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amends Section 110, imposes 70% limit on the input tax which may be credited

01. Abakada Guro Party List vs. Ermita (HQ) against the output tax and provides for the amortization of input tax on depreciable
Topic: Input VAT (Nature)
goods over 60-month period. The petitioners contend that such amendment was
Relevant Laws/Issuances:
unconstitutional for being arbitrary, oppressive, excessive and confiscatory and
R.A. No. 9337 (VAT Reform Act): particularly Section 8 which amends argued that the input tax partakes the nature of a property that may not be
Section 110 of the NIRC confiscated, appropriated, or limited without due process of law. The SC disagreed
Section 110, NIRC with the petitioners and held that input tax is not a property or property right but a
VAT-registered persons entitlement to creditable input tax was a mere statutory
G.R. No. 168056 privilege. Accordingly, the State can modify, limit, remove or restore such privilege.
September 1, 2005 In sum, the SC ruled that the VAT Reform Act was valid and should therefore be
Petitioners: ABAKADA GURO PARTY LIST (Formerly AASJAS) implemented.
Respondents: EXECUTIVE SECRETARY EDUARDO ERMITA; SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR PURISIMA; and COMMISSIONER OF INTERNAL Facts:
REVENUE GUILLERMO PARAYNO, JR. Background: R.A. No. 9337 is a consolidation of the 3 legislative bills, namely House
G.R. No. 168207 Bill Nos. 3555 and 3705, and Senate Bill No. 1950. When the law took effect on July
Petitioners: AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. 1, 2005, the SC issued a TRO 5pm the same day because of the confusion in its
ESTRADA, PANFILO M. LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND implementation. There were many complaints aired in tv and radio that prices will
SERGIO R. OSMEA III go up by a certain % due to its implementation, which the Court said is not
Respondents: ERMITA, PURISIMA, PARAYNO, JR. necessarily correct.
G.R. No. 168461
Petitioners: ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. et. al. G.R. No. 168056
Respondents: PURISIMA, PARAYNO, JR. Before the effectivity of RA No. 9337, ABAKADA GURO Party List et. al. filed
G.R. No. 168463 a petition for prohibition. They question the constitutionality of Sections
Petitioners: Francis Escudero et. al. 4, 5 & 6 of the said law, amending Sections 106, 107 & 108 respectively of
Respondents: ERMITA, PURISIMA, PARAYNO, JR. the NIRC.
G.R. No. 168730 Section 4 10% VAT Sale of goods and properties
Petitioners: BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Section 5 10% VAT Importation of Goods
Respondents: EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. Section 6 10% VAT Sale of Services and use or lease of
MARGARITO TEVES, in his capacity as Secretary of Finance; HON. JOSE MARIO properties
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
The questioned provisions contained a uniform proviso authorizing the
Bureau of Customs,
President, upon the recommendation of the Secretary of Finance, to raise
the VAT to 12% (effective January 1, 2006) after any of the following
(This case is very long and the its all about VAT. But, you may skip the gray parts since they
do not directly discuss INPUT VAT :) conditions have been satisfied:
o VAT collection as a percentage of Gross Domestic Product (GDP)
Summary: (on Input VAT) of the previous year exceeds two and four-fifth percent (2 4/5
Petitioners assail the constitutionality of RA No. 9337 or the VAT Reform Act %); or
amending several provisions in the NIRC. In relation to input tax, Section 8, which o National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 %).
the government gets to tax a profit or value-added even if there is no profit
G.R. No. 168207 or value-added
Sen. Pimentel et. al. filed a petition for certiorari assailing the The petitioners also believe that these provisions violate the constitutional
constitutionality of Sections 4, 5 & 6 of RA No. 9337 guarantee of equal protection of law as the limitation on the creditable
Again, they questioned the stand-by authority of the President to input tax if: (1) the entity has a high ratio of input tax; or (2) invests in
increase the VAT rate to 12%, on the ground that it amounts to an undue capital equipment; or (3) has several transactions with the government, is
delegation of legislative power not based on real and substantial differences to meet a valid classification.
Also, they contend that the increase in VAT rate contingent on any of the Lastly, they contend that the 70% limit is anything but progressive,
2 conditions being satisfied violates the due process clause violative of Article VI Section 28(1) of the Constitution The rule of
o 12% increase is ambiguous because it does not state if the rate taxation shall be uniform and equitable. The Congress shall evolve a
would be returned to the original 10% if the conditions are no progressive system of taxation.
longer satisfied
o rate is unfair and unreasonable G.R. No. 168463 (more on procedural issues - irrelevant)
o increased in VAT rate should only be based on fiscal adequacy Rep. Escudero etc. filed a petition for certiorari questioning the
constitutionality of R.A. No. 9337 on the following grounds:
G.R. No. 168461 o Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue
Association of Pilipinas Shell Dealers et. al. assailed the following delegation of legislative power, in violation of Article VI, Section
provisions of RA No. 9337: 28(2) of the Constitution The Congress may, by law, authorize
o Section 8 (amending Section 110 (A)(2) of NIRC): requiring that the President to fix within specified limits, and subject to such
the input tax on depreciable goods shall be amortized over 60- limitations and restrictions as it may impose, tariff rates, import
month period, if the acquisition cost (excluding the VAT and export quotas, tonnage and wharfage dues, and other duties
component) exceeds 1million pesos or imposts within the framework of the national development
o Section 8 (amending Section 110 (B) of NIRC): imposing 70% program of the Government.
limit on the amount of input tax to be credited against the o The Bicameral Conference Committee acted without jurisdiction
output tax [NOTE: No more 70% limit, this was already repealed in deleting the no pass on provisions present in Senate Bill No.
by R.A. No. 9361, see Tax Code] 1950 and House Bill No. 3705; and
o Section 12 (amending Section 114(c) of NIRC): authorizing the o Insertion by the Bicameral Conference Committee of several
Government or any of its political subdivisions etc. to deduct 5% Sections which were present in Senate Bill No. 1950, violates
final withholding tax on gross payments of goods and services Article VI, Section 24(1) of the Constitution, which provides that
subject to VAT all appropriation, revenue or tariff bills shall originate exclusively
in the House of Representatives
They contend that these provisions are unconstitutional for being
arbitrary, oppressive, excessive and confiscatory G.R. No. 168730
They contested the sections which impose limitations on the amount of Gov. Garcia filed a petition for certiorari and prohibition alleging
input tax that may be claimed. They argue that the input tax partakes the unconstitutionality of the law based on the following grounds:
nature of a property that may not be confiscated, appropriated, or o that the creditable input tax in effect allows VAT-registered
limited without due process of law. establishments to retain a portion of the taxes they collect, thus
Furthermore, the input tax credit (like any other property or property violating the principle that tax collection and revenue should be
rights) may be transferred or disposed of, and that by limiting the same, solely allocated for public purpose and expenditures
o allowing the VAT-registered establishments to pass on the tax law of the state, although it may not take away property, which was vested by
to the consumers is inequitable, in violation of Article VI, Section virtue of such rights.
28(1) of the Constitution
PRELIMINARY DISCUSSION:
OSGs comments: VALUE-ADDED TAX (recall)
Basically, OSG contends that the law enjoys the presumption of The VAT is a tax on spending or consumption
constitutionality and the petitioners failed to cast doubt on its validity It is levied on the sale, barter, exchange or lease of goods or properties and
OSG also refuted petitioners arguments and manifested that RA No. 9337 services.
is the anchor of the governments fiscal reform agenda. A reform in the Indirect Tax the seller of goods or services may pass on the amount of
value-added system of taxation is the core revenue measure that will tilt tax paid to the buyer
the balance towards a sustainable macroeconomic environment necessary Background: Before, the value-added system of sales taxation was a single-
for economic growth. stage tax computed under the cost deduction method, payable only by
the original seller. NOW, it was modified and a mixture of the cost
Issues: deduction method and tax credit method is used to determine the VAT
On the issue regarding authority of the President to increase the VAT to payable.
12%, subject to certain conditions SC ruled that this was not a delegation Under the tax credit method, an entity can CREDIT against or SUBTRACT
of legislative power. It is simply a delegation of ascertainment of facts upon from the VAT charged on its sales or outputs the VAT paid on its purchases,
which enforcement and administration of the increase rate under the law inputs and imports. ----INPUT TAX
is contingent. 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 INPUT TAX/INPUT VAT (vs. OUTPUT TAX/OUTPUT VAT)
legislative policy. That Congress chose to do so in such a manner is not It is defined as the VAT due from or paid by a VAT-registered person on
within the province of the Court to inquire into, its task being to interpret the importation of goods or local purchase of good and services,
the law. including lease or use of property, in the course of trade or business, from
a VAT-registered person.
Whether or not Section 8 of R.A. No. 9337 (which amends the input tax On the other hand, OUTPUT TAX is the value-added tax due on the sale
parts of NIRC) is constitutional YES, CONSTITUTIONAL! or lease of taxable goods or properties or services by any person registered
or required to register under the law.
Held: In effect, the OUTPUT VAT of the VAT-registered SELLER becomes the
R.A. No. 9337, not being unconstitutional, the Petitions are hereby INPUT VAT of the VAT-registered BUYER. Now, if the latter (BUYER) sold
DISMISSED the goods, he can reduce the related OUTPUT VAT of his sales by the
There being NO constitutional impediment to the full enforcement and INPUT VAT from his purchases. (This is due to a tax principle that the value
implementation of R.A. No. 9337, the TRO issued is LIFTED of goods previously subjected to VAT should NOT be subjected to the same
tax.)
Ratio: To illustrate:
Re: Input Tax In sum, the case states that input tax is NOT a property or a property Seller Buyer Computation: VAT Payable
right within the constitutional purview of the due process clause. A VAT-registered Selling Price: 100 Paid to Seller 112 Output VAT from 18
persons entitlement to the creditable input tax is a MERE STATUTORY PRIVILEGE. sales
Output VAT 12 Sold to another: 168 Less: Input VAT (12)
Accordingly, the state may change or take away rights, which were created by the (12% of the SP) SP: 150
Output VAT: 18 (Output VAT of the o 2.) When the output taxes exceed the input taxes, the person
(150*12%) seller)
shall be liable for the excess, which has to be paid to the (BIR)
TOTAL 112 VAT Payable 6 o 3.) If the input taxes exceed the output taxes, the excess shall
*At the end of any taxable period, if the output VAT exceeds the input VAT, ONLY such excess be carried over to the succeeding quarter or quarters. Should
amount is payable to the BIR. 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
ON THE IMPOSITION OF 70% LIMITATION ON THE AMOUNT OF INPUT TAX THAT
revenue taxes, at the taxpayers option.
MAY BE CREDITED AGAINST THE OUTPUT TAX
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input
Petitioners claim that the contested sections impose limitations on the
tax. Thus, a person can credit his input tax only up to the extent of 70%
amount of input tax that may be claimed.
of the output tax.
In effect, a portion of the input tax that has already been paid cannot now
In laymans term, the value-added taxes that a person/taxpayer paid and
be credited against the output tax.
passed on to him by a seller can ONLY be credited up to 70% of the value-
Petitioners argument is not absolute. It assumes that the input tax
added taxes that is due to him on a taxable transaction.
exceeds 70% of the output tax, and therefore, the input tax in excess of
There is no retention of any tax collection because the person/taxpayer
70% remains uncredited. However, to the extent that the input tax is less
has already previously paid the input tax to a seller, and the seller will
than 70% of the output tax, then 100% of such input tax is still creditable.
subsequently remit such input tax to the BIR. The party directly liable for
More importantly, the excess input tax, if any, is retained in a business
the payment of the tax is the seller. What only needs to be done is for the
books of accounts and remains creditable in the succeeding quarter/s.
person/taxpayer to apply or credit these input taxes, as evidenced by
This is explicitly allowed by Section 110(B), which provides that "if the input
receipts, against his output taxes.
tax exceeds the output tax, the excess shall be carried over to the
Bottom line: The right to input tax as against the output tax is clearly a
succeeding quarter or quarters."
privilege created by law, a privilege that also can remove, or in this case,
In addition, Section 112(B) allows a VAT-registered person to apply for the
limit.
issuance of a tax credit certificate or refund for any unused input taxes,
Additional Info (not in the case): Subsequently, R.A. 9361 removed the 70%
to the extent that such input taxes have not been applied against the
cap on input VAT. Hence, the computation for the VAT due will be simpler
output taxes. Such unused input tax may be used in payment of his other
(Output VAT Input VAT = Net VAT Due OR Excess Input Tax. The excess
internal revenue taxes.
input tax can be carried over the next period.)
Another contention (petition filed by Garcia) was that the limitation on the
ON THE AMORTIZATION OF INPUT TAX ON DEPRECIABLE GOODS OVER 60-MONTH
creditable input tax in effect allows VAT-registered establishments to
PERIOD (IF ACQUISITION COST EXCEEDS 1MILLION)
retain a portion of the taxes they collect, which violates the principle that
Petitioners also contest as arbitrary, oppressive, excessive and
tax collection and revenue should be for public purposes and expenditures.
confiscatory, Section 8 amending Section 110(A) of NIRC which provides:
As earlier stated, the input tax is the tax paid by a person, passed on to him
o the input tax on goods purchased or imported in a calendar
by the seller, when he buys goods. Output tax meanwhile is the tax due to
month for use in trade or business for depreciation is allowed
the person when he sells goods.
under this Code, shall be spread evenly over the month of
In computing the VAT, 3 possible scenarios may arise:
acquisition and the fifty-nine (59) succeeding months if the
o 1.) If at the end of a taxable quarter the output taxes charged by
aggregate acquisition cost for such goods, excluding the VAT
the seller are equal to the input taxes that he paid and passed
component thereof, exceeds 1million pesos
on by the suppliers, then no payment is required
o PROVIDED, that if the estimated useful life of the capital goods The law does not make any classification in the subject of taxation, the kind
is less than 5 years, as used for depreciation purposes, then the of property, the rates to be levied or the amounts to be raised, the
input VAT shall be spread over such a shorter period methods of assessment, valuation and collection.
Petitioners argument is without basis because the taxpayer is NOT While the implementation of the law may yield varying end results
permanently deprived of his privilege to credit the input tax. Such spread depending on ones profit margin and value-added, the Court cannot go
out only poses a delay in the crediting of the input tax. beyond what the legislature has laid down and interfere with the affairs of
Again, for whatever is the purpose of the 60-month amortization, this business.
involves executive policy and legislative wisdom in which the Court cannot
intervene. UNIFORMITY AND EQUITABILITY OF TAXATION
Uniformity in taxation means that all taxable articles or kinds of property
ON THE 5% (now *7%) CREDITABLE WITHHOLDING TAX IMPOSED ON PAYMENTS of the same class shall be taxed at the same rate.
MADE BY THE GOVERNMENT FOR TAXABLE TRANSACTIONS (Sec. 12 of RA 9337, In this case, the tax law is uniform as it provides a standard rate of 0% or
which amended Section 114 of NIRC) 10% (or 12%) on all goods and services.
The creditable input VAT for sales to government would be the 5% (now Neither does the law make any distinction as to the type of industry or
*7%) standard input VAT and 5% final withholding VAT based on sales to trade that will bear the 70% limitation on the creditable input tax, 5-year
government. amortization of input tax paid on purchase of capital goods or the 5% final
Section 114(C) merely provides a method of collection, or a more withholding tax by the government.
simplified VAT withholding system It must be stressed that the rule of uniform taxation does not deprive
The amendment provides a uniform rate of 5% final VAT, which constitutes Congress of the power to classify subjects of taxation, and only demands
as full payment of the tax payable on the transaction uniformity within the particular class.
The other 5% (now *7%) effectively accounts for the standard input VAT
(deemed input VAT), in lieu of the actual input VAT directly or attributable R.A. No. 9337 is also equitable. The law is equipped with a threshold
to the taxable transaction. margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of
Again, the Court need not explore the rationale behind the provision. It is goods or services with gross annual sales or receipts not exceeding
clear that Congress intended to treat differently taxable transactions with P1.5million.
the government
PROGRESSIVITY OF TAXATION
OTHER MATTERS: (just in case he asks) Petitioners contend that the limitation on the creditable input tax is
anything but regressive. It is the smaller business with higher input tax-
EQUAL PROTECTION CLAUSE output tax ratio that will suffer the consequences.
The power of the State to make reasonable and natural classifications for Progressive taxation is built on the principle of the taxpayers ability to pay.
the purposes of taxation has long been established. The VAT is an antithesis of progressive taxation. By its very nature, it is
As a rule, the judiciary will not interfere with such power absent a clear regressive.
showing of unreasonableness, discrimination, or arbitrariness. The Constitution does not really prohibit the imposition of indirect taxes
Petitioners point out that the limitation on the creditable input tax if the which, like the VAT, are regressive. What it simply provides is that
entity has a high ratio of input tax, or invests in capital equipment, or has Congress shall evolve a progressive system of taxation.
several transactions with the government, is not based on real and
substantial differences to meet a valid classification. BASELESS!
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.