1
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-41631 December 17, 1976
HON. RAMON D. BAGATSING, as Mayor of the City of Manila; ROMAN G.
GARGANTIEL, as Secretary to the Mayor; THE MARKET ADMINISTRATOR; and
THE MUNICIPAL BOARD OF MANILA, petitioners,
vs.
HON. PEDRO A. RAMIREZ, in his capacity as Presiding Judge of the Court of First
Instance of Manila, Branch XXX and the FEDERATION OF MANILA MARKET
VENDORS, INC., respondents.
Santiago F. Alidio and Restituto R. Villanueva for petitioners.
Antonio H. Abad, Jr. for private respondent.
Federico A. Blay for petitioner for intervention.
MARTIN, J.:
The chief question to be decided in this case is what law shall govern the
publication of a tax ordinance enacted by the Municipal Board of Manila, the
Revised City Charter (R.A. 409, as amended), which requires publication of the
ordinance before its enactment and after its approval, or the Local Tax Code (P.D.
No. 231), which only demands publication after approval.
On June 12, 1974, the Municipal Board of Manila enacted Ordinance No. 7522,
"AN ORDINANCE REGULATING THE OPERATION OF PUBLIC MARKETS AND
PRESCRIBING FEES FOR THE RENTALS OF STALLS AND PROVIDING PENALTIES
FOR VIOLATION THEREOF AND FOR OTHER PURPOSES." The petitioner City
Mayor, Ramon D. Bagatsing, approved the ordinance on June 15, 1974.
On February 17, 1975, respondent Federation of Manila Market Vendors, Inc.
commenced Civil Case 96787 before the Court of First Instance of Manila
presided over by respondent Judge, seeking the declaration of nullity of
Ordinance No. 7522 for the reason that (a) the publication requirement under
the Revised Charter of the City of Manila has not been complied with; (b) the
Market Committee was not given any participation in the enactment of the
ordinance, as envisioned by Republic Act 6039; (c) Section 3 (e) of the Anti-Graft
and Corrupt Practices Act has been violated; and (d) the ordinance would violate
Presidential Decree No. 7 of September 30, 1972 prescribing the collection of fees
and charges on livestock and animal products.
Resolving the accompanying prayer for the issuance of a writ of preliminary
injunction, respondent Judge issued an order on March 11, 1975, denying the plea
for failure of the respondent Federation of Manila Market Vendors, Inc. to exhaust
the administrative remedies outlined in the Local Tax Code.
After due hearing on the merits, respondent Judge rendered its decision on
August 29, 1975, declaring the nullity of Ordinance No. 7522 of the City of Manila
on the primary ground of non-compliance with the requirement of publication
under the Revised City Charter. Respondent Judge ruled:
There is, therefore, no question that the ordinance in question was not published
at all in two daily newspapers of general circulation in the City of Manila before
its enactment. Neither was it published in the same manner after approval,
although it was posted in the legislative hall and in all city public markets and city
public libraries. There being no compliance with the mandatory requirement of
publication before and after approval, the ordinance in question is invalid and,
therefore, null and void.
Petitioners moved for reconsideration of the adverse decision, stressing that (a)
only a post-publication is required by the Local Tax Code; and (b) private
respondent failed to exhaust all administrative remedies before instituting an
action in court.
On September 26, 1975, respondent Judge denied the motion.
Forthwith, petitioners brought the matter to Us through the present petition for
review on certiorari.
We find the petition impressed with merits.
1. The nexus of the present controversy is the apparent conflict between
the Revised Charter of the City of Manila and the Local Tax Code on the manner
of publishing a tax ordinance enacted by the Municipal Board of Manila. For,
while Section 17 of the Revised Charter provides:
Each proposed ordinance shall be published in two daily newspapers of general
circulation in the city, and shall not be discussed or enacted by the Board until
after the third day following such publication. * * * Each approved ordinance * *
* shall be published in two daily newspapers of general circulation in the city,
within ten days after its approval; and shall take effect and be in force on and

after the twentieth day following its publication, if no date is fixed in the
ordinance.
Section 43 of the Local Tax Code directs:
Within ten days after their approval, certified true copies of all provincial, city,
municipal and barrio ordinances levying or imposing taxes, fees or other charges
shall be published for three consecutive days in a newspaper or publication
widely circulated within the jurisdiction of the local government, or posted in the
local legislative hall or premises and in two other conspicuous places within the
territorial jurisdiction of the local government. In either case, copies of all
provincial, city, municipal and barrio ordinances shall be furnished the
treasurers of the respective component and mother units of a local government
for dissemination.
In other words, while the Revised Charter of the City of Manila requires
publication before the enactment of the ordinance and after the approval thereof
in two daily newspapers of general circulation in the city, the Local Tax Code only
prescribes for publication after the approval of "ordinances levying or imposing
taxes, fees or other charges" either in a newspaper or publication widely
circulated within the jurisdiction of the local government or by posting the
ordinance in the local legislative hall or premises and in two other conspicuous
places within the territorial jurisdiction of the local government. Petitioners'
compliance with the Local Tax Code rather than with the Revised Charter of the
City spawned this litigation.
There is no question that the Revised Charter of the City of Manila is a special act
since it relates only to the City of Manila, whereas the Local Tax Code is a general
law because it applies universally to all local governments. Blackstone defines
general law as a universal rule affecting the entire community and special law as
one relating to particular persons or things of a class. 1 And the rule commonly
said is that a prior special law is not ordinarily repealed by a subsequent general
law. The fact that one is special and the other general creates a presumption that
the special is to be considered as remaining an exception of the general, one as a
general law of the land, the other as the law of a particular case. 2 However, the
rule readily yields to a situation where the special statute refers to a subject in
general, which the general statute treats in particular. The exactly is the
circumstance obtaining in the case at bar. Section 17 of the Revised Charter of the
City of Manila speaks of "ordinance" in general, i.e., irrespective of the nature and
scope thereof, whereas, Section 43 of the Local Tax Code relates to "ordinances
levying or imposing taxes, fees or other charges" in particular. In regard,
therefore, to ordinances in general, the Revised Charter of the City of Manila is
doubtless dominant, but, that dominant force loses its continuity when it
approaches the realm of "ordinances levying or imposing taxes, fees or other
2
charges" in particular. There, the Local Tax Code controls. Here, as always, a
general provision must give way to a particular provision. 3 Special provision
governs. 4 This is especially true where the law containing the particular
provision was enacted later than the one containing the general provision. The
City Charter of Manila was promulgated on June 18, 1949 as against the Local Tax
Code which was decreed on June 1, 1973. The law-making power cannot be said
to have intended the establishment of conflicting and hostile systems upon the
same subject, or to leave in force provisions of a prior law by which the new will
of the legislating power may be thwarted and overthrown. Such a result would
render legislation a useless and Idle ceremony, and subject the law to the
reproach of uncertainty and unintelligibility. 5
The case of City of Manila v. Teotico 6 is opposite. In that case, Teotico sued the
City of Manila for damages arising from the injuries he suffered when he fell
inside an uncovered and unlighted catchbasin or manhole on P. Burgos Avenue.
The City of Manila denied liability on the basis of the City Charter (R.A. 409)
exempting the City of Manila from any liability for damages or injury to persons
or property arising from the failure of the city officers to enforce the provisions
of the charter or any other law or ordinance, or from negligence of the City Mayor,
Municipal Board, or other officers while enforcing or attempting to enforce the
provisions of the charter or of any other law or ordinance. Upon the other hand,
Article 2189 of the Civil Code makes cities liable for damages for the death of, or
injury suffered by any persons by reason of the defective condition of roads,
streets, bridges, public buildings, and other public works under their control or
supervision. On review, the Court held the Civil Code controlling. It is true that,
insofar as its territorial application is concerned, the Revised City Charter is a
special law and the subject matter of the two laws, the Revised City Charter
establishes a general rule of liability arising from negligence in general,
regardless of the object thereof, whereas the Civil Code constitutes a particular
prescription for liability due to defective streets in particular. In the same
manner, the Revised Charter of the City prescribes a rule for the publication of
"ordinance" in general, while the Local Tax Code establishes a rule for the
publication of "ordinance levying or imposing taxes fees or other charges in
particular.
In fact, there is no rule which prohibits the repeal even by implication of a special
or specific act by a general or broad one. 7 A charter provision may be impliedly
modified or superseded by a later statute, and where a statute is controlling, it
must be read into the charter notwithstanding any particular charter provision.
8 A subsequent general law similarly applicable to all cities prevails over any
conflicting charter provision, for the reason that a charter must not be
inconsistent with the general laws and public policy of the state. 9 A chartered
city is not an independent sovereignty. The state remains supreme in all matters
not purely local. Otherwise stated, a charter must yield to the constitution and

general laws of the state, it is to have read into it that general law which governs
the municipal corporation and which the corporation cannot set aside but to
which it must yield. When a city adopts a charter, it in effect adopts as part of its
charter general law of such character. 10
2. The principle of exhaustion of administrative remedies is strongly
asserted by petitioners as having been violated by private respondent in bringing
a direct suit in court. This is because Section 47 of the Local Tax Code provides
that any question or issue raised against the legality of any tax ordinance, or
portion thereof, shall be referred for opinion to the city fiscal in the case of tax
ordinance of a city. The opinion of the city fiscal is appealable to the Secretary of
Justice, whose decision shall be final and executory unless contested before a
competent court within thirty (30) days. But, the petition below plainly shows
that the controversy between the parties is deeply rooted in a pure question of
law: whether it is the Revised Charter of the City of Manila or the Local Tax Code
that should govern the publication of the tax ordinance. In other words, the
dispute is sharply focused on the applicability of the Revised City Charter or the
Local Tax Code on the point at issue, and not on the legality of the imposition of
the tax. Exhaustion of administrative remedies before resort to judicial bodies is
not an absolute rule. It admits of exceptions. Where the question litigated upon is
purely a legal one, the rule does not apply. 11 The principle may also be
disregarded when it does not provide a plain, speedy and adequate remedy. It
may and should be relaxed when its application may cause great and irreparable
damage. 12
3. It is maintained by private respondent that the subject ordinance is not
a "tax ordinance," because the imposition of rentals, permit fees, tolls and other
fees is not strictly a taxing power but a revenue-raising function, so that the
procedure for publication under the Local Tax Code finds no application. The
pretense bears its own marks of fallacy. Precisely, the raising of revenues is the
principal object of taxation. Under Section 5, Article XI of the New Constitution,
"Each local government unit shall have the power to create its own sources of
revenue and to levy taxes, subject to such provisions as may be provided by law."
13 And one of those sources of revenue is what the Local Tax Code points to in
particular: "Local governments may collect fees or rentals for the occupancy or
use of public markets and premises * * *." 14 They can provide for and regulate
market stands, stalls and privileges, and, also, the sale, lease or occupancy
thereof. They can license, or permit the use of, lease, sell or otherwise dispose of
stands, stalls or marketing privileges. 15
It is a feeble attempt to argue that the ordinance violates Presidential Decree No.
7, dated September 30, 1972, insofar as it affects livestock and animal products,
because the said decree prescribes the collection of other fees and charges
thereon "with the exception of ante-mortem and post-mortem inspection fees, as
3
well as the delivery, stockyard and slaughter fees as may be authorized by the
Secretary of Agriculture and Natural Resources." 16 Clearly, even the exception
clause of the decree itself permits the collection of the proper fees for livestock.
And the Local Tax Code (P.D. 231, July 1, 1973) authorizes in its Section 31: "Local
governments may collect fees for the slaughter of animals and the use of corrals
***"
4. The non-participation of the Market Committee in the enactment of
Ordinance No. 7522 supposedly in accordance with Republic Act No. 6039, an
amendment to the City Charter of Manila, providing that "the market committee
shall formulate, recommend and adopt, subject to the ratification of the municipal
board, and approval of the mayor, policies and rules or regulation repealing or
maneding existing provisions of the market code" does not infect the ordinance
with any germ of invalidity. 17 The function of the committee is purely
recommendatory as the underscored phrase suggests, its recommendation is
without binding effect on the Municipal Board and the City Mayor. Its prior
acquiescence of an intended or proposed city ordinance is not a condition sine
qua non before the Municipal Board could enact such ordinance. The native
power of the Municipal Board to legislate remains undisturbed even in the
slightest degree. It can move in its own initiative and the Market Committee
cannot demur. At most, the Market Committee may serve as a legislative aide of
the Municipal Board in the enactment of city ordinances affecting the city
markets or, in plain words, in the gathering of the necessary data, studies and the
collection of consensus for the proposal of ordinances regarding city markets.
Much less could it be said that Republic Act 6039 intended to delegate to the
Market Committee the adoption of regulatory measures for the operation and
administration of the city markets. Potestas delegata non delegare potest.
5. Private respondent bewails that the market stall fees imposed in the disputed
ordinance are diverted to the exclusive private use of the Asiatic Integrated
Corporation since the collection of said fees had been let by the City of Manila to
the said corporation in a "Management and Operating Contract." The assumption
is of course saddled on erroneous premise. The fees collected do not go direct to
the private coffers of the corporation. Ordinance No. 7522 was not made for the
corporation but for the purpose of raising revenues for the city. That is the object
it serves. The entrusting of the collection of the fees does not destroy the public
purpose of the ordinance. So long as the purpose is public, it does not matter
whether the agency through which the money is dispensed is public or private.
The right to tax depends upon the ultimate use, purpose and object for which the
fund is raised. It is not dependent on the nature or character of the person or
corporation whose intermediate agency is to be used in applying it. The people
may be taxed for a public purpose, although it be under the direction of an
individual or private corporation. 18
 4

Nor can the ordinance be stricken down as violative of Section 3(e) of the Anti- EN BANC
Graft and Corrupt Practices Act because the increased rates of market stall fees
as levied by the ordinance will necessarily inure to the unwarranted benefit and
advantage of the corporation. 19 We are concerned only with the issue whether ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.
the ordinance in question is intra vires. Once determined in the affirmative, the ALCANTARA and ED VINCENT S. ALBANO,
measure may not be invalidated because of consequences that may arise from its
enforcement. 20 G.R. No. 168056
Petitioners,
ACCORDINGLY, the decision of the court below is hereby reversed and set aside.
Ordinance No. 7522 of the City of Manila, dated June 15, 1975, is hereby held to Present:
have been validly enacted. No. costs. - versus -

SO ORDERED.

Castro, C.J., Barredo, Makasiar, Antonio, Muoz Palma, Aquino and Concepcion, GARCIA, JJ.
Jr., JJ., concur. THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and
Teehankee, J., reserves his vote. HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR.,

Respondents.
Promulgated:
Respondents.

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 on February 8, 2005. The House of Representatives
approved the bill on second and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No.
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.
5
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]
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
7
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)
8
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.
9
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 in Arroyo vs. De Venecia, viz.:
But the cases, both here and abroad, in varying forms of expression, all deny to
the courts the power to inquire into allegations that, in enacting a law, a House of
Congress failed to comply with its own rules, in the absence of showing that there
10
was a violation of a constitutional provision or the rights of private individuals.
In Osmea 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
11
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
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.
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.
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:
12
(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.
13
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 No-Amendment Rule
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been
distributed to its Members three days before its passage, except when the
President certifies to the necessity of its immediate enactment to meet a public
calamity or emergency. Upon the last reading of a bill, no amendment thereto
shall be allowed, and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.
Petitioners argument that the practice where a bicameral conference committee
is allowed to add or delete provisions in the House bill and the Senate bill after
these had passed three readings is in effect a circumvention of the no amendment
rule (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to
deviate from its ruling in the Tolentino case that:
 14

Nor is there any reason for requiring that the Committees Report in these cases 34(B)(1)
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 Inter-corporate Dividends
the compromise bill. . . .
116
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 Tax on Persons Exempt from VAT
report.[32] (Emphasis supplied)
117

The Court reiterates here that the no-amendment rule refers only to the Percentage Tax on domestic carriers and keepers of Garage
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 119
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 Tax on franchises
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. 121
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 Tax on banks and Non-Bank Financial Intermediaries
modifications to disagreeing provisions in bills that have been acted upon by both
houses of Congress is prohibited. 148

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Excise Tax on manufactured oils and other fuels
Exclusive Origination of Revenue Bills
151

Coming to the issue of the validity of the amendments made regarding the NIRC Excise Tax on mineral products
provisions on corporate income taxes and percentage, excise taxes. Petitioners
refer to the following provisions, to wit: 236

Section 27 Registration requirements

237

Rates of Income Tax on Domestic Corporation Issuance of receipts or sales or commercial invoices

28(A)(1) 288

Tax on Resident Foreign Corporation Disposition of Incremental Revenue

28(B)(1)

Inter-corporate Dividends 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.
15
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.
16
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
17
(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.
18
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
19
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
20
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
21
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.
22
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:
23
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-
added tax due from or paid by a VAT-registered person on the importation of
goods or local purchase of good and services, including lease or use of property,
in the course of trade or business, from a VAT-registered person, and Output Tax
is the value-added tax due on the sale or lease of taxable goods or properties or
services by any person registered or required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of
input tax that may be claimed. In effect, a portion of the input tax that has already
been paid cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70%
of the output tax, and therefore, the input tax in excess of 70% remains
uncredited. However, to the extent that the input tax is less than 70% of the
output tax, then 100% of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a 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]
24
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% non-creditable VAT,
foreign investments were not deterred.[78] Again, for whatever is the purpose of
the 60-month amortization, this involves executive economic policy and
legislative wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made by
the government for taxable transactions, Section 12 of R.A. No. 9337, which
amended Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making payment on account of
each purchase of goods and services which are subject to the value-added tax
imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-
added tax at the rate of five percent (5%) of the gross payment thereof: Provided,
That the payment for lease or use of properties or property rights to nonresident
owners shall be subject to ten percent (10%) withholding tax at the time of
payment. For purposes of this Section, the payor or person in control of the
payment shall be considered as the withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10)
days following the end of the month the withholding was made.
Section 114(C) merely provides a method of collection, or as stated by
respondents, a more simplified VAT withholding system. The government in this
case is constituted as a withholding agent with respect to their payments for
goods and services.
Prior to its amendment, Section 114(C) provided for different rates of value-
added taxes to be withheld -- 3% on gross payments for purchases of goods; 6%
on gross payments for services supplied by contractors other than by public
works contractors; 8.5% on gross payments for services supplied by public work
contractors; or 10% on payment for the lease or use of properties or property
rights to nonresident owners. Under the present Section 114(C), these different
rates, except for the 10% on lease or property rights payment to nonresidents,
were deleted, and a uniform rate of 5% is applied.
The Court observes, however, that the law the used the word final. In tax usage,
final, as opposed to creditable, means full. Thus, it is provided in Section 114(C):
final value-added tax at the rate of five percent (5%).
25
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.
26
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,
27
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]
 28

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]
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.

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

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-1104 May 31, 1949
EASTERN THEATRICAL CO., INC., ET AL., plaintiffs-appellants,
vs.
VICTOR, ALFONSO as City Treasurer of Manila, THE MUNICIPAL BOARD OF THE
CITY OF MANILA, and JUAN NOLASCO, as Mayor of the City of Manila, defendants-
appellees.
Francisco Zulueta and Poblador Jr. for appellants.
City Fiscal Jose P. Bengzon and Assistant City Fiscal Julio Villamor for appellees.
Assistant Solicitor General Carmelino G. Alvendia, Solicitor Guillermo E.Torres
and Manuel D. Baldeo as amicus curiae.
PERFECTO, J.:
Twelve corporation engaged in motion picture business have initiated these
proceeding through a complaint dated May 5, 1946, to impugn the validity of
Ordinance No. 2958 of the City of Manila which was enacted by the
municipalBoard of said city on April 25 1946 approved by the Mayor on April 27,
1946 and took effect on May 1, 1946 said ordinance reading as follows:
AN ORDINANCE IMPOSING A FEE ON THE PRICE OF EVERY ADMISSION TICKET
SOLD BY CINEMATOGRAPHS, THEATERS VAUDEVILLE COMPANIES
THEATRICAL SHOWS AND BOXING EXHIBITION AND PROVIDING FOR OTHER
PURPOSES.
SEC. 1. In addition to the fees paid by cinematographers, theaters, vaudeville
companies, theatrical shows and boxing exhibitions, as provided for in sections
633 and 778 of Ordinance No. 1600, known as the Revised Ordinance of the City
of Manila, as amended, there shall be collected from the place of amusement
which are specifically mentioned above the following fees on the price of every
admission ticket sold by such enterprises:
a. For every ticket sold the price of which is from P0.25 to P0.99
P0.05
b. For every ticket sold the price of which is from P1 to P1.99
29
0.10
c. For every ticket sold the price of which is from P2 to P2.99
0.15
d. for every ticket sold the price of which is from P3 to P4.99
0.20
e. or every ticket sold the price of which is from P5 to P5.99
0.25
f. For every ticket sold the price of which is from P0 to P14.99
0.35
g. For ticket sold thee price of which is from P15 or more
0.50
SEC. 2 It shall be the duty of every proprietor lessee, promoter, or operatorof
such cinematographs, theater, vaudeville companies, theatrical show and boxing
exhibition to provide himself with tickets which shall be serially numbered,
indication therein the name of amusement place and the fee charge for admission.
Before such ticket are sold he same shall be presented to the office of the city
Treasurer for registration. Tickets once issued and presented at the gate of
entrance shall be cut by the gatekeeper into halves, the first half to be returned
to the customer and the other half to be retained by the gate keeper.
It shall also be the duty of said proprietor lessee promoter or operator to deliver
to the Office of the City Treasurer the fees corresponding to the number of ticket
old by him within two days after the performances or exhibition has taken place.
SEC. 3. The fees herein prescribed shall not be paid where the admission fees or
charge are collection for and in behalf of any charitable education or religion
institution or association.
All place of amusement which are operate by U.S. Army and Navy with fund
belonging to the U.S. Government are hereby exempted from fees herein
imposed.

SEC. 4. Any person violation any of the provision of this ordinance shall upon
conviction thereof be punished by a fine of not more than P200 or by
imprisonment for not more than six months or by both such fine and
imprisonment in the discretion of the court. If the violation is committed by the
club firm or corporation the manager the managing director or person charged
with the management of the business of such club firm or corporation shall be
criminally responsible therefor.
SEC. 5. This Ordinance shall take effect on the May 1, 1946.
Plaintiffs, operator of theaters in Manila And distributor of local or imported films
allege that they are interested in the provision of section 1,2 and 4 of said
ordinance which they impugn as null and void upon the following grounds: (a)
For violation the Constitution more particular the provision regarding the
uniformity and equality of taxation and thee equal protection of the laws; (b)
because the Municipal Board of Manila exceeded and over-stepped the power
granted it the Charter of the City of Manila; (c) because it contravenes violates
and is inconsistent with, existing nationallegislation more particularly revenue
and tax laws and (d) because it is unfair, unjust, arbitrary capricious
unreasonable oppressive and is contrary to and violation our basic and
recognizes principles of taxation and licensing laws.
Defendants allege as affirmative defenses the following: (a) That the ordinance
was passed by the Municipal Board of Manila by virtue of its express legislative
power to tax fix the license fee and regulate the business of theaters,
cinematographs and further to fix the location of and to tax, fix the license fee for
and regulate the business of theatrical performances public exhibition circus and
other performances and places of amusement; (b) that the graduated tax
required by said ordinance being applied to all cinematographs, theaters,
vaudeville companies theatricalshow and boxing exhibitions similarly situated
and as a class without distinction or exception the same does not violate the
prohibition against uniformity and equality of taxation; (c) that the graduated tax
onadmission tickets to theaters and other places of amusement imposed by the
National Internal Revenue Code (Commonwealth Act No. 466) is collected by and
for the purposes of the National Government, whereas, Ordinance No.2958
imposes and requires the collection of a similar tax by and for the purposes of the
Government of the City of Manila, and there is no case of double taxation, (d) that
said ordinance having been enacted under the express power of the Municipal
Board to tax for revenue as distinguishedfrom its power to license for purely
police purposes, the fact that the amount collected thereunder are higher than
what are needed for police regulation and supervision does not render said
ordinance unfair unjust capricious unreasonable and oppressive; (e) that
consideration the nature of the business of the plaintiffs and the enormous
30
volume of business they handle the graduated tax fixed by the ordinance is not
unreasonable.
Defendants allege also that since May 1, 1946, when the ordinance in question
took effect plaintiffs have been charging the theater-going public increased prices
for admission to the cinematographs owned and operated to the graduated tax
imposed by said ordinance and as a result while refusing to pay said tax but at
the same time collecting an amount equal to said tax plaintiffs have taken undue
advantage of said ordinance to realized more profits.
On September 5, 1946, Judge Emilio Pena of the court of first Instance of Manila
rendered a decision upholding the validity of Ordinance No. 2958.
Plaintiffs appellants assign in the their brief three errors committed by the trial
court. We will consider them separately.
Appellants contend that the lower court erred in holding that under section 2444
(m) of the Revised administrative Code the Municipal Board of the City ofManila
had the power to enact Ordinance No. 2958.
Section 2444 (m) of the Revised Administrative code reads as follows:
To tax fix the license fee and regulate the business of hotels restaurants
refreshment places, cafes, lodging houses, boarding houses livery garages
warehouses, pawnshops theaters, cinematographs; and further to fix the location
of and to tax fix the license fee for and regulate the businessof lively stables, the
license fee for and regulate the business of livery stable, boarding stables,
embalmers, public billiard table public pool tables, bowling alleys, dance halls,
public dancing halls, cabarets, circusand other similar parades, public vehicles,
race tracks, horse races,Junk dealers, theatrical performances, public exhibitions,
circus andother performances and places of amusements, match factories,
blacksmith shops, foundries, steam boilers, lumber yards, shipyards, thestorage
and sale of gunpowder, tar, pitch, resin, coal, oil, gasoline,benzene, turpentine,
'hemp, cotton, nitroglycerin, petroleum or any Ofthe products thereof and of all
other highly combustible or explosivematerials and other establishment likely to
endanger the public safety or give rise to conflagration or explosion and subject
to the provision of ordinance issue by the (Philippines Health Service) Bureau of
Health in accordance with law tanneries, renders tallow chandlers bone factories
and soap factories.
Appellants line of argument runs as follows:
By virtue of the specific power granted in the above quoted provision of the
Revised Administration Code Ordinance No. 2958 was enacted.

On August 7, 1940 the National Assembly enacted Commonwealth Act No. 466,
known as the National Internal Revenue Code section 18, 260 and 261 of which
read as follows:
SEC. 18. Sources of revenue. The following taxes fees and charges are deemed
to be national internal revenue taxes:
(a) Income tax;
(b) Estate inheritance and gift taxes;
(c) Specific taxes on certain articles;
(d) Privilege taxes on business or occupation;
(e) Documentary stamp taxes;
(f) Mining taxes;
(g) Miscellaneous taxes fees and charges, namely, taxes on banks and insurance
companies franchise taxes on amusements charges on forest product fees for
sealing weights and measures firearms license fees radio registration fees and
water rentals.
SEC. 260. Amusement taxes. There shall be collected from the proprietor,
lessee, or operation of theater cinematographs, concert halls, circuses, boxing
exhibition and other places of amusement the following taxes:
(a) When the amount paid for admission exceeds twenty-nine centavos, two
centavos on each admission;
(b) When the amount paid for admission exceeds twenty-nine but does not
exceed thirty-nine centavos, three centavos on each admission;
(c) When the amount paid for admission exceeds thirty-nine centavos but does
not exceed forty-nine centavos four centavos on each admission.
(d) When the amount paid for admission exceeds forty-nine centavos but does
not exceed fifty-nine centavos five admission.
(e) When the amount paid for admission exceeds fifty-nine centavos but does not
exceed sixty-nine centavos six centavos on each admission.
(f) When the amount paid for admission exceeds sixty-nine centavos but does not
exceed seventy nine centavos seven centavos on each admission.
(g) When the amount paid for admission exceeds seventy nine centavos but does
not exceed eighty-nine centavos eight centavos on each admission;
31
(h) When the amount paid for admission exceeds eighty-nine centavos but does
not exceed ninty-nine centavos, nine centavos on each admission;
(i) When the amount paid for admission exceeds ninety-nine centavos, ten
centavos on each admission.
In the case of theaters or cinematographs, the taxes herein prescribed shall first
be decuted and withheld by the proprietros, lessees, or operators of such theaters
or cinematogrphs and paid to the Collector of Internal Revenue before the gross
receipts are divided between the proprietros, lessees, or operators of the theaters
of cinematographs and the distributors of the cinematographic films.
In the case of cockpits, race tracks, and cabarets, there shall be collected from the
proprietor, lessee, or operator a tax equivalent to ten per centum of the gross
receipts, irrespective of whether or not any amount is charged or paid for
admission: Provided, however, That in the case of race tracks, this tax is in
addition to the privilege tax prescribed in seciton 193. for the purpose of the
amusement tax, the term "gross receipts" embraces all the receipts of the
proprietor, lessee, or operator of the amusement place, excluding the receipts
derived by him from the sale of liquors, beverages, or other articles subject to
specific tax, or from any business subject to tax under this Code. (This section was
amended by section 8, Republic Act No. 39, effective October 1, 1946. We are
quoting the original provision to show the status of the law when the Ordinance
was passed.)
SEC. 261. Exemption. The tax herein imposed shall not be paid where the
admission fee or charges are collected by or for and in behalf of any religious,
charitable, scientific, or educational institution or association, and where no part
of the net proceeds of such admission fees or charges inures to the benefit of any
private stockholder or individual.
Ordinance No. 2958 does not specify the kind of the tax sought to be imposed but
the seven schedules and other details of said ordinance are, in every respect,
identical with the amusement tax provided by section 260 of Commonwealth Act
No. 466.
But, plaintiffs argue, that section 2444(m) of the Revised Administrative Code
confers upon the City of Manila the power to impose a tax on business but not on
amusement and, consequently, Ordinance No. 2958 was enacted beyond the
charter powers of the City of Manila.
The whole argument of plaintiffs hinges, therefore, on the assumption that the
power granted to the City of Manila by section 2444(m) of the Revised
Administrative Code is limited to the authority to impose a tax on business, with
 32

exclusion of the power to impose a tax amusement; but, the assumption is based
on an arbitrary labeling of the kind of tax authorized by said section 2444(m).
The distinction made by plaintiffs as to the power to tax on business and the
power to tax on amusement has no ground under the provisions of section
2444(m) of the Revised Administrative Code. The tax therein authorized cannot
be defined as tax on business and cannot be restricted within a smaller scope than
what is authorized by the words used, to the extent of excluding what plaintiffs
describe as tax on amusement.
The very fact that section 2444 (m) of the Revised Administrative Code includes
theaters, cinematographs, public billiard tables, public pool tables, bowling
alleys, dance halls, public dancing halls, cabarets, circuses and other similar
places, race tracks, horse races, theatrical performances, public exhibition, circus
and other performances and places of amusements, will show conclusively that
the power to tax amusement is expressly included within the power granted by
section 2444(m) of the Revised Administrative Code.
Plaintiffs-appellants contend that the lower court erred in not holding that
section 2444 (m) of the Revised Administrative Code was repealed or the power
therein contained was withdrawn by the National Assembly by the enactment of
Commonwealth Act No. 466 known as the National Internal Revenue Code.
specified, such as "race tracks, cockpits, cabarets, concert halls, circuses, and
other places of amusement." the argument has absolutely no merit. The fact that
some places of amusement are not taxed while others, such as cinematographs,
theaters, vaudeville companies, theatrical shows, and boxing exhibitions and
other kinds of amusements or places of amusement are taxed, is no argument at
all against the equality and uniformity of the tax imposition. Equality and
uniformity of the tax imposition. Equality and uniformity in taxation means that
all taxable articles or kinds of property of the same class shall be taxed at the
same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation; and the appellants cannot point out what
places of amusement taxed by the ordinance do not constitute a class by
themselves and which can be confused with those not included in the ordinance.
The judgment of the trial court is affirmed with costs against appellants.
Paras, Pablo, Bengzon, Tuason, Montemayor and Reyes, JJ., concur.
Perfecto, J., We certify that the Chief Justice voted to affirm the appealed
judgment.

In support of this contention, plaintiffs aver that the Charter of the City of Manila,
containing section 2444(m) of the Revised Administrative Code, was enacted on
December 8, 1929. On April 25, 1940, the National Assembly enacted
Commonwealth Act No. 466, including provisions on amusement tax, covering
the whole field on taxation and provided for more than what the ordinance in
question has provided. As a result, there are two taxing powers seeking to occupy
exactly the same field of legislation, and so the apparent conflict must be resolved
with the conclusion that, with the enactment of Commonwealth Act No. 466, as
later amended by Republic Act No. 39, section 2444(m) of the Revised
Administrative Code has been impliedly repealed and the power therein
delegated to the City of Manila withdrawn.

We see absolutely no force in plaintiffs' contention. The conflict pointed out by

them is imaginary. Both provisions of law may stand together and be enforced at
the same time without any incompatibility among themselves.

Finally, plaintiffs contend that the trial court erred in not holding that Ordinance
No. 2958 violated the principle of equality and uniformity of taxation enjoined by
the Constitution (sec. 22, sub-sec. 1, Art. VI, Constitution of the philippines).

To support this contenttion, appellantts point out to the fact that the ordinance
in question does not tax "many more kinds of amusements" than those therein
 33

2008 CASE YNARES-SANTIAGO, J.:

EN BANC
This petition for review assails the validity of: (1) Section 145 of the National
Internal Revenue Code (NIRC), as recodified by Republic Act (RA) 8424; (2) RA
BRITISH AMERICAN TOBACCO, G.R. No. 163583 9334, which further amended Section 145 of the NIRC on January 1, 2005; (3)
Petitioner, Revenue Regulations Nos. 1-97, 9-2003, and 22-2003; and (4) Revenue
Present: Memorandum Order No. 6-2003. Petitioner argues that the said provisions are
violative of the equal protection and uniformity clauses of the Constitution.
Puno, C.J.,
Quisumbing, RA 8240, entitled An Act Amending Sections 138, 139, 140, and 142 of the NIRC,
Ynares-Santiago, as Amended and For Other Purposes, took effect on January 1, 1997. In the same
Carpio, year, Congress passed RA 8424 or The Tax Reform Act of 1997, re-codifying the
- versus - Austria-Martinez, NIRC. Section 142 was renumbered as Section 145 of the NIRC.
Corona,
Carpio Morales, Paragraph (c) of Section 145 provides for four tiers of tax rates based on the net
Azcuna, retail price per pack of cigarettes. To determine the applicable tax rates of
Tinga, existing cigarette brands, a survey of the net retail prices per pack of cigarettes
Chico-Nazario, was conducted as of October 1, 1996, the results of which were embodied in
Velasco, Jr., Annex D of the NIRC as the duly registered, existing or active brands of cigarettes.
Nachura,
Reyes, Paragraph (c) of Section 145, [1] states
Leonardo-De Castro, and
Brion, JJ. SEC. 145. Cigars and cigarettes.
JOSE ISIDRO N. CAMACHO,
in his capacity as Secretary of xxxx
the Department of Finance and
GUILLERMO L. PARAYNO, JR., (c) Cigarettes packed by machine. There shall be levied, assessed and collected
in his capacity as Commissioner of on cigarettes packed by machine a tax at the rates prescribed below:
the Bureau of Internal Revenue,
Respondents. (1) If the net retail price (excluding the excise tax and the value-added tax) is
PHILIP MORRIS PHILIPPINES above Ten pesos (P10.00) per pack, the tax shall be Thirteen pesos and forty-four
MANUFACTURING, INC., centavos (P13.44) per pack;
FORTUNE TOBACCO, CORP., Promulgated:
MIGHTY CORPORATION, and (2) If the net retail price (excluding the excise tax and the value-added tax)
JT INTERNATIONAL, S.A., exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten pesos
Respondents-in-Intervention. August 20, 2008 (10.00) per pack, the tax shall be Eight pesos and ninety-six centavos (P8.96) per
pack;
x ---------------------------------------------------------------------------------------- x (3) If the net retail price (excluding the excise tax and the value-added tax) is Five
pesos (P5.00) but does not exceed Six pesos and fifty centavos (P6.50) per pack,
the tax shall be Five pesos and sixty centavos (P5.60) per pack;

DECISION (4) If the net retail price (excluding the excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax shall be One peso and twelve centavos
(P1.12) per pack.

Variants of existing brands of cigarettes which are introduced in the domestic
market after the effectivity of this Act shall be taxed under the highest
classification of any variant of that brand.
xxxx
New brands shall be classified according to their current net retail price.
For the above purpose, net retail price shall mean the price at which the cigarette
is sold on retail in 20 major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount intended to cover the
applicable excise tax and the value-added tax. For brands which are marketed
only outside Metro Manila, the net retail price shall mean the price at which the
cigarette is sold in five major supermarkets in the region excluding the amount
intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average net retail price
as of October 1, 1996, as set forth in Annex D of this Act, shall remain in force until
revised by Congress. (Emphasis supplied)
As such, new brands of cigarettes shall be taxed according to their current net
retail price while existing or old brands shall be taxed based on their net retail
price as of October 1, 1996.
To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue
Regulations No. 1-97,[2] which classified the existing brands of cigarettes as
those duly registered or active brands prior to January 1, 1997. New brands, or
those registered after January 1, 1997, shall be initially assessed at their
suggested retail price until such time that the appropriate survey to determine
their current net retail price is conducted. Pertinent portion of the regulations
reads
SECTION 2. Definition of Terms.
xxxx
3. Duly registered or existing brand of cigarettes shall include duly registered,
existing or active brands of cigarettes, prior to January 1, 1997.
xxxx
34
6. New Brands shall mean brands duly registered after January 1, 1997 and shall
include duly registered, inactive brands of cigarette not sold in commercial
quantity before January 1, 1997.
SECTION 4. Classification and Manner of Taxation of Existing Brands, New Brands
and Variant of Existing Brands.
xxxx
B. New Brand
New brands shall be classified according to their current net retail price. In the
meantime that the current net retail price has not yet been established, the
suggested net retail price shall be used to determine the specific tax classification.
Thereafter, a survey shall be conducted in 20 major supermarkets or retail
outlets in Metro Manila (for brands of cigarette marketed nationally) or in five
(5) major supermarkets or retail outlets in the region (for brands which are
marketed only outside Metro Manila) at which the cigarette is sold on retail in
reams/cartons, three (3) months after the initial removal of the new brand to
determine the actual net retail price excluding the excise tax and value added tax
which shall then be the basis in determining the specific tax classification. In case
the current net retail price is higher than the suggested net retail price, the
former shall prevail. Any difference in specific tax due shall be assessed and
collected inclusive of increments as provided for by the National Internal
Revenue Code, as amended.
In June 2001, petitioner British American Tobacco introduced into the market
Lucky Strike Filter, Lucky Strike Lights and Lucky Strike Menthol Lights
cigarettes, with a suggested retail price of P9.90 per pack.[3] Pursuant to Sec. 145
(c) quoted above, the Lucky Strike brands were initially assessed the excise tax
at P8.96 per pack.
On February 17, 2003, Revenue Regulations No. 9-2003,[4] amended Revenue
Regulations No. 1-97 by providing, among others, a periodic review every two
years or earlier of the current net retail price of new brands and variants thereof
for the purpose of establishing and updating their tax classification, thus:
For the purpose of establishing or updating the tax classification of new brands
and variant(s) thereof, their current net retail price shall be reviewed
periodically through the conduct of survey or any other appropriate activity, as
mentioned above, every two (2) years unless earlier ordered by the
Commissioner. However, notwithstanding any increase in the current net retail
price, the tax classification of such new brands shall remain in force until the

same is altered or changed through the issuance of an appropriate Revenue
Regulations.
Pursuant thereto, Revenue Memorandum Order No. 6-2003[5] was issued on
March 11, 2003, prescribing the guidelines and procedures in establishing
current net retail prices of new brands of cigarettes and alcohol products.
Subsequently, Revenue Regulations No. 22-2003[6] was issued on August 8, 2003
to implement the revised tax classification of certain new brands introduced in
the market after January 1, 1997, based on the survey of their current net retail
price. The survey revealed that Lucky Strike Filter, Lucky Strike Lights, and Lucky
Strike Menthol Lights, are sold at the current net retail price of P22.54, P22.61
and P21.23, per pack, respectively.[7] Respondent Commissioner of the Bureau
of Internal Revenue thus recommended the applicable tax rate of P13.44 per pack
inasmuch as Lucky Strikes average net retail price is above P10.00 per pack.
Thus, on September 1, 2003, petitioner filed before the Regional Trial Court
(RTC) of Makati, Branch 61, a petition for injunction with prayer for the issuance
of a temporary restraining order (TRO) and/or writ of preliminary injunction,
docketed as Civil Case No. 03-1032. Said petition sought to enjoin the
implementation of Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-
2003, 22-2003 and Revenue Memorandum Order No. 6-2003 on the ground that
they discriminate against new brands of cigarettes, in violation of the equal
protection and uniformity provisions of the Constitution.
Respondent Commissioner of Internal Revenue filed an Opposition[8] to the
application for the issuance of a TRO. On September 4, 2003, the trial court denied
the application for TRO, holding that the courts have no authority to restrain the
collection of taxes.[9] Meanwhile, respondent Secretary of Finance filed a Motion
to Dismiss,[10] contending that the petition is premature for lack of an actual
controversy or urgent necessity to justify judicial intervention.
In an Order dated March 4, 2004, the trial court denied the motion to dismiss and
issued a writ of preliminary injunction to enjoin the implementation of Revenue
Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-
2003.[11] Respondents filed a Motion for Reconsideration[12] and Supplemental
Motion for Reconsideration.[13] At the hearing on the said motions, petitioner
and respondent Commissioner of Internal Revenue stipulated that the only issue
in this case is the constitutionality of the assailed law, order, and regulations.[14]
On May 12, 2004, the trial court rendered a decision[15] upholding the
constitutionality of Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-
2003, 22-2003 and Revenue Memorandum Order No. 6-2003. The trial court also
lifted the writ of preliminary injunction. The dispositive portion of the decision
reads:
35
WHEREFORE, premises considered, the instant Petition is hereby DISMISSED for
lack of merit. The Writ of Preliminary Injunction previously issued is hereby
lifted and dissolved.
SO ORDERED.[16]
Petitioner brought the instant petition for review directly with this Court on a
pure question of law.
While the petition was pending, RA 9334 (An Act Increasing The Excise Tax Rates
Imposed on Alcohol And Tobacco Products, Amending For The Purpose Sections
131, 141, 143, 144, 145 and 288 of the NIRC of 1997, As Amended), took effect
on January 1, 2005. The statute, among others,
(1) increased the excise tax rates provided in paragraph (c) of Section 145;
(2) mandated that new brands of cigarettes shall initially be classified according
to their suggested net retail price, until such time that their correct tax bracket is
finally determined under a specified period and, after which, their classification
shall remain in force until revised by Congress;
(3) retained Annex D as tax base of those surveyed as of October 1, 1996 including
the classification of brands for the same products which, although not set forth in
said Annex D, were registered on or before January 1, 1997 and were being
commercially produced and marketed on or after October 1, 1996, and which
continue to be commercially produced and marketed after the effectivity of this
Act. Said classification shall remain in force until revised by Congress; and
(4) provided a legislative freeze on brands of cigarettes introduced between the
period January 2, 1997[17] to December 31, 2003, such that said cigarettes shall
remain in the classification under which the BIR has determined them to belong
as of December 31, 2003, until revised by Congress.
Pertinent portions, of RA 9334, provides:
SEC. 145. Cigars and Cigarettes.
xxxx
(C) Cigarettes Packed by Machine. There shall be levied, assessed and collected
on cigarettes packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos (P2.23) per
pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47) per
pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos (P2.72) per
pack.
(2) If the net retail price (excluding the excise tax and the value-added tax) is Five
pesos (P5.00) but does not exceed Six pesos and fifty centavos (P6.50) per pack,
the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35) per pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74) per
pack;
Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14) per
pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56) per pack.
(3) If the net retail price (excluding the excise tax and the value-added tax)
exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten pesos
(P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos (P10.88) per
pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos (P11.43) per
pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax shall be:
36
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06) per
pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos (P27.16)
per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty centavos (P28.30)
per pack.
xxxx
New brands, as defined in the immediately following paragraph, shall initially be
classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of R.A. No.
8240.
Suggested net retail price shall mean the net retail price at which new brands, as
defined above, of locally manufactured or imported cigarettes are intended by
the manufacturer or importer to be sold on retail in major supermarkets or retail
outlets in Metro Manila for those marketed nationwide, and in other regions, for
those with regional markets. At the end of three (3) months from the product
launch, the Bureau of Internal Revenue shall validate the suggested net retail
price of the new brand against the net retail price as defined herein and
determine the correct tax bracket under which a particular new brand of
cigarette, as defined above, shall be classified. After the end of eighteen (18)
months from such validation, the Bureau of Internal Revenue shall revalidate the
initially validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which a
particular new brand of cigarettes shall be classified; Provided however, That
brands of cigarettes introduced in the domestic market between January 1, 1997
[should be January 2, 1997] and December 31, 2003 shall remain in the
classification under which the Bureau of Internal Revenue has determined them
to belong as of December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall not be revised
except by an act of Congress.
Net retail price, as determined by the Bureau of Internal Revenue through a price
survey to be conducted by the Bureau of Internal Revenue itself, or the National
Statistics Office when deputized for the purpose by the Bureau of Internal
Revenue, shall mean the price at which the cigarette is sold in retail in at least

twenty (20) major supermarkets in Metro Manila (for brands of cigarettes
marketed nationally), excluding the amount intended to cover the applicable
excise tax and the value-added tax. For brands which are marketed only outside
Metro Manila, the net retail price shall mean the price at which the cigarette is
sold in at least five (5) major supermarkets in the region excluding the amount
intended to cover the applicable excise tax and value-added tax.
The classification of each brand of cigarettes based on its average net retail price
as of October 1, 1996, as set forth in Annex D, including the classification of
brands for the same products which, although not set forth in said Annex D, were
registered and were being commercially produced and marketed on or after
October 1, 1996, and which continue to be commercially produced and marketed
after the effectivity of this Act, shall remain in force until revised by Congress.
(Emphasis added)
Under RA 9334, the excise tax due on petitioners products was increased to
P25.00 per pack. In the implementation thereof, respondent Commissioner
assessed petitioners importation of 911,000 packs of Lucky Strike cigarettes at
the increased tax rate of P25.00 per pack, rendering it liable for taxes in the total
sum of P22,775,000.00.[18]
Hence, petitioner filed a Motion to Admit Attached Supplement[19] and a
Supplement[20] to the petition for review, assailing the constitutionality of RA
9334 insofar as it retained Annex D and praying for a downward classification of
Lucky Strike products at the bracket taxable at P8.96 per pack. Petitioner
contended that the continued use of Annex D as the tax base of existing brands of
cigarettes gives undue protection to said brands which are still taxed based on
their price as of October 1996 notwithstanding that they are now sold at the same
or even at a higher price than new brands like Lucky Strike. Thus, old brands of
cigarettes such as Marlboro and Philip Morris which, like Lucky Strike, are sold
at or more than P22.00 per pack, are taxed at the rate of P10.88 per pack, while
Lucky Strike products are taxed at P26.06 per pack.
In its Comment to the supplemental petition, respondents, through the Office of
the Solicitor General (OSG), argued that the passage of RA 9334, specifically the
provision imposing a legislative freeze on the classification of cigarettes
introduced into the market between January 2, 1997 and December 31, 2003,
rendered the instant petition academic. The OSG claims that the provision in
Section 145, as amended by RA 9334, prohibiting the reclassification of cigarettes
introduced during said period, cured the perceived defect of Section 145
considering that, like the cigarettes under Annex D, petitioners brands and other
brands introduced between January 2, 1997 and December 31, 2003, shall
remain in the classification under which the BIR has placed them and only
Congress has the power to reclassify them.
37
On March 20, 2006, Philip Morris Philippines Manufacturing Incorporated filed a
Motion for Leave to Intervene with attached Comment-in-Intervention.[21] This
was followed by the Motions for Leave to Intervene of Fortune Tobacco
Corporation,[22] Mighty Corporation, [23] and JT International, S.A., with their
respective Comments-in-Intervention. The Intervenors claim that they are
parties-in-interest who stand to be affected by the ruling of the Court on the
constitutionality of Section 145 of the NIRC and its Annex D because they are
manufacturers of cigarette brands which are included in the said Annex. Hence,
their intervention is proper since the protection of their interest cannot be
addressed in a separate proceeding.
According to the Intervenors, no inequality exists because cigarettes classified by
the BIR based on their net retail price as of December 31, 2003 now enjoy the
same status quo provision that prevents the BIR from reclassifying cigarettes
included in Annex D. It added that the Court has no power to pass upon the
wisdom of the legislature in retaining Annex D in RA 9334; and that the
nullification of said Annex would bring about tremendous loss of revenue to the
government, chaos in the collection of taxes, illicit trade of cigarettes, and cause
decline in cigarette demand to the detriment of the farmers who depend on the
tobacco industry.
Intervenor Fortune Tobacco further contends that petitioner is estopped from
questioning the constitutionality of Section 145 and its implementing rules and
regulations because it entered into the cigarette industry fully aware of the
existing tax system and its consequences. Petitioner imported cigarettes into the
country knowing that its suggested retail price, which will be the initial basis of
its tax classification, will be confirmed and validated through a survey by the BIR
to determine the correct tax that would be levied on its cigarettes.
Moreover, Fortune Tobacco claims that the challenge to the validity of the BIR
issuances should have been brought by petitioner before the Court of Tax Appeals
(CTA) and not the RTC because it is the CTA which has exclusive appellate
jurisdiction over decisions of the BIR in tax disputes.
On August 7, 2006, the OSG manifested that it interposes no objection to the
motions for intervention.[24] Therefore, considering the substantial interest of
the intervenors, and in the higher interest of justice, the Court admits their
intervention.
Before going into the substantive issues of this case, we must first address the
matter of jurisdiction, in light of Fortune Tobaccos contention that petitioner
should have brought its petition before the Court of Tax Appeals rather than the
regional trial court.

The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125,
as amended by Republic Act No. 9282. Section 7 thereof states, in pertinent part:
Sec. 7. Jurisdiction. The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the National Internal Revenue
or other laws administered by the Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
in relations thereto, or other matters arising under the National Internal Revenue
Code or other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period of action, in which case
the inaction shall be deemed a denial; xxx.[25]
While the above statute confers on the CTA jurisdiction to resolve tax disputes in
general, this does not include cases where the constitutionality of a law or rule is
challenged. Where what is assailed is the validity or constitutionality of a law, or
a rule or regulation issued by the administrative agency in the performance of its
quasi-legislative function, the regular courts have jurisdiction to pass upon the
same. The determination of whether a specific rule or set of rules issued by an
administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power of
judicial review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation in the
courts, including the regional trial courts. This is within the scope of judicial
power, which includes the authority of the courts to determine in an appropriate
action the validity of the acts of the political departments. Judicial power includes
the duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine whether or not
there has been a grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the Government.[26]
In Drilon v. Lim,[27] it was held:
We stress at the outset that the lower court had jurisdiction to consider the
constitutionality of Section 187, this authority being embraced in the general
definition of the judicial power to determine what are the valid and binding laws
by the criterion of their conformity to the fundamental law. Specifically, B.P. 129
38
vests in the regional trial courts jurisdiction over all civil cases in which the
subject of the litigation is incapable of pecuniary estimation, even as the accused
in a criminal action has the right to question in his defense the constitutionality
of a law he is charged with violating and of the proceedings taken against him,
particularly as they contravene the Bill of Rights. Moreover, Article X, Section
5(2), of the Constitution vests in the Supreme Court appellate jurisdiction over
final judgments and orders of lower courts in all cases in which the
constitutionality or validity of any treaty, international or executive agreement,
law, presidential decree, proclamation, order, instruction, ordinance, or
regulation is in question.
The petition for injunction filed by petitioner before the RTC is a direct attack on
the constitutionality of Section 145(C) of the NIRC, as amended, and the validity
of its implementing rules and regulations. In fact, the RTC limited the resolution
of the subject case to the issue of the constitutionality of the assailed provisions.
The determination of whether the assailed law and its implementing rules and
regulations contravene the Constitution is within the jurisdiction of regular
courts. The Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation in the courts, including the regional
trial courts.[28] Petitioner, therefore, properly filed the subject case before the
RTC.
We come now to the issue of whether petitioner is estopped from assailing the
authority of the Commissioner of Internal Revenue. Fortune Tobacco raises this
objection by pointing out that when petitioner requested the Commissioner for a
ruling that its Lucky Strike Soft Pack cigarettes was a new brand rather than a
variant of an existing brand, and thus subject to a lower specific tax rate,
petitioner executed an undertaking to comply with the procedures under existing
regulations for the assessment of deficiency internal revenue taxes.
Fortune Tobacco argues that petitioner, after invoking the authority of the
Commissioner of Internal Revenue, cannot later on turn around when the ruling
is adverse to it.
Estoppel, an equitable principle rooted in natural justice, prevents persons from
going back on their own acts and representations, to the prejudice of others who
have relied on them.[29] The principle is codified in Article 1431 of the Civil Code,
which provides:
Through estoppel, an admission or representation is rendered conclusive upon
the person making it and cannot be denied or disproved as against the person
relying thereon.

Estoppel can also be found in Rule 131, Section 2 (a) of the Rules of Court, viz:
Sec. 2. Conclusive presumptions. The following are instances of conclusive
presumptions:
(a) Whenever a party has by his own declaration, act or omission, intentionally
and deliberately led another to believe a particular thing true, and to act upon
such belief, he cannot, in any litigation arising out of such declaration, act or
omission be permitted to falsify it.
The elements of estoppel are: first, the actor who usually must have knowledge,
notice or suspicion of the true facts, communicates something to another in a
misleading way, either by words, conduct or silence; second, the other in fact
relies, and relies reasonably or justifiably, upon that communication; third, the
other would be harmed materially if the actor is later permitted to assert any
claim inconsistent with his earlier conduct; and fourth, the actor knows, expects
or foresees that the other would act upon the information given or that a
reasonable person in the actor's position would expect or foresee such
action.[30]
In the early case of Kalalo v. Luz,[31] the elements of estoppel, as related to the
party to be estopped, are: (1) conduct amounting to false representation or
concealment of material facts; or at least calculated to convey the impression that
the facts are other than, and inconsistent with, those which the party
subsequently attempts to assert; (2) intent, or at least expectation that this
conduct shall be acted upon by, or at least influence, the other party; and (3)
knowledge, actual or constructive, of the real facts.
We find that petitioner was not guilty of estoppel. When it made the undertaking
to comply with all issuances of the BIR, which at that time it considered as valid,
petitioner did not commit any false misrepresentation or misleading act. Indeed,
petitioner cannot be faulted for initially undertaking to comply with, and
subjecting itself to the operation of Section 145(C), and only later on filing the
subject case praying for the declaration of its unconstitutionality when the
circumstances change and the law results in what it perceives to be unlawful
discrimination. The mere fact that a law has been relied upon in the past and all
that time has not been attacked as unconstitutional is not a ground for
considering petitioner estopped from assailing its validity. For courts will pass
upon a constitutional question only when presented before it in bona fide cases
for determination, and the fact that the question has not been raised before is not
a valid reason for refusing to allow it to be raised later.[32]
39
Now to the substantive issues.
To place this case in its proper context, we deem it necessary to first discuss how
the assailed law operates in order to identify, with precision, the specific
provisions which, according to petitioner, have created a grossly discriminatory
classification scheme between old and new brands. The pertinent portions of RA
8240, as amended by RA 9334, are reproduced below for ready reference:
SEC. 145. Cigars and Cigarettes.
xxxx
(C) Cigarettes Packed by Machine. There shall be levied, assessed and collected
on cigarettes packed by machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos (P2.23) per
pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos (P2.47) per
pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos (P2.72) per
pack.
(2) If the net retail price (excluding the excise tax and the value-added tax) is Five
pesos (P5.00) but does not exceed Six pesos and fifty centavos (P6.50) per pack,
the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35) per pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos (P6.74) per
pack;
Effective on January 1, 2009, Seven pesos and fourteen centavos (P7.14) per
pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos (P7.56) per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax)
exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten pesos
(P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos (10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos (P10.88) per
pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos (P11.43) per
pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos (P26.06) per
pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen centavos (P27.16)
per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty centavos (P28.30)
per pack.
xxxx
New brands, as defined in the immediately following paragraph, shall initially be
classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of R.A. No.
8240.
Suggested net retail price shall mean the net retail price at which new brands, as
defined above, of locally manufactured or imported cigarettes are intended by
the manufacturer or importer to be sold on retail in major supermarkets or retail
outlets in Metro Manila for those marketed nationwide, and in other regions, for
those with regional markets. At the end of three (3) months from the product
launch, the Bureau of Internal Revenue shall validate the suggested net retail
price of the new brand against the net retail price as defined herein and
determine the correct tax bracket under which a particular new brand of
40
cigarette, as defined above, shall be classified. After the end of eighteen (18)
months from such validation, the Bureau of Internal Revenue shall revalidate the
initially validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which a
particular new brand of cigarettes shall be classified; Provided however, That
brands of cigarettes introduced in the domestic market between January 1, 1997
[should be January 2, 1997] and December 31, 2003 shall remain in the
classification under which the Bureau of Internal Revenue has determined them
to belong as of December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall not be revised
except by an act of Congress.
Net retail price, as determined by the Bureau of Internal Revenue through a price
survey to be conducted by the Bureau of Internal Revenue itself, or the National
Statistics Office when deputized for the purpose by the Bureau of Internal
Revenue, shall mean the price at which the cigarette is sold in retail in at least
twenty (20) major supermarkets in Metro Manila (for brands of cigarettes
marketed nationally), excluding the amount intended to cover the applicable
excise tax and the value-added tax. For brands which are marketed only outside
Metro Manila, the net retail price shall mean the price at which the cigarette is
sold in at least five (5) major supermarkets in the region excluding the amount
intended to cover the applicable excise tax and value-added tax.
The classification of each brand of cigarettes based on its average net retail price
as of October 1, 1996, as set forth in Annex D, including the classification of
brands for the same products which, although not set forth in said Annex D, were
registered and were being commercially produced and marketed on or after
October 1, 1996, and which continue to be commercially produced and marketed
after the effectivity of this Act, shall remain in force until revised by Congress.
As can be seen, the law creates a four-tiered system which we may refer to as the
low-priced,[33] medium-priced,[34] high-priced,[35] and premium-priced[36]
tax brackets. When a brand is introduced in the market, the current net retail
price is determined through the aforequoted specified procedure. The current
net retail price is then used to classify under which tax bracket the brand belongs
in order to finally determine the corresponding excise tax rate on a per pack
basis. The assailed feature of this law pertains to the mechanism where, after a
brand is classified based on its current net retail price, the classification is frozen
and only Congress can thereafter reclassify the same. From a practical point of
view, Annex D is merely a by-product of the whole mechanism and philosophy of
the assailed law. That is, the brands under Annex D were also classified based on
their current net retail price, the only difference being that they were the first
ones so classified since they were the only brands surveyed as of October 1, 1996,
or prior to the effectivity of RA 8240 on January 1, 1997.[37]

Due to this legislative classification scheme, it is possible that over time the net
retail price of a previously classified brand, whether it be a brand under Annex D
or a new brand classified after the effectivity of RA 8240 on January 1, 1997,
would increase (due to inflation, increase of production costs, manufacturers
decision to increase its prices, etc.) to a point that its net retail price pierces the
tax bracket to which it was previously classified.[38] Consequently, even if its
present day net retail price would make it fall under a higher tax bracket, the
previously classified brand would continue to be subject to the excise tax rate
under the lower tax bracket by virtue of the legislative classification freeze.
Petitioner claims that this is what happened in 2004 to the Marlboro and Philip
Morris brands, which were permanently classified under Annex D. As of October
1, 1996, Marlboro had net retail prices ranging from P6.78 to P6.84 while Philip
Morris had net retail prices ranging from P7.39 to P7.48. Thus, pursuant to RA
8240,[39] Marlboro and Philip Morris were classified under the high-priced tax
bracket and subjected to an excise tax rate of P8.96 per pack. Petitioner then
presented evidence showing that after the lapse of about seven years or
sometime in 2004, Marlboros and Philip Morris net retail prices per pack both
increased to about P15.59.[40] This meant that they would fall under the
premium-priced tax bracket, with a higher excise tax rate of P13.44 per pack,[41]
had they been classified based on their 2004 net retail prices. However, due to
the legislative classification freeze, they continued to be classified under the high-
priced tax bracket with a lower excise tax rate. Petitioner thereafter deplores the
fact that its Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol
Lights cigarettes, introduced in the market sometime in 2001 and validated by a
BIR survey in 2003, were found to have net retail prices of P11.53, P11.59 and
P10.34,[42] respectively, which are lower than those of Marlboro and Philip
Morris. However, since petitioners cigarettes were newly introduced brands in
the market, they were taxed based on their current net retail prices and, thus, fall
under the premium-priced tax bracket with a higher excise tax rate of P13.44 per
pack. This unequal tax treatment between Marlboro and Philip Morris, on the one
hand, and Lucky Strike, on the other, is the crux of petitioners contention that the
legislative classification freeze violates the equal protection and uniformity of
taxation clauses of the Constitution.
It is apparent that, contrary to its assertions, petitioner is not only questioning
the undue favoritism accorded to brands under Annex D, but the entire
mechanism and philosophy of the law which freezes the tax classification of a
cigarette brand based on its current net retail price. Stated differently, the alleged
discrimination arising from the legislative classification freeze between the
brands under Annex D and petitioners newly introduced brands arose only
because the former were classified based on their current net retail price as of
October 1, 1996 and petitioners newly introduced brands were classified based
41
on their current net retail price as of 2003. Without this corresponding freezing
of the classification of petitioners newly introduced brands based on their
current net retail price, it would be impossible to establish that a disparate tax
treatment occurred between the Annex D brands and petitioners newly
introduced brands.
This clarification is significant because, under these circumstances, a declaration
of unconstitutionality would necessarily entail nullifying the whole mechanism
of the law and not just Annex D. Consequently, if the assailed law is declared
unconstitutional on equal protection grounds, the entire method by which a
brand of cigarette is classified would have to be invalidated. As a result, no
method to classify brands under Annex D as well as new brands would be left
behind and the whole Section 145 of the NIRC, as amended, would become
inoperative.[43]
To simplify the succeeding discussions, we shall refer to the whole mechanism
and philosophy of the assailed law which freezes the tax classification of a
cigarette brand based on its current net retail price and which, thus, produced
different classes of brands based on the time of their introduction in the market
(starting with the brands in Annex D since they were the first brands so classified
as of October 1, 1996) as the classification freeze provision.[44]
As thus formulated, the central issue is whether or not the classification freeze
provision violates the equal protection and uniformity of taxation clauses of the
Constitution.
In Sison, Jr. v. Ancheta,[45] this Court, through Chief Justice Fernando, explained
the applicable standard in deciding equal protection and uniformity of taxation
challenges:
Now for equal protection. The applicable standard to avoid the charge that there
is a denial of this constitutional mandate whether the assailed act is in the
exercise of the police power or the power of eminent domain is to demonstrate
"that the governmental act assailed, far from being inspired by the attainment of
the common weal was prompted by the spirit of hostility, or at the very least,
discrimination that finds no support in reason. It suffices then that the laws
operate equally and uniformly on all persons under similar circumstances or that
all persons must be treated in the same manner, the conditions not being
different, both in the privileges conferred and the liabilities imposed. Favoritism
and undue preference cannot be allowed. For the principle is that equal
protection and security shall be given to every person under circumstances,
which if not identical are analogous. If law be looks upon in terms of burden or
charges, those that fall within a class should be treated in the same fashion,
whatever restrictions cast on some in the group equally binding on the rest." That

same formulation applies as well to taxation measures. The equal protection
clause is, of course, inspired by the noble concept of approximating the ideal of
the laws's benefits being available to all and the affairs of men being governed by
that serene and impartial uniformity, which is of the very essence of the idea of
law. There is, however, wisdom, as well as realism, in these words of Justice
Frankfurter: "The equality at which the 'equal protection' clause aims is not a
disembodied equality. The Fourteenth Amendment enjoins 'the equal protection
of the laws,' and laws are not abstract propositions. They do not relate to abstract
units A, B and C, but are expressions of policy arising out of specific difficulties,
addressed to the attainment of specific ends by the use of specific remedies. The
Constitution does not require things which are different in fact or opinion to be
treated in law as though they were the same." Hence the constant reiteration of
the view that classification if rational in character is allowable. As a matter of fact,
in a leading case of Lutz v. Araneta, this Court, through Justice J.B.L. Reyes, went
so far as to hold "at any rate, it is inherent in the power to tax that a state be free
to select the subjects of taxation, and it has been repeatedly held that 'inequalities
which result from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation.'"
Petitioner likewise invoked the kindred concept of uniformity. According to the
Constitution: "The rule of taxation shall be uniform and equitable." This
requirement is met according to Justice Laurel in Philippine Trust Company v.
Yatco, decided in 1940, when the tax "operates with the same force and effect in
every place where the subject may be found." He likewise added: "The rule of
uniformity does not call for perfect uniformity or perfect equality, because this is
hardly attainable." The problem of classification did not present itself in that case.
It did not arise until nine years later, when the Supreme Court held: "Equality and
uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The taxing power has the authority to
make reasonable and natural classifications for purposes of taxation, . . . As
clarified by Justice Tuason, where "the differentiation" complained of "conforms
to the practical dictates of justice and equity" it "is not discriminatory within the
meaning of this clause and is therefore uniform." There is quite a similarity then
to the standard of equal protection for all that is required is that the tax "applies
equally to all persons, firms and corporations placed in similar situation."[46]
(Emphasis supplied)
In consonance thereto, we have held that in our jurisdiction, the standard and
analysis of equal protection challenges in the main have followed the rational
basis test, coupled with a deferential attitude to legislative classifications and a
reluctance to invalidate a law unless there is a showing of a clear and unequivocal
breach of the Constitution.[47] Within the present context of tax legislation on
sin products which neither contains a suspect classification nor impinges on a
fundamental right, the rational-basis test thus finds application. Under this test,
a legislative classification, to survive an equal protection challenge, must be
42
shown to rationally further a legitimate state interest.[48] The classifications
must be reasonable and rest upon some ground of difference having a fair and
substantial relation to the object of the legislation.[49] Since every law has in its
favor the presumption of constitutionality, the burden of proof is on the one
attacking the constitutionality of the law to prove beyond reasonable doubt that
the legislative classification is without rational basis.[50] The presumption of
constitutionality can be overcome only by the most explicit demonstration that a
classification is a hostile and oppressive discrimination against particular
persons and classes, and that there is no conceivable basis which might support
it.[51]
A legislative classification that is reasonable does not offend the constitutional
guaranty of the equal protection of the laws. The classification is considered valid
and reasonable provided that: (1) it rests on substantial distinctions; (2) it is
germane to the purpose of the law; (3) it applies, all things being equal, to both
present and future conditions; and (4) it applies equally to all those belonging to
the same class.[52]
The first, third and fourth requisites are satisfied. The classification freeze
provision was inserted in the law for reasons of practicality and expediency. That
is, since a new brand was not yet in existence at the time of the passage of RA
8240, then Congress needed a uniform mechanism to fix the tax bracket of a new
brand. The current net retail price, similar to what was used to classify the brands
under Annex D as of October 1, 1996, was thus the logical and practical choice.
Further, with the amendments introduced by RA 9334, the freezing of the tax
classifications now expressly applies not just to Annex D brands but to newer
brands introduced after the effectivity of RA 8240 on January 1, 1997 and any
new brand that will be introduced in the future.[53] (However, as will be
discussed later, the intent to apply the freezing mechanism to newer brands was
already in place even prior to the amendments introduced by RA 9334 to RA
8240.) This does not explain, however, why the classification is frozen after its
determination based on current net retail price and how this is germane to the
purpose of the assailed law. An examination of the legislative history of RA 8240
provides interesting answers to this question.
RA 8240 was the first of three parts in the Comprehensive Tax Reform Package
then being pushed by the Ramos Administration. It was enacted with the
following objectives stated in the Sponsorship Speech of Senator Juan Ponce
Enrile (Senator Enrile), viz:
First, to evolve a tax structure which will promote fair competition among the
players in the industries concerned and generate buoyant and stable revenue for
the government.

Second, to ensure that the tax burden is equitably distributed not only amongst
the industries affected but equally amongst the various levels of our society that
are involved in various markets that are going to be affected by the excise tax on
distilled spirits, fermented liquor, cigars and cigarettes.
In the case of firms engaged in the industries producing the products that we are
about to tax, this means relating the tax burden to their market share, not only in
terms of quantity, Mr. President, but in terms of value.
In case of consumers, this will mean evolving a multi-tiered rate structure so that
low-priced products are subject to lower tax rates and higher-priced products
are subject to higher tax rates.
Third, to simplify the tax administration and compliance with the tax laws that
are about to unfold in order to minimize losses arising from inefficiencies and tax
avoidance scheme, if not outright tax evasion.[54]
In the initial stages of the crafting of the assailed law, the Department of Finance
(DOF) recommended to Congress a shift from the then existing ad valorem
taxation system to a specific taxation system with respect to sin products,
including cigarettes. The DOF noted that the ad valorem taxation system was a
source of massive tax leakages because the taxpayer was able to evade paying the
correct amount of taxes through the undervaluation of the price of cigarettes
using various marketing arms and dummy corporations. In order to address this
problem, the DOF proposed a specific taxation system where the cigarettes would
be taxed based on volume or on a per pack basis which was believed to be less
susceptible to price manipulation. The reason was that the BIR would only need
to monitor the sales volume of cigarettes, from which it could easily compute the
corresponding tax liability of cigarette manufacturers. Thus, the DOF suggested
the use of a three-tiered system which operates in substantially the same manner
as the four-tiered system under RA 8240 as earlier discussed. The proposal of the
DOF was embodied in House Bill (H.B.) No. 6060, the pertinent portions of which
states
SEC. 142. Cigars and cigarettes.
(c) Cigarettes packed by machine. There shall be levied, assessed and collected
on cigarettes packed by machine a tax at the rates prescribed below:
(1) If the manufacturers or importers wholesale price (net of excise tax and
value-added tax) per pack exceeds four pesos and twenty centavos (P4.20), the
tax shall be seven pesos and fifty centavos (P7.50);
43
(2) If the manufacturers or importers wholesale price (net of excise tax and
value-added tax) per pack exceeds three pesos and ninety centavos (P3.90) but
does not exceed four pesos and twenty centavos (P4.20), the tax shall be five
pesos and fifty centavos (P5.50): provided, that after two (2) years from the
effectivity of this Act, cigarettes otherwise subject to tax under this subparagraph
shall be taxed under subparagraph (1) above.
(3) If the manufacturers or importers wholesale price (net of excise tax and
value-added tax) per pack does not exceeds three pesos and ninety centavos
(P3.90), the tax rate shall be one peso (P1.00).
Variants of existing brands and new brands of cigarettes packed by machine to
be introduced in the domestic market after the effectivity of this Act, shall be
taxed under paragraph (c)(1) hereof.
The rates of specific tax on cigars and cigarettes under paragraphs (a), (b), and
(c) hereof, including the price levels for purposes of classifying cigarettes packed
by machine, shall be revised upward two (2) years after the effectivity of this Act
and every two years thereafter by the Commissioner of Internal Revenue, subject
to the approval of the Secretary of Finance, taking into account the movement of
the consumer price index for cigars and cigarettes as established by the National
Statistics Office: provided, that the increase in taxes and/or price levels shall be
equal to the present change in such consumer price index for the two-year
period: provided, further, that the President, upon the recommendation of the
Secretary of Finance, may suspend or defer the adjustment in price levels and tax
rates when the interest of the national economy and general welfare so require,
such as the need to obviate unemployment, and economic and social dislocation:
provided, finally, that the revised price levels and tax rates authorized herein
shall in all cases be rounded off to the nearest centavo and shall be in force and
effect on the date of publication thereof in a newspaper of general circulation. x x
x (Emphasis supplied)
What is of particular interest with respect to the proposal of the DOF is that it
contained a provision for the periodic adjustment of the excise tax rates and tax
brackets, and a corresponding periodic resurvey and reclassification of cigarette
brands based on the increase in the consumer price index as determined by the
Commissioner of Internal Revenue subject to certain guidelines. The evident
intent was to prevent inflation from eroding the value of the excise taxes that
would be collected from cigarettes over time by adjusting the tax rate and tax
brackets based on the increase in the consumer price index. Further, under this
proposal, old brands as well as new brands introduced thereafter would be
subjected to a resurvey and reclassification based on their respective values at
the end of every two years in order to align them with the adjustment of the

excise tax rate and tax brackets due to the movement in the consumer price
index.[55]
Of course, we now know that the DOF proposal, insofar as the periodic
adjustment of tax rates and tax brackets, and the periodic resurvey and
reclassification of cigarette brands are concerned, did not gain approval from
Congress. The House and Senate pushed through with their own versions of the
excise tax system on beers and cigarettes both denominated as H.B. No. 7198. For
convenience, we shall refer to the bill deliberated upon by the House as the House
Version and that of the Senate as the Senate Version.
The Houses Committee on Ways and Means, then chaired by Congressman
Exequiel B. Javier (Congressman Javier), roundly rejected the DOF proposal.
Instead, in its Committee Report submitted to the plenary, it proposed a different
excise tax system which used a specific tax as a basic tax with an ad valorem
comparator. Further, it deleted the proposal to have a periodic adjustment of tax
rates and the tax brackets as well as periodic resurvey and reclassification of
cigarette brands, to wit:
The rigidity of the specific tax system calls for the need for frequent congressional
intervention to adjust the tax rates to inflation and to keep pace with the
expanding needs of government for more revenues. The DOF admits this flaw
inherent in the tax system it proposed. Hence, to obviate the need for remedial
legislation, the DOF is asking Congress to grant to the Commissioner the power
to revise, one, the specific tax rates: and two, the price levels of beer and
cigarettes. What the DOF is asking, Mr. Speaker, is for Congress to delegate to the
Commissioner of Internal Revenue the power to fix the tax rates and classify the
subjects of taxation based on their price levels for purposes of fixing the tax rates.
While we sympathize with the predicament of the DOF, it is not for Congress to
abdicate such power. The power sought to be delegated to be exercised by the
Commissioner of Internal Revenue is a legislative power vested by the
Constitution in Congress pursuant to Section 1, Article VI of the Constitution.
Where the power is vested, there it must remain in Congress, a body of
representatives elected by the people. Congress may not delegate such power,
much less abdicate it.
xxxx
Moreover, the grant of such power, if at all constitutionally permissible, to the
Commissioner of Internal Revenue is fraught with ethical implications. The
debates on how much revenue will be raised, how much money will be taken
from the pockets of taxpayers, will inexorably shift from the democratic Halls of
Congress to the secret and non-transparent corridors of unelected agencies of
government, the Department of Finance and the Bureau of Internal Revenue,
which are not accountable to our people. We cannot countenance the shift for
44
ethical reasons, lest we be accused of betraying the trust reposed on this Chamber
by the people. x x x
A final point on this proposal, Mr. Speaker, is the exercise of the taxing power of
the Commissioner of Internal Revenue which will be triggered by inflation rates
based on the consumer price index. Simply stated, Mr. Speaker, the specific tax
rates will be fixed by the Commissioner depending on the price levels of beers
and cigarettes as determined by the consumers price index. This is a novel idea,
if not necessarily weird in the field of taxation. What if the brewer or the cigarette
manufacturer sells at a price below the consumers price index? Will it be taxed
on the basis of the consumers price index which is over and above its wholesale
or retail price as the case may be? This is a weird form of exaction where the tax
is based not on what the brewer or manufacturer actually realized but on an
imaginary wholesale or retail price. This amounts to a taxation based on
presumptive price levels and renders the specific tax a presumptive tax. We hope,
the DOF and the BIR will also honor a presumptive tax payment.
Moreover, specific tax rates based on price levels tied to consumers price index
as proposed by the DOF engenders anti-trust concerns. The proposal if enacted
into law will serve as a barrier to the entry of new players in the beer and
cigarette industries which are presently dominated by shared monopolies. A new
player in these industries will be denied business flexibility to fix its price levels
to promote its product and penetrate the market as the price levels are dictated
by the consumer price index. The proposed tax regime, Mr. Speaker, will merely
enhance the stranglehold of the oligopolies in the beer and cigarette industries,
thus, reversing the governments policy of dismantling monopolies and
combinations in restraint of trade.[56]
For its part, the Senates Committee on Ways and Means, then chaired by Senator
Juan Ponce Enrile (Senator Enrile), developed its own version of the excise tax
system on cigarettes. The Senate Version consisted of a four-tiered system and,
interestingly enough, contained a periodic excise tax rate and tax bracket
adjustment as well as a periodic resurvey and reclassification of brands provision
(periodic adjustment and reclassification provision, for brevity) to be conducted
by the DOF in coordination with the BIR and the National Statistics Office based
on the increase in the consumer price index similar to the one proposed by the
DOF, viz:
SEC. 4 Section 142 of the National Internal Revenue Code, as amended, is hereby
further amended to read as follows:
SEC. 142. Cigars and cigarettes.
xxxx

(c) Cigarettes packed by machine. There shall be levied, assessed and collected
on cigarettes packed by machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is
above Ten pesos (P10.00) per pack, the tax shall be Twelve pesos (P12.00) per
pack;
(2) If the net retail price (excluding the excise tax and the value-added tax)
exceeds Six pesos and fifty centavos (P6.50) per pack, the tax shall be Eight pesos
(P8.00) per pack;
(3) If the net retail price (excluding the excise tax and the value-added tax) is Five
pesos (P5.00) up to Six pesos and fifty centavos (P6.50) per pack, the tax shall be
Five pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the value-added tax) is
below Five pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack.
Variants of existing brands of cigarettes which are introduced in the domestic
market after the effectivity of this Act shall be taxed under the highest
classification of any variant of that brand.
xxx
The rates of specific tax on cigars and cigarettes under subparagraph (a), (b) and
(c) hereof, including the net retail prices for purposes of classification, shall be
adjusted on the sixth of January three years after the effectivity of this Act and
every three years thereafter. The adjustment shall be in accordance with the
inflation rate measured by the average increase in the consumer price index over
the three-year period. The adjusted tax rates and net price levels shall be in force
on the eighth of January.
Within the period hereinabove mentioned, the Secretary of Finance shall direct
the conduct of a survey of retail prices of each brand of cigarettes in coordination
with the Bureau of Internal Revenue and the National Statistics Office.
For purposes of this Section, net retail price shall mean the price at which the
cigarette is sold on retail in 20 major supermarkets in Metro Manila (for brands
of cigarettes marketed nationally), excluding the amount intended to cover the
applicable excise tax and the value-added tax. For brands which are marketed
only outside Metro Manila, the net retail price shall mean the price at which the
cigarette is sold in five major supermarkets in the region excluding the amount
intended to cover the applicable excise tax and the value-added tax.
45
The classification of each brand of cigarettes in the initial year of implementation
of this Act shall be based on its average net retail price as of October 1, 1996. The
said classification by brand shall remain in force until January 7, 2000.
New brands shall be classified according to their current net retail price.[57]
(Emphasis supplied)
During the period of interpellations, the late Senator Raul S. Roco (Senator Roco)
expressed doubts as to the legality and wisdom of putting a periodic adjustment
and reclassification provision:
Senator Enrile: This will be the first time that a tax burden will be allowed to be
automatically adjusted upwards based on a system of indexing tied up with the
Consumers Price Index (CPI). Although I must add that we have adopted a similar
system in adjusting the personal tax exemption from income tax of our individual
taxpayers.
Senator Roco: They are not exactly the same, Mr. President. But even then, we do
note that this the first time we are trying to put an automatic adjustment. My
concern is, why do we propose now this automatic adjustment? What is the
reason that impels the committee? Maybe we can be enlightened and maybe we
shall embrace it forthwith. But what is the reason?
Senator Enrile: Mr. President, we will recall that in the House of Representatives,
it has adopted a tax proposal on these products based on a specific tax as a basic
tax with an ad valorem comparator. The Committee on Ways and Means of the
Senate has not seen it fit to adopt this system, but it recognized the possibility
that there may be an occasion where the price movement in the country might
unwarrantedly move upwards, in which case, if we peg the government to a
specific tax rate of P6.30, P9.30 and P12.30 for beer, since we are talking of beer,
[58] the government might lose in the process.
In order to consider the interest of the government in this, Mr. President, and in
order to obviate the possibility that some of these products categorized under the
different tiers with different specific tax rates from moving upwards and piercing
their own tiers and thereby expose themselves to an incremental tax of higher
magnitude, it was felt that we should adopt a system where, in spite of any
escalation in the price of these products in the future, the tax rates could be
adjusted upwards so that none of these products would leave their own tier. That
was the basic principle under which we crafted this portion of the tax proposal.
Senator Roco: Mr. President, we certainly share the judgment of the distinguished
gentleman as regards the comparator provision in the House of Representatives
and we appreciate the reasons given. But we are under the impression that the
House also, aside from the comparator, has an adjustment clause that is fixed. It

has fixed rates for the adjustment. So that one of the basic differences between
the Senate proposed version now and the House version is that, the House of
Representatives has manifested its will and judgment as regards the tax to which
we will adjust, whereas the Senate version relegates fundamentally that
judgment to the Department of Finance.
Senator Enrile: That is correct, Mr. President, because we felt that in imposing a
fixed adjustment, we might be fixing an amount that is either too high or too low.
We cannot foresee the economic trends in this country over a period of two years,
three years, let alone ten years. So we felt that a mechanism ought to be adopted
in order to serve the interest of the government, the interest of the producers,
and the interest of the consuming public.
Senator Roco: This is where, Mr. President, my policy difficulties start. Under the
Constitution I think it is Article VI, Section 24, and it was the distinguished
chairman of the Committee on Ways and Means who made this Chamber very
conscious of this provision revenue measures and tariff measures shall originate
exclusively from the House of Representatives.
The reason for this, Mr. President, is, there is a long history why the House of
Representatives must originate judgments on tax. The House members represent
specific districts. They represent specific constituencies, and the whole history of
parliamentarism, the whole history of Congress as an institution is founded on
the proposition that the direct representatives of the people must speak about
taxes.
Mr. President, while the Senate can concur and can introduce amendments, the
proposed change here is radical. This is the policy difficulty that I wish to clarify
with the gentleman because the judgment call now on the amount of tax to be
imposed is not coming from Congress. It is shifted to the Department of Finance.
True, the Secretary of Finance may have been the best finance officer two years
ago and now the best finance officer in Asia, but that does not make him qualified
to replace the judgment call of the House of Representatives. That is my first
difficulty.
Senator Enrile: Mr. President, precisely the law, in effect, authorizes this rate
beforehand. The computation of the rate is the only thing that was left to the
Department of Finance as a tax implementor of Congress. This is not unusual
because we have already, as I said, adopted a system similar to this. If we adjust
the personal exemption of an individual taxpayer, we are in effect adjusting the
applicable tax rate to him.
Senator Roco: But the point I was trying to demonstrate, Mr. President, is that we
depart precisely from the mandate of the Constitution that judgment on revenue
must emanate from Congress. Here, it is shifted to the Department of Finance for
46
no visible or patent reason insofar as I could understand. The only difference is,
who will make the judgment? Should it be Congress?
Senator Enrile: Mr. President, forgive me for answering sooner than I should. My
understanding of the Constitution is that all revenue measures must emanate
from the House. That is all the Constitution says.
Now, it does not say that the judgment call must belong to the House. The
judgment call can belong both to the House and to the Senate. We can change
whatever proposal the House did. Precisely, we are now crafting a measure, and
we are saying that this is the rate subject to an adjustment which we also provide.
We are not giving any unusual power to the Secretary of Finance because we tell
him, This is the formula that you must adopt in arriving at the adjustment so that
you do not have to come back to us.[59]
Apart from his doubts as to the legality of the delegation of taxing power to the
DOF and BIR, Senator Roco also voiced out his concern about the possible abuse
and corruption that will arise from the periodic adjustment and reclassification
provision. Continuing
Senator Roco: Mr. President, if that is the argument, that the distinguished
gentleman has a different legal interpretation, we will then now examine the
choice. Because his legal interpretation is different from mine, then the issues
becomes: Is it more advantageous that this judgment be exercised by the House?
Should we not concur or modify in terms of the exercise by the House of its power
or are we better off giving this judgment call to the Department of Finance?
Let me now submit, Mr. President, that in so doing, it is more advantageous to fix
the rate so that even if we modify the rates identified by Congress, it is better and
less susceptible to abuse.
For instance, Mr. President, would the gentlemen wish to demonstrate to us how
this will be done? On page 8, lines 5 to 9, there is a provision here as to when the
Secretary of Finance shall direct the conduct of survey of retail prices of each
brand of fermented liquor in coordination with the Bureau of Internal Revenue
and the National Statistics Office.
These offices are not exactly noted, Mr. President, for having been sanctified by
the Holy Spirit in their noble intentions. x x x[60] (Emphasis supplied)
Pressing this point, Senator Roco continued his query:
Senator Roco: x x x [On page 8, lines 5 to 9] it says that during the two-year period,
the Secretary of Finance shall direct the conduct of the survey. How? When?

Which retail prices and what brand shall he consider? When he coordinates with
the Bureau of Internal Revenue, what is the Bureau of Internal Revenue supposed
to be doing? What is the National Statistics Office supposed to be doing, and under
what guides and standards?
May the gentleman wish to demonstrate how this will be done? My point, Mr.
President, is, by giving the Secretary of Finance, the BIR and the National
Statistics Office discretion over a two-year period will invite corruption and
arbitrariness, which is more dangerous than letting the House of Representatives
and this Chamber set the adjustment rate. Why not set the adjustment rate? Why
should Congress not exercise that judgment now? x x x
Senator Enrile: x x x
Senator Roco: x x x We respectfully submit that the Chairman consider choosing
the judgment of this Chamber and the House of Representatives over a delegated
judgment of the Department of Finance.
Again, it is not to say that I do not trust the Department of Finance. It has won
awards, and I also trust the undersecretary. But that is beside the point.
Tomorrow, they may not be there.[61] (Emphasis supplied)
This point was further dissected by the two senators. There was a genuine
difference of opinion as to which system one with a fixed excise tax rate and
classification or the other with a periodic adjustment of excise tax rate and
reclassification was less susceptible to abuse, as the following exchanges show:
Senator Enrile: Mr. President, considering the sensitivity of these products from
the viewpoint of exerted pressures because of the understandable impact of this
measure on the pockets of the major players producing these products, the
committee felt that perhaps to lessen such pressures, it is best that we now
establish a norm where the tax will be adjusted without incurring too much
political controversy as has happened in the case of this proposal.
Senator Roco: But that is exactly the same reason we say we must rely upon
Congress because Congress, if it is subjected to pressure, at least balances off
because of political factors.
When the Secretary of Finance is now subjected to pressure, are we saying that
the Secretary of Finance and the Department of Finance is better-suited to
withstand the pressure? Or are we saying Let the Finance Secretary decide whom
to yield?
47
I am saying that the temptation and the pressure on the Secretary of Finance is
more dangerous and more corruption-friendly than ascertaining for ourselves
now a fixed rate of increase for a fixed period.
Senator Enrile: Mr. President, perhaps the gentleman may not agree with this
representation, but in my humble opinion, this formulation is less susceptible to
pressure because there is a definite point of reference which is the consumer
price index, and that consumer price index is not going to be used only for this
purpose. The CPI is used for a national purpose, and there is less possibility of
tinkering with it.[62]
Further, Senator Roco, like Congressman Javier, expressed the view that the
periodic adjustment and reclassification provision would create an anti-
competitive atmosphere. Again, Senators Roco and Enrile had genuine
divergence of opinions on this matter, to wit:
Senator Roco: x x x On the marketing level, an adjustment clause may, in fact, be
disadvantageous to both companies, whether it is the Lucio Tan companies or the
San Miguel companies. If we have to adjust our marketing position every two
years based on the adjustment clause, the established company may survive, but
the new ones will have tremendous difficulty. Therefore, this provision tends to
indicate an anticompetitive bias.
It is good for San Miguel and the Lucio Tan companies, but the new companies
assuming there may be new companies and we want to encourage them because
of the old point of liberalization will be at a disadvantage under this situation. If
this observation will find receptivity in the policy consideration of the
distinguished Gentleman, maybe we can also further, later on, seek amendments
to this automatic adjustment clause in some manner.
Senator Enrile: Mr. President, I cannot foresee any anti-competitiveness of this
provision with respect to a new entrant, because a new entrant will not just come
in without studying the market. He is a lousy businessman if he will just come in
without studying the market. If he comes in, he will determine at what retail price
level he will market his product, and he will be coming under any of the tiers
depending upon his net retail price. Therefore, I do not see how this particular
provision will affect a new entrant.
Senator Roco: Be that as it may, Mr. President, we obviously will not resort to
debate until this evening, and we will have to look for other ways of resolving the
policy options.
Let me just close that particular area of my interpellation, by summarizing the
points we were hoping could be clarified.

1. That the automatic adjustment clause is at best questionable in law.
2. It is corruption-friendly in the sense that it shifts the discretion from the House
of Representatives and this Chamber to the Secretary of Finance, no matter how
saintly he may be.
3. There is, although the judgment call of the gentleman disagrees to our view, an
anticompetitive situation that is geared at[63]
After these lengthy exchanges, it appears that the views of Senator Enrile were
sustained by the Senate Body because the Senate Version was passed on Third
Reading without substantially altering the periodic adjustment and
reclassification provision.
It was actually at the Bicameral Conference Committee level where the Senate
Version underwent major changes. The Senate Panel prevailed upon the House
Panel to abandon the basic excise tax rate and ad valorem comparator as the
means to determine the applicable excise tax rate. Thus, the Senates four-tiered
system was retained with minor adjustments as to the excise tax rate per tier.
However, the House Panel prevailed upon the Senate Panel to delete the power
of the DOF and BIR to periodically adjust the excise tax rate and tax brackets, and
periodically resurvey and reclassify the cigarette brands based on the increase in
the consumer price index.
In lieu thereof, the classification of existing brands based on their average net
retail price as of October 1, 1996 was frozen and a fixed across-the-board 12%
increase in the excise tax rate of each tier after three years from the effectivity of
the Act was put in place. There is a dearth of discussion in the deliberations as to
the applicability of the freezing mechanism to new brands after their
classification is determined based on their current net retail price. But a plain
reading of the text of RA 8240, even before its amendment by RA 9334, as well as
the previously discussed deliberations would readily lead to the conclusion that
the intent of Congress was to likewise apply the freezing mechanism to new
brands. Precisely, Congress rejected the proposal to allow the DOF and BIR to
periodically adjust the excise tax rate and tax brackets as well as to periodically
resurvey and reclassify cigarettes brands which would have encompassed old
and new brands alike. Thus, it would be absurd for us to conclude that Congress
intended to allow the periodic reclassification of new brands by the BIR after
their classification is determined based on their current net retail price. We shall
return to this point when we tackle the second issue.
In explaining the changes made at the Bicameral Conference Committee level,
Senator Enrile, in his report to the Senate plenary, noted that the fixing of the
excise tax rates was done to avoid confusion.[64] Congressman Javier, for his
48
part, reported to the House plenary the reasons for fixing the excise tax rate and
freezing the classification, thus:
Finally, this twin feature, Mr. Speaker, fixed specific tax rates and frozen
classification, rejects the Senate version which seeks to abdicate the power of
Congress to tax by pegging the rates as well as the classification of sin products
to consumer price index which practically vests in the Secretary of Finance the
power to fix the rates and to classify the products for tax purposes.[65]
(Emphasis supplied)
Congressman Javier later added that the frozen classification was intended to
give stability to the industry as the BIR would be prevented from tinkering with
the classification since it would remain unchanged despite the increase in the net
retail prices of the previously classified brands.[66] This would also assure the
industry players that there would be no new impositions as long as the law is
unchanged.[67]
From the foregoing, it is quite evident that the classification freeze provision
could hardly be considered arbitrary, or motivated by a hostile or oppressive
attitude to unduly favor older brands over newer brands. Congress was
unequivocal in its unwillingness to delegate the power to periodically adjust the
excise tax rate and tax brackets as well as to periodically resurvey and reclassify
the cigarette brands based on the increase in the consumer price index to the DOF
and the BIR. Congress doubted the constitutionality of such delegation of power,
and likewise, considered the ethical implications thereof. Curiously, the
classification freeze provision was put in place of the periodic adjustment and
reclassification provision because of the belief that the latter would foster an anti-
competitive atmosphere in the market. Yet, as it is, this same criticism is being
foisted by petitioner upon the classification freeze provision.
To our mind, the classification freeze provision was in the main the result of
Congresss earnest efforts to improve the efficiency and effectivity of the tax
administration over sin products while trying to balance the same with other
state interests. In particular, the questioned provision addressed Congresss
administrative concerns regarding delegating too much authority to the DOF and
BIR as this will open the tax system to potential areas for abuse and corruption.
Congress may have reasonably conceived that a tax system which would give the
least amount of discretion to the tax implementers would address the problems
of tax avoidance and tax evasion.
To elaborate a little, Congress could have reasonably foreseen that, under the
DOF proposal and the Senate Version, the periodic reclassification of brands
would tempt the cigarette manufacturers to manipulate their price levels or bribe
the tax implementers in order to allow their brands to be classified at a lower tax

bracket even if their net retail prices have already migrated to a higher tax
bracket after the adjustment of the tax brackets to the increase in the consumer
price index. Presumably, this could be done when a resurvey and reclassification
is forthcoming. As briefly touched upon in the Congressional deliberations, the
difference of the excise tax rate between the medium-priced and the high-priced
tax brackets under RA 8240, prior to its amendment, was P3.36. For a moderately
popular brand which sells around 100 million packs per year, this easily
translates to P336,000,000.[68] The incentive for tax avoidance, if not outright
tax evasion, would clearly be present. Then again, the tax implementers may use
the power to periodically adjust the tax rate and reclassify the brands as a tool to
unduly oppress the taxpayer in order for the government to achieve its revenue
targets for a given year.
Thus, Congress sought to, among others, simplify the whole tax system for sin
products to remove these potential areas of abuse and corruption from both the
side of the taxpayer and the government. Without doubt, the classification freeze
provision was an integral part of this overall plan. This is in line with one of the
avowed objectives of the assailed law to simplify the tax administration and
compliance with the tax laws that are about to unfold in order to minimize losses
arising from inefficiencies and tax avoidance scheme, if not outright tax
evasion.[69] RA 9334 did not alter this classification freeze provision of RA 8240.
On the contrary, Congress affirmed this freezing mechanism by clarifying the
wording of the law. We can thus reasonably conclude, as the deliberations on RA
9334 readily show, that the administrative concerns in tax administration, which
moved Congress to enact the classification freeze provision in RA 8240, were
merely continued by RA 9334. Indeed, administrative concerns may provide a
legitimate, rational basis for legislative classification.[70] In the case at bar, these
administrative concerns in the measurement and collection of excise taxes on sin
products are readily apparent as afore-discussed.
Aside from the major concern regarding the elimination of potential areas for
abuse and corruption from the tax administration of sin products, the legislative
deliberations also show that the classification freeze provision was intended to
generate buoyant and stable revenues for government. With the frozen tax
classifications, the revenue inflow would remain stable and the government
would be able to predict with a greater degree of certainty the amount of taxes
that a cigarette manufacturer would pay given the trend in its sales volume over
time. The reason for this is that the previously classified cigarette brands would
be prevented from moving either upward or downward their tax brackets despite
the changes in their net retail prices in the future and, as a result, the amount of
taxes due from them would remain predictable. The classification freeze
provision would, thus, aid in the revenue planning of the government.[71]
49
All in all, the classification freeze provision addressed Congresss administrative
concerns in the simplification of tax administration of sin products, elimination
of potential areas for abuse and corruption in tax collection, buoyant and stable
revenue generation, and ease of projection of revenues. Consequently, there can
be no denial of the equal protection of the laws since the rational-basis test is
amply satisfied.
Going now to the contention of petitioner that the classification freeze provision
unduly favors older brands over newer brands, we must first contextualize the
basis of this claim. As previously discussed, the evidence presented by the
petitioner merely showed that in 2004, Marlboro and Philip Morris, on the one
hand, and Lucky Strike, on the other, would have been taxed at the same rate had
the classification freeze provision been not in place. But due to the operation of
the classification freeze provision, Lucky Strike was taxed higher. From here,
petitioner generalizes that this differential tax treatment arising from the
classification freeze provision adversely impacts the fairness of the playing field
in the industry, particularly, between older and newer brands. Thus, it is virtually
impossible for new brands to enter the market.
Petitioner did not, however, clearly demonstrate the exact extent of such impact.
It has not been shown that the net retail prices of other older brands previously
classified under this classification system have already pierced their tax brackets,
and, if so, how this has affected the overall competition in the market. Further, it
does not necessarily follow that newer brands cannot compete against older
brands because price is not the only factor in the market as there are other factors
like consumer preference, brand loyalty, etc. In other words, even if the newer
brands are priced higher due to the differential tax treatment, it does not mean
that they cannot compete in the market especially since cigarettes contain
addictive ingredients so that a consumer may be willing to pay a higher price for
a particular brand solely due to its unique formulation. It may also be noted that
in 2003, the BIR surveyed 29 new brands[72] that were introduced in the market
after the effectivity of RA 8240 on January 1, 1997, thus negating the sweeping
generalization of petitioner that the classification freeze provision has become an
insurmountable barrier to the entry of new brands. Verily, where there is a claim
of breach of the due process and equal protection clauses, considering that they
are not fixed rules but rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent such a showing,
the presumption of validity must prevail.[73]
Be that as it may, petitioners evidence does suggest that, at least in 2004, Philip
Morris and Marlboro, older brands, would have been taxed at the same rate as
Lucky Strike, a newer brand, due to certain conditions (i.e., the increase of the
older brands net retail prices beyond the tax bracket to which they were
previously classified after the lapse of some time) were it not for the classification

freeze provision. It may be conceded that this has adversely affected, to a certain
extent, the ability of petitioner to competitively price its newer brands vis--vis
the subject older brands. Thus, to a limited extent, the assailed law seems to
derogate one of its avowed objectives, i.e. promoting fair competition among the
players in the industry. Yet, will this occurrence, by itself, render the assailed law
unconstitutional on equal protection grounds?
We answer in the negative.
Whether Congress acted improvidently in derogating, to a limited extent, the
states interest in promoting fair competition among the players in the industry,
while pursuing other state interests regarding the simplification of tax
administration of sin products, elimination of potential areas for abuse and
corruption in tax collection, buoyant and stable revenue generation, and ease of
projection of revenues through the classification freeze provision, and whether
the questioned provision is the best means to achieve these state interests,
necessarily go into the wisdom of the assailed law which we cannot inquire into,
much less overrule. The classification freeze provision has not been shown to be
precipitated by a veiled attempt, or hostile attitude on the part of Congress to
unduly favor older brands over newer brands. On the contrary, we must
reasonably assume, owing to the respect due a co-equal branch of government
and as revealed by the Congressional deliberations, that the enactment of the
questioned provision was impelled by an earnest desire to improve the efficiency
and effectivity of the tax administration of sin products. For as long as the
legislative classification is rationally related to furthering some legitimate state
interest, as here, the rational-basis test is satisfied and the constitutional
challenge is perfunctorily defeated.
We do not sit in judgment as a supra-legislature to decide, after a law is passed
by Congress, which state interest is superior over another, or which method is
better suited to achieve one, some or all of the states interests, or what these
interests should be in the first place. This policy-determining power, by
constitutional fiat, belongs to Congress as it is its function to determine and
balance these interests or choose which ones to pursue. Time and again we have
ruled that the judiciary does not settle policy issues. The Court can only declare
what the law is and not what the law should be. Under our system of government,
policy issues are within the domain of the political branches of government and
of the people themselves as the repository of all state power.[74] Thus, the
legislative classification under the classification freeze provision, after having
been shown to be rationally related to achieve certain legitimate state interests
and done in good faith, must, perforce, end our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited
extent, one of its avowed objectives (i.e. promoting fair competition among the
50
players in the industry) would suggest that, by Congresss own standards, the
current excise tax system on sin products is imperfect. But, certainly, we cannot
declare a statute unconstitutional merely because it can be improved or that it
does not tend to achieve all of its stated objectives.[75] This is especially true for
tax legislation which simultaneously addresses and impacts multiple state
interests.[76] Absent a clear showing of breach of constitutional limitations,
Congress, owing to its vast experience and expertise in the field of taxation, must
be given sufficient leeway to formulate and experiment with different tax systems
to address the complex issues and problems related to tax administration.
Whatever imperfections that may occur, the same should be addressed to the
democratic process to refine and evolve a taxation system which ideally will
achieve most, if not all, of the states objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision of
Congress and the method by which the latter sought to achieve the same. But its
remedy is with Congress and not this Court. As succinctly articulated in Vance v.
Bradley:[77]
The Constitution presumes that, absent some reason to infer antipathy, even
improvident decisions will eventually be rectified by the democratic process, and
that judicial intervention is generally unwarranted no matter how unwisely we
may think a political branch has acted. Thus, we will not overturn such a statute
unless the varying treatment of different groups or persons is so unrelated to the
achievement of any combination of legitimate purposes that we can only
conclude that the legislature's actions were irrational.[78]
We now tackle the second issue.
Petitioner asserts that Revenue Regulations No. 1-97, as amended by Revenue
Regulations No. 9-2003, Revenue Regulations No. 22-2003 and Revenue
Memorandum Order No. 6-2003, are invalid insofar as they empower the BIR to
reclassify or update the classification of new brands of cigarettes based on their
current net retail prices every two years or earlier. It claims that RA 8240, even
prior to its amendment by RA 9334, did not authorize the BIR to conduct said
periodic resurvey and reclassification.
The questioned provisions are found in the following sections of the assailed
issuances:
(1) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as
amended by Section 2 of Revenue Regulations 9-2003, viz:
For the purpose of establishing or updating the tax classification of new brands
and variant(s) thereof, their current net retail price shall be reviewed

periodically through the conduct of survey or any other appropriate activity, as
mentioned above, every two (2) years unless earlier ordered by the
Commissioner. However, notwithstanding any increase in the current net retail
price, the tax classification of such new brands shall remain in force until the
same is altered or changed through the issuance of an appropriate Revenue
Regulations.
(2) Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance
Division II) II(b) of Revenue Memorandum Order No. 6-2003, insofar as pertinent
to cigarettes packed by machine, viz:
II. POLICIES AND GUIDELINES
1. The conduct of survey covered by this Order, for purposes of determining the
current retail prices of new brands of cigarettes and alcohol products introduced
in the market on or after January 1, 1997, shall be undertaken in the following
instances:
xxxx
b. For reclassification of new brands of said excisable products that were
introduced in the market after January 1, 1997.
xxxx
4. The determination of the current retail prices of new brands of the aforesaid
excisable products shall be initiated as follows:
xxxx
b. After the lapse of the prescribed two-year period or as the Commissioner may
otherwise direct, the appropriate tax reclassification of these brands based on
the current net retail prices thereof shall be determined by a survey to be
conducted upon a written directive by the Commissioner.
For this purpose, a memorandum order to the Assistant Commissioner, Large
Taxpayers Service, Heads, Excise Tax Areas, and Regional Directors of all
Revenue Regions, except Revenue Region Nos. 4, 5, 6, 7, 8 and 9, shall be issued
by the Commissioner for the submission of the list of major supermarkets/retail
outlets where the above excisable products are being sold, as well as the list of
selected revenue officers who shall be designated to conduct the said
activity(ies).
51
xxxx
6. The results of the survey conducted in Revenue Region Nos. 4 to 9 shall be
submitted directly to the Chief, LT Assistance Division II (LTAD II), National Office
for consolidation. On the other hand, the results of the survey conducted in
Revenue Regions other than Revenue Region Nos. 4 to 9, shall be submitted to
the Office of the Regional Director for regional consolidation. The consolidated
regional survey, together with the accomplished survey forms shall be
transmitted to the Chief, LTAD II for national consolidation within three (3) days
from date of actual receipt from the survey teams. The LTAD II shall be
responsible for the evaluation and analysis of the submitted survey forms and the
preparation of the recommendation for the updating/revision of the tax
classification of each brand of cigarettes and alcohol products. The said
recommendation, duly validated by the ACIR, LTS, shall be submitted to the
Commissioner for final review within ten (10) days from the date of actual receipt
of complete reports from all the surveying Offices.
7. Upon final review by the Commissioner of the revised tax classification of the
different new brands of cigarettes and alcohol products, the appropriate revenue
regulations shall be prepared and submitted for approval by the Secretary of
Finance.
xxxx
III. PROCEDURES
xxxx
Large Taxpayers Assistance Division II
xxxx
1. Perform the following preparatory procedures on the identification of brands
to be surveyed, supermarkets/retail outlets where the survey shall be conducted,
and the personnel selected to conduct the survey.
xxxx
b. On the tax reclassification of new brands
i. Submit a master list of registered brands covered by the survey pursuant to the
provisions of Item II.2 of this Order containing the complete description of each
brand, existing net retail price and the corresponding tax rate thereof.

ii. Submit to the ACIR, LTS, a list of major supermarkets/retail outlets within the
territorial jurisdiction of the concerned revenue regions where the survey will be
conducted to be used as basis in the issuance of Mission Orders. Ensure that the
minimum number of establishments to be surveyed, as prescribed under existing
revenue laws and regulations, is complied with. In addition, the names and
designations of revenue officers selected to conduct the survey shall be clearly
indicated opposite the names of the establishments to be surveyed.
There is merit to the contention.
In order to implement RA 8240 following its effectivity on January 1, 1997, the
BIR issued Revenue Regulations No. 1-97, dated December 13, 1996, which
mandates a one-time classification only.[79] Upon their launch, new brands shall
be initially taxed based on their suggested net retail price. Thereafter, a survey
shall be conducted within three (3) months to determine their current net retail
prices and, thus, fix their official tax classifications. However, the BIR made a
turnaround by issuing Revenue Regulations No. 9-2003, dated February 17,
2003, which partly amended Revenue Regulations No. 1-97, by authorizing the
BIR to periodically reclassify new brands (i.e., every two years or earlier) based
on their current net retail prices. Thereafter, the BIR issued Revenue
Memorandum Order No. 6-2003, dated March 11, 2003, prescribing the
guidelines on the implementation of Revenue Regulations No. 9-2003. This was
patent error on the part of the BIR for being contrary to the plain text and
legislative intent of RA 8240.
It is clear that the afore-quoted portions of Revenue Regulations No. 1-97, as
amended by Section 2 of Revenue Regulations 9-2003, and Revenue
Memorandum Order No. 6-2003 unjustifiably emasculate the operation of
Section 145 of the NIRC because they authorize the Commissioner of Internal
Revenue to update the tax classification of new brands every two years or earlier
subject only to its issuance of the appropriate Revenue Regulations, when
nowhere in Section 145 is such authority granted to the Bureau. Unless expressly
granted to the BIR, the power to reclassify cigarette brands remains a prerogative
of the legislature which cannot be usurped by the former.
More importantly, as previously discussed, the clear legislative intent was for
new brands to benefit from the same freezing mechanism accorded to Annex D
brands. To reiterate, in enacting RA 8240, Congress categorically rejected the
DOF proposal and Senate Version which would have empowered the DOF and
BIR to periodically adjust the excise tax rate and tax brackets, and to periodically
resurvey and reclassify cigarette brands. (This resurvey and reclassification
would have naturally encompassed both old and new brands.) It would thus, be
absurd for us to conclude that Congress intended to allow the periodic
reclassification of new brands by the BIR after their classification is determined
52
based on their current net retail price while limiting the freezing of the
classification to Annex D brands. Incidentally, Senator Ralph G. Recto expressed
the following views during the deliberations on RA 9334, which later amended
RA 8240:
Senator Recto: Because, like I said, when Congress agreed to adopt a specific tax
system [under R.A. 8240], when Congress did not index the brackets, and
Congress did not index the rates but only provided for a one rate increase in the
year 2000, we shifted from ad valorem which was based on value to a system of
specific which is based on volume. Congress then, in effect, determined the
classification based on the prices at that particular period of time and classified
these products accordingly.
Of course, Congress then decided on what will happen to the new brands or
variants of existing brands. To favor government, a variant would be classified as
the highest rate of tax for that particular brand. In case of a new brand, Mr.
President, then the BIR should classify them. But I do not think it was the
intention of Congress then to give the BIR the authority to reclassify them every
so often. I do not think it was the intention of Congress to allow the BIR to classify
a new brand every two years, for example, because it will be arbitrary for the BIR
to do so. x x x[80] (Emphasis supplied)
For these reasons, the amendments introduced by RA 9334 to RA 8240, insofar
as the freezing mechanism is concerned, must be seen merely as underscoring
the legislative intent already in place then, i.e. new brands as being covered by
the freezing mechanism after their classification based on their current net retail
prices.
Unfortunately for petitioner, this result will not cause a downward
reclassification of Lucky Strike. It will be recalled that petitioner introduced
Lucky Strike in June 2001. However, as admitted by petitioner itself, the BIR did
not conduct the required market survey within three months from product
launch. As a result, Lucky Strike was never classified based on its actual current
net retail price. Petitioner failed to timely seek redress to compel the BIR to
conduct the requisite market survey in order to fix the tax classification of Lucky
Strike. In the meantime, Lucky Strike was taxed based on its suggested net retail
price of P9.90 per pack, which is within the high-priced tax bracket. It was only
after the lapse of two years or in 2003 that the BIR conducted a market survey
which was the first time that Lucky Strikes actual current net retail price was
surveyed and found to be from P10.34 to P11.53 per pack, which is within the
premium-priced tax bracket. The case of petitioner falls under a situation where
there was no reclassification based on its current net retail price which would
have been invalid as previously explained. Thus, we cannot grant petitioners

prayer for a downward reclassification of Lucky Strike because it was never
reclassified by the BIR based on its actual current net retail price.
It should be noted though that on August 8, 2003, the BIR issued Revenue
Regulations No. 22-2003 which implemented the revised tax classifications of
new brands based on their current net retail prices through the market survey
conducted pursuant to Revenue Regulations No. 9-2003. Annex A of Revenue
Regulations No. 22-2003 lists the result of the market survey and the
corresponding recommended tax classification of the new brands therein aside
from Lucky Strike. However, whether these other brands were illegally
reclassified based on their actual current net retail prices by the BIR must be
determined on a case-to-case basis because it is possible that these brands were
classified based on their actual current net retail price for the first time in the
year 2003 just like Lucky Strike. Thus, we shall not make any pronouncement as
to the validity of the tax classifications of the other brands listed therein.
Finally, it must be noted that RA 9334 introduced changes in the manner by
which the current net retail price of a new brand is determined and how its
classification is permanently fixed, to wit:
New brands, as defined in the immediately following paragraph, shall initially be
classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity of R.A. No.
8240 [on January 1, 1997].
Suggested net retail price shall mean the net retail price at which new brands, as
defined above, of locally manufactured or imported cigarettes are intended by
the manufacture or importer to be sold on retail in major supermarkets or retail
outlets in Metro Manila for those marketed nationwide, and in other regions, for
those with regional markets. At the end of three (3) months from the product
launch, the Bureau of Internal Revenue shall validate the suggested net retail
price of the new brand against the net retail price as defined herein and
determine the correct tax bracket under which a particular new brand of
cigarette, as defined above, shall be classified. After the end of eighteen (18)
months from such validation, the Bureau of Internal Revenue shall revalidate the
initially validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under which a
particular new brand of cigarettes shall be classified; Provided however, That
brands of cigarettes introduced in the domestic market between January 1, 1997
and December 31, 2003 shall remain in the classification under which the Bureau
of Internal Revenue has determined them to belong as of December 31, 2003.
Such classification of new brands and brands introduced between January 1,
53
1997 and December 31, 2003 shall not be revised except by an act of Congress.
(Emphasis supplied)
Thus, Revenue Regulations No. 9-2003 and Revenue Memorandum Order No. 6-
2003 should be deemed modified by the above provisions from the date of
effectivity of RA 9334 on January 1, 2005.
In sum, Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as
amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b),
II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue
Memorandum Order No. 6-2003, as pertinent to cigarettes packed by machine,
are invalid insofar as they grant the BIR the power to reclassify or update the
classification of new brands every two years or earlier. Further, these provisions
are deemed modified upon the effectivity of RA 9334 on January 1, 2005 insofar
as the manner of determining the permanent classification of new brands is
concerned.
We now tackle the last issue.
Petitioner contends that RA 8240, as amended by RA 9334, and its implementing
rules and regulations violate the General Agreement on Tariffs and Trade (GATT)
of 1947, as amended, specifically, Paragraph 2, Article III, Part II:
2. The products of the territory of any contracting party imported into the
territory of any other contracting party shall not be subject, directly or indirectly,
to internal taxes or other internal charges of any kind in excess of those applied,
directly or indirectly, to like domestic products. Moreover, no contracting party
shall otherwise apply internal taxes or other internal charges to imported or
domestic products in a manner contrary to the principles set forth in paragraph
1.
It claims that it is the duty of this Court to correct, in favor of the GATT, whatever
inconsistency exists between the assailed law and the GATT in order to prevent
triggering the international dispute settlement mechanism under the GATT-WTO
Agreement.
We disagree.
The classification freeze provision uniformly applies to all newly introduced
brands in the market, whether imported or locally manufactured. It does not
purport to single out imported cigarettes in order to unduly favor locally
produced ones. Further, petitioners evidence was anchored on the alleged
unequal tax treatment between old and new brands which involves a different
frame of reference vis--vis local and imported products. Petitioner has, therefore,
 54

failed to clearly prove its case, both factually and legally, within the parameters (1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is
of the GATT. CONSTITUTIONAL; and that

At any rate, even assuming arguendo that petitioner was able to prove that the
classification freeze provision violates the GATT, the outcome would still be the
same. The GATT is a treaty duly ratified by the Philippine Senate and under
Article VII, Section 21[81] of the Constitution, it merely acquired the status of a
statute.[82] Applying the basic principles of statutory construction in case of
irreconcilable conflict between statutes, RA 8240, as amended by RA 9334, would
prevail over the GATT either as a later enactment by Congress or as a special law
dealing with the taxation of sin products. Thus, in Abbas v. Commission on
Elections,[83] we had occasion to explain:
Petitioners premise their arguments on the assumption that the Tripoli
Agreement is part of the law of the land, being a binding international agreement.
The Solicitor General asserts that the Tripoli Agreement is neither a binding
treaty, not having been entered into by the Republic of the Philippines with a
sovereign state and ratified according to the provisions of the 1973 or 1987
Constitutions, nor a binding international agreement.
(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as
amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b),
II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue
Memorandum Order No. 6-2003, insofar as pertinent to cigarettes packed by
machine, are INVALID insofar as they grant the BIR the power to reclassify or
update the classification of new brands every two years or earlier.
SO ORDERED.
2009 CASE:
EN BANC
BRITISH AMERICAN TOBACCO, G.R. No. 163583
Petitioner,
Present:

We find it neither necessary nor determinative of the case to rule on the nature Puno, C.J.,
of the Tripoli Agreement and its binding effect on the Philippine Government Quisumbing,
whether under public international or internal Philippine law. In the first place, Ynares-Santiago,
it is now the Constitution itself that provides for the creation of an autonomous Carpio,
region in Muslim Mindanao. The standard for any inquiry into the validity of R.A. Austria-Martinez,
No. 6734 would therefore be what is so provided in the Constitution. Thus, any Corona,
conflict between the provisions of R.A. No. 6734 and the provisions of the Tripoli - versus - Carpio Morales,
Agreement will not have the effect of enjoining the implementation of the Organic Tinga,
Act. Assuming for the sake of argument that the Tripoli Agreement is a binding Chico-Nazario,
treaty or international agreement, it would then constitute part of the law of the Velasco, Jr.,
land. But as internal law it would not be superior to R.A. No. 6734, an enactment Nachura,
of the Congress of the Philippines, rather it would be in the same class as the latter Leonardo-De Castro,
[SALONGA, PUBLIC INTERNATIONAL LAW 320 (4th ed., 1974), citing Head Brion,
Money Cases, 112 U.S. 580 (1884) and Foster v. Nelson, 2 Pet. 253 (1829)]. Thus, Peralta, and
if at all, R.A. No. 6734 would be amendatory of the Tripoli Agreement, being a Bersamin, JJ.
subsequent law. Only a determination by this Court that R.A. No. 6734 JOSE ISIDRO N. CAMACHO,
contravenes the Constitution would result in the granting of the reliefs sought. in his capacity as Secretary of
(Emphasis supplied) the Department of Finance and
GUILLERMO L. PARAYNO, JR.,
WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the in his capacity as Commissioner of
Regional Trial Court of Makati, Branch 61, in Civil Case No. 03-1032, is AFFIRMED the Bureau of Internal Revenue,
with MODIFICATION. As modified, this Court declares that: Respondents.
PHILIP MORRIS PHILIPPINES
MANUFACTURING, INC.,

FORTUNE TOBACCO, CORP., Promulgated:
MIGHTY CORPOR.A.TION, and
JT INTERNATIONAL, S.A.,
Respondents-in-Intervention. April 15, 2009
x ---------------------------------------------------------------------------------------- x
RESOLUTION
YNARES-SANTIAGO, J.:
On August 20, 2008, the Court rendered a Decision partially granting the petition
in this case, viz:
WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the
Regional Trial Court of Makati, Branch 61, in Civil Case No. 03-1032, is AFFIRMED
with MODIFICATION. As modified, this Court declares that:
(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is
CONSTITUTIONAL; and that
(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as
amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b),
II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue
Memorandum Order No. 6-2003, insofar as pertinent to cigarettes packed by
machine, are INVALID insofar as they grant the BIR the power to reclassify or
update the classification of new brands every two years or earlier.
SO ORDERED.
In its Motion for Reconsideration, petitioner insists that the assailed provisions
(1) violate the equal protection and uniformity of taxation clauses of the
Constitution, (2) contravene Section 19,[1] Article XII of the Constitution on
unfair competition, and (3) infringe the constitutional provisions on regressive
and inequitable taxation. Petitioner further argues that assuming the assailed
provisions are constitutional, petitioner is entitled to a downward
reclassification of Lucky Strike from the premium-priced to the high-priced tax
bracket.
The Court is not persuaded.
55
The assailed law does not violate the equal protection and uniformity of taxation
clauses.
Petitioner argues that the classification freeze provision violates the equal
protection and uniformity of taxation clauses because Annex D brands are taxed
based on their 1996 net retail prices while new brands are taxed based on their
present day net retail prices. Citing Ormoc Sugar Co. v. Treasurer of Ormoc
City,[2] petitioner asserts that the assailed provisions accord a special or
privileged status to Annex D brands while at the same time discriminate against
other brands.
These contentions are without merit and a rehash of petitioners previous
arguments before this Court. As held in the assailed Decision, the instant case
neither involves a suspect classification nor impinges on a fundamental right.
Consequently, the rational basis test was properly applied to gauge the
constitutionality of the assailed law in the face of an equal protection challenge.
It has been held that in the areas of social and economic policy, a statutory
classification that neither proceeds along suspect lines nor infringes
constitutional rights must be upheld against equal protection challenge if there
is any reasonably conceivable state of facts that could provide a rational basis for
the classification.[3] Under the rational basis test, it is sufficient that the
legislative classification is rationally related to achieving some legitimate State
interest. As the Court ruled in the assailed Decision, viz:
A legislative classification that is reasonable does not offend the constitutional
guaranty of the equal protection of the laws. The classification is considered valid
and reasonable provided that: (1) it rests on substantial distinctions; (2) it is
germane to the purpose of the law; (3) it applies, all things being equal, to both
present and future conditions; and (4) it applies equally to all those belonging to
the same class.
The first, third and fourth requisites are satisfied. The classification freeze
provision was inserted in the law for reasons of practicality and expediency. That
is, since a new brand was not yet in existence at the time of the passage of RA
8240, then Congress needed a uniform mechanism to fix the tax bracket of a new
brand. The current net retail price, similar to what was used to classify the brands
under Annex D as of October 1, 1996, was thus the logical and practical choice.
Further, with the amendments introduced by RA 9334, the freezing of the tax
classifications now expressly applies not just to Annex D brands but to newer
brands introduced after the effectivity of RA 8240 on January 1, 1997 and any
new brand that will be introduced in the future. (However, as will be discussed
later, the intent to apply the freezing mechanism to newer brands was already in
place even prior to the amendments introduced by RA 9334 to RA 8240.) This
does not explain, however, why the classification is frozen after its determination

based on current net retail price and how this is germane to the purpose of the
assailed law. An examination of the legislative history of RA 8240 provides
interesting answers to this question.
xxxx
From the foregoing, it is quite evident that the classification freeze provision
could hardly be considered arbitrary, or motivated by a hostile or oppressive
attitude to unduly favor older brands over newer brands. Congress was
unequivocal in its unwillingness to delegate the power to periodically adjust the
excise tax rate and tax brackets as well as to periodically resurvey and reclassify
the cigarette brands based on the increase in the consumer price index to the DOF
and the BIR. Congress doubted the constitutionality of such delegation of power,
and likewise, considered the ethical implications thereof. Curiously, the
classification freeze provision was put in place of the periodic adjustment and
reclassification provision because of the belief that the latter would foster an anti-
competitive atmosphere in the market. Yet, as it is, this same criticism is being
foisted by petitioner upon the classification freeze provision.
To our mind, the classification freeze provision was in the main the result of
Congresss earnest efforts to improve the efficiency and effectivity of the tax
administration over sin products while trying to balance the same with other
State interests. In particular, the questioned provision addressed Congresss
administrative concerns regarding delegating too much authority to the DOF and
BIR as this will open the tax system to potential areas for abuse and corruption.
Congress may have reasonably conceived that a tax system which would give the
least amount of discretion to the tax implementers would address the problems
of tax avoidance and tax evasion.
To elaborate a little, Congress could have reasonably foreseen that, under the
DOF proposal and the Senate Version, the periodic reclassification of brands
would tempt the cigarette manufacturers to manipulate their price levels or bribe
the tax implementers in order to allow their brands to be classified at a lower tax
bracket even if their net retail prices have already migrated to a higher tax
bracket after the adjustment of the tax brackets to the increase in the consumer
price index. Presumably, this could be done when a resurvey and reclassification
is forthcoming. As briefly touched upon in the Congressional deliberations, the
difference of the excise tax rate between the medium-priced and the high-priced
tax brackets under RA 8240, prior to its amendment, was P3.36. For a moderately
popular brand which sells around 100 million packs per year, this easily
translates to P336,000,000. The incentive for tax avoidance, if not outright tax
evasion, would clearly be present. Then again, the tax implementers may use the
power to periodically adjust the tax rate and reclassify the brands as a tool to
56
unduly oppress the taxpayer in order for the government to achieve its revenue
targets for a given year.
Thus, Congress sought to, among others, simplify the whole tax system for sin
products to remove these potential areas of abuse and corruption from both the
side of the taxpayer and the government. Without doubt, the classification freeze
provision was an integral part of this overall plan. This is in line with one of the
avowed objectives of the assailed law to simplify the tax administration and
compliance with the tax laws that are about to unfold in order to minimize losses
arising from inefficiencies and tax avoidance scheme, if not outright tax evasion.
RA 9334 did not alter this classification freeze provision of RA 8240. On the
contrary, Congress affirmed this freezing mechanism by clarifying the wording of
the law. We can thus reasonably conclude, as the deliberations on RA 9334
readily show, that the administrative concerns in tax administration, which
moved Congress to enact the classification freeze provision in RA 8240, were
merely continued by RA 9334. Indeed, administrative concerns may provide a
legitimate, rational basis for legislative classification. In the case at bar, these
administrative concerns in the measurement and collection of excise taxes on sin
products are readily apparent as afore-discussed.
Aside from the major concern regarding the elimination of potential areas for
abuse and corruption from the tax administration of sin products, the legislative
deliberations also show that the classification freeze provision was intended to
generate buoyant and stable revenues for government. With the frozen tax
classifications, the revenue inflow would remain stable and the government
would be able to predict with a greater degree of certainty the amount of taxes
that a cigarette manufacturer would pay given the trend in its sales volume over
time. The reason for this is that the previously classified cigarette brands would
be prevented from moving either upward or downward their tax brackets despite
the changes in their net retail prices in the future and, as a result, the amount of
taxes due from them would remain predictable. The classification freeze
provision would, thus, aid in the revenue planning of the government.
All in all, the classification freeze provision addressed Congresss administrative
concerns in the simplification of tax administration of sin products, elimination
of potential areas for abuse and corruption in tax collection, buoyant and stable
revenue generation, and ease of projection of revenues. Consequently, there can
be no denial of the equal protection of the laws since the rational-basis test is
amply satisfied.
Moreover, petitioners contention that the assailed provisions violate the
uniformity of taxation clause is similarly unavailing. In Churchill v.
Concepcion,[4] we explained that a tax is uniform when it operates with the same
force and effect in every place where the subject of it is found.[5] It does not

signify an intrinsic but simply a geographical uniformity.[6] A levy of tax is not
unconstitutional because it is not intrinsically equal and uniform in its
operation.[7] The uniformity rule does not prohibit classification for purposes of
taxation.[8] As ruled in Tan v. Del Rosario, Jr.:[9]
Uniformity of taxation, like the kindred concept of equal protection, merely
requires that all subjects or objects of taxation, similarly situated, are to be
treated alike both in privileges and liabilities (citations omitted). Uniformity does
not forfend classification as long as: (1) the standards that are used therefor are
substantial and not arbitrary, (2) the categorization is germane to achieve the
legislative purpose, (3) the law applies, all things being equal, to both present and
future conditions, and (4) the classification applies equally well to all those
belonging to the same class (citations omitted).[10]
In the instant case, there is no question that the classification freeze provision
meets the geographical uniformity requirement because the assailed law applies
to all cigarette brands in the Philippines. And, for reasons already adverted to in
our August 20, 2008 Decision, the above four-fold test has been met in the
present case.
Petitioners reliance on Ormoc Sugar Co. is misplaced. In said case, the
controverted municipal ordinance specifically named and taxed only the Ormoc
Sugar Company, and excluded any subsequently established sugar central from
its coverage. Thus, the ordinance was found unconstitutional on equal protection
grounds because its terms do not apply to future conditions as well. This is not
the case here. The classification freeze provision uniformly applies to all cigarette
brands whether existing or to be introduced in the market at some future time. It
does not purport to exempt any brand from its operation nor single out a brand
for the purpose of imposition of excise taxes.
At any rate, petitioners real disagreement lies with the legitimate State interests.
Although it concedes that the Court utilized the rationality test and that the
classification freeze provision was necessitated by several legitimate State
interests, however, it refuses to accept the justifications given by Congress for the
classification freeze provision. As we elucidated in our August 20, 2008 Decision,
this line of argumentation revolves around the wisdom and expediency of the
assailed law which we cannot inquire into, much less overrule. Equal protection
is not a license for courts to judge the wisdom, fairness, or logic of legislative
choices.[11] We reiterate, therefore, that petitioners remedy is with Congress
and not this Court.
The assailed provisions do not violate the constitutional prohibition on unfair
competition.
57
Petitioner asserts that the Court erroneously applied the rational basis test
allegedly because this test does not apply in a constitutional challenge based on
a violation of Section 19, Article XII of the Constitution on unfair competition.
Citing Tatad v. Secretary of the Department of Energy,[12] it argues that the
classification freeze provision gives the brands under Annex D a decisive edge
because it constitutes a substantial barrier to the entry of prospective players;
that the Annex D provision is no different from the 4% tariff differential which
we invalidated in Tatad; that some of the new brands, like Astro, Memphis, Capri,
L&M, Bowling Green, Forbes, and Canon, which were introduced into the market
after the effectivity of the assailed law on January 1, 1997, were killed by Annex
D brands because the former brands were reclassified by the BIR to higher tax
brackets; that the finding that price is not the only factor in the market as there
are other factors like consumer preference, active ingredients, etc. is contrary to
the evidence presented and the deliberations in Congress; that the classification
freeze provision will encourage predatory pricing in contravention of the
constitutional prohibition on unfair competition; and that the cumulative effect
of the operation of the classification freeze provision is to perpetuate the
oligopoly of intervenors Philip Morris and Fortune Tobacco in contravention of
the constitutional edict for the State to regulate or prohibit monopolies, and to
disallow combinations in restraint of trade and unfair competition.
The argument lacks merit. While previously arguing that the rational basis test
was not satisfied, petitioner now asserts that this test does not apply in this case
and that the proper matrix to evaluate the constitutionality of the assailed law is
the prohibition on unfair competition under Section 19, Article XII of the
Constitution. It should be noted that during the trial below, petitioner did not
invoke said constitutional provision as it relied solely on the alleged violation of
the equal protection and uniformity of taxation clauses. Well-settled is the rule
that points of law, theories, issues and arguments not adequately brought to the
attention of the lower court will not be ordinarily considered by a reviewing
court as they cannot be raised for the first time on appeal.[13] At any rate, even
if we were to relax this rule, as previously stated, the evidence presented before
the trial court is insufficient to establish the alleged violation of the constitutional
proscription against unfair competition.
Indeed, in Tatad we ruled that a law which imposes substantial barriers to the
entry and exit of new players in our downstream oil industry may be struck down
for being violative of Section 19, Article XII of the Constitution.[14] However, we
went on to say in that case that if they are insignificant impediments, they need
not be stricken down.[15] As we stated in our August 20, 2008 Decision,
petitioner failed to convincingly prove that there is a substantial barrier to the
entry of new brands in the cigarette market due to the classification freeze
provision. We further observed that several new brands were introduced in the
market after the assailed law went into effect thus negating petitioners sweeping

claim that the classification freeze provision is an insurmountable barrier to the
entry of new brands. We also noted that price is not the only factor affecting
competition in the market for there are other factors such as taste, brand loyalty,
etc.
We see no reason to depart from these findings for the following reasons:
First, petitioner did not lay down the factual foundations, as supported by
verifiable documentary proof, which would establish, among others, the cigarette
brands in competition with each other; the current net retail prices of Annex D
brands, as determined through a market survey, to provide a sufficient point of
comparison with those covered by the BIRs market survey of new brands; and
the causal connection with as well as the extent of the impact on the competition
in the cigarette market of the classification freeze provision. Other than
petitioners self-serving allegations and testimonial evidence, no adequate
documentary evidence was presented to substantiate its claims. Absent ample
documentary proof, we cannot accept petitioners claim that the classification
freeze provision is an insurmountable barrier to the entry of new players.
Second, we cannot lend credence to petitioners claim that it cannot produce
cigarettes that can compete with Marlboro and Philip Morris in the high-priced
tax bracket. Except for its self-serving testimonial evidence, no sufficient
documentary evidence was presented to substantiate this claim. The current net
retail price, which is the basis for determining the tax bracket of a cigarette brand,
more or less consists of the costs of raw materials, labor, advertising and profit
margin. To a large extent, these factors are controllable by the manufacturer, as
such, the decision to enter which tax bracket will depend on the pricing strategy
adopted by the individual manufacturer. The same holds true for its claims that
other new brands, like Astro, Memphis, Capri, L&M, Bowling Green, Forbes, and
Canon, were killed by Annex D brands due to the effects of the operation of the
classification freeze provision over time. The evidence that petitioner presented
before the trial court failed to substantiate the basis for these claims.
Essentially, petitioner would want us to accept its conclusions of law without first
laying down the factual foundations of its arguments. This Court, which is not a
trier of facts, cannot take judicial notice of the factual premises of these
arguments as petitioner now seems to suggest. The evidence should have been
presented before the trial court to allow it to examine and determine for itself
whether such factual premises, as supported by sufficient documentary evidence,
provide reasonable basis for petitioners conclusion that there arose an
unconstitutional unfair competition due to the operation of the classification
freeze provision. Petitioner should be reminded that it appealed this case from
the adverse ruling of the trial court directly to this Court on pure questions of law
instead of resorting to the Court of Appeals.
58
Third, Tatad is not applicable to the instant case. In Tatad, we found that the 4%
tariff differential between imported crude oil and imported refined petroleum
products erects a high barrier to the entry of new players because (1) it imposes
an undue burden on new players to spend billions of pesos to build refineries in
order to compete with the old players, and (2) new players, who opt not to build
refineries, suffer from the huge disadvantage of increasing their product cost by
4%.[16] The tariff was imposed on the raw materials uniformly used by the
players in the oil industry. Thus, the adverse effect on competition arising from
this discriminatory treatment was readily apparent. In contrast, the excise tax
under the assailed law is imposed based on the current net retail price of a
cigarette brand. As previously explained, the current net retail price is
determined by the pricing strategy of the manufacturer. This Court cannot simply
speculate that the reason why a new brand cannot enter a specific tax bracket
and compete with the brands therein was because of the classification freeze
provision, rather than the manufacturers own pricing decision or some other
factor solely attributable to the manufacturer. Again, the burden of proof in this
regard is on petitioner which it failed to muster.
Fourth, the finding in our August 20, 2008 Decision that price is not the only
factor which affects consumer behavior in the cigarette market is based on
petitioners own evidence. On cross-examination, petitioners witness admitted
that notwithstanding the change in price, a cigarette smoker may prefer the old
brand because of its addictive formulation.[17] As a result, even if we were to
assume that the classification freeze provision distorts the pricing scheme of the
market players, it is not clear whether a substantial barrier to the entry of new
players would thereby be created because of these other factors affecting
consumer behavior.
Last, the claim that the assailed provisions encourage predatory pricing was
never raised nor substantiated before the trial court. It is merely an afterthought
and cannot be given weight.
In sum, the totality of the evidence presented by petitioner before the trial court
failed to convincingly establish the alleged violation of the constitutional
prohibition on unfair competition. It is a basic postulate that the one who
challenges the constitutionality of a law carries the heavy burden of proof for
laws enjoy a strong presumption of constitutionality as it is an act of a co-equal
branch of government. Petitioner failed to carry this burden.
The assailed law does not transgress the constitutional provisions on regressive
and inequitable taxation.

Petitioner argues that the classification freeze provision is a form of regressive
and inequitable tax system which is proscribed under Article VI, Section
28(1)[18] of the Constitution. It claims that people in equal positions should be
treated alike. The use of different tax bases for brands under Annex D vis--vis new
brands is discriminatory, and thus, iniquitous. Petitioner further posits that the
classification freeze provision is regressive in character. It asserts that the
harmonization of revenue flow projections and ease of tax administration cannot
override this constitutional command.
We note that the points raised by petitioner with respect to alleged inequitable
taxation perpetuated by the classification freeze provision are a mere
reformulation of its equal protection challenge. As stated earlier, the assailed
provisions do not infringe the equal protection clause because the four-fold test
is satisfied. In particular, the classification freeze provision has been found to
rationally further legitimate State interests consistent with rationality review.
Petitioners repackaged argument has, therefore, no merit.
Anent the issue of regressivity, it may be conceded that the assailed law imposes
an excise tax on cigarettes which is a form of indirect tax, and thus, regressive in
character. While there was an attempt to make the imposition of the excise tax
more equitable by creating a four-tiered taxation system where higher priced
cigarettes are taxed at a higher rate, still, every consumer, whether rich or poor,
of a cigarette brand within a specific tax bracket pays the same tax rate. To this
extent, the tax does not take into account the persons ability to pay. Nevertheless,
this does not mean that the assailed law may be declared unconstitutional for
being regressive in character because the Constitution does not prohibit the
imposition of indirect taxes but merely provides that Congress shall evolve a
progressive system of taxation. As we explained in Tolentino v. Secretary of
Finance:[19]
[R]egressivity is not a negative standard for courts to enforce. What Congress is
required by the Constitution to do is to "evolve a progressive system of taxation."
This is a directive to Congress, just like the directive to it to give priority to the
enactment of laws for the enhancement of human dignity and the reduction of
social, economic and political inequalities [Art. XIII, Section 1] or for the
promotion of the right to "quality education" [Art. XIV, Section 1]. These
provisions are put in the Constitution as moral incentives to legislation, not as
judicially enforceable rights.[20]
Petitioner is not entitled to a downward reclassification of Lucky Strike.
Petitioner alleges that assuming the assailed law is constitutional, its Lucky Strike
brand should be reclassified from the premium-priced to the high-priced tax
59
bracket. Relying on BIR Ruling No. 018-2001 dated May 10, 2001, it claims that it
timely sought redress from the BIR to have the market survey conducted within
three months from product launch, as provided for under Section 4(B)[21] of
Revenue Regulations No. 1-97, in order to determine the actual current net retail
price of Lucky Strike, and thus, fix its tax classification. Further, the upward
reclassification of Lucky Strike amounts to deprivation of property right without
due process of law. The conduct of the market survey after two years from
product launch constitutes gross neglect on the part of the BIR. Consequently, for
failure of the BIR to conduct a timely market survey, Lucky Strikes classification
based on its suggested gross retail price should be deemed its official tax
classification. Finally, petitioner asserts that had the market survey been timely
conducted sometime in 2001, the current net retail price of Lucky Strike would
have been found to be under the high-priced tax bracket.
These contentions are untenable and misleading.
First, BIR Ruling No. 018-2001 was requested by petitioner for the purpose of
fixing Lucky Strikes initial tax classification based on its suggested gross retail
price relative to its planned introduction of Lucky Strike in the market sometime
in 2001 and not for the conduct of the market survey within three months from
product launch. In fact, the said Ruling contained an express reservation that the
tax classification of Lucky Strike set therein is without prejudice, however, to the
subsequent conduct of a survey x x x in order to determine if the actual gross
retail price thereof is consistent with [petitioners] suggested gross retail
price.[22] In short, petitioner acknowledged that the initial tax classification of
Lucky Strike may be modified depending on the outcome of the survey which will
determine the actual current net retail price of Lucky Strike in the market.
Second, there was no upward reclassification of Lucky Strike because it was taxed
based on its suggested gross retail price from the time of its introduction in the
market in 2001 until the BIR market survey in 2003. We reiterate that Lucky
Strikes actual current net retail price was surveyed for the first time in 2003 and
was found to be from P10.34 to P11.53 per pack, which is within the premium-
priced tax bracket. There was, thus, no prohibited upward reclassification of
Lucky Strike by the BIR based on its current net retail price.
Third, the failure of the BIR to conduct the market survey within the three-month
period under the revenue regulations then in force can in no way make the initial
tax classification of Lucky Strike based on its suggested gross retail price
permanent. Otherwise, this would contravene the clear mandate of the law which
provides that the basis for the tax classification of a new brand shall be the
current net retail price and not the suggested gross retail price. It is a basic
principle of law that the State cannot be estopped by the mistakes of its agents.
 60

Last, the issue of timeliness of the market survey was never raised before the trial
court because petitioners theory of the case was wholly anchored on the alleged
unconstitutionality of the classification freeze provision. As a consequence, no
documentary evidence as to the actual net retail price of Lucky Strike in 2001,
based on a market survey at least comparable to the one mandated by law, was
presented before the trial court. Evidently, it cannot be assumed that had the BIR
conducted the market survey within three months from its product launch
sometime in 2001, Lucky Strike would have been found to fall under the high-
priced tax bracket and not the premium-priced tax bracket. To so hold would run
roughshod over the States right to due process. Verily, petitioner prosecuted its
case before the trial court solely on the theory that the assailed law is
unconstitutional instead of merely challenging the timeliness of the market
survey. The rule is that a party is bound by the theory he adopts and by the cause
of action he stands on. He cannot be permitted after having lost thereon to
repudiate his theory and cause of action, and thereafter, adopt another and seek
to re-litigate the matter anew either in the same forum or on appeal.[23] Having
pursued one theory and lost thereon, petitioner may no longer pursue another
inconsistent theory without thereby trifling with court processes and burdening
the courts with endless litigation.

WHEREFORE, the motion for reconsideration is DENIED.

SO ORDERED.