SECOND DIVISION

G.R. No. 119286             October 13, 2004

PASEO REALTY & DEVELOPMENT CORPORATION, petitioner, 

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,respondents.

DECISION

TINGA, J.:

The changes in the reportorial requirements and payment schedules of corporate income taxes from annual to quarterly have
created problems, especially on the matter of tax refunds.1 In this case, the Court is called to resolve the question of whether
alleged excess taxes paid by a corporation during a taxable year should be refunded or credited against its tax liabilities for the
succeeding year. 

Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of two (2) parcels of land at Paseo de
Roxas in Makati City, seeks a review of the Decision2  of the Court of Appeals dismissing its petition for review of the
resolution3 of the Court of Tax Appeals (CTA) which, in turn, denied its claim for refund.

The factual antecedents4 are as follows:

On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989 declaring a gross income of
₱1,855,000.00, deductions of ₱1,775,991.00, net income of ₱79,009.00, an income tax due thereon in the amount of
₱27,653.00, prior year’s excess credit of ₱146,026.00, and creditable taxes withheld in 1989 of ₱54,104.00 or a total
tax credit of ₱200,130.00 and credit balance of ₱172,477.00.

On November 14, 1991, petitioner filed with respondent a claim for "the refund of excess creditable withholding and
income taxes for the years 1989 and 1990 in the aggregate amount of ₱147,036.15."

On December 27, 1991 alleging that the prescriptive period for refunds for 1989 would expire on December 30, 1991
and that it was necessary to interrupt the prescriptive period, petitioner filed with the respondent Court of Tax Appeals
a petition for review praying for the refund of "₱54,104.00 representing creditable taxes withheld from income
payments of petitioner for the calendar year ending December 31, 1989."

On February 25, 1992, respondent Commissioner filed an Answer and by way of special and/or affirmative defenses
averred the following: a) the petition states no cause of action for failure to allege the dates when the taxes sought to be
refunded were paid; b) petitioner’s claim for refund is still under investigation by respondent Commissioner; c) the
taxes claimed are deemed to have been paid and collected in accordance with law and existing pertinent rules and
regulations; d) petitioner failed to allege that it is entitled to the refund or deductions claimed; e) petitioner’s contention
that it has available tax credit for the current and prior year is gratuitous and does not  ipso facto  warrant the refund; f)
petitioner failed to show that it has complied with the provision of Section 230 in relation to Section 204 of the Tax
Code.
 After trial, the respondent Court rendered a decision ordering respondent Commissioner "to refund in favor of
petitioner the amount of ₱54,104.00, representing excess creditable withholding taxes paid for January to July1989."

Respondent Commissioner moved for reconsideration of the decision, alleging that the ₱54,104.00 ordered to be
refunded "has already been included and is part and parcel of the ₱172,477.00 which petitioner automatically applied
as tax credit for the succeeding taxable year 1990."

In a resolution dated October 21, 1993 Respondent Court reconsidered its decision of July 29, 1993 and dismissed the
petition for review, stating that it has "overlooked the fact that the petitioner’s 1989 Corporate Income Tax Return
(Exh. "A") indicated that the amount of ₱54,104.00 subject of petitioner’s claim for refund has already been included
as part and parcel of the ₱172,477.00 which the petitioner automatically applied as tax credit for the succeeding taxable
year 1990."

Petitioner filed a Motion for Reconsideration which was denied by respondent Court on March 10, 1994. 5

Petitioner filed a Petition for Review6 dated April 3, 1994  with the Court of Appeals. Resolving the twin issues of whether
petitioner is entitled to a refund of ₱54,104.00 representing creditable taxes withheld in 1989 and whether petitioner applied
such creditable taxes withheld to its 1990 income tax liability, the appellate court held that petitioner is not entitled to a refund
because it had already elected to apply the total amount of ₱172,447.00, which includes the ₱54,104.00 refund claimed, against
its income tax liability for 1990. The appellate court elucidated on the reason for its dismissal of petitioner’s claim for refund,
thus:

In the instant case, it appears that when petitioner filed its income tax return for the year 1989, it filled up the box
stating that the total amount of ₱172,477.00 shall be applied against its income tax liabilities for the succeeding taxable
year.

Petitioner did not specify in its return the amount to be refunded and the amount to be applied as tax credit to the
succeeding taxable year, but merely marked an "x" to the box indicating "to be applied as tax credit to the succeeding
taxable year." Unlike what petitioner had done when it filed its income tax return for the year 1988, it specifically
stated that out of the ₱146,026.00 the entire refundable amount, only ₱64,623.00 will be made available as tax credit,
while the amount of ₱81,403.00 will be refunded.

In its 1989 income tax return, petitioner filled up the box "to be applied as tax credit to succeeding taxable year," which
signified that instead of refund, petitioner will apply the total amount of ₱172,447.00, which includes the amount of
₱54,104.00 sought to be refunded, as tax credit for its tax liabilities in 1990. Thus, there is really nothing left to be
refunded to petitioner for the year 1989. To grant petitioner’s claim for refund is tantamount to granting twice the
refund herein sought to be refunded, to the prejudice of the Government.

The Court of Appeals denied petitioner’s Motion for Reconsideration7 dated November 8, 1994  in its Resolution8dated February
21, 1995 because the motion merely restated the grounds which have already been considered and passed upon in its Decision.9

Petitioner thus filed the instant Petition for Review10 dated April 14, 1995 arguing that the evidence presented before the lower
courts conclusively shows that it did not apply the ₱54,104.00 to its 1990 income tax liability; that the Decision  subject of the
instant petition is inconsistent with a final decision 11 of the Sixteenth Division of the appellate court in C.A.-G.R. Sp. No. 32890
involving the same parties and subject matter; and that the affirmation of the questioned Decision would lead to absurd results
in the manner of claiming refunds or in the application of prior years’ excess tax credits.

The Office of the Solicitor General (OSG) filed a Comment12  dated May 16, 1996 on behalf of respondents asserting that the
claimed refund of ₱54,104.00 was, by petitioner’s election in its Corporate Annual Income Tax Return for 1989, to be applied
against its tax liability for 1990. Not having submitted its tax return for 1990 to show whether the said amount was indeed
applied against its tax liability for 1990, petitioner’s election in its tax return stands. The OSG also contends that petitioner’s
election to apply its overpaid income tax as tax credit against its tax liabilities for the succeeding taxable year is mandatory and
irrevocable.
On September 2, 1997, petitioner filed a Reply13 dated August 31, 1996 insisting that the issue in this case is not whether the
amount of ₱54,104.00 was included as tax credit to be applied against its 1990 income tax liability but whether the same
amount was actually applied as tax credit for 1990. Petitioner claims that there is no need to show that the amount of
₱54,104.00 had not been automatically applied against its 1990 income tax liability because the appellate court’s decision in
C.A.-G.R. Sp. No. 32890 clearly held that petitioner charged its 1990 income tax liability against its tax credit for 1988 and not
1989. Petitioner also disputes the OSG’s assertion that the taxpayer’s election as to the application of excess taxes is irrevocable
averring that there is nothing in the law that prohibits a taxpayer from changing its mind especially if subsequent events leave
the latter no choice but to change its election. 

The OSG filed a Rejoinder14 dated March 5, 1997 stating that petitioner’s 1988 tax return shows a prior year’s excess credit of
₱81,403.00, creditable tax withheld of ₱92,750.00 and tax due of ₱27,127.00. Petitioner indicated that the prior year’s excess
credit of ₱81,403.00 was to be refunded, while the remaining amount of ₱64,623.00 (₱92,750.00 - ₱27,127.00) shall be
considered as tax credit for 1989. However, in its 1989 tax return, petitioner included the ₱81,403.00 which had already been
segregated for refund in the computation of its excess credit, and specified that the full amount of ₱172,479.00*  (₱81,403.00 +
₱64,623.00 + ₱54,104.00** - ₱27,653.00***) be considered as its tax credit for 1990. Considering that it had obtained a
favorable ruling for the refund of its excess credit for 1988 in CA-G.R. SP. No. 32890, its remaining tax credit for 1989 should
be the excess credit to be applied against its 1990 tax liability. In fine, the OSG argues that by its own election, petitioner can
no longer ask for a refund of its creditable taxes withheld in 1989 as the same had been applied against its 1990 tax due.

In its Resolution15 dated July 16, 1997, the Court gave due course to the petition and required the parties to simultaneously file
their respective memoranda within 30 days from notice. In compliance with this directive, petitioner submitted
its Memorandum16  dated September 18, 1997 in due time, while the OSG filed its Memorandum17 dated April 27, 1998 only on
April 29, 1998 after several extensions.

The petition must be denied.

As a matter of principle, it is not advisable for this Court to set aside the conclusion reached by an agency such as the CTA
which is, by the very nature of its functions, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority. 18

This interdiction finds particular application in this case since the CTA, after careful consideration of the merits of the
Commissioner of Internal Revenue’s motion for reconsideration, reconsidered its earlier decision which ordered the latter to
refund the amount of ₱54,104.00 to petitioner. Its resolution cannot be successfully assailed based, as it is, on the pertinent laws
as applied to the facts.

Petitioner’s 1989 tax return indicates an aggregate creditable tax of ₱172,477.00, representing its 1988 excess credit of
₱146,026.00 and 1989 creditable tax of ₱54,104.00 less tax due for 1989, which it elected to apply as tax credit for the
succeeding taxable year.19 According to petitioner, it successively utilized this amount when it obtained refunds in CTA Case
No. 4439 (C.A.-G.R. Sp. No. 32300) and CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890), and applied its 1990 tax liability,
leaving a balance of ₱54,104.00, the amount subject of the instant claim for refund. 20 Represented mathematically, petitioner
accounts for its claim in this wise:

₱172,477.0 Amount indicated in petitioner’s 1989 tax return to be applied as tax

0 credit for the succeeding taxable year

- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)

₱146,854.0 Balance as of April 16, 1990

0

- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890)

₱87,344.00 Balance as of January 2, 1991

- 33,240.00 Income tax liability for calendar year 1990 applied as of April 15, 1991
 ₱54,104.00 Balance as of April 15, 1991 now subject of the instant claim for
refund21

Other than its own bare allegations, however, petitioner offers no proof to the effect that its creditable tax of ₱172,477.00 was
applied as claimed above. Instead, it anchors its assertion of entitlement to refund on an alleged finding in C.A.-G.R. Sp. No.
3289022 involving the same parties to the effect that petitioner charged its 1990 income tax liability to its tax credit for 1988 and
not its 1989 tax credit. Hence, its excess creditable taxes withheld of ₱54,104.00 for 1989 was left untouched and may be
refunded. 

Note should be taken, however, that nowhere in the case referred to by petitioner did the Court of Appeals make a categorical
determination that petitioner’s tax liability for 1990 was applied against its 1988 tax credit. The statement adverted to by
petitioner was actually presented in the appellate court’s decision in CA-G.R. Sp No. 32890 as part of petitioner’s own
narration of facts. The pertinent portion of the decision reads:

It would appear from petitioner’s submission as follows:

x x x since it has already applied to its prior year’s excess credit of ₱81,403.00 (which petitioner wanted refunded
when it filed its 1988 Income Tax Return on April 14, 1989) the income tax liability for 1988 of ₱28,127.00 and the
income tax liability for 1989 of ₱27,653.00, leaving a balance refundable of ₱25,623.00 subject of C.T.A. Case No.
4439, the ₱92,750.00 (₱64,623.00 plus ₱28,127.00, since this second amount was already applied to the amount
refundable of ₱81,403.00) should be the refundable amount. But since the taxpayer again used part of it to satisfy its
income tax liability of ₱33,240.00 for 1990, the amount refundable was ₱59,510.00, which is the amount prayed for in
the claim for refund and also in the petitioner (sic) for review.

That the present claim for refund already consolidates its claims for refund for 1988, 1989, and 1990, when it filed a
claim for refund of ₱59,510.00 in this case (CTA Case No. 4528). Hence, the present claim should be resolved together
with the previous claims.23

The confusion as to petitioner’s entitlement to a refund could altogether have been avoided had it presented its tax return for
1990. Such return would have shown whether petitioner actually applied its 1989 tax credit of ₱172,477.00, which includes the
₱54,104.00 creditable taxes withheld for 1989 subject of the instant claim for refund, against its 1990 tax liability as it had
elected in its 1989 return, or at least, whether petitioner’s tax credit of ₱172,477.00 was applied to its approved refunds as it
claims. 

The return would also have shown whether there remained an excess credit refundable to petitioner after deducting its tax
liability for 1990. As it is, we only have petitioner’s allegation that its tax due for 1990 was ₱33,240.00 and that this was
applied against its remaining tax credits using its own "first in, first out" method of computation.

It would have been different had petitioner not included the ₱54,104.00 creditable taxes for 1989 in the total amount it elected
to apply against its 1990 tax liabilities. Then, all that would have been required of petitioner are: proof that it filed a claim for
refund within the two (2)-year prescriptive period provided under Section 230 of the NIRC; evidence that the income upon
which the taxes were withheld was included in its return; and to establish the fact of withholding by a copy of the statement
(BIR Form No. 1743.1) issued by the payor24 to the payee showing the amount paid and the amount of tax withheld therefrom.
However, since petitioner opted to apply its aggregate excess credits as tax credit for 1990, it was incumbent upon it to present
its tax return for 1990 to show that the claimed refund had not been automatically credited and applied to its 1990 tax
liabilities. 

The grant of a refund is founded on the assumption that the tax return is valid, i.e.,  that the facts stated therein are true and
correct.25 Without the tax return, it is error to grant a refund since it would be virtually impossible to determine whether the
proper taxes have been assessed and paid. 

Why petitioner failed to present such a vital piece of evidence confounds the Court. Petitioner could very well have attached a
copy of its final adjustment return for 1990 when it filed its claim for refund on November 13, 1991. Annex "B" of its Petition
for Review26 dated December 26, 1991 filed with the CTA, in fact, states that its annual tax return for 1990 was submitted in
support of its claim. Yet, petitioner’s tax return for 1990 is nowhere to be found in the records of this case. 

Had petitioner presented its 1990 tax return in refutation of respondent Commissioner’s allegation that it did not present
evidence to prove that its claimed refund had already been automatically credited against its 1990 tax liability, the CTA would
not have reconsidered its earlier Decision.  As it is, the absence of petitioner’s 1990 tax return was the principal basis of the
CTA’s Resolution  reconsidering its earlier Decision  to grant petitioner’s claim for refund. 

Petitioner could even still have attached a copy of its 1990 tax return to its petition for review before the Court of Appeals. The
appellate court, being a trier of facts, is authorized to receive it in evidence and would likely have taken it into account in its
disposition of the petition. 

In BPI-Family Savings Bank v. Court of Appeals,27 although petitioner failed to present its 1990 tax return, it presented other
evidence to prove its claim that it did not apply and could not have applied the amount in dispute as tax credit. Importantly,
petitioner therein attached a copy of its final adjustment return for 1990 to its motion for reconsideration before the CTA
buttressing its claim that it incurred a net loss and is thus entitled to refund. Considering this fact, the Court held that there is no
reason for the BIR to withhold the tax refund.

In this case, petitioner’s failure to present sufficient evidence to prove its claim for refund is fatal to its cause. After all, it is
axiomatic that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. Tax
refunds, like tax exemptions, are construed strictly against the taxpayer.28

Section 69, Chapter IX, Title II of the National Internal Revenue Code of the Philippines (NIRC) provides:

Sec. 69. Final Adjustment Return.—Every corporation liable to tax under Section 24 shall file a final adjustment return
covering the total net income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable net income of that year the corporation
shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the
refundable amount shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable year. [Emphasis supplied]

Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies:

SEC. 7. Filing of final or adjustment return and final payment of income tax. – A final or an adjustment return on
B.I.R. Form No. 1702 covering the total taxable income of the corporation for the preceding calendar or fiscal year
shall be filed on or before the 15th day of the fourth month following the close of the calendar or fiscal year. The return
shall include all the items of gross income and deductions for the taxable year. The amount of income tax to be paid
shall be the balance of the total income tax shown on the final or adjustment return after deducting therefrom the total
quarterly income taxes paid during the preceding first three quarters of the same calendar or fiscal year.

Any excess of the total quarterly payments over the actual income tax computed and shown in the adjustment or final
corporate income tax return shall either (a) be refunded to the corporation, or (b) may be credited against the estimated
quarterly income tax liabilities for the quarters of the succeeding taxable year. The corporation must signify in its
annual corporate adjustment return its intention whether to request for refund of the overpaid income tax or claim for
automatic credit to be applied against its income tax liabilities for the quarters of the succeeding taxable year by filling
up the appropriate box on the corporate tax return (B.I.R. Form No. 1702). [Emphasis supplied]

As clearly shown from the above-quoted provisions, in case the corporation is entitled to a refund of the excess estimated
quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding year. The carrying forward of any excess or overpaid
income tax for a given taxable year is limited to the succeeding taxable year only.

In the recent case of AB Leasing and Finance Corporation v. Commissioner of Internal Revenue,29  where the Court declared
that "[T]he carrying forward of any excess or overpaid income tax for a given taxable year then is limited to the succeeding
taxable year only," we ruled that since the case involved a claim for refund of overpaid taxes for 1993, petitioner could only
have applied the 1993 excess tax credits to its 1994 income tax liabilities. To further carry-over to 1995 the 1993 excess tax
credits is violative of Section 69 of the NIRC.

In this case, petitioner included its 1988 excess credit of ₱146,026.00 in the computation of its total excess credit for 1989. It
indicated this amount, plus the 1989 creditable taxes withheld of ₱54,104.00 or a total of ₱172,477.00, as its total excess credit
to be applied as tax credit for 1990. By its own disclosure, petitioner effectively combined its 1988 and 1989 tax credits and
applied its 1990 tax due of ₱33,240.00 against the total, and not against its creditable taxes for 1989 only as allowed by Section
69. This is a clear admission that petitioner’s 1988 tax credit was incorrectly and illegally applied against its 1990 tax liabilities.

Parenthetically, while a taxpayer is given the choice whether to claim for refund or have its excess taxes applied as tax credit
for the succeeding taxable year, such election is not final. Prior verification and approval by the Commissioner of Internal
Revenue is required. The availment of the remedy of tax credit is not absolute and mandatory. It does not confer an absolute
right on the taxpayer to avail of the tax credit scheme if it so chooses. Neither does it impose a duty on the part of the
government to sit back and allow an important facet of tax collection to be at the sole control and discretion of the taxpayer. 30

Contrary to petitioner’s assertion however, the taxpayer’s election, signified by the ticking of boxes in Item 10 of BIR Form
No. 1702, is not a mere technical exercise. It aids in the proper management of claims for refund or tax credit by leading tax
authorities to the direction they should take in addressing the claim. 

The amendment of Section 69 by what is now Section 76 of Republic Act No. 8424 31 emphasizes that it is imperative to indicate
in the tax return or the final adjustment return whether a tax credit or refund is sought by making the taxpayer’s choice
irrevocable. Section 76 provides:

SEC. 76. Final Adjustment Return.—Every corporation liable to tax under Section 27 shall file a final adjustment
return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year,
the corporation shall either:

(A) Pay the balance of the tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the
excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and
apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed therefore. [Emphasis supplied]

As clearly seen from this provision, the taxpayer is allowed three (3) options if the sum of its quarterly tax payments made
during the taxable year is not equal to the total tax due for that year: (a) pay the balance of the tax still due; (b) carry-over the
excess credit; or (c) be credited or refunded the amount paid. If the taxpayer has paid excess quarterly income taxes, it may be
entitled to a tax credit or refund as shown in its final adjustment return which may be carried over and applied against the
estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. However, once the taxpayer
has exercised the option to carry-over and to apply the excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years, such option is irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed.
Had this provision been in effect when the present claim for refund was filed, petitioner’s excess credits for 1988 could have
been properly applied to its 1990 tax liabilities. Unfortunately for petitioner, this is not the case. 

Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a
portion of their property for the support of the government. And since taxes are what we pay for civilized society, or are the
lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of refund or exemption
from tax payments must be clearly shown and be based on language in the law too plain to be mistaken. Elsewise stated,
taxation is the rule, exemption therefrom is the exception.32

WHEREFORE, the instant petition is DENIED. The challenged decision of the Court of Appeals is hereby AFFIRMED. No
pronouncement as to costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 120082 September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, 

vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial Court, Branch 20, Cebu
City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R. OSMEÑA, and EUSTAQUIO B.
CESA, respondents.

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of 22 March 1995  of the
1

Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition for declaratory relief in Civil Case No.
CEB-16900 entitled "Mactan Cebu International Airport Authority vs. City of Cebu", and its order of 4, May
1995  denying the motion to reconsider the decision.
2

We resolved to give due course to this petition for its raises issues dwelling on the scope of the taxing power of local
government-owned and controlled corporations.

The uncontradicted factual antecedents are summarized in the instant petition as follows:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of Republic Act No.
6958, mandated to "principally undertake the economical, efficient and effective control, management and
supervision of the Mactan International Airport in the Province of Cebu and the Lahug Airport in Cebu
City, . . . and such other Airports as may be established in the Province of Cebu . . . (Sec. 3, RA 6958). It is
also mandated to:

a) encourage, promote and develop international and domestic air traffic in

the Central Visayas and Mindanao regions as a means of making the regions
centers of international trade and tourism, and accelerating the development
of the means of transportation and communication in the country; and

b) upgrade the services and facilities of the airports and to formulate

internationally acceptable standards of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of realty
taxes in accordance with Section 14 of its Charter.

Sec. 14. Tax Exemptions. — The authority shall be exempt from realty taxes imposed by the
National Government or any of its political subdivisions, agencies and instrumentalities . . .

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of the City
of Cebu, demanded payment for realty taxes on several parcels of land belonging to the petitioner (Lot Nos.
913-G, 743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and
991-A), located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total amount of
P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor the aforecited
Section 14 of RA 6958 which exempt it from payment of realty taxes. It was also asserted that it is an
instrumentality of the government performing governmental functions, citing section 133 of the Local
Government Code of 1991 which puts limitations on the taxing powers of local government units:

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

a) . . .

x x x           x x x          x x x

o) Taxes, fees or charges of any kind on the National Government, its

agencies and instrumentalities, and local government units. (Emphasis
supplied)

Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that the MCIAA is a
government-controlled corporation whose tax exemption privilege has been withdrawn by virtue of Sections
193 and 234 of the Local Governmental Code that took effect on January 1, 1992:

Sec. 193. Withdrawal of Tax Exemption Privilege. — Unless otherwise provided in this Code, tax exemptions
or incentives granted to, or presently enjoyed by all persons whether natural or juridical, including
government-owned or controlled corporations, except local water districts, cooperatives duly registered under
RA No. 6938, non-stock, and non-profit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code. (Emphasis supplied)

xxx xxx xxx

Sec. 234. Exemptions from Real Property taxes. — . . .

(a) . . .

x x x           x x x          x x x

(c) . . .

Except as provided herein, any exemption from payment of real property tax previously
granted to, or presently enjoyed by all persons, whether natural or juridical, including
government-owned or controlled corporations are hereby withdrawn upon the effectivity of
this Code.

As the City of Cebu was about to issue a warrant of levy against the properties of petitioner, the latter was
compelled to pay its tax account "under protest" and thereafter filed a Petition for Declaratory Relief with the
Regional Trial Court of Cebu, Branch 20, on December 29, 1994. MCIAA basically contended that the taxing
powers of local government units do not extend to the levy of taxes or fees of any kind on
an instrumentality of the national government. Petitioner insisted that while it is indeed a government-owned
corporation, it nonetheless stands on the same footing as an agency or instrumentality of the national
government. Petitioner insisted that while it is indeed a government-owned corporation, it nonetheless stands
on the same footing as an agency or instrumentality of the national government by the very nature of its
powers and functions.
 Respondent City, however, asserted that MACIAA is not an instrumentality of the government but merely a
government-owned corporation performing proprietary functions As such, all exemptions previously granted
to it were deemed withdrawn by operation of law, as provided under Sections 193 and 234 of the Local
Government Code when it took effect on January 1, 1992. 3

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

In its decision of 22 March 1995,  the trial court dismissed the petition in light of its findings, to wit:
4

A close reading of the New Local Government Code of 1991 or RA 7160 provides the express cancellation
and withdrawal of exemption of taxes by government owned and controlled corporation per Sections after the
effectivity of said Code on January 1, 1992, to wit: [proceeds to quote Sections 193 and 234]

Petitioners claimed that its real properties assessed by respondent City Government of Cebu are exempted
from paying realty taxes in view of the exemption granted under RA 6958 to pay the same (citing Section 14
of RA 6958).

However, RA 7160 expressly provides that "All general and special laws, acts, city charters, decress [ sic],
executive orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent
with any of the provisions of this Code are hereby repealed or modified accordingly." ([f], Section 534, RA
7160).

With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided for in RA
6958 creating petitioner had been expressly repealed by the provisions of the New Local Government Code of
1991.

So that petitioner in this case has to pay the assessed realty tax of its properties effective after January 1, 1992
until the present.

This Court's ruling finds expression to give impetus and meaning to the overall objectives of the New Local
Government Code of 1991, RA 7160. "It is hereby declared the policy of the State that the territorial and
political subdivisions of the State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective partners in the attainment
of national goals. Towards this end, the State shall provide for a more responsive and accountable local
government structure instituted through a system of decentralization whereby local government units shall be
given more powers, authority, responsibilities, and resources. The process of decentralization shall proceed
from the national government to the local government units. . . . 5

Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the petitioner filed the
instant petition based on the following assignment of errors:

I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS

VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN
THE SAME CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE
GOVERNMENT.

II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY

REAL PROPERTY TAXES TO THE CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a government-owned or controlled corporation it
is mandated to perform functions in the same category as an instrumentality of Government. An instrumentality of
Government is one created to perform governmental functions primarily to promote certain aspects of the economic
life of the people.  Considering its task "not merely to efficiently operate and manage the Mactan-Cebu International
6

Airport, but more importantly, to carry out the Government policies of promoting and developing the Central Visayas
and Mindanao regions as centers of international trade and tourism, and accelerating the development of the means of
transportation and communication in the country,"  and that it is an attached agency of the Department of
7

Transportation and Communication (DOTC),  the petitioner "may stand in [sic] the same footing as an agency or
8

instrumentality of the national government." Hence, its tax exemption privilege under Section 14 of its Charter "cannot
be considered withdrawn with the passage of the Local Government Code of 1991 (hereinafter LGC) because Section
133 thereof specifically states that the taxing powers of local government units shall not extend to the levy of taxes of
fees or charges of any kind on the national government its agencies and instrumentalities."

As to the second assigned error, the petitioner contends that being an instrumentality of the National Government,
respondent City of Cebu has no power nor authority to impose realty taxes upon it in accordance with the aforesaid
Section 133 of the LGC, as explained in Basco vs. Philippine Amusement and Gaming Corporation; 9

Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a
government owned or controlled corporation with an original character, PD 1869. All its shares of stock are
owned by the National Government. . . .

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is governmental, which
places it in the category of an agency or instrumentality of the Government. Being an instrumentality of the
Government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by a mere Local government.

The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control the
operation of constitutional laws enacted by Congress to carry into execution the powers vested in the federal
government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579).

This doctrine emanates from the "supremacy" of the National Government over local government.

Justice Holmes, speaking for the Supreme Court, make references to the entire absence of power on the part of
the States to touch, in that way (taxation) at least, the instrumentalities of the United States (Johnson v.
Maryland, 254 US 51) and it can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them. (Antieau Modern Constitutional Law, Vol. 2, p. 140)

Otherwise mere creature of the State can defeat National policies thru extermination of what local authorities
may perceive to be undesirable activities or enterprise using the power to tax as "a toll for regulation" (U.S. v.
Sanchez, 340 US 42). The power to tax which was called by Justice Marshall as the "power to destroy"
(McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity
which has the inherent power to wield it. (Emphasis supplied)

It then concludes that the respondent Judge "cannot therefore correctly say that the questioned provisions of the Code
do not contain any distinction between a governmental function as against one performing merely proprietary ones
such that the exemption privilege withdrawn under the said Code would apply to all government corporations." For it
is clear from Section 133, in relation to Section 234, of the LGC that the legislature meant to exclude instrumentalities
of the national government from the taxing power of the local government units.

In its comment respondent City of Cebu alleges that as local a government unit and a political subdivision, it has the
power to impose, levy, assess, and collect taxes within its jurisdiction. Such power is guaranteed by the
Constitution  and enhanced further by the LGC. While it may be true that under its Charter the petitioner was exempt
10

from the payment of realty taxes,  this exemption was withdrawn by Section 234 of the LGC. In response to the
11

petitioner's claim that such exemption was not repealed because being an instrumentality of the National Government,
Section 133 of the LGC prohibits local government units from imposing taxes, fees, or charges of any kind on it,
respondent City of Cebu points out that the petitioner is likewise a government-owned corporation, and Section 234
thereof does not distinguish between government-owned corporation, and Section 234 thereof does not distinguish
between government-owned corporation, and Section 234 thereof does not distinguish between government-owned or
controlled corporations performing governmental and purely proprietary functions. Respondent city of Cebu urges this
the Manila International Airport Authority is a governmental-owned corporation,   and to reject the application of
12
Basco because it was "promulgated . . . before the enactment and the singing into law of R.A. No. 7160," and was not,
therefore, decided "in the light of the spirit and intention of the framers of the said law.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which
imposes the tax on the constituency who are to pay it. Nevertheless, effective limitations thereon may be imposed by
the people through their Constitutions.  Our Constitution, for instance, provides that the rule of taxation shall be
13

uniform and equitable and Congress shall evolve a progressive system of taxation.  So potent indeed is the power that
14

it was once opined that "the power to tax involves the power to destroy."  Verily, taxation is a destructive power which
15

interferes with the personal and property for the support of the government. Accordingly, tax statutes must be
construed strictly against the government and liberally in favor of the taxpayer.  But since taxes are what we pay for
16

civilized society,  or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes
17

granting tax exemptions are thus construed strictissimi juris against the taxpayers and liberally in favor of the taxing
authority.  A claim of exemption from tax payment must be clearly shown and based on language in the law too plain
18

to be mistaken.  Elsewise stated, taxation is the rule, exemption therefrom is the exception.  However, if the grantee of
19 20

the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the
practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government in
the course of its operations.
21

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local
legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred
by Section 5, Article X of the Constitution.  Under the latter, the exercise of the power may be subject to such
22

guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of
local autonomy.

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the payment of realty
taxes imposed by the National Government or any of its political subdivisions, agencies, and instrumentalities.
Nevertheless, since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn
at the pleasure of the taxing authority. The only exception to this rule is where the exemption was granted to private
parties based on material consideration of a mutual nature, which then becomes contractual and is thus covered by the
non-impairment clause of the Constitution. 23

The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise by local government
units of their power to tax, the scope thereof or its limitations, and the exemption from taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of local government units as follows:

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

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

(b) Documentary stamp tax;

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

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

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

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

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

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

(i) Percentage or value added tax (VAT) on sales, barters or exchanges or similar transactions
on goods or services except as otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractor and person engage in the
transportation of passengers of freight by hire and common carriers by air, land, or water,
except as provided in this code;

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

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

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

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

(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT, ITS

AGENCIES AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS. (emphasis
supplied)

Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges" referred to are "of any kind",
hence they include all of these, unless otherwise provided by the LGC. The term "taxes" is well understood so as to
need no further elaboration, especially in the light of the above enumeration. The term "fees" means charges fixed by
law or Ordinance for the regulation or inspection of business activity, while "charges" are pecuniary liabilities such as
24

rents or fees against person or property.25

Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section 232. It reads as follows:

Sec. 232. Power to Levy Real Property Tax. — A province or city or a municipality within the Metropolitan
Manila Area may levy on an annual ad valorem tax on real property such as land, building, machinery and
other improvements not hereafter specifically exempted.

Section 234 of LGC provides for the exemptions from payment of real property taxes and withdraws previous
exemptions therefrom granted to natural and juridical persons, including government owned and controlled
corporations, except as provided therein. It provides:

Sec. 234. Exemptions from Real Property Tax. — The following are exempted from payment of the real
property tax:
 (a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof had been granted, for reconsideration or otherwise, to
a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenants thereto, mosques

nonprofits or religious cemeteries and all lands, building and improvements actually, directly,
and exclusively used for religious charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local
water districts and government-owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. No.
6938; and;

(e) Machinery and equipment used for pollution control and environmental protection.

Except as provided herein, any exemptions from payment of real property tax previously
granted to or presently enjoyed by, all persons whether natural or juridical, including all
government owned or controlled corporations are hereby withdrawn upon the effectivity of
his Code.

These exemptions are based on the ownership, character, and use of the property. Thus;

(a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership
are real properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality,
(v) a barangay, and (vi) registered cooperatives.

(b) Character Exemptions. Exempted from real property taxes on the basis of their character
are: (i) charitable institutions, (ii) houses and temples of prayer like churches, parsonages or
convents appurtenant thereto, mosques, and (iii) non profit or religious cemeteries.

(c) Usage exemptions. Exempted from real property taxes on the basis of the actual, direct
and exclusive use to which they are devoted are: (i) all lands buildings and improvements
which are actually, directed and exclusively used for religious, charitable or educational
purpose; (ii) all machineries and equipment actually, directly and exclusively used or by local
water districts or by government-owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power; and (iii) all
machinery and equipment used for pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the country, all machinery and
equipment for pollution control and environmental protection may not be taxed by local governments.

2. Other Exemptions Withdrawn. All other exemptions previously granted to natural or

juridical persons including government-owned or controlled corporations are withdrawn upon
the effectivity of the Code.26

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It provides:

Sec. 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided in this code, tax exemptions
or incentives granted to or presently enjoyed by all persons, whether natural or juridical, including
government-owned, or controlled corporations, except local water districts, cooperatives duly registered under
R.A. 6938, non stock and non profit hospitals and educational constitutions, are hereby withdrawn upon the
effectivity of this Code.
On the other hand, the LGC authorizes local government units to grant tax exemption privileges. Thus, Section 192
thereof provides:

Sec. 192. Authority to Grant Tax Exemption Privileges. — Local government units may, through ordinances
duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem
necessary.

The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local government units and
the exceptions to such limitations; and (b) the rule on tax exemptions and the exceptions thereto. The use of  exceptions
of provisos in these section, as shown by the following clauses:

(1) "unless otherwise provided herein" in the opening paragraph of Section 133;

(2) "Unless otherwise provided in this Code" in section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in section 133 seems
to be inaccurately worded. Instead of the clause "unless otherwise provided herein," with the "herein" to mean, of
course, the section, it should have used the clause "unless otherwise provided in this Code." The former results in
absurdity since the section itself enumerates what are beyond the taxing powers of local government units and, where
exceptions were intended, the exceptions were explicitly indicated in the text. For instance, in item (a) which excepts
the income taxes "when livied on banks and other financial institutions", item (d) which excepts "wharfage on wharves
constructed and maintained by the local government until concerned"; and item (1) which excepts taxes, fees, and
charges for the registration and issuance of license or permits for the driving of "tricycles". It may also be observed that
within the body itself of the section, there are exceptions which can be found only in other parts of the LGC, but the
section interchangeably uses therein the clause "except as otherwise provided herein" as in items (c) and (i), or the
clause "except as otherwise provided herein" as in items (c) and (i), or the clause "excepts as provided in this Code" in
item (j). These clauses would be obviously unnecessary or mere surplus-ages if the opening clause of the section were"
"Unless otherwise provided in this Code" instead of "Unless otherwise provided herein". In any event, even if the latter
is used, since under Section 232 local government units have the power to levy real property tax, except those
exempted therefrom under Section 234, then Section 232 must be deemed to qualify Section 133.

Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule, as laid down in
Section 133 the taxing powers of local government units cannot extend to the levy of inter alia, "taxes, fees, and
charges of any kind of the National Government, its agencies and instrumentalties, and local government units";
however, pursuant to Section 232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the
real property tax except on, inter alia, "real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial used thereof has been granted, for consideration or otherwise, to a taxable
person", as provided in item (a) of the first paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons, including
government-owned and controlled corporations, Section 193 of the LGC prescribes the general rule, viz., they
are withdrawn upon the effectivity of the LGC, except upon the effectivity of the LGC, except  those granted to local
water districts, cooperatives duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational
institutions, and unless otherwise provided in the LGC. The latter proviso could refer to Section 234, which enumerates
the properties exempt from real property tax. But the last paragraph of Section 234 further qualifies the retention of the
exemption in so far as the real property taxes are concerned by limiting the retention only to those enumerated there-in;
all others not included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as the real
property is owned by the Republic of the Philippines, or any of its political subdivisions covered by item (a) of the first
paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has been granted to taxable
person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC, exemptions from real
property taxes granted to natural or juridical persons, including government-owned or controlled corporations, except
as provided in the said section, and the petitioner is, undoubtedly, a government-owned corporation, it necessarily
follows that its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been withdrawn.
Any claim to the contrary can only be justified if the petitioner can seek refuge under any of the exceptions provided in
Section 234, but not under Section 133, as it now asserts, since, as shown above, the said section is qualified by
Section 232 and 234.

In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing powers of the local
government units cannot extend to the levy of:

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

I must show that the parcels of land in question, which are real property, are any one of those enumerated in Section
234, either by virtue of ownership, character, or use of the property. Most likely, it could only be the first, but not
under any explicit provision of the said section, for one exists. In light of the petitioner's theory that it is an
"instrumentality of the Government", it could only be within be first item of the first paragraph of the section by
expanding the scope of the terms Republic of the Philippines" to embrace . . . . . . "instrumentalities" and "agencies" or
expediency we quote:

(a) real property owned by the Republic of the Philippines, or any of the Philippines, or any
of its political subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.

This view does not persuade us. In the first place, the petitioner's claim that it is an instrumentality of the Government
is based on Section 133(o), which expressly mentions the word "instrumentalities"; and in the second place it fails to
consider the fact that the legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political subdivision "in Section 234(a).

The terms "Republic of the Philippines" and "National Government" are not interchangeable. The former is boarder
and synonymous with "Government of the Republic of the Philippines" which the Administrative Code of the 1987
defines as the "corporate governmental entity though which the functions of the government are exercised through at
the Philippines, including, saves as the contrary appears from the context, the various arms through which political
authority is made effective in the Philippines, whether pertaining to the autonomous reason, the provincial, city,
municipal or barangay subdivision or other forms of local government."  These autonomous regions, provincial, city,
27

municipal or barangay subdivisions" are the political subdivision.28

On the other hand, "National Government" refers "to the entire machinery of the central government, as distinguished
from the different forms of local Governments."  The National Government then is composed of the three great
29

departments the executive, the legislative and the judicial.

30

An "agency" of the Government refers to "any of the various units of the Government, including a department, bureau,
office instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit
therein;"  while an "instrumentality" refers to "any agency of the National Government, not integrated within the
31

department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy; usually through a charter. This term includes
regulatory agencies, chartered institutions and government-owned and controlled corporations". 32

If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption from payment of real
property taxes under the last sentence of the said section to the agencies and instrumentalities of the National
Government mentioned in Section 133(o), then it should have restated the wording of the latter. Yet, it did not
Moreover, that Congress did not wish to expand the scope of the exemption in Section 234(a) to include real property
owned by other instrumentalities or agencies of the government including government-owned and controlled
corporations is further borne out by the fact that the source of this exemption is Section 40(a) of P.D. No. 646,
otherwise known as the Real Property Tax Code, which reads:

Sec 40. Exemption from Real Property Tax. — The exemption shall be as follows:

(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions and any government-owned or controlled corporations
so exempt by is charter: Provided, however, that this exemption shall not
apply to real property of the above mentioned entities the beneficial use of
which has been granted, for consideration or otherwise, to a taxable person.

Note that as a reproduced in Section 234(a), the phrase "and any government-owned or controlled corporation so
exempt by its charter" was excluded. The justification for this restricted exemption in Section 234(a) seems obvious: to
limit further tax exemption privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last paragraph of Section 234. These policy
considerations are consistent with the State policy to ensure autonomy to local governments  and the objective of the
33

LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-
reliant communities and make them effective partners in the attainment of national goals.  The power to tax is the most
34

effective instrument to raise needed revenues to finance and support myriad activities of local government units for the
delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. It may also be relevant to recall that the original reasons for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, and
there was a need for this entities to share in the requirements of the development, fiscal or otherwise, by paying the
taxes and other charges due from them. 35

The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to the Republic of the
Philippines whose beneficial use has been granted to the petitioner, and (b) whether the petitioner is a "taxable person".

Section 15 of the petitioner's Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. — All existing public airport facilities, runways,
lands, buildings and other properties, movable or immovable, belonging to or presently administered by the
airports, and all assets, powers, rights, interests and privileges relating on airport works, or air operations,
including all equipment which are necessary for the operations of air navigation, acrodrome control towers,
crash, fire, and rescue facilities are hereby transferred to the Authority: Provided however, that the operations
control of all equipment necessary for the operation of radio aids to air navigation, airways communication,
the approach control office, and the area control center shall be retained by the Air Transportation Office. No
equipment, however, shall be removed by the Air Transportation Office from Mactan without the concurrence
of the authority. The authority may assist in the maintenance of the Air Transportation Office equipment.

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International AirPort in the Province
of Cebu",  which belonged to the Republic of the Philippines, then under the Air Transportation Office (ATO).
36 37

It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then administered by the Lahug Air
Port and includes the parcels of land the respondent City of Cebu seeks to levy on for real property taxes. This section
involves a "transfer" of the "lands" among other things, to the petitioner and not just the transfer of the beneficial use
thereof, with the ownership being retained by the Republic of the Philippines.

This "transfer" is actually an absolute conveyance of the ownership thereof because the petitioner's authorized capital
stock consists of, inter alia "the value of such real estate owned and/or administered by the airports."  Hence, the
38

petitioner is now the owner of the land in question and the exception in Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It was only exempted from
the payment of real property taxes. The grant of the privilege only in respect of this tax is conclusive proof of the
legislative intent to make it a taxable person subject to all taxes, except real property tax.

Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, in light of the
forgoing disquisitions, it had already become even if it be conceded to be an "agency" or "instrumentality" of the
Government, a taxable person for such purpose in view of the withdrawal in the last paragraph of Section 234 of
exemptions from the payment of real property taxes, which, as earlier adverted to, applies to the petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine Amusement and
Gaming Corporation  is unavailing since it was decided before the effectivity of the LGC. Besides, nothing can
39

prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental
functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no
one can doubt its wisdom.

WHEREFORE, the instant petition is DENIED. The challenged decision and order of the Regional Trial Court of
Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION 

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

COMMISSIONER OF INTERNAL REVENUE, petitioner, 

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

CRUZ, J.:

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

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

We deal first with the procedural question. 

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction
and other allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency
income taxes for the years 1958 and 1959.  On January 18, 1965, Algue flied a letter of protest or request for reconsideration,
1

which letter was stamp received on the same day in the office of the petitioner.   On March 12, 1965, a warrant of distraint and
2

levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the
ground of the pending protest.   A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his
3

file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant.   On April 7, 1965, Atty. 4

Guevara was finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the
warrant of distraint and levy earlier sought to be served.  Sixteen days later, on April 23, 1965, Algue filed a petition for review
5

of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made
within thirty days after receipt of the decision or ruling challenged.  It is true that as a rule the warrant of distraint and levy is
7

"proof of the finality of the assessment"   and renders hopeless a request for reconsideration,"   being "tantamount to an outright
8 9

denial thereof and makes the said request deemed rejected."   But there is a special circumstance in the case at bar that prevents
10

application of this accepted doctrine. 

The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of
protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest
could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was,
if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be
served. 

As the Court of Tax Appeals correctly noted,"   the protest filed by private respondent was not pro forma and was based on
11

strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period
which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7,
1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was
finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been
consumed. 
Now for the substantive question. 

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

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding
company income   but later conformed to the decision of the respondent court rejecting this assertion.  In fact, as the said court
12 13

found, the amount was earned through the joint efforts of the persons among whom it was distributed It has been established
that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land,
factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara,
Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other
persons to invest in it.  Ultimately, after its incorporation largely through the promotion of the said persons, this new
14

corporation purchased the PSEDC properties.  For this sale, Algue received as agent a commission of P126,000.00, and it was
15

from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16

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

dividends was involved. 18

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

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the
accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different
amounts as each payee's need arose.   It should be remembered that this was a family corporation where strict business
19

procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the
books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of
P75,000.00.   Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the
20

close relationship among the persons in the family corporation. 

We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by
the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00.  After deducting the said fees, Algue
21

still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding
of the respondent court is in accord with the following provision of the Tax Code: 

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

(a) Expenses: 

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

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

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

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

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

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

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

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

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

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

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant, 

vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.

Sabido, Sabido & Associates for appellant. 

Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant Solicitor General Conrado
T. Limcaoco & Solicitor Enrique M. Reyes for appellees. 

MARTIN, J.:

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which was certified to Us
by the Court of Appeals on October 6, 1969, as involving only pure questions of law, challenging the power of taxation
delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a complaint
with preliminary injunction before the Court of First Instance of Leyte for that court to declare Section 2 of Republic Act No.
2264.  otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well as to
1

declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void. 

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state that,  first, both Ordinances
Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates imposed therein are practically the same,
and second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the
Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the provisions of
said Ordinance No. 27, series of 1962. 

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and collects "from soft
drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked."   For the
2

purpose of computing the taxes due, the person, firm, company or corporation producing soft drinks shall submit to the
Municipal Treasurer a monthly report, of the total number of bottles produced and corked during the month.  3

On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and collects "on soft drinks
produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity."   For the purpose of computing the taxes due, the person, fun company,
4

partnership, corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of the total
number of gallons produced or manufactured during the month.  5

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.' 

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and upholding the
constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering
the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the costs." 

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in turn, elevated the
case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal: 

1. — Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and oppressive? 

2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific taxes? 

3. — Are Ordinances Nos. 23 and 27 unjust and unfair? 

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every
independent government, without being expressly conferred by the people.   It is a power that is purely legislative and which the
6

central legislative body cannot delegate either to the executive or judicial department of the government without infringing
upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which, said
theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern.    This
7

is sanctioned by immemorial practice.   By necessary implication, the legislative power to create political corporations for
8

purposes of local self-government carries with it the power to confer on such local governmental agencies the power to
tax.   Under the New Constitution, local governments are granted the autonomous authority to create their own sources of
9

revenue and to levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create its sources
of revenue and to levy taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of
Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local governments the
power of local taxation. 

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to invalidate
the said law as confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact measure of that
which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant
that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for
more general purposes.   This is not to say though that the constitutional injunction against deprivation of property without due
10

process of law may be passed over under the guise of the taxing power, except when the taking of the property is in the lawful
exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3)
either the person or property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and
collection of certain kinds of taxes notice and opportunity for hearing are provided.   Due process is usually violated where the
11

tax imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not
violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury rather
than a benefit to such taxpayer. Due process does not require that the property subject to the tax or the amount of tax to be
raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it
shall be apportioned are generally not necessary to due process of law.  12

There is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory of double
taxation. It must be observed that the delegating authority specifies the limitations and enumerates the taxes over which local
taxation may not be exercised.   The reason is that the State has exclusively reserved the same for its own prerogative.
13

Moreover, double taxation, in general, is not forbidden by our fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the United States and some states of the Union.  Double taxation
14

becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity    or by the same
15

jurisdiction for the same purpose,  but not in a case where one tax is imposed by the State and the other by the city or
16

municipality. 17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because these two ordinances cover
the same subject matter and impose practically the same tax rate. The thesis proceeds from its assumption that both ordinances
are valid and legally enforceable. This is not so. As earlier quoted, Ordinance No. 23, which was approved on September 25,
1962, levies or collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle
corked, irrespective of the volume contents of the bottle used. When it was discovered that the producer or manufacturer could
increase the volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No.
27, approved on October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity. The difference between the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No.
23, it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus
clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even without
words to that effect.   Plaintiff-appellant in its brief admitted that defendants-appellees are only seeking to enforce Ordinance
18

No. 27, series of 1962. Even the stipulation of facts confirms the fact that the Acting Municipal Treasurer of Tanauan, Leyte
sought t6 compel compliance by the plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962. The
aforementioned admission shows that only Ordinance No. 27, series of 1962 is being enforced by defendants-appellees. Even
the Provincial Fiscal, counsel for defendants-appellees admits in his brief "that Section 7 of Ordinance No. 27, series of 1962
clearly repeals Ordinance No. 23 as the provisions of the latter are inconsistent with the provisions of the former." 

That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a specific tax. Undoubtedly,
the taxing authority conferred on local governments under Section 2, Republic Act No. 2264, is broad enough as to extend to
almost "everything, accepting those which are mentioned therein." As long as the text levied under the authority of a city or
municipal ordinance is not within the exceptions and limitations in the law, the same comes within the ambit of the general rule,
pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non excepti   The limitation applies,
19

particularly, to the prohibition against municipalities and municipal districts to impose "any percentage tax or other taxes in any
form based thereon  nor impose taxes on articles subject to specific tax except gasoline, under the provisions of the National
Internal Revenue Code." For purposes of this particular limitation, a municipal ordinance which prescribes a set ratio between
the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and is null and void for being outside the
power of the municipality to enact.   But, the imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces,
20

U.S.) of volume capacity" on all soft drinks produced or manufactured under Ordinance No. 27 does not partake of the nature
of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce (whether sold or not)
and not on the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for purposes of
determining the tax rate on the products, but there is not set ratio between the volume of sales and the amount of the tax. 21

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such as distilled spirits,
wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches firecrackers, manufactured oils and
other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine, opium and other habit-
forming drugs.   Soft drink is not one of those specified.
22

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all softdrinks, produced or
manufactured, or an equivalent of 1-½ centavos per case,   cannot be considered unjust and unfair. 24 an increase in the tax
23

alone would not support the claim that the tax is oppressive, unjust and confiscatory. Municipal corporations are allowed much
discretion in determining the reates of imposable taxes. 25 This is in line with the constutional policy of according the widest
possible autonomy to local governments in matters of local taxation, an aspect that is given expression in the Local Tax Code
(PD No. 231, July 1, 1973). 26 Unless the amount is so excessive as to be prohibitive, courts will go slow in writing off an
ordinance as unreasonable. 27 Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the
purpose of the law to further strengthen local autonomy were to be realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten crowners or P2,000.00 with
ten but not more than twenty crowners imposed on manufacturers, producers, importers and dealers of soft drinks and/or
mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of 1968, of defendant
Municipality,   appears not to affect the resolution of the validity of Ordinance No. 27. Municipalities are empowered to
29

impose, not only municipal license taxes upon persons engaged in any business or occupation but also to levy for public
purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27) comes within the second power of a
municipality. 

ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy Act,
as amended, is hereby upheld and Municipal Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-
pealing Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect. Costs against petitioner-
appellant. 

SO ORDERED.

Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz Palma, Aquino and Concepcion, Jr., JJ., concur. 

 
 

Separate Opinions

 
FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive character. Insofar as it
shows adherence to tried and tested concepts of the law of municipal taxation, I am only in agreement. If I limit myself to
concurrence in the result, it is primarily because with the article on Local Autonomy found in the present Constitution, I feel a
sense of reluctance in restating doctrines that arose from a different basic premise as to the scope of such power in accordance
with the 1935 Charter. Nonetheless it is well-nigh unavoidable that I do so as I am unable to share fully what for me are the
nuances and implications that could arise from the approach taken by my brethren. Likewise as to the constitutional aspect of
the thorny question of double taxation, I would limit myself to what has been set forth in City of Baguio v. De Leon. 1

1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal corporations. It is therein
specifically provided: "Each local government unit shall have the power to create its own sources of revenue and to levy taxes
subject to such limitations as may be provided by law.   That was not the case under the 1935 Charter. The only limitation then
2

on the authority, plenary in character of the national government, was that while the President of the Philippines was vested
with the power of control over all executive departments, bureaus, or offices, he could only . It exercise general supervision
over all local governments as may be provided by law ...   As far as legislative power over local government was concerned, no
3

restriction whatsoever was placed on the Congress of the Philippines. It would appear therefore that the extent of the taxing
power was solely for the legislative body to decide. It is true that in 1939, there was a statute that enlarged the scope of the
municipal taxing power.   Thereafter, in 1959 such competence was further expanded in the Local Autonomy
4

Act.   Nevertheless, as late as December of 1964, five years after its enactment of the Local Autonomy Act, this Court, through
5

Justice Dizon, in Golden Ribbon Lumber Co. v. City of Butuan,   reaffirmed the traditional concept in these words: "The rule is
6

well-settled that municipal corporations, unlike sovereign states, after clothed with no power of taxation; that its charter or a
statute must clearly show an intent to confer that power or the municipal corporation cannot assume and exercise it, and that
any such power granted must be construed strictly, any doubt or ambiguity arising from the terms of the grant to be resolved
against the municipality."7

Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao,  "is an attribute of sovereignty
8

which municipal corporations do not enjoy."   That case left no doubt either as to weakness of a claim "based merely by
9

inferences, implications and deductions, [as they have no place in the interpretation of the power to tax of a municipal
corporation."   As the conclusion reached by the Court finds support in such grant of the municipal taxing power, I concur in
10

the result. 2. As to any possible infirmity based on an alleged double taxation, I would prefer to rely on the doctrine announced
by this Court in City of Baguio v. De Leon.  Thus: "As to why double taxation is not violative of due process, Justice Holmes
11

made clear in this language: 'The objection to the taxation as double may be laid down on one side. ... The 14th Amendment
[the due process clause) no more forbids double taxation than it does doubling the amount of a tax, short of (confiscation or
proceedings unconstitutional on other grouse With that decision rendered at a time when American sovereignty in the
Philippines was recognized, it possesses more than just a persuasive effect. To some, it delivered the coup justice to the bogey
of double taxation as a constitutional bar to the exercise of the taxing power. It would seem though that in the United States, as
with us, its ghost, as noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we quoted with
approval this excerpt from a leading American decision: 'Where, as here, Congress has clearly expressed its intention, the
statute must be sustained even though double taxation results.  12

So I would view the issues in this suit and accordingly concur in the result.
 EN BANC

April 25, 2017

G.R. No. 199669

SOUTHERN LUZON DRUG CORPORATION, Petitioner, 

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

DECISION

REYES, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the Decision  dated June
1 2

17, 2011, and Resolution  dated November 25, 2011 of the Court of Appeals (CA) in CA-G.R. SP No. 102486, which dismissed
3

the petition for prohibition filed by Southern Luzon Drug Corporation (petitioner) against the Department of1 Social Welfare
and Development (DSWD), the National Council for the Welfare of Disabled Persons (NCWDP) (now National Council on
Disability Affairs or NCDA), the Department of Finance (DOF) and the Bureau of: Internal Revenue (collectively, the
respondents), which sought to prohibit the implementation of Section 4(a) of Republic Act (R.A.) No. 9257, otherwise known
as the "Expanded Senior Citizens Act of 2003" and Section 32 of R.A. No. 9442, which amends the "Magna Carta for Disabled
Persons,"  particularly the granting of 20% discount on the purchase of medicines by senior citizens and persons with disability
(PWD),: respectively, and treating them as tax deduction.

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

Factual Antecedents

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

thereof, one of which is 20% discount on the purchase of medicines. The said provision states:

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

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

x x x x (Emphasis ours)

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

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

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

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

xxxx

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

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

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

The change in the tax treatment of the discount given to senior citizens did not sit well with some drug store owners and
corporations, claiming it affected the profitability of their business. Thus, on January 13, 2005, I Carlos Superdrug Corporation
(Carlos Superdrug), together with other. corporation and proprietors operating drugstores in the Philippines, filed a Petition for
Prohibition with Prayer for Temporary Restraining Order (TRO) I and/or Preliminary Injunction before this Court,
entitled Carlos Superdrug I Corporation v. DSWD, docketed as G.R. No. 166494, assailing the constitutionality of Section 4(a)
5

of R.A. No. 9257 primarily on the ground that it amounts to taking of private property without payment of just compensation.
In a Decision dated June 29, 2007, the Court upheld the constitutionality of the assailed provision, holding that the same is a
legitimate exercise of police power. The relevant portions of the decision read, thus:

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

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

xxxx

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

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

6

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

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

CHAPTER 8. Other Privileges and Incentives

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

xxxx

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

xxxx

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

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

Sec. 5. Definition of Terms. For purposes of these Rules and Regulations, these terms are defined as follows:
 5.1. Persons with Disability  are those individuals defined under Section 4 of RA 7277, "An Act Providing for
the Rehabilitation, Self-Development and Self-Reliance of Persons with Disability as amended and their
integration into the Mainstream of Society and for Other Purposes." This is defined as a person suffering from
restriction or different abilities, as a result of a mental, physical or sensory impairment, to perform an activity
in a manner or within the range considered normal for human being. Disability shall mean: (1) a physical or
mental impairment that substantially limits one or more psychological, physiological or anatomical function of
an individual or activities of such individual; (2) a record of such an impairment; or (3) being regarded as
having such an impairment.

xxxx

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

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

Ruling of the CA

On June 17, 2011, the CA dismissed the petition, reiterating the ruling of the Court in  Carlos Superdrug particularly that
10

Section 4(a) of R.A. No. 9257 was a valid exercise of police power. Moreover, the CA held that considering that the same
question had been raised by parties similarly situated and was resolved in Carlos Superdrug,  the rule of stare decisis stood as a
hindrance to any further attempt to relitigate the same issue. It further noted that jurisdictional considerations also compel the
dismissal of the action. It particularly emphasized that it has no original or appellate jurisdiction to pass upon the
constitutionality of the assailed laws,   the same pertaining to the Regional Trial Court (RTC). Even assuming that it had
11

concurrent jurisdiction with the RTC, the principle of hierarchy of courts mandates that the case be commenced and heard by
the lower court.   The CA further ruled that the petitioner resorted to the wrong remedy as a petition for prohibition will not lie
12

to restrain the actions of the respondents for the simple reason that they do not exercise judicial, quasi-judicial or ministerial
duties relative to the issuance or implementation of the questioned provisions. Also, the petition was wanting of the allegations
of the specific acts committed by the respondents that demonstrate the exercise of these powers which may be properly
challenged in a petition for prohibition.13

The petitioner filed its Motion for Reconsideration   of the Decision dated June 17, 2011 of the CA, but the same was denied in
14

a Resolution   dated November 25, 2011.

15

Unyielding, the petitioner filed the instant petition, raising the following assignment of errors, to wit:

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

II

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

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

IV

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

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

Ruling of the Court

Prohibition may be filed to question

the constitutionality of a law

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

The Court clarifies.

Generally, the office of prohibition is to prevent the unlawful and oppressive exercise of authority and is directed against
proceedings that are done without or in excess of jurisdiction, or with grave abuse of discretion, there being no appeal or other
plain, speedy, and adequate remedy in the ordinary course of law. It is the remedy to prevent inferior courts, corporations,
boards, or persons from usurping or exercising a jurisdiction or power with which they have not been vested by law.   This is,
18

however, not the lone office of an action for prohibition. In Diaz, et al. v. The Secretary of Finance, et al.,   prohibition was
19

also recognized as a proper remedy to prohibit or nullify acts of executive officials that amount to usurpation of legislative
authority.   And, in a number of jurisprudence, prohibition was allowed as a proper action to assail the constitutionality of a law
20

or prohibit its implementation.

In Social Weather Stations, Inc. v. Commission on Elections, therein petitioner filed a petition for prohibition to assail the
21

constitutionality of Section 5.4 of R.A. No. 9006, or the "Fair Elections Act," which prohibited the publication of surveys
within 15 days before an election for national candidates, and seven days for local candidates. Included in the petition is a
prayer to prohibit the Commission on Elections from enforcing the said provision. The Court granted the Petition and struck
down the assailed provision for being unconstitutional.  22

In Social Justice Society (SJS) v. Dangerous Drugs Board, et al.,  therein petitioner assailed the constitutionality of paragraphs
23

(c ), (d), (f) and (g) of Section 36 of R.A. No. 9165, otherwise known as the "Comprehensive Dangerous Drugs Act of
2002,"  on the ground that they constitute undue delegation of legislative power for granting unbridled discretion to schools and
private employers in determining the manner of drug 'testing of their employees, and that the law constitutes a violation of the
right against unreasonable searches and seizures. It also sought to enjoin the Dangerous Drugs Board and the Philippine Drug
Enforcement Agency from enforcing the challenged provision.  The Court partially granted the petition by declaring Section
24

36(f) and (g) of R.A. No. 9165 unconstitutional, and permanently enjoined the concerned agencies from implementing them.  25

In another instance, consolidated petitions for prohibitions  questioning the constitutionality of the Priority Development
26

Assistance Fund were deliberated upon by this Court which ultimately granted the same.
Clearly, prohibition has been found an appropriate remedy to challenge the constitutionality of various laws, rules, and
regulations.

There is also no question regarding the jurisdiction of the CA to hear and decide a petition for prohibition. By express provision
of the law, particularly Section 9(1) of Batas Pambansa Bilang 129,  the CA was granted "original jurisdiction to issue writs
27

of mandamus,  prohibition, certiorari, habeas corpus,  and quo warranto, and auxiliary writs or I processes, whether or not in
aid of its appellate jurisdiction." This authority· the CA enjoys concurrently with RTCs and this Court.

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

Moreover, the principle of hierarchy of courts may be set aside for special and important reasons, such as when dictated by
public welfare and ' the advancement of public policy, or demanded by the broader interest of justice.  Thus, when based on the
29

good judgment of the court, the urgency and significance of the issues presented calls for its intervention, it should not hesitate
to exercise its duty to resolve.

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

The instant case is not barred by

stare decisis

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

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

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

In both cases, it is apparent that what the petitioners are ultimately questioning is not the grant of the senior citizen discount  per
se,  but the manner by which they were allowed to recoup the said discount. In particular, they are protesting the change in the
tax treatment of the senior citizen discount from tax credit to being merely a deduction from gross income which they claimed
to have significantly reduced their profits.
This question had been settled in Carlos Superdrug, where the Court ruled that the change in the tax treatment of the discount
was a valid exercise of police power, thus:

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

xxxx

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

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

The Court believes so.

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

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

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

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

xxxx

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

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

The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its
object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to underscore its
comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions and
circumstances, thus assuring the greatest benefits. Accordingly, it has been described as "the most essential, insistent and the
least limitable of powers, extending as it does to all the great public needs." It is "[t]he power vested in the legislature by the
constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with
penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth,
and of the subjects of the same."
For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of
police power because proper rights, though sheltered by due process, must yield to general welfare.   (Citations omitted and
31

emphasis in the original)

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

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

which had been unduly tilted against them because of their limitations.

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

eminent domain and power of taxation.

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

emphasized, thus:

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

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

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

The Court is not swayed.

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

In Manila Memorial Park, Inc., et al. v. Secretary of the DSWD, et al.,   the Court ruled that by examining the nature and the
36

effects of R.A. No. 9257, it becomes apparent that the challenged governmental act was an exercise of police power. It was
held, thus:

[W]e now look at the nature and effects of the 20% discount to determine if it constitutes an exercise of police power or
eminent domain.
The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to be gainfully
employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may
not be amiss to mention also that the discount serves to honor senior citizens who presumably spent the productive years of
their lives on contributing to the development and progress of the nation. This distinct cultural Filipino practice of honoring the
elderly is an integral part of this law.

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

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

In the exercise of police power, "property rights of private individuals are subjected to restraints and burdens in order to secure
the general comfort, health, and prosperity of the State."  Even then, the State's claim of police power cannot be arbitrary or
38

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

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

In the same manner, the family and the community have equally significant duties to perform in reducing social inequality. The
family as the basic social institution has the foremost duty to care for its elderly members.  On the other hand, the community,
41

which include the private sector, is recognized as an active partner of the State in pursuing greater causes. The private sector,
being recipients of the privilege to engage business in our land, utilize our goods as well as the services of our people for
proprietary purposes, it is only fitting to expect their support in measures that contribute to common good. Moreover, their right
to own, establish and operate economic enterprises is always subject to the duty of the State to promote distributive justice and
to intervene when the common good so demands. 42

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

Illuminating on this point is the discussion of the Court on the concept of taking  in City of Manila v. Hon. Laguio, Jr.,   viz.:
43
There are two different types of taking that can be identified. A "possessory" taking occurs when the government confiscates or
physically occupies property. A "regulatory" taking occurs when the government's regulation leaves no reasonable
economically viable use of the property.

xxxx

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

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

xxxx

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

omitted)

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

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

According to Republic of the Philippines v. Vda. de Castellvi, five circumstances must be present in order to qualify "taking" as
45

an exercise of eminent domain. First,  the expropriator must enter a private property. Second, the entrance into private property
must be for more than a momentary period. Third,  the entry into the property should be under warrant or color of legal
authority. Fourth, the property must be devoted to a public use or otherwise informally appropriated or injuriously
affected. Fifth,  the utilization of the property for public use must be in such a way as to oust the owner and deprive him of all
beneficial enjoyment of the property. 46

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

The supposed taking also lacked the characteristics of permanence   and consistency.  The presence of these characteristics is
47
1âwphi1

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

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

Apart from the foregoing, covered establishments are also provided with a mechanism to recoup the amount of discounts they
grant the senior citizens and PWDs. It is provided in Section 4(a) of R.A. No. 9257 and Section 32 of R.A. No. 9442 that
establishments may claim the discounts as "tax deduction based on the net cost of the goods sold or services rendered."
Basically, whatever amount was given as discount, covered establishments may claim an equal amount as an expense or tax
deduction. The trouble is that the petitioner, in protesting the change in the tax treatment of the discounts, apparently seeks tax
incentive and not merely a return of the amount given as discounts. It premised its interpretation of  financial losses in terms of
the effect of the change in the tax treatment of the discount on its tax liability; hence, the claim that the measure was
confiscatory. However, as mentioned earlier in the discussion, loss of profits is not the inevitable result of the change in tax
treatment of the discounts; it is more appropriately a consequence of poor business decision.

It bears emphasizing that the law does not place a cap on the amount of mark up that covered establishments may impose on
their items. This rests on the discretion of the establishment which, of course, is expected to put in the price of the overhead
costs, expectation of profits and other considerations into the selling price of an item. In a simple illustration, here is Drug
A,  with acquisition cost of ₱8.00, and selling price of ₱10.00. Then comes a law that imposes 20% on senior citizens and
PWDs, which affected Establishments 1, 2 and 3. Let us suppose that the approximate number of patrons who purchases  Drug
A is 100, half of which are senior citizens and PWDs. Before the passage of the law, all of the establishments are earning the
same amount from profit from the sale of Drug A, viz.:

Before the passage of the law:

Drug A

Acquisition cost ₱8.00

Selling price ₱10.00

Number of
100
patrons

Sales:

100 x ₱10.00 = ₱1,000.00

Profit: ₱200

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

Establishment 1

Drug A

Acquisition cost ₱8.00

Selling price ;₱10.00

Number of
patrons 100
Senior 50
Citizens/PWD
 Sales

100 x ₱10.00 = ₱1,000.00

Deduction: ₱100.00

Profit: ₱100.00

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

Establishment 2

Drug A

Acquisition cost ;₱8.00

Selling price ₱11.20

Number of patron
100
Senior
50
Citizens/PWDs

Sale
s

100 x ₱10.00 = ₱1,000.00

Deduction: ₱112.00

Profit: ₱208.00

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

Establishment 3

Drug A

Acquisition cost ₱8.00

Selling price ₱11.20

Number of
patrons 100
Senior 50
Citizens/PWD

Sale
s

100 x ₱10.00 = ₱1,000.00

Deduction: ₱110.00

Profit: ₱190.00
The foregoing demonstrates that it is not the law per se which occasioned the losses in the covered establishments but bad
business I judgment. One of the main considerations in making business decisions is the law because its effect is widespread
and inevitable. Literally, anything can be a subject of legislation. It is therefore incumbent upon business managers to cover this
contingency and consider it in making business strategies. As shown in the illustration, the better responses were exemplified
by Establishments 2 and 3 which promptly put in the additional costs brought about by the law into the price of  Drug A.  In
doing so, they were able to maintain the profitability of the business, even earning some more, while at the same time being
fully compliant with the law. This is not to mention that the illustration is even too simplistic and not' the most ideal since it
dealt only with a single drug being purchased by both regular patrons and senior citizens and PWDs. It did not consider the
accumulated profits from the other medical and non-medical products being sold by the establishments which are expected to
further curb the effect of the granting of the discounts in the business.

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

Still, the petitioner argues that the law is confiscatory in the sense that the State takes away a portion of its supposed profits
which could have gone into its coffers and utilizes it for public purpose. The petitioner claims that the action of the State
amounts to taking for which it should be compensated.

To reiterate, the subject provisions only affect the petitioner's right to profit, and not earned profits. Unfortunately for the
petitioner, the right to profit is not a vested right or an entitlement that has accrued on the person or entity such that its invasion
or deprivation warrants compensation. Vested rights are "fixed, unalterable, or irrevocable."48 More extensively, they are
depicted as follows:

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

Right to profits does not give the petitioner the cause of action to ask for just compensation, it being only an inchoate right or
one that has not fully developed  and therefore cannot be claimed as one's own. An inchoate right is a mere expectation, which
50

may or may not come into existence. It is contingent as it only comes "into existence on an event or condition which may not
happen or be performed until some other event may prevent their vesting."  Certainly, the petitioner cannot claim confiscation
51

or taking of something that has yet to exist. It cannot claim deprivation of profit before the consummation of a sale and the
purchase by a senior citizen or PWD.

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

The inchoate nature of the right to profit precludes the possibility of compensation because it lacks the quality or characteristic
which is necessary before any act of taking or expropriation can be effected. Moreover, there is no yardstick fitting to quantify a
contingency or to determine compensation for a mere possibility. Certainly, "taking" presupposes the existence of a subject that
has a quantifiable or determinable value, characteristics which a mere contingency does not possess.
Anent the question regarding the shift from tax credit to tax deduction, suffice it is to say that it is within the province of
Congress to do so in the exercise of its legislative power. It has the authority to choose the subject of legislation, outline the
effective measures to achieve its declared policies and even impose penalties in case of non-compliance. It has the sole
discretion to decide which policies to pursue and devise means to achieve them, and courts often do not interfere in this
exercise for as long as it does not transcend constitutional limitations. "In performing this duty, the legislature has no guide but
its judgment and discretion and the wisdom of experience."  In Carter v. Carter Coal Co., legislative discretion has been
53 54

described as follows:

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

Corollary, whether to treat the discount as a tax deduction or tax credit is a matter addressed to the wisdom of the legislature.
After all, it is within its prerogative to enact laws which it deems sufficient to address a specific public concern. And, in the
process of legislation, a bill goes through rigorous tests of validity, necessity and sufficiency in both houses of Congress before
enrolment. It undergoes close scrutiny of the members of Congress and necessarily had to surpass the arguments hurled against
its passage. Thus, the presumption of validity that goes with every law as a form of deference to the process it had gone through
and also to the legislature's exercise of discretion. Thus, in lchong, etc., et al. v. Hernandez) etc., and Sarmiento, the Court
56

emphasized, thus:

It must not be overlooked, in the first place, that the legislature, which is the constitutional repository of police power and
exercises the prerogative of determining the policy of the State, is by force of circumstances primarily  the judge of necessity,
adequacy or reasonableness and wisdom, of any law promulgated in the exercise of the police power, or of the measures
adopted to implement the public policy or to achieve public interest.x x x.  (Emphasis ours)
57

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

Indeed, regulatory laws are within the category of police power measures from which affected persons or entities cannot claim
exclusion or compensation. For instance, private establishments cannot protest that the imposition of the minimum wage is
confiscatory since it eats up a considerable chunk of its profits or that the mandated remuneration is not commensurate for the
work done. The compulsory nature of the provision for minimum wages underlies the effort of the State; as R.A. No.
6727  expresses it, to promote productivity-improvement and gain-sharing measures to ensure a decent standard of living for
59

the workers and their families; to guarantee the rights of labor to its just share in the fruits of production; to enhance
employment generation in the countryside through industry dispersal; and to allow business and industry reasonable returns on
investment, expansion and growth, and as the Constitution expresses it, to affirm labor as a primary social economic force.  60

Similarly, the imposition of price control on staple goods in R.A. No. 7581  is likewise a valid exercise of police power and
61

affected establishments cannot argue that the law was depriving them of supposed gains. The law seeks to ensure the
availability of basic necessities and prime commodities at reasonable prices at all times without denying legitimate business a
fair return on investment. It likewise aims to provide effective and sufficient protection to consumers against hoarding,
profiteering and cartels with respect to the supply, distribution, marketing and pricing of said goods, especially during periods
of calamity, emergency, widespread illegal price manipulation and other similar situations. 62

More relevantly, in Manila Memorial Park, Inc., it was ruled that it is within the bounds of the police power of the state to
63

impose burden on private entities, even if it may affect their profits, such as in the imposition of price control measures. There
is no compensable taking but only a recognition of the fact that they are subject to the regulation of the State and that all
personal or private interests must bow down to the more paramount interest of the State.

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

in Philippine Communications Satellite Corporation v. Alcuaz,   the Court emphasized:

65

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

Here, the petitioner failed to show that R.A. Nos. 9257 and 9442, under the guise of regulation, allow undue interference in an
otherwise legitimate business.  On the contrary, it was shown that the questioned laws do not meddle in the business or take
1avvphi1

anything from it but only regulate its realization of profits.

The subject laws do not violate the

equal protection clause

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

The contention lacks merit.

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

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

"The equal protection clause is not infringed by legislation which applies only to those persons falling within a specified class.
If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated
differently from another."  For a classification to be valid, (1) it must be based upon substantial distinctions, (2) it must be
69

germane to the purposes of the law, (3) it must not be limited to existing conditions only, and (4) it must apply equally to all
members of the same class.  70

To recognize all senior citizens as a group, without distinction as to income, is a valid classification. The Constitution itself
considered the elderly as a class of their own and deemed it a priority to address their needs. When the Constitution declared its
intention to prioritize the predicament of the underprivileged sick, elderly, disabled, women, and children,  it did not make any
71

reservation as to income, race, religion or any other personal circumstances. It was a blanket privilege afforded the group of
citizens in the enumeration in view of the vulnerability of their class.

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

It is well to consider that our senior citizens have already reached the age when work opportunities have dwindled concurrently
as their physical health.  They are no longer expected to work, but there are still those who continue to work and contribute
1âwphi1

what they can to the country. Thus, to single them out and take them out of the privileges of the law for continuing to strive and
earn income to fend for themselves is inimical to a welfare state that the Constitution envisions. It is tantamount to penalizing
them for their persistence. It is commending indolence rather than rewarding diligence. It encourages them to become wards of
the State rather than productive partners.
Our senior citizens were the laborers, professionals and overseas contract workers of the past. While some may be well to do or
may have the capacity to support their sustenance, the discretion to avail of the privileges of the law is up to them. But to
instantly tag them. as undeserving of the privilege would be the height of ingratitude; it is an outright discrimination.

The same ratiocination may be said of the recognition of PWDs as a class in R.A. No. 9442 and in granting them discounts.  It 1âwphi1

needs no further explanation that PWDs have special needs which, for most,' last their entire lifetime. They constitute a class of
their own, equally deserving of government support as our elderlies. While some of them maybe willing to work and earn
income for themselves, their disability deters them from living their full potential. Thus, the need for assistance from the
government to augment the reduced income or productivity brought about by their physical or intellectual limitations.

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

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

The definitions of "disabilities" and

"PWDs" are clear and unequivocal

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

The Court disagrees.

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

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

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

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

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

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

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

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

75

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

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

Sec. 32. x x x

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

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

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

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

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

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

PWD Identification Card:

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

2. One (1) Valid ID

3. Document to confirm the medical or disability condition  78

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

DISABILITY DOCUMENT ISSUING ENTITY

Apparent  Medical  Licensed Private or 

Disability  Certificate Government Physician
  

  School  Licensed Teacher duly 

Assessment signed by the School 
Principal

  Certificate of   Head of the Business

Disability

Establishment

 Head of Non-
Government
Organization

Non-Apparent  Medical  Licensed Private or 

Disability  Certificate Government Physician
 

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

i. PWD identification card x x x

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

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

a) PWD ID number

b) Booklet control number

c) Name of PWD

d) Sex

e) Address

f) Date of Birth

g) Picture

h) Signature of PWD

i) Information of medicine purchased:

i.1 Name of medicine

 i.2 Quantity

i.3 Attending Physician

i.4 License Number

i.5 Servicing drug store name

i.6 Name of dispensing pharmacist

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

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

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

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

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

<<page>> 

SO ORDERED.

BIENVENIDO L. REYES,
Associate Justice
 CONCURRING and DISSENTING OPINION

LEONEN, J.:

This case involves a Petition for Review on Certiorari questioning the constitutionality of Section 4(a) of Republic Act No.
9257 (Expanded Senior Citizens Act of2003), Section 32 of Republic Act No. 9442 (Magna Carta of Persons with Disability),
and Sections 5.1 and 6.1.d of the Implementing Rules and Regulations of Republic Act No. 9442.

I concur in the ponencia's finding that the subject provisions are constitutional.

In Manila Memorial Park, Inc. et al. vs. Secretary of Department of Social Welfare and Development, et al.,   this Court has
1

ruled on the constitutionality of Republic Act No. 9257, and the validity of the 20% discount granted to senior citizens and of
the Tax Deduction Scheme, in which the cost of the discount is allowed as a deduction from the establishment's gross income.  2

This case presents the same questions, except it includes as an issue the grant of the same benefits to persons with disability.

Thus, I restate my opinion in Manila Memorial Park.   I concur that the subject provisions are constitutional. The grant of the
3

20% discount to senior citizens and persons with disability is a valid exercise of police power. However, I opine that the Tax
Deduction Scheme is an exercise of the State's power of taxation. Moreover, I insist that establishments are not entitled to just
compensation, whether there is proof of loss of profits or "oppressive taking," as the subject of the taking is not property, but a
mere inchoate right.

The subject provisions grant senior citizens and persons with disability a 20% discount on medicine purchases. Establishments
4

giving the discount may claim the costs of the discount as tax deductions from their gross income. 5

For senior citizens, Section 4(a) of Republic Act No. 9257  provides:
6

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

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

....

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

For persons with disability, Republic Act No. 94427 amended Republic Act No. 7277 (Magna Carta for Disabled Persons) to
grant personswith disability a 20% discount on the purchase of medicines. It also allowed establishments to deduct the cost of
the discount from their gross income:

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

....

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

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

Thus, the Department of Social Welfare and Development, the Department of Education, the Department of Finance, the
Department of Tourism, and the Department of Transportation promulgated the Implementing Rules and Regulations of
Republic Act No. 9442 (Implementing Rules). Sections 5.1 and 6.1.d of the Implementing Rules state:

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

SECTION 6. Other Privileges and Incentives.  - Persons with disability shall be entitled to the following:

6.1 Discounts from All Establishments - At least twenty percent (20%) discount from all establishments relative to the
utilization of all services in hotels and similar lodging establishments, restaurants and recreation centers for the exclusive use or
enjoyment of persons with disability.

….

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

II

In Manila Memorial Park,   this Court already upheld the constitutionality of Republic Act No. 9257 and of the Tax Deduction
8

Scheme. It strengthened its ruling in Carlos Superdrug Corporation v. Department of Social Welfare and Development.   It has 9

held that the tax treatment is a valid exercise of police power:

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

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

On its face, therefore, the subject regulation is a police power measure. 10

I agree with the ponencia in reiterating this ruling in the present case. The imposition of the 20% discount to senior citizens and
persons with disability is a valid exercise of police power. It is a regulatory function toimprove the public welfare, which
imposes a differentiated pricing system for two (2) types of customers: (1) those who are subject to the regular price, and (2)
those who are senior citizens and persons with disability. The public purpose in granting this discount to the two (2)
classifications cannot be denied.

However, as I maintained in my separate opinion in Manila Memorial Park,  the Tax Deduction Scheme is an exercise of the
State's power to tax. 
11

The power of taxation is an inherent and indispensable power of the State.   As taxes are the "lifeblood of the government", the
12

power of the legislature is unlimited and plenary.   The legislature is given a wide range of discretion in determining what to
13

tax, the purpose of the tax, how much the tax will be, who will be taxed, and where the tax will be imposed.  14

Included in this discretion is the power to determine the method  of collection of the taxes imposed.  In Abakada Gura Party
15

List v. Ermita: 16

The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established.
Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods
of assessment, valuation and collection, the State's power is entitled to presumption of validity. As a rule, the judiciary will not
interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness.  17

The State's power to tax is limited by the Constitution.   Taxes must be uniform and equitable,  and must not be confiscatory or
18 19

arbitrary.  It must be "exercised reasonably and in accordance with the prescribed procedure. "
20 21

Nonetheless, the exercise of the power to tax is presumed valid absent any proof of violation of these limitations.  In Chamber
22

of Real Estate and Builders' Association, Inc. v. Romulo: 23

The principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its
constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other
statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property
without due process of law." In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly be invoked to
invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But in the same case, we also
explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on
the mere allegation of arbitrariness by the taxpayer. There must be a factual foundation to such an unconstitutional taint.  This
merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule
but rather a broad standard, there is a need for proof of such persuasive character.  (Emphasis supplied)
24

The determination that the cost of the 20% discount will be recoverea as a tax deduction instead of a tax credit is within the
legislative's power to tax.  It is a determination of the method of collection of taxes.  The legislative has the power to determine
25 26

if particular costs should be treated as deductions or if it entitles taxpayers to credits.  27

In this case, the Congress deemed the tax deduction as the better option. There is no showing that this option is violative of any
of the constitutional limitations on the power to tax.

The Tax Deduction Scheme is uniform and equitable. Uniformity of taxation means that all subjects of taxation similarly
situated are to be treated alike both in privileges and liabilities.   The taxes are uniform if: (1) the standards used are substantial
28

and not arbitrary, (2) the categorization is germane to the purpose of the law, (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.    Since the
29
20%discount applies to all senior citizens and persons with disability equally, and the tax deduction scheme applies to all
establishments granting the discounts, there is no issue on the uniformity of the tax measure.

Likewise, the tax deduction is not confiscatory or arbitrary. While the establishments cannot recover the full cost of the granted
discount, they are still not at a full loss as they may claim the cost as a tax deduction from their gross income, and they are free
to adjust prices and costs of their products.

III

There is no merit in the contention that the State deprived them of their profits. Establishments can always increase their price
to recover their costs and increase their profitability. They can avoid losses altogether such that it can be said that the State took
nothing from them.

My opinion in Manila Memorial Park  discussed the impact of the senior citizen's discount to an establishment's revenue for the
sale of memorial lots.30

This same principle applies to the sale of medicine to senior citizens and persons with disability. Revenue still depends on the1
price, quantity, and costs of the items sold. 
31

To illustrate, if Company XYZ sells medicine, and for the sake of argument, we assume that the medicine is acquired at zero
cost, revenue is acquired multiplying the price and the quantity sold.  Thus:
32

R = PxQ

Where:

R = Revenue

P = Price per unit

Q = Quantity sold

Before the discounts are granted to senior citizens and persons with disability, let us assume that Company XYZ sells 16,000
bottles of antibiotic syrup at the price of Pl 00.00. Its profit is thus ₱1,600,000.00:

R=PxQ

R = Pl00.00 x 16,000

R = Pl,600,000.00

Assuming that out of the 16,000 bottles sold, 2,200 bottles are bought by senior citizens and 1,000 bottles are purchased by
persons with disability. Thus, 12,800 bottles are bought by ordinary customers.

The subject provisions require that a 20% discount be given to senior citizens and persons with disability. Necessarily, there
will be two (2) types of revenue received by Company XYZ: (1) revenue from ordinary customers, and (2) revenue from senior
citizens and persons with disability. Thus, a bottle of antibiotic syrup will be sold to ordinary customers at ₱100.00, and to
senior citizens and persons with disability at only ₱80.00.

The formula of the revenue of Company XYZ then becomes:

RT = RSD + RC

RSD = PSD x QSD

 RC = PC x QC

RT = (PSD x QSD) +(PC x QC)

Wher RT = Total Revenue

e
RSD = Revenue from Senior Citizens and

Persons with Disability

RC = Revenue from Ordinary Customers

PSD = Price per Unit for Senior Citizens and Persons with
Disability

QSD = Quantity Sold to Senior Citizens and Persons with

Disability

PC = Price for Ordinary Customers per Unit

QC = Quantity Sold to Ordinary Customers

Given this equation, the total revenue of Company XYZ becomes ₱ l,536,000.00:

RT1 = RSD + RC

RT1 = (PSD x QSD) + (PC x QC)

RT1 = (80 x 3,200) + (100 x 12,800)

RT1 = 256,000 + 1,280,000

RT1 = ₱1,536,000.00

Clearly, an increase in the item's price results to an increase in the establishment's profitability, even after the implementation of
the 20% discount. As shown in the example, the price increase may even be less than the discount given to the senior citizens
and persons with disability.

The change in the price also augments the· tax implications of the subject provisions. If we treat the discount as a tax credit
after the implementation of the subject provisions, Company XYZ will have the net income of ₱l,335,480.00:

Gross Income (RT1) 1,536,000

Less: Deductions (600.000)

Taxable Income 936,000

Income Tax Rate ₱125,000 + 32% of

excess
over ₱500,000

Income Tax Liability 264,520

 Less: Discount for (64,000)
Senior

Citizens/Persons with

Disability (Tax
Credit)

Final Income Tax

200,520
Liability

Net Income ₱1,335,480

Without the adjustments, the net income in the Tax Deduction Scheme is less than the net income if the discounts are treated as
tax credits. Thus, if the discount is treated as a tax deduction, its income is ₱1,291,960.00:

Gross Income (RT1) ₱ 1,536,000

Less: Deductions (600,000)

Less: Discount for

(64,000)
Senior

Citizens and Persons

with

Disability

Taxable Income 872,000

Income Tax Rate ₱125,000 + 32% of

excess
over ₱500,000

Income Tax Liability 244,040

Less: Discount for

0
Senior

Citizens/Persons with

Disability (Tax Credit)

Final Income Tax

244,040
Liability

Net Income ₱1,291,960

However, if the price is adjusted as discussed in the earlier example, the net income becomes:

Gross Income (RT2 1,689,600

Less: Deductions (600,000)

 Less: Discount for Senior (70,400)

Citizens and Persons

with

Disability

Taxable Income
1,019,200

Income Tax Rate ₱125,000 + 32% of

excess
over ₱500,000

Income Tax Liability 291,144

Less: Discount for Senior

Citizen/Person with
Disability

(Tax Credit)

Final Income Tax Liability 291,144

Net Income ₱ 1,398,456

Thus, the tax deduction scheme can still allow the improvement of net income in case of a price increase. Losses are not
unavoidable. Br increasing the price of the items, establishments may be able to gain more. I Moreover, bettering the efficiency
of the business by minimizing costs may maintain or improve profits.  In such cases, there is no confiscatory taking that
34

justifies the payment of just compensation.

IV

In any case, I reiterate that whether or not there is proof of loss of profits, establishments are still not entitled to just
compensation under the power of eminent domain.

Petitioners submitted financial statements to prove that they incurred losses because of the imposition of the subject provisions.
They thus claim they are entitled to just compensation.

In Manila Memorial Park, it was held that Republic Act No. 9257 was not shown to have been unreasonable, oppressive or
confiscatory enough as to amount to a "taking" of private property subject to just compensation.35 It emphasized that there was
no proof of the losses incurred, and that petitioners merely relied on a hypothetical computation:

The impact or effect of a regulation, such as the one under consideration, must, thus, be determined on a case-to-case basis.
Whether that line between permissible regulation under police power and "taking" under eminent domain has been crossed
must, under the specific circumstances of this case, be subject to proof and the one assailing the constitutionality of the
regulation carries the heavy burden of proving that the measure is unreasonable, oppressive or confiscatory. The time-honored
rule is that the burden of proving the unconstitutionality of a law rests upon the one assailing it and "the burden becomes
heavier when police power is at issue."
….

We adopted a similar line of reasoning in Carlos Superdrug Corporation when we ruled that petitioners therein failed to prove
that the 20% discount is arbitrary, oppressive or confiscatory. We noted that no evidence, such as a financial report, to establish
the impact of the 20% discount on the overall profitability of petitioners was presented in order to show that they would be
operating at a loss due to the subject regulation or that the continued implementation of the law would be unconscionably
detrimental to the business operations of petitioners. In the case at bar, petitioners proceeded with a hypothetical computation of
the alleged loss that they will suffer similar to what the petitioners in Carlos Superdrug Corporation did. Petitioners went
directly to this Court without first establishing the factual bases of their claims. Hence, the present recourse must, likewise, fail.

….

In sum, we sustain our ruling in Carlos Superdrug Corporation that the 20% senior citizen discount and tax deduction scheme
are valid exercises of police power of the State absent a clear showing that it is arbitrary, oppressive or confiscatory.36

The ponencia reiterated this rule in this case. It found that it must be proven that the State regulation is so oppressive as to
amount to a compensable taking. In applying this principle to the case at bar, it held that petitioners failed to prove the
oppressive and confiscatory nature of the subject provisions. The financial statements were deemed not enough to show the
confiscatory taking warranting just compensation.  37

I maintain my opinion in Manila Memorial Park. I disagree insofar as the rule is premised on the of the losses caused by the
discount.

I opine that whether or not there is sufficient proof of actual losses,1 there is no compensable taking. The provisions are still not
an exercise of the power of eminent domain that requires the payment of just compensation.

The power of eminent domain is found in the Constitution under Article III, Section 9 of the Constitution: "Private property
shall not be taken for public use without just compensation."

The requisites for the exercise of eminent domain are: (1) there must be a genuine necessity for its exercise;  (2) what is taken
38

must be private property; (3) there is taking in the constitutional sense;   (4) the taking is for public use;   and (5) there must be
39 40

payment of just compensation. 41

The difference between police power and eminent domain was discussed in Didipio Earth-Savers' Multi-Purpose Association,
Inc. v. Gozun: 42

The power of eminent domain is the inherent right of the state (and of those entities to which the power has been lawfully
delegated) to condemn private property to public use upon payment of just compensation. On the other hand, police power is
the power of the state to promote public welfare by restraining and regulating the use of liberty and property. Although both
police power and the power of eminent domain have the general welfare for their object, and recent trends show a mingling of
the two with the latter being used as an implement of the former, there are still traditional distinctions between the two.

Property condemned under police power is usually noxious or intended for a noxious purpose; hence, no compensation shall be
paid. Likewise, in the exercise of police power, property rights of private individuals are subjected to restraints and burdens in
order to secure the general comfort, health, and prosperity of the state. Thus, an ordinance prohibiting theaters from selling
tickets in excess of their seating capacity (which would result in the diminution of profits of the theater-owners) was upheld
valid as this would promote the comfort, convenience and safety of the customers. In US. v. Toribio, the court upheld the
provisions of Act No. 1147, a statute regulating the slaughter of carabao for the purpose of conserving an adequate supply of
draft animals, as a valid exercise of police power, notwithstanding the property rights impairment that the ordinance imposed
on cattle owners.

….

According to noted constitutionalist, Fr. Joaquin Bernas, SJ, in the exercise of its police power regulation,  the state restricts the
use of private property, but none of the property interests in the bundle of rights which constitute ownership is appropriated for
use by or for the benefit of the public. Use of the property by the owner was limited, but no aspect of the property is used by or
for the public. The deprivation of use can in fact be total and it will not constitute compensable taking if nobody else acquires
use of the property or any interest therein.

If, however, in the regulation of the use of the property, somebody else acquires the use or interest thereof, such restriction
constitutes compensable taking.43 (Emphasis supplied, citations omitted)

The exercise of the power of eminent domain requires that there is property that is taken from the owner. In this case, there is
no private property that may be the subject of a constitutional taking. The subject of the alleged "taking" is the establishments'
possible profits. Possible profits cannot be acquired by the State through the exercise of the power of eminent domain. Possible
profits are yet to be earned; hence, they are yet to be owned. They are intangible property for which establishments do not have
a j vested right.

A vested right is a fixed or established interest in a property that can no longer be doubted or questioned.  It is an "immediate
44

fixed right of present or future enjoyment."  It is the opposite of an expectant or contingent right. 
45 46

In Benguet Consolidated Mining Co. v. Pineda,   this Court, citing Corpus Juris Secundum, elaborated:
47

Rights are vested when the right to enjoyment, present or prospective, has become the property of some particular person or
persons as a present interest. The right must be absolute, complete, and unconditional, independent of a contingency, and a
mere expectancy of future benefit, or a contingent interest in property founded on anticipated continuance of existing laws, does
not constitute a vested right. So, inchoate rights which have not been acted on are not vested. (16 C. J. S. 214-215.)
48

Establishments do not have a vested right on possible profits. Their right is not yet absolute, complete, and unconditional.
Profits are earned only after the sale of their products, and after deducting costs. These sales may or may not occur. The
existence of the profit or the loss is not certain. It cannot be assumed that the profits will be earned or that losses will be
incurred. Assuming there are profits or losses, its amount is undeterminable.

Thus, for purposes of eminent domain, there is still no property that can be taken. There is no property owned. There is nothing
to compensate.

The ponencia shares the same view. However, I maintain that to be: consistent with this view, the proof of losses (or the lack of
profits) must be irrelevant. No matter the evidence, petitioners cannot be entitled to just compensation.

Assuming there was a "taking," what was taken is not property contemplated by the exercise of eminent domain. Eminent
domain pertains to physical property. In my opinion in Manila Memorial Park:  49

Most if not all jurisprudence on eminent domain involves real property, specifically that of land. Although Rule 67 of the Rules
of Court, the rules governing expropriation proceedings, requires the complaint to "describe the real or personal
property sought to be expropriated," this refers to tangible personal property for which the court will deliberate as to its value
for purposes of just compensation.

In a sense, the forced nature of a sale under eminent domain is more justified for real property such as land. The common
situation is that the government needs a specific plot, for the construction of a public highway for example, and the private
owner cannot move his land to avoid being part of the project. On the other hand, most tangible personal or movable property
need not be subject of a forced sale when the government can procure these items in a public bidding with several able and
willing private sellers.

In Republic of the Philippines v. Vda. de Castellvi, this Court also laid down five (5) "circumstances [that] must be present in
the 'taking' of property for purposes of eminent domain" as follows:

First, the expropriator must enter a private property[.]

Second, the entrance into private property must be for more than a momentary period[.]
 Third, the entry into the property should be under warrant or color of legal authority[.]

Fourth, the property must be devoted to a public use or otherwise informally appropriated or injuriously
affected[.]

Fifth, the utilization of the property for public use must be in such a way as to oust the owner and deprive him
of all beneficial enjoyment of the property[.]

The requirement for "entry" or the element of "oust[ing] the owner" is not possible for intangible personal property such as
profits.

….

At most, profits can materialize in the form of cash, but even then, this is not the private property contemplated by the
Constitution and whose value will be deliberated by courts for purposes of just compensation. We cannot compensate cash for
cash. 
50

The right to profit is an intangible right, which cannot be appropriated for public use. In fact, it is a right and not property in
itself.  Moreover, the right was merely restricted, not taken. The establishment still is given a wide discretion on how to address
1âwphi1

the changes caused by the subject provisions, and how to ensure their profits. As shown in the above example, they may adjust
their pricing, and improve on the costs of goods or their f efficiency to manage potential outcomes. Profits may thus still be
earned.

Losses and profits are still highly dependent on business judgments based on the economic environment. Whether or not losses
are incurred cannot be attributable to the law alone. In fact, the law is one (1) of the givens that businesses must adjust to. It is
not the law that must adjust for businesses. Businesses cannot claim compensation for a regulatory measure which caused dips
in their profit. Pricing and costs may be adjust accordingly, and it cannot be the law that will be limited by business decisions,
which establishments refuse to change.

Thus, in the exercise of its police power, the State may make variances in the pricing of goods to accommodate public policy,
and to promote social justice. The State's determination of how establishments can recover the cost of the discounted prices is
also a valid exercise of its power to tax. In this instance, the legislative chose to allow establishments a partial recovery of the
granted discount through a tax deduction instead of a tax credit.

Both tax deductions and tax credits are valid options for the Congress, although the impacts of the two (2) are different.

As shown above, a tax deduction will naturally cause establishments to increase their prices to fully recover the cost of the
discounts, and prevent losses. The burden of the cost is thus passed on to ordinary customers - to non-senior citizens with no
disability.

However, the Philippine market is not homogenous. The impact of prices on ordinary customers from various sectors in society
is different. It is possible that the poorer sectors in society are denied options because they can no longer afford the items that
used to be available to them before the price increase caused by the granting of the discounts.

In the example above, a bottle of antibiotic syrup costs ₱100.00 prior to the grant of the discount. When the discount was
imposed, Company XYZ adjusted its price by increasing it to ₱110.00. Under the subject provisions, a 78-year-old business
tycoon earning billions every year is entitled to a 20% senior citizen discount. Thus, the business tycoon will be I charged with
only ₱88.00. On the other hand, an ordinary customer will have to allot a bigger portion of his wage to buy antibiotics. This 10-
peso difference may be a bigger burden for the ordinary customer belonging t1 the poorer sectors of society. It may not be felt
by some ordinary customers, but it may cause budgetary strains or may make it completely unaffordable for others.
Another example is the grant of free admissions in cinemas to senior citizens. Again, the cost of this discount is passed on to the
ordinary consumer. While there may be those who do not feel the impact of the price increase, those who are living on small
wages, who used to be able to watch films in the theatres, may no longer have enough in their budgets to pay for the difference
in the price.

Necessarily, the public good is affected. The subject provisions seek the betterment of public welfare by improving the lives of
its senior citizens and persons with disability. However, the practical effect of the Tax Deduction Scheme may be prejudicial to
those ordinary customers who cannot keep up with the price increase. As a consequence, citizens may be denied certain goods
and services because the burden falls on all ordinary customers, without considering their resources or their ability to pay.
There may be thus an issue on equitability and progressiveness in terms of its effects.

A tax credit, on the other hand, allows the cost to be shouldered completely by the government. In such a case, establishments
will not need to adjust its prices to recover the cost of the discount. Moreover, when it is the government who shoulders the cost
through taxes paid by its people, the issue on equitability and progressiveness is better addressed. Taxes are constitutionally
mandated to be equitable.  Congress is directed to evolve a progressive system of taxation.  Thus, when the government carries
51 52

the burden of the discount through taxes collected in an equitable and progressive manner, the objective of improving the public
welfare may still be achieved without much prejudice to the poorer sectors of society.

Nonetheless, this is a question of policy, and one which pertains to the wisdom of the legislative.

ACCORDINGLY, I vote to DENY the Petition, and to declare that Section 4(a) of Republic Act No. 9257 and Section 32 of
Republic Act No. 9442 are CONSTITUTIONAL.

MARVIC M.V.F. LEONEN

Associate Justice
 Republic of the Philippines
SUPREME COURT

EN BANC

G.R. No. 168056 September 1, 2005

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

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

G.R. No. 168207

AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON,

ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEÑ A III, Petitioners, 
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE,
GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Respondent.

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

G.R. No. 168461

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

G.R. No. 168463

FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA, RODOLFO G.

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

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

G.R. No. 168730

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner, 

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

DECISION

AUSTRIA-MARTINEZ, J.:

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

-Anne Robert Jacques Turgot (1727-1781)

French statesman and economist

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

Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners failed to justify
their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

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

House Bill No. 35552  was introduced on first reading on January 7, 2005. The House Committee on Ways and Means approved
the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced on August 8, 2004.
The President certified the bill on January 7, 2005 for immediate enactment. On January 27, 2005, the House of Representatives
approved the bill on second and third reading.
House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F. Baterina, and House
Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No. 3555. The House Committee on Ways
and Means approved the bill on February 2, 2005. The President also certified it as urgent on February 8, 2005. The House of
Representatives approved the bill on second and third reading on February 28, 2005.

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

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

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

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

July 1, 2005 is the effectivity date of R.A. No. 9337. 5 When said date came, the Court issued a temporary restraining order,
effective immediately and continuing until further orders, enjoining respondents from enforcing and implementing the law.

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

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

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

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

J. PANGANIBAN : That’s correct . . .

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

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

ATTY. BANIQUED : Yes, Your Honor.

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

ATTY. BANIQUED : Yes, Your Honor.

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

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

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

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

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

ATTY. BANIQUED : Yes, Your Honor.

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

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

G.R. No. 168056

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

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

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

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

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

G.R. No. 168207

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

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

G.R. No. 168461

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

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

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

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

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and confiscatory.

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

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

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

G.R. No. 168463

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

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of Article VI, Section
28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions present in Senate Bill
No. 1950 and House Bill No. 3705; and

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

G.R. No. 168730

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

RESPONDENTS’ COMMENT

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

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

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

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

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

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

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

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

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

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

b. Article VI, Section 28(2)

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

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

b. Article III, Section 1

RULING OF THE COURT

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

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and
services.8 Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the
buyer,9 with the seller acting merely as a tax collector.10 The burden of VAT is intended to fall on the immediate buyers and
ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without
transferring the burden to someone else.11 Examples are individual and corporate income taxes, transfer taxes, and residence
taxes.12

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

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

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

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

I.

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

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

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

1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

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

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

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

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

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:

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

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

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

...

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

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

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

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

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

...

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

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

Striking down such argument, the Court held thus:

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

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

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

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

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,23the 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  
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)
No similar provision    Provides that the VAT imposed on power   Provides that the VAT imposed on
House Bill No.3705  
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)
With regard to the "no pass-on" provision
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
Senate Bill No. 1950
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)
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

Provides that the input tax credit for   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 5% of the
total amount of such goods and
services; and for persons engaged in
retail trading of goods, the allowable
input tax credit shall not exceed
11% of the total amount of goods
purchased.
With regard to amendments to be made to NIRC provisions regarding income and excise taxes
No similar provision  
With regard to 70% limit on input tax credit
No similar provision  
generation, transmission, and
distribution companies.
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.
Provided for amendments to
several NIRC provisions
regarding corporate income,
percentage, franchise and excise
taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what rate of VAT is to
be imposed; (2) whether only the VAT imposed on electricity generation, transmission and distribution companies should not
be passed on to consumers, as proposed in the Senate bill, or both the VAT imposed on electricity generation, transmission and
distribution companies and the VAT imposed on sale of petroleum products should not be passed on to consumers, as proposed
in the House bill; (3) in what manner input tax credits should be limited; (4) and whether the NIRC provisions on corporate
income taxes, percentage, franchise and excise taxes should be amended.

There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the Bicameral
Conference Committee was mandated by the rules of both houses of Congress to act on the same by settling said differences
and/or disagreements. The Bicameral Conference Committee acted on the disagreeing provisions by making the following
changes:

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

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

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

(A) Creditable Input Tax. – . . .

...

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

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

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

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

be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions were meant only
to reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent that is wholly foreign to the subject
embraced by the original provisions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Section 27 Rates of Income Tax on Domestic Corporation

28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House. They aver that
House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill
No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other sections of the
NIRC which the Senate amended but which amendments were not found in the House bills are not intended to be amended by
the House of Representatives. Hence, they argue that since the proposed amendments did not originate from the House, such
amendments are a violation of Article VI, Section 24 of the Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

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

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

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

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

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

...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that will be in effect
for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry date.

For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief. We would like
to assure them that not because there is a light at the end of the tunnel, this government will keep on making the tunnel long.

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

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

Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to the VAT system,
as these sections would cushion the effects of VAT on consumers. Considering that certain goods and services which were
subject to percentage tax and excise tax would no longer be VAT-exempt, the consumer would be burdened more as they would
be paying the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften the impact of VAT. Again,
in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen the effect of a
VAT on this product.

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

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

...

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

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

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

SUBSTANTIVE ISSUES

I.

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

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

b. Article VI, Section 28(2)

A. No Undue Delegation of Legislative Power

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

The assailed provisions read as follows:

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

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

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

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

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

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

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

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

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

...

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

In Edu vs. Ericta,47 the Court reiterated:

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

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

The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is not of itself a
legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information and making
recommendations is the kind of subsidiary activity which the legislature may perform through its members, or which it may
delegate to others to perform. Intelligent legislation on the complicated problems of modern society is impossible in the absence
of accurate information on the part of the legislators, and any reasonable method of securing such information is proper. 51 The
Constitution as a continuously operative charter of government does not require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself detailed determinations which it has declared
to be prerequisite to application of legislative policy to particular facts and circumstances impossible for Congress itself
properly to investigate.52

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

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

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

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

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

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

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

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

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

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

In the present case, in making his recommendation to the President on the existence of either of the two conditions, the
Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to
the power of control and direction of the President. He is acting as the agent of the legislative department, to determine and
declare the event upon which its expressed will is to take effect. 56The 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 (2 4/5%) or the national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1½%). If either of these two instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then the 12% VAT rate must be imposed by the President effective
January 1, 2006. There is no undue delegation of legislative power but only of the discretion as to the execution of a law.
This is constitutionally permissible.57 Congress does not abdicate its functions or unduly delegate power when it describes
what job must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently the
only way in which the legislative process can go forward.58

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

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

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

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

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

Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be introduced where none
is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon. 60

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

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

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

1. VAT/GDP Ratio > 2.8%

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

2. Nat’l Gov’t Deficit/GDP >1.5%

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

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

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

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

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

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

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

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

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

What do I mean by that?

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

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

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

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

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

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

II.

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

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

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

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

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

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

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

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a VAT-
registered person on the importation of goods or local purchase of good and services, including lease or use of property, in the
course of trade or business, from a VAT-registered person, and Output Tax  is the value-added tax due  on the sale or lease of
taxable goods or properties or services by any person registered or required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In effect, a
portion of the input tax that has already been paid cannot now be credited against the output tax.

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

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

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

Therefore, petitioners’ argument must be rejected.

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

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

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

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

Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should
the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue taxes, at the taxpayer’s option. 70

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input tax only up
to the extent of 70% of the output tax. In layman’s term, the value-added taxes that a person/taxpayer paid and passed on to him
by a seller can only be credited up to 70% of the value-added taxes that is due to him on a taxable transaction. There is no
retention of any tax collection because the person/taxpayer has already previously paid the input tax to a seller, and the seller
will subsequently remit such input tax to the BIR. The party directly liable for the payment of the tax is the seller. 71 What only
needs to be done is for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output
taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a property that
may not be confiscated, appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-registered
person’s entitlement to the creditable input tax is a mere statutory privilege.
The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in
statutory privileges. The state may change or take away rights, which were created by the law of the state, although it may not
take away property, which was vested by virtue of such rights.72

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable from the taxes
payable, although it becomes part of the cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No.
273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of the input tax paid on purchase or importation
of goods and services by VAT-registered persons against the output tax was introduced. 73 This was adopted by the Expanded
VAT Law (R.A. No. 7716),74 and The Tax Reform Act of 1997 (R.A. No. 8424). 75 The right to credit input tax as against the
output tax is clearly a privilege created by law, a privilege that also the law can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending Section
110(A) of the NIRC, which provides:

SEC. 110. Tax Credits. –

(A) Creditable Input Tax. – …

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine
(59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One
million pesos (₱1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less than five (5)
years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period:  Provided, finally, That
in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license
upon payment of the compensation, rental, royalty or fee.

The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or importation
of capital goods with acquisition cost of ₱1 Million pesos, exclusive of the VAT component. Such spread out only poses a
delay in the crediting of the input tax. Petitioners’ argument is without basis because the taxpayer is not permanently deprived
of his privilege to credit the input tax.

It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts to a 4-year
interest-free loan to the government.76 In the same breath, Congress also justified its move by saying that the provision was
designed to raise an annual revenue of 22.6 billion. 77 The legislature also dispelled the fear that the provision will fend off
foreign investments, saying that foreign investors have other tax incentives provided by law, and citing the case of China,
where despite a 17.5% non-creditable VAT, foreign investments were not deterred. 78 Again, for whatever is the purpose of the
60-month amortization, this involves executive economic policy and legislative wisdom in which the Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable transactions,
Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Value-added Tax. – The Government or any of its political subdivisions, instrumentalities or agencies,
including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase
of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and
withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for
lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the
time of payment. For purposes of this Section, the payor or person in control of the payment shall be considered as the
withholding agent.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the
withholding was made.
Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT withholding
system. The government in this case is constituted as a withholding agent with respect to their payments for goods and services.

Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3% on gross
payments for purchases of goods; 6% on gross payments for services supplied by contractors other than by public works
contractors; 8.5% on gross payments for services supplied by public work contractors; or 10% on payment for the lease or use
of properties or property rights to nonresident owners. Under the present Section 114(C), these different rates, except for the
10% on lease or property rights payment to nonresidents, were deleted, and a uniform rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to creditable, means full.
Thus, it is provided in Section 114(C): "final value-added tax at the rate of five percent (5%)."

In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of final
withholding tax on income was explained, to wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. – Under the final withholding tax system the amount of income tax withheld by the withholding
agent is constituted as full and final payment of the income tax due from the payee on the said income. The liability for
payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case
of underwithholding, the deficiency tax shall be collected from the payor/withholding agent. …

(B) Creditable Withholding Tax. – Under the creditable withholding tax system, taxes withheld on certain income payments are
intended to equal or at least approximate the tax due of the payee on said income. … Taxes withheld on income payments
covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to
in Sec. 2.78 also of these regulations) are creditable in nature.

As applied to value-added tax, this means that taxable transactions with the government are subject to a 5% rate, which
constitutes as full payment of the tax payable on the transaction. This represents the net VAT payable of the seller. The other
5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of the actual input VAT directly or
attributable to the taxable transaction.79

The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat differently taxable
transactions with the government.80 This is supported by the fact that under the old provision, the 5% tax withheld by the
government remains creditable against the tax liability of the seller or contractor, to wit:

SEC. 114. Return and Payment of Value-added Tax. –

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

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

As amended, the use of the word final  and the deletion of the word creditable exhibits Congress’s intention to treat transactions
with the government differently. Since it has not been shown that the class subject to the 5% final withholding tax has been
unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as petroleum dealers, are not the only ones
subjected to the 5% final withholding tax. It applies to all those who deal with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No. 14-2005 or the
Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the actual input tax exceed 5% of
gross payments, the excess may form part of the cost. Equally, should the actual input tax be less than 5%, the difference is
treated as income.81

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a profit or value-
added even if there is no profit or value-added.

Petitioners’ stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a legal joust where
premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the Court on this point will only be, as
Shakespeare describes life in Macbeth,82 "full of sound and fury, signifying nothing."

What’s more, petitioners’ contention assumes the proposition that there is no profit or value-added. It need not take an astute
businessman to know that it is a matter of exception that a business will sell goods or services without profit or value-added. It
cannot be overstressed that a business is created precisely for profit.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same
protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances." 83

The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established.
Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods
of assessment, valuation and collection, the State’s power is entitled to presumption of validity. As a rule, the judiciary will not
interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness. 84

Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or invests in capital
equipment, or has several transactions with the government, is not based on real and substantial differences to meet a valid
classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of taxation, the kind
of property, the rates to be levied or the amounts to be raised, the methods of assessment, valuation and collection. Petitioners’
alleged distinctions are based on variables that bear different consequences. While the implementation of the law may yield
varying end results depending on one’s profit margin and value-added, the Court cannot go beyond what the legislature has laid
down and interfere with the affairs of business.

The equal protection clause does not require the universal application of the laws on all persons or things without distinction.
This might in fact sometimes result in unequal protection. What the clause requires is equality among equals as determined
according to a valid classification. By classification is meant the grouping of persons or things similar to each other in certain
particulars and different from all others in these same particulars.85

Petitioners brought to the Court’s attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osme ñ a III and Ma. Ana
Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks
to amend the 70% limitation by increasing the same to 90%. This, according to petitioners, supports their stance that the 70%
limitation is arbitrary and confiscatory. On this score, suffice it to say that these are still proposed legislations. Until Congress
amends the law, and absent any unequivocal basis for its unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.
Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all
people at all times.86

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections 4, 5
and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on
sale of goods and properties, importation of goods, and sale of services and use or lease of properties. These same sections also
provide for a 0% rate on certain sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable
input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government.
It must be stressed that the rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and
only demands uniformity within the particular class.87

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not
apply to sales of goods or services with gross annual sales or receipts not exceeding ₱1,500,000.00. 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 ₱200,000.00. Small corner sari-sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales of farm and marine products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the
general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those with high
profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law entails, the law, under Section
116, imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross annual sales
and/or receipts not exceeding ₱1.5 Million. This acts as a equalizer because in effect, bigger businesses that qualify for VAT
coverage and VAT-exempt taxpayers stand on equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those previously
exempt. Excise taxes on petroleum products91 and natural gas92 were reduced. Percentage tax on domestic carriers was
removed.93 Power producers are now exempt from paying franchise tax.94

Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden of taxation.
Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate, from a previous
32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to 15% final withholding tax but the tax
credit allowed on the corporation’s domicile was increased to 20%. 96 The Philippine Amusement and Gaming Corporation
(PAGCOR) is not exempt from income taxes anymore. 97 Even the sale by an artist of his works or services performed for the
production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest largely on the
consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.

C. Progressivity of Taxation

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

Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was also lifted from Adam
Smith’s Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to
their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the person affected. 98

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation has
no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or services
enjoyed is the same regardless of income. In

other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income earned by
a person or profit margin marked by a business, such that the higher the income or profit margin, the smaller the portion of the
income or profit that is eaten by VAT. A converso, the lower the income or profit margin, the bigger the part that the VAT eats
away. At the end of the day, it is really the lower income group or businesses with low-profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is
that Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply
provides is that Congress shall ‘evolve a progressive system of taxation.’ The constitutional provision has been interpreted to
mean simply that ‘direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be minimized.’ (E.
FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is not
to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes,
would have been prohibited with the proclamation of Art. VIII, §17 (1) of the 1973 Constitution from which the present Art.
VI, §28 (1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by
imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects
of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC),
while granting exemptions to other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC) 99

CONCLUSION

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

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should stand ready to
afford relief. There are undoubtedly many wrongs the judicature may not correct, for instance, those involving political
questions. . . .

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

The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered, there is no raison
d'être for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207, 168461, 168463,
and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the temporary
restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 166006               March 14, 2008

PLANTERS PRODUCTS, INC., Petitioner, 

vs.
FERTIPHIL CORPORATION, Respondent.

DECISION

REYES, R.T., J.:

THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality of statutes, executive
orders, presidential decrees and other issuances. The Constitution vests that power not only in the Supreme Court but in all
Regional Trial Courts.

The principle is relevant in this petition for review on certiorari of the Decision 1 of the Court of Appeals (CA) affirming with
modification that of the RTC in Makati City,2 finding petitioner Planters Products, Inc. (PPI) liable to private respondent
Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of Instruction (LOI) No. 1465.

The Facts

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws. 3They are both
engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided,
among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers in the
Philippines.4 The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a  capital contribution
component of not less than ₱10 per bag. This capital contribution shall be collected until adequate capital is raised to make PPI
viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the Philippines. 5 (Underscoring
supplied)

Pursuant to the LOI, Fertiphil paid ₱10 for every bag of fertilizer it sold in the domestic market to the Fertilizer and Pesticide
Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust Company, the depositary bank of PPI.
Fertiphil paid ₱6,689,144 to FPA from July 8, 1985 to January 24, 1986.6

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the ₱10 levy. With the return of democracy,
Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to the demand. 7

Fertiphil filed a complaint for collection and damages 8 against FPA and PPI with the RTC in Makati. It questioned the
constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted
to a denial of due process of law.9 Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used
the proceeds to maintain its monopoly of the fertilizer industry.

In its Answer,10 FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid exercise of the
police power of the State in ensuring the stability of the fertilizer industry in the country. It also averred that Fertiphil did not
sustain any damage from the LOI because the burden imposed by the levy fell on the ultimate consumer, not the seller.
 RTC Disposition

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against the defendant
Planters Product, Inc., ordering the latter to pay the former:

1) the sum of ₱6,698,144.00 with interest at 12% from the time of judicial demand;

2) the sum of ₱100,000 as attorney’s fees;

3) the cost of suit.

SO ORDERED.11

Ruling that the imposition of the ₱10 CRC was an exercise of the State’s inherent power of taxation, the RTC invalidated the
levy for violating the basic principle that taxes can only be levied for public purpose, viz.:

It is apparent that the imposition of ₱10 per fertilizer bag sold in the country by LOI 1465 is purportedly in the exercise of the
power of taxation. It is a settled principle that the power of taxation by the state is plenary. Comprehensive and supreme, the
principal check upon its abuse resting in the responsibility of the members of the legislature to their constituents. However,
there are two kinds of limitations on the power of taxation: the inherent limitations and the constitutional limitations.

One of the inherent limitations is that a tax may be levied only for public purposes:

The power to tax can be resorted to only for a constitutionally valid public purpose. By the same token, taxes may not be levied
for purely private purposes, for building up of private fortunes, or for the redress of private wrongs. They cannot be levied for
the improvement of private property, or for the benefit, and promotion of private enterprises, except where the aid is incident to
the public benefit. It is well-settled principle of constitutional law that no general tax can be levied except for the purpose of
raising money which is to be expended for public use. Funds cannot be exacted under the guise of taxation to promote a
purpose that is not of public interest. Without such limitation, the power to tax could be exercised or employed as an authority
to destroy the economy of the people. A tax, however, is not held void on the ground of want of public interest unless the want
of such interest is clear. (71 Am. Jur. pp. 371-372)

In the case at bar, the plaintiff paid the amount of ₱6,698,144.00 to the Fertilizer and Pesticide Authority pursuant to the ₱10
per bag of fertilizer sold imposition under LOI 1465 which, in turn, remitted the amount to the defendant Planters Products, Inc.
thru the latter’s depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation,
which is a private domestic corporation, became poorer by the amount of ₱6,698,144.00 and the defendant, Planters Product,
Inc., another private domestic corporation, became richer by the amount of ₱6,698,144.00.

Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quite evident that LOI 1465
insofar as it imposes the amount of ₱10 per fertilizer bag sold in the country and orders that the said amount should go to the
defendant Planters Product, Inc. is unlawful because it violates the mandate that a tax can be levied only for a public purpose
and not to benefit, aid and promote a private enterprise such as Planters Product, Inc. 12

PPI moved for reconsideration but its motion was denied. 13 PPI then filed a notice of appeal with the RTC but it failed to pay
the requisite appeal docket fee. In a separate but related proceeding, this Court 14 allowed the appeal of PPI and remanded the
case to the CA for proper disposition.

CA Decision

On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC, with the following
fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject to the MODIFICATION
that the award of attorney’s fees is hereby DELETED.15

In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the constitutionality of LOI
No. 1465, thus:

The question then is whether it was proper for the trial court to exercise its power to judicially determine the constitutionality of
the subject statute in the instant case.

As a rule, where the controversy can be settled on other grounds, the courts will not resolve the constitutionality of a law (Lim
v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to avoid ruling on constitutional questions and to presume that
the acts of political departments are valid, absent a clear and unmistakable showing to the contrary.

However, the courts are not precluded from exercising such power when the following requisites are obtaining in a controversy
before it: First, there must be before the court an actual case calling for the exercise of judicial review. Second, the question
must be ripe for adjudication. Third, the person challenging the validity of the act must have standing to challenge. Fourth, the
question of constitutionality must have been raised at the earliest opportunity; and lastly, the issue of constitutionality must be
the very lis mota of the case (Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]).

Indisputably, the present case was primarily instituted for collection and damages. However, a perusal of the complaint also
reveals that the instant action is founded on the claim that the levy imposed was an unlawful and unconstitutional special
assessment. Consequently, the requisite that the constitutionality of the law in question be the very lis mota of the case is
present, making it proper for the trial court to rule on the constitutionality of LOI 1465.16

The CA held that even on the assumption that LOI No. 1465 was issued under the police power of the state, it is still
unconstitutional because it did not promote public welfare. The CA explained:

In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the said law was an invalid exercise of
the State’s power of taxation inasmuch as it violated the inherent and constitutional prescription that taxes be levied only for
public purposes. It reasoned out that the amount collected under the levy was remitted to the depository bank of PPI, which the
latter used to advance its private interest.

On the other hand, appellant submits that the subject statute’s passage was a valid exercise of police power. In addition, it
disputes the court a quo’s findings arguing that the collections under LOI 1465 was for the benefit of Planters Foundation,
Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock ownership of PPI.

Of the three fundamental powers of the State, the exercise of police power has been characterized as the most essential,
insistent and the least limitable of powers, extending as it does to all the great public needs. It may be exercised as long as the
activity or the property sought to be regulated has some relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p.
38, 1995 Edition).

Vast as the power is, however, it must be exercised within the limits set by the Constitution, which requires the concurrence of
a lawful subject and a lawful method. Thus, our courts have laid down the test to determine the validity of a police measure as
follows: (1) the interests of the public generally, as distinguished from those of a particular class, requires its exercise; and (2)
the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon
individuals (National Development Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]).

It is upon applying this established tests that We sustain the trial court’s holding LOI 1465 unconstitutional. To be sure,
ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public interest.
However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote the public welfare.
The government’s commitment to support the successful rehabilitation and continued viability of PPI, a private corporation, is
an unmistakable attempt to mask the subject statute’s impartiality. There is no way to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the country’s farmers or even the Filipino people in general. Well to stress,
substantive due process exacts fairness and equal protection disallows distinction where none is needed. When a statute’s public
purpose is spoiled by private interest, the use of police power becomes a travesty which must be struck down for being an
arbitrary exercise of government power. To rule in favor of appellant would contravene the general principle that revenues
derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private individuals.17

The CA did not accept PPI’s claim that the levy imposed under LOI No. 1465 was for the benefit of Planters Foundation, Inc., a
foundation created to hold in trust the stock ownership of PPI. The CA stated:

Appellant next claims that the collections under LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a
foundation created by law to hold in trust for millions of farmers, the stock ownership of PFI on the strength of Letter of
Undertaking (LOU) issued by then Prime Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of Justice in an
Opinion dated October 12, 1987, to wit:

"2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer pricing
formula a capital recovery component, the proceeds of which will be used initially for the purpose of funding the unpaid portion
of the outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc. (Planters Foundation), which
unpaid capital is estimated at approximately ₱206 million (subject to validation by Planters and Planters Foundation) (such
unpaid portion of the outstanding capital stock of Planters being hereafter referred to as the ‘Unpaid Capital’), and subsequently
for such capital increases as may be required for the continuing viability of Planters.

The capital recovery component shall be in the minimum amount of ₱10 per bag, which will be added to the price of all
domestic sales of fertilizer in the Philippines by any importer and/or fertilizer mother company. In this connection, the Republic
hereby acknowledges that the advances by Planters to Planters Foundation which were applied to the payment of the Planters
shares now held in trust by Planters Foundation, have been assigned to, among others, the Creditors. Accordingly, the Republic,
through FPA, hereby agrees to deposit the proceeds of the capital recovery component in the special trust account designated in
the notice dated April 2, 1985, addressed by counsel for the Creditors to Planters Foundation. Such proceeds shall be deposited
by FPA on or before the 15th day of each month.

The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid Capital
and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the
amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables and (d) the capital
increases contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the ‘carrying cost’ shall be at such
rate as will represent the full and reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign
currency-denominated obligations." (Records, pp. 42-43)

Appellant’s proposition is open to question, to say the least. The LOU issued by then Prime Minister Virata taken together with
the Justice Secretary’s Opinion does not preponderantly demonstrate that the collections made were held in trust in favor of
millions of farmers. Unfortunately for appellant, in the absence of sufficient evidence to establish its claims, this Court is
constrained to rely on what is explicitly provided in LOI 1465 – that one of the primary aims in imposing the levy is to support
the successful rehabilitation and continued viability of PPI.18

PPI moved for reconsideration but its motion was denied.19 It then filed the present petition with this Court.

Issues

Petitioner PPI raises four issues for Our consideration, viz.:

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE DECREED VIA A

DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE OF
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE. NEITHER CAN LOI 1465 BE CHALLENGED
BY ANY PERSON OR ENTITY WHICH HAS NO STANDING TO DO SO.

II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER SUPPLY AND
DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW TO HOLD IN
TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION
PURSUANT TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.

III

THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO THE
GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY ENACTED
LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF "OPERATIVE
FACT" PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.

IV

THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN THE INSTANT
CASE.20 (Underscoring supplied)

Our Ruling

We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve constitutional issues.

Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere procedural technicality which may be
waived.

PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it does not have a
"personal and substantial interest in the case or will sustain direct injury as a result of its enforcement." 21It asserts that Fertiphil
did not suffer any damage from the CRC imposition because "incidence of the levy fell on the ultimate consumer or the farmers
themselves, not on the seller fertilizer company."22

We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has been adequately discussed by
this Court in a catena of cases. Succinctly put, the doctrine requires a litigant to have a material interest in the outcome of a
case. In private suits, locus standi requires a litigant to be a "real party in interest," which is defined as "the party who stands to
be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit." 23

In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts a public right on
behalf of the general public because of conflicting public policy issues. 24 On one end, there is the right of the ordinary citizen to
petition the courts to be freed from unlawful government intrusion and illegal official action. At the other end, there is the
public policy precluding excessive judicial interference in official acts, which may unnecessarily hinder the delivery of basic
public services.

In this jurisdiction, We have adopted the "direct injury test" to determine locus standi in public suits. In People v. Vera, 25 it was
held that a person who impugns the validity of a statute must have "a personal and substantial interest in the case such that he
has sustained, or will sustain direct injury as a result." The "direct injury test" in public suits is similar to the "real party in
interest" rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure. 26

Recognizing that a strict application of the "direct injury" test may hamper public interest, this Court relaxed the requirement in
cases of "transcendental importance" or with "far reaching implications." Being a mere procedural technicality, it has also been
held that locus standi may be waived in the public interest.27

Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus standi to file it.
Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it did pay, the ₱10 levy imposed
for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has passed some or all of the levy to the
ultimate consumer, but that does not disqualify it from attacking the constitutionality of the LOI or from seeking a refund. As
seller, it bore the ultimate burden of paying the levy. It faced the possibility of severe sanctions for failure to pay the levy. The
fact of payment is sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in its product the levy.
The levy certainly rendered the fertilizer products of Fertiphil and other domestic sellers much more expensive. The harm to
their business consists not only in fewer clients because of the increased price, but also in adopting alternative corporate
strategies to meet the demands of LOI No. 1465. Fertiphil and other fertilizer sellers may have shouldered all or part of the levy
just to be competitive in the market. The harm occasioned on the business of Fertiphil is sufficient injury for purposes of locus
standi.

Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted by this Court on
locus standi must apply. The issues raised by Fertiphil are of paramount public importance. It involves not only the
constitutionality of a tax law but, more importantly, the use of taxes for public purpose. Former President Marcos issued LOI
No. 1465 with the intention of rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is expressly
named in the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and conditional upon PPI
becoming financially viable. The LOI provided that "the capital contribution shall be collected until adequate capital is raised to
make PPI viable."

The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional duty to squarely
resolve the issue as the final arbiter of all justiciable controversies. The doctrine of standing, being a mere procedural
technicality, should be waived, if at all, to adequately thresh out an important constitutional issue.

RTC may resolve constitutional issues; the constitutional issue was adequately raised in the complaint; it is the lis mota of the
case.

PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that the constitutionality of the
LOI cannot be collaterally attacked in a complaint for collection. 28 Alternatively, the resolution of the constitutional issue is not
necessary for a determination of the complaint for collection.29

Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It claims that the
constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot determine its claim without
resolving the issue.30

It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential decree or an executive order.
This is clear from Section 5, Article VIII of the 1987 Constitution, which provides:

SECTION 5. The Supreme Court shall have the following powers:

xxxx

(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final
judgments and orders of lower courts in:

(a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential
decree, proclamation, order, instruction, ordinance, or regulation is in question. (Underscoring supplied)

In Mirasol v. Court of Appeals,31 this Court recognized the power of the RTC to resolve constitutional issues, thus:

On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider the constitutionality of a
statute, presidential decree, or executive order. The Constitution vests the power of judicial review or the power to declare a
law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation not only in this
Court, but in all Regional Trial Courts.32

In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,33 this Court reiterated:

There is no denying that regular courts have jurisdiction over cases involving the validity or constitutionality of a rule or
regulation issued by administrative agencies. Such jurisdiction, however, is not limited to the Court of Appeals or to this Court
alone for even the regional trial courts can take cognizance of actions assailing a specific rule or set of rules promulgated by
administrative bodies. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the
regional trial courts.34

Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through any of the actions
cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such review may be had in criminal actions, as in
People v. Ferrer35 involving the constitutionality of the now defunct Anti-Subversion law, or in ordinary actions, as in Krivenko
v. Register of Deeds36 involving the constitutionality of laws prohibiting aliens from acquiring public lands. The constitutional
issue, however, (a) must be properly raised and presented in the case, and (b) its resolution is necessary to a determination of
the case, i.e., the issue of constitutionality must be the very lis mota presented.37

Contrary to PPI’s claim, the constitutionality of LOI No. 1465 was properly and adequately raised in the complaint for
collection filed with the RTC. The pertinent portions of the complaint allege:

6. The CRC of ₱10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer in the Philippines, is unlawful,
unjust, uncalled for, unreasonable, inequitable and oppressive because:

xxxx

(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at the expense and disadvantage of the
other fertilizer importers/distributors who were themselves in tight business situation and were then exerting all efforts and
maximizing management and marketing skills to remain viable;

xxxx

(e) It was a glaring example of crony capitalism, a forced program through which the PPI, having been presumptuously
masqueraded as "the" fertilizer industry itself, was the sole and anointed beneficiary;

7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is tantamount to illegal exaction
amounting to a denial of due process since the persons of entities which had to bear the burden of paying the CRC derived no
benefit therefrom; that on the contrary it was used by PPI in trying to regain its former despicable monopoly of the fertilizer
industry to the detriment of other distributors and importers.38 (Underscoring supplied)

The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphil filed the complaint to
compel PPI to refund the levies paid under the statute on the ground that the law imposing the levy is unconstitutional. The
thesis is that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no legal obligation to pay the levy.
Necessarily, all levies duly paid pursuant to an unconstitutional law should be refunded under the civil code principle against
unjust enrichment. The refund is a mere consequence of the law being declared unconstitutional. The RTC surely cannot order
PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It is the unconstitutionality of the LOI which triggers the
refund. The issue of constitutionality is the very lis mota of the complaint with the RTC.

The ₱10 levy under LOI No. 1465 is an exercise of the power of taxation.

At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality of the LOI.

PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It claims that the LOI was
implemented for the purpose of assuring the fertilizer supply and distribution in the country and for benefiting a foundation
created by law to hold in trust for millions of farmers their stock ownership in PPI.

Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private company. The levy was
imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI is enacted under the police power, it is still
unconstitutional because it did not promote the general welfare of the people or public interest.

Police power and the power of taxation are inherent powers of the State. These powers are distinct and have different tests for
validity. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order
to promote the general welfare, 39 while the power of taxation is the power to levy taxes to be used for public purpose. The main
purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The "lawful subjects"
and "lawful means" tests are used to determine the validity of a law enacted under the police power. 40 The power of taxation, on
the other hand, is circumscribed by inherent and constitutional limitations.

We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it is true that
the power of taxation can be used as an implement of police power, 41 the primary purpose of the levy is revenue generation. If
the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly
called a tax.42

In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of a vehicle registration fee is not an exercise by the State of
its police power, but of its taxation power, thus:

It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land Transportation and Traffic
Code that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration is  mainly to
raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the
administering agency. x x x Fees may be properly regarded as taxes even though they also serve as an instrument of regulation.

Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily
revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Such is the
case of motor vehicle registration fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is
patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration,
operation or ownership of a motor vehicle as a "tax or fee." x x x Simply put, if the exaction under Rep. Act 4136 were merely
a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees"
such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec.
11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising . Thus, they are not
mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs’ license fee. Such fees are to
go into the expenditures of the Land Transportation Commission as provided for in the last proviso of Sec. 61. 44 (Underscoring
supplied)

The ₱10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt, was a big burden on
the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as five percent. 45 A plain reading of
the LOI also supports the conclusion that the levy was for revenue generation. The LOI expressly provided that the levy was
imposed "until adequate capital is raised to make PPI viable."

Taxes are exacted only for a public purpose. The ₱10 levy is unconstitutional because it was not for a public purpose. The levy
was imposed to give undue benefit to PPI.

An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be
used for purely private purposes or for the exclusive benefit of private persons. 46 The reason for this is simple. The power to tax
exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose. It
would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. As an old United States
case bluntly put it: "To lay with one hand, the power of the government on the property of the citizen, and with the other to
bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is
done under the forms of law and is called taxation."47

The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence
states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are
traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes
those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers,
low-cost housing and urban or agrarian reform.

While the categories of what may constitute a public purpose are continually expanding in light of the expansion of government
functions, the inherent requirement that taxes can only be exacted for a public purpose still stands. Public purpose is the heart of
a tax law. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and
advantage to a private enterprise, that law will not satisfy the requirement of "public purpose."

The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree with the RTC and that
CA that the levy imposed under LOI No. 1465 was not for a public purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is explicit from
Clause 3 of the law, thus:

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a  capital contribution
component of not less than ₱10 per bag. This capital contribution shall be collected until adequate capital is raised to make PPI
viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the Philippines. 48 (Underscoring
supplied)

It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. In this case, the text of the
LOI is plain that the levy was imposed in order to raise capital for PPI. The framers of the LOI did not even hide the insidious
purpose of the law. They were cavalier enough to name PPI as the ultimate beneficiary of the taxes levied under the LOI. We
find it utterly repulsive that a tax law would expressly name a private company as the ultimate beneficiary of the taxes to be
levied from the public. This is a clear case of crony capitalism.

Second, the LOI provides that the imposition of the ₱10 levy was conditional and dependent upon PPI becoming financially
"viable." This suggests that the levy was actually imposed to benefit PPI. The LOI notably does not fix a maximum amount
when PPI is deemed financially "viable." Worse, the liability of Fertiphil and other domestic sellers of fertilizer to pay the levy
is made indefinite. They are required to continuously pay the levy until adequate capital is raised for PPI.

Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by FPA to Far East
Bank and Trust Company, the depositary bank of PPI. 49 This proves that PPI benefited from the LOI. It is also proves that the
main purpose of the law was to give undue benefit and advantage to PPI.

Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of Understanding 50 dated May 18, 1985
signed by then Prime Minister Cesar Virata reveals that PPI was in deep financial problem because of its huge corporate debts.
There were pending petitions for rehabilitation against PPI before the Securities and Exchange Commission. The government
guaranteed payment of PPI’s debts to its foreign creditors. To fund the payment, President Marcos issued LOI No. 1465. The
pertinent portions of the letter of understanding read:

Republic of the Philippines

Office of the Prime Minister
Manila

LETTER OF UNDERTAKING

May 18, 1985

TO: THE BANKING AND FINANCIAL INSTITUTIONS

LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")

Gentlemen:

This has reference to Planters which is the principal importer and distributor of fertilizer, pesticides and agricultural chemicals
in the Philippines. As regards Planters, the Philippine Government confirms its awareness of the following: (1) that  Planters has
outstanding obligations in foreign currency and/or pesos, to the Creditors, (2) that Planters is currently experiencing financial
difficulties, and (3) that there are presently pending with the Securities and Exchange Commission of the Philippines a petition
filed at Planters’ own behest for the suspension of payment of all its obligations, and a separate petition filed by Manufacturers
Hanover Trust Company, Manila Offshore Branch for the appointment of a rehabilitation receiver for Planters.

In connection with the foregoing, the Republic of the Philippines (the "Republic") confirms that it considers and continues to
consider Planters as a major fertilizer distributor. Accordingly, for and in consideration of your expressed willingness to
consider and participate in the effort to rehabilitate Planters, the Republic hereby manifests its full and unqualified support of
the successful rehabilitation and continuing viability of Planters, and to that end, hereby binds and obligates itself to the
creditors and Planters, as follows:

xxxx

2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer pricing formula
a capital recovery component, the proceeds of which will be used initially for the purpose of funding the unpaid portion of the
outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc. ("Planters Foundation"), which unpaid
capital is estimated at approximately ₱206 million (subject to validation by Planters and Planters Foundation) such unpaid
portion of the outstanding capital stock of Planters being hereafter referred to as the "Unpaid Capital"), and subsequently for
such capital increases as may be required for the continuing viability of Planters.

xxxx

The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid Capital
and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the
amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital
increases contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the "carrying cost" shall be at such
rate as will represent the full and reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign
currency-denominated obligations.

REPUBLIC OF THE PHILIPPINES

By:

(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance51

It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts of PPI. We cannot
agree with PPI that the levy was imposed to ensure the stability of the fertilizer industry in the country. The letter of
understanding and the plain text of the LOI clearly indicate that the levy was exacted for the benefit of a private corporation.

All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not for a public purpose.
LOI No. 1465 failed to comply with the public purpose requirement for tax laws.

The LOI is still unconstitutional even if enacted under the police power; it did not promote public interest.

Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid for failing to comply
with the test of "lawful subjects" and "lawful means." Jurisprudence states the test as follows: (1) the interest of the public
generally, as distinguished from those of particular class, requires its exercise; and (2) the means employed are reasonably
necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. 52

For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest. The law was enacted to
give undue advantage to a private corporation. We quote with approval the CA ratiocination on this point, thus:

It is upon applying this established tests that We sustain the trial court’s holding LOI 1465 unconstitutional.  To be sure,
1awphil

ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public interest.
However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote the public
welfare. The government’s commitment to support the successful rehabilitation and continued viability of PPI, a private
corporation, is an unmistakable attempt to mask the subject statute’s impartiality. There is no way to treat the self-interest of a
favored entity, like PPI, as identical with the general interest of the country’s farmers or even the Filipino people in general.
Well to stress, substantive due process exacts fairness and equal protection disallows distinction where none is needed. When a
statute’s public purpose is spoiled by private interest, the use of police power becomes a travesty which must be struck down
for being an arbitrary exercise of government power. To rule in favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private individuals.
(Underscoring supplied)

The general rule is that an unconstitutional law is void; the doctrine of operative fact is inapplicable.

PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional. It banks on the doctrine of
operative fact, which provides that an unconstitutional law has an effect before being declared unconstitutional. PPI wants to
retain the levies paid under LOI No. 1465 even if it is subsequently declared to be unconstitutional.

We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless it has been raised in the
court a quo.53 PPI did not raise the applicability of the doctrine of operative fact with the RTC and the CA. It cannot belatedly
raise the issue with Us in order to extricate itself from the dire effects of an unconstitutional law.

At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void. It produces no rights,
imposes no duties and affords no protection. It has no legal effect. It is, in legal contemplation, inoperative as if it has not been
passed.54 Being void, Fertiphil is not required to pay the levy. All levies paid should be refunded in accordance with the general
civil code principle against unjust enrichment. The general rule is supported by Article 7 of the Civil Code, which provides:

ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by disuse or
custom or practice to the contrary.

When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern.

The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair play. 55 It nullifies
the effects of an unconstitutional law by recognizing that the existence of a statute prior to a determination of
unconstitutionality is an operative fact and may have consequences which cannot always be ignored. The past cannot always be
erased by a new judicial declaration.56

The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those who have relied on
the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality would put the accused in
double jeopardy57 or would put in limbo the acts done by a municipality in reliance upon a law creating it. 58

Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil under LOI No. 1465. It unduly
benefited from the levy. It was proven during the trial that the levies paid were remitted and deposited to its bank account.
Quite the reverse, it would be inequitable and unjust not to order a refund. To do so would unjustly enrich PPI at the expense of
Fertiphil. Article 22 of the Civil Code explicitly provides that "every person who, through an act of performance by another
comes into possession of something at the expense of the latter without just or legal ground shall return the same to him." We
cannot allow PPI to profit from an unconstitutional law. Justice and equity dictate that PPI must refund the amounts paid by
Fertiphil.

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is AFFIRMED.

SO ORDERED.

RUBEN T. REYES
Associate Justice