2. ABAKADA Guro Party List v. Ermita G.R. No.

168056, 1 September 2005

Doctrine: 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.’

FACTS:
RA 9337 was enacted in order to widen the coverage of value-added tax benefits, generate revenue, increased
emoluments for health workers, increased fiscal allocation for education and decreased mounting budget deficit.
ABAKADA Guro challenged the constitutionality of the law contending that:
1. 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 contested provisions states that: “provided, further, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%)
after any of the following conditions has been satisfied.

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

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

2. 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.
 Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax
that may be credited against the output tax. It states, in part: "[P]rovided, that the input tax inclusive of the input
VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent
(70%) of the output VAT: …"

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a
VAT-registered person on the importation of goods or local purchase of good and services, including lease or use of
property, in the course of trade or business, from a VAT-registered person, and Output Tax is the value-added tax due
on the sale or lease of taxable goods or properties or services by any person registered or required to register under
the law.

ABAKADA claimed 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.

ISSUES: Are the contentions of ABAKADA Guro meritorious?

RULING:
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight of
the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other cases, the
Court cannot strike down a law as unconstitutional simply because of its yokes.

As to the first challenge, there is no 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. Where the law is clear and
unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the
mandate is obeyed.

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

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

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

7. CIR v. American Rubber, 29 November 1966

FACTS:
American Rubber Company, a domestic corporation, was engaged in producing rubber from its rubber tree
plantation, which it owned and operated. Its products are Preserved Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed
Smoked Sheets Nos. 1 and 2, Flat Bark Rubber, 2X Brown Crepe and 3X Brown Crepe. The CIR assessed the local sale
of the products for sales tax. American Rubber paid under protest. After which, they filed a claim for refund
contending that under Section 188 (b) of the Internal Revenue Code, its rubber products were agricultural products
exempt from sales tax. CIR refused to refund arguing that the sales tax having been passed to the buyers during the
period that elapsed from January 1, 1955 to August 2, 1957, American RUbber did not have personality to demand,
sue for and recover the aforesaid sales taxes, plus interest.

TheTax Court held Preserved Latex, Flat Bark Rubber, and 3x Brown Crepe to be agricultural products,
"because the labor employed in the processing thereof is agricultural labor", and, hence, the sales of such products
were exempt from sales tax but declared Pale Crepe No. 1, Ribbed Smoked Sheets Nos. 1 and 3, as well as 2X Brown
Crepe (which is obtained from rolling excess pieces of Smoked Sheets) to be manufactured products, sales of which
were subject to tax.

ISSUES: Should the rubber products be considered agricultural or manufactured, for purposes of their subjection to
the sales tax? Is American Rubber entitled to recover the sales tax paid by it, but passed on to and paid by the buyers
of its products? And Is American Rubber entitled to interest on the sales tax paid by it under protest, in case recovery
thereof is allowed?

RULING:
First issue: The exemption from sales tax established in Section 188(b) of the Internal Revenue Tax Code in
favor of sales of agricultural products, whether in their original form or not, made by the producer or owner of the
land where produced is not taken away merely because the produce undergoes processing at the hand of said
producer or owner for the purpose of working his product into a more convenient and valuable form suited to meet
the demand of an expanded market; that the exemption was not designed in favor of the small agricultural producer,
already exempted by the subsequent paragraphs of the same Section 188, but that said exemption is not
incompatible with large scale agricultural production that incidentally required resort to preservative processes
designed to increase or prolong marketability of the product.

American Rubber have stipulated that fresh latex directly obtained from the rubber tree, which is clearly an
agricultural product, becomes spoiled after only two hours. It has, therefore, a severely limited marketability. The
addition of ammonia prevents its deterioration for about a month.

Taking also into account the great distance that separates the plantation from the main rubber processing
centres in Japan, the United States and Europe, and the difficulty in handling products in liquid form, it can be
discerned without difficulty that preserved latex, with its 30-day spoilage limit, is still severely handicapped for export
and dollar earning purposes.

To overcome these shortcomings, and extend its useful life almost indefinitely, it becomes necessary to separate and
solidify the rubber granules diffused in the latex, and hence, according to the stipulation of facts and the evidence,
acetic acid is added to hasten coagulation. There is nothing on record to show that the acetic acid in any way
produces anything that was not originally in the source, the liquid latex. The coagulum is then rolled and compacted
and afterwards air dried to make Pale Crepe (1 and 2), or else cured and smoked to produce rubber sheets. There is
nothing in this processing to alter the agricultural nature of the result, what takes place is merely an accelerated
coagulation and desiccation that would naturally occur anyway, only within a longer period of time, coupled with
greater spoilage of the product.
Thus the operations carried out by American Rubber appears to be purely preservative in nature, made necessary by
its production of fresh rubber latex in a large scale. They are purely incidental to the latter, just as the canning of
skinned and cored pineapples in syrup was held to be incidental to the large-scale cultivation of the fruit in the
Philippine Packing Corporation case (ante). Being necessary to suit the product to the demands of the market, the
operations in both cases should lead to the same result, non-taxability of the sales of the respective agricultural
products.

Second issue: The sales tax is by law imposed directly, not on the thing sold, but on the act (sale) of the
manufacturer, producer or importer, who is exclusively made liable for its timely payment. There is no proof that the
tax paid by American Rubber is the very money charged to and paid by its customers. Where the tax money came
from, is no concern of the Government, but solely a matter between the seller and its customers. Hence, American
RUbber is entitled to recover the sales tax collected from it without legal sanction. Once it is recovered, American
Rubber must hold the refunded taxes in trust for the individual purchasers who advanced payment thereof. The
separate billing of the sales tax in the company’s invoices, being a step suggested by the Internal Revenue authorities
themselves, should not be used to block the company’s action to recover the taxes.

Philippine Packing Corporation vs. CIT, December 26, 1956

Facts:
Philippine Packing Corporation is a domestic corporation engaged in the growing and canning of pineapples in
Mindanao for sale locally and abroad. Approximately 120,000 tons of pineapple every year are produced by the
corporation. After harvest, the pinapples are washed, peeled and sorted, then sliced, cubed, or crushed and placed in
cans. The residual air is removed and heavy syrup, made up from a mixture of juice and sugar, is added. The cans are
closed. Heat is applied to sterilize the contents, after which the cans are cooled rapidly. With respect to the canned
pineapple juice, no sugar is added. Unless preserved in tin cans, fresh pineapple fruits are very perishable and will not
keep longer than two days.
In 1948, the CIR declared that the pineapple products are exempt from sales tax in accordance with Section
188(b) of the Internal Revenue Code because the operation of Philippine Packing is entirely agricultural.
However, in 1954, the Collector of Internal Revenue informed the corporation that they had to pay P196,060.69
as fixed and percentage taxes and surcharges on its domestic sales of pineapple products since October, 1948 to
September, 1953, plus the additional sum of P1,000 as penalty for alleged violation of the Internal Revenue Law. The
Court of Tax Appeals affirmed the decision of the Collector of Internal Revenue.

ISSUE: Are the domestic sales of pineapples and pineapple products grown and canned by Philippine Packing exempted
from tax under Section 188 (b) of the Internal Revenue Code?

RULING: Yes.
“SEC. 188. Transactions and persons not subject to percentage tax. — In computing the tax imposed in sections one
hundred eighty- four, one hundred eighty-five, and one hundred eighty-six, transactions in the following commodities
shall be excluded:

“(b) Agricultural products and the ordinary salt when sold, bartered, or exchanged in this country by the producer or
owner of the land where produced, as well as fish and its by-products when sold, bartered or exchanged by the
fisherman or fishing operator, whether in their original state or not.”

The very text of the law, in exempting “agricultural products — whether in their original state or not,” makes it clear that
the exemption is not divested merely because the products themselves have undergone processing of some kind.

The canning of the products is a mere incident and consequence of Philippine Packing’s large scale production of
pineapples. The corporation had to resort to a preserving process, for the volume of its products (170,000 tons) made it
impossible to dispose of the same in the local market. The pineapples could not be sold in the open market unless
properly ripened; on the other hand, once ripened, the fruit would quickly deteriorate, and become unsalable, unless
the deterioration was arrested by some preservative process, which thus becomes an essential part of the production
and disposition of the fruit. The legislature, in providing a tax exemption for agricultural products, “whether in their
original state or not”, had precisely in mind that fruit crops could not be raised and sold on a large scale without resort
to some process to prevent their deterioration.

The nature, qualities and texture of the product was not altered by the canning process, and it distinctly remains an
agricultural product. Certainly the canned pineapples as compared to the original fruit have undergone much less
change than that found in the case of centrifugal sugar obtained from the sugar cane or of abaca-fiber when compared
with the raw plant stalks. And yet the state admits that the sugar from the cane is exempt from the tax under sec. 188(b)
of the Internal Revenue Code.

The purpose of the tax exemption was to foster agriculture and the utilization of idle lands.

ADDENDUM:
RA 1612 was passed on August 24, 1956. It amended Sec. 188 (b) of the Tax Code, stating that the term “agricultural
products” will no longer comprehend those which have undergone the process of manufacturing.

Note that while the old provision exempts “agricultural products—whether in their original state or not”, the new
amendment omitted the words “or not”, limiting the exemption to “agricultural products—in their original form”, and
further clarified the meaning of the phrase “in their original form” as follows:

“the term agricultural products shall not include—those which have undergone the process of manufacturing as defined
in section one hundred ninety-four (x) of this Code.”

By the very nature of the changes made in the original statute, it is clear that the amendment is intended, not to clarify
the doubtful meaning of the former law, but to withdraw from the scope of the former exemption the agricultural
products that are no longer in their original form because they have undergone the process of manufacture.

Of course, under the new amendment to Sec. 188. (b) of the Tax Code, the products of Philippine Packing Corporation
are now subject to percentage tax; but as Republic Act No. 1612 does not have any retroactive effect, there being no
provision for its retroactive operation, it can only affect Philippine Packing after, and not before, its passage and
effectivity.

23. CIR v. Acesite Hotel Corporation, 16 February 2007

FACTS:
Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel along United Nations Avenue in
Manila. It leases 6,768.53 square meters of the hotel’s premises to the Philippine Amusement and Gaming Corporation
[PAGCOR] for casino operations. It also caters food and beverages to PAGCOR’s casino patrons through the hotel’s
restaurant outlets. For the period January 1996 to April 1997, Acesite incurred VAT amounting to P30,152,892.02 from
its rental income and sale of food and beverages to PAGCOR during said period. Acesite tried to shift the said taxes to
PAGCOR by incorporating it in the amount assessed to PAGCOR but the latter refused to pay the taxes on account of its
tax exempt status.1awphi1.net

Acesite, therefore, paid theVAT to the CIR as it feared the legal consequences of non-payment of the tax. However,
Acesite belatedly learned that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt
entity. Acesite then filed an administrative claim for refund with the CIR but the latter failed to resolve the same. Thus,
Acesite filed a petition with the CTA.

CTA decided that Acesite is subject to zero percent tax pursuant to Section 102 (b)(3) [now 106(A)(C)] insofar as its
gross income from rentals and sales to PAGCOR, a tax exempt entity by virtue of a special law. Accordingly, the amounts
of P21,413,026.78 and P8,739,865.24, representing the 10% EVAT on its sales of food and services and gross rentals,
respectively from PAGCOR shall, as a matter of course, be refunded to Acesite for having been inadvertently remitted to
CIR. Considering further the principle of ‘solutio indebiti’ which requires the return of what has been delivered through
mistake, CIR must refund to Acesite the amount of P30,054,148.64.

CA affirmed in toto the decision of the CTA holding that PAGCOR was not only exempt from direct taxes but was also
exempt from indirect taxes like the VAT and consequently, the transactions between respondent Acesite and PAGCOR
were "effectively zero-rated" because they involved the rendition of services to an entity exempt from indirect taxes.

ISSUES:
1. Does PAGCOR’s tax exemption privilege includes the indirect tax of VAT, thereby, entitling Acesite to zero
percent (0%) VAT rate?
2. Does the zero percent (0%) VAT rate under then Section 102 (b)(3) of the Tax Code (now Section 108 (B)(3) of
the Tax Code of 1997) legally applies to Acesite?

RULING:
1. Yes. P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of taxes.
Sec. 13(2a) states that: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation.

Sec. 13 (2b) states: The exemptions herein granted for earnings derived from the operations conducted under the
franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or
levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with
whom the Corporation or operator has any contractual relationship in connection with the operations of the
casino(s) authorized to be conducted under this Franchise

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to
PAGCOR. Although the law does not specifically mention PAGCOR’s exemption from indirect taxes, PAGCOR
is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting
with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR
from indirect taxes. In fact, it goes one step further by granting tax exempt status to persons dealing with
PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the
P30,152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108
B (3). R.A. 8424.

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly
granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case,
can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT.
Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is
exempting PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in
which case it is computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, the seller or
lessor has the option to follow either way in charging its clients and customer. In the instant case, Acesite
followed the latter method, that is, charging an additional 10% of the gross sales and rentals. Be that as it may, the
use of either method, and in particular, the first method, does not denigrate the fact that PAGCOR is exempt from
an indirect tax, like VAT.

2. Yes.

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the
payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such
exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of
R.A. 8424), which provides:
Section 102. Value-added tax on sale of services – (a) Rate and base of tax – There shall be levied, assessed and
collected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the sale of
services x x x; Provided, that the following services performed in the Philippines by VAT-registered persons shall
be subject to 0%.

xxxx

(b) Transactions subject to zero percent (0%) rated.—

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate.

Acesite paid VAT by mistake

There is erroneous payment of taxes when a taxpayer pays under a mistake of fact, as for the instance in a case
where he is not aware of an existing exemption in his favor at the time the payment was made. Such payment is
held to be not voluntary and, therefore, can be recovered or refunded.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio indebiti and the pertinent laws governing this
principle are found in Arts. 2142 and 2154 of the Civil Code, which provide, thus:

Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to the juridical relation of quasi-contract to the
end that no one shall be unjustly enriched or benefited at the expense of another.

Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.

When money is paid to another under the influence of a mistake of fact, that is to say, on the mistaken supposition
of the existence of a specific fact, where it would not have been known that the fact was otherwise, it may be
recovered. The ground upon which the right of recovery rests is that money paid through misapprehension of facts
belongs in equity and in good conscience to the person who paid it.9

The Government comes within the scope of solutio indebiti principle as elucidated in Commissioner of Internal
Revenue v. Fireman’s Fund Insurance Company, where we held that: "Enshrined in the basic legal principles is
the time-honored doctrine that no person shall unjustly enrich himself at the expense of another. It goes without
saying that the Government is not exempted from the application of this doctrine."

Action for refund strictly construed; Acesite discharged the burden of proof

Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in
the most explicit and categorical language, it is strictly construed against the claimant who must discharge such
burden convincingly.11 In the instant case, respondent Acesite had discharged this burden as found by the CTA
and the CA. Indeed, the records show that Acesite proved its actual VAT payments subject to refund, as attested
to by an independent Certified Public Accountant who was duly commissioned by the CTA. On the other hand,
petitioner never disputed nor contested respondent’s testimonial and documentary evidence. In fact, petitioner
never presented any evidence on its behalf.

The BIR must release the refund to respondent without any unreasonable delay. Indeed, fair dealing is expected
by our taxpayers from the BIR and this duty demands that the BIR should refund without any unreasonable delay
what it has erroneously collected.