 20%.[96] The Philippine
Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes
anymore.[97] Even the sale by an artist of his works or services performed for the
production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which
would otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A.
No. 9337 is equitable.
C.

Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but
regressive. It is the smaller business with higher input tax-output tax ratio that will suffer
the consequences.

Progressive taxation is built on the principle of the taxpayers ability to pay. This principle
was also lifted from Adam Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the government, as
nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue
which they respectively enjoy under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person
affected.[98]
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The
principle of progressive taxation has no relation with the VAT system inasmuch as the
VAT paid by the consumer or business for every goods bought or services enjoyed is the
same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small. The
disparity lies in the income earned by a person or profit margin marked by a business,
such that the higher the income or profit margin, the smaller the portion of the income or
profit that is eaten by VAT. A converso, the lower the income or profit margin, the bigger
the part that the VAT eats away. At the end of the day, it is really the lower income group
or businesses with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes,
like the VAT. What it simply provides is that Congress shall "evolve a progressive system
of taxation." The Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall evolve a progressive system of
taxation. The constitutional provision has been interpreted to mean simply that direct taxes
are . . . to be preferred [and] as much as possible, indirect taxes should be minimized. (E.
FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the
mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise,
sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with
the proclamation of Art. VIII, 17 (1) of the 1973 Constitution from which the present Art. VI, 28 (1)
was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In
the case of the VAT, the law minimizes the regressive effects of this imposition by providing for
zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A. No. 7716, 4 amending 103 of the NIRC) [99]

CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just an
enema, a first-aid measure to resuscitate an economy in distress. The Court is neither
blind nor is it turning a deaf ear on the plight of the masses. But it does not have the
panacea for the malady that the law seeks to remedy. As in other cases, the Court
cannot strike down a law as unconstitutional simply because of its yokes.
Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the
judiciary should stand ready to afford relief. There are undoubtedly many wrongs the judicature
may not correct, for instance, those involving political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies
for all political or social ills; We should not forget that the Constitution has judiciously allocated
the powers of government to three distinct and separate compartments; and that judicial
interpretation has tended to the preservation of the independence of the three, and a zealous
regard of the prerogatives of each, knowing full well that one is not the guardian of the others
and that, for official wrong-doing, each may be brought to account, either by impeachment, trial
or by the ballot box.[100]

The words of the Court in Vera vs. Avelino[101] holds true then, as it still holds true now. All
things considered, there is no raison d'tre for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos.
168056, 168207, 168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement and implementation of
R.A. No. 9337, the temporary restraining order issued by the Court on July 1, 2005
is LIFTED upon finality of herein decision.
SO ORDERED.