INCOME TAXATION

TOPIC I: FUNDAMENTAL PRINCIPLES (Part 1)

1. What is taxation?

- Taxation is an act of laying a tax, a process or means by which the sovereign,

through its law-making body, raises income to defray the necessary expenses
of the government.

2. What is the power of taxation?

- Inherent power of the state to demand enforced contribution for public

purpose or purposes.

2.1. What are the inherent powers of the state?

- There are three(3) inherent powers of the state:

1. Police Power
2. Eminent Domain
3. Taxation

2.1.1. What are these powers?

1. Police Power
Power of the state to make and implement laws for the general
welfare.

2. Eminent Domain
Power of the state to take private property for public use with
just compensation.

3. Taxation
Power to enforce contributions to raise government funds.

2.1.2. Why are they called inherent powers?

- These powers exist automatically or inherently upon the

formation of a sovereign state, thus, there is no need for a law
or constitution to enforce such powers.
- Thus, taxation exists regardless of the absence of any
law. The constitution or the law only limits or defines the
powers of taxation.
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TOPIC I: FUNDAMENTAL PRINCIPLES (Part 1)

3. What is the purpose of taxation?

a. Primary: Revenue Purpose

- The primary purpose of taxation on the part of the government is to
provide funds or property with which to promote the general welfare
and the protection of its citizens and to enable it to finance its
activities.

b. Secondary: Regulatory Purposes

- Taxation is often employed as a device for regulation or control by
means of which certain effects or conditions envisioned by the
government may be achieved such as:
1. Promotion of General Welfare
2. Reduction of Social Inequality
3. Economic Growth

3.1. What are examples of taxes for Revenue Purpose? Regulatory

Purpose?

1. Revenue purpose
a. Income tax
b. Value-added tax

2. Regulatory purpose
a. Sin taxes on alcoholic beverages and cigarettes
b. Tax incentives for senior citizens and PWDs
c. Tax incentives for business in special economic zones, e.g.,
Mactan Export Processing Zone located in Cebu.

4. What are the Theories and Bases of Taxation?

a. Lifeblood Theory
Taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need.

b. Necessity Theory
The power of taxation proceeds upon the theory that the existence of
government is a necessity; that it cannot continue without means to pay its
 INCOME TAXATION

TOPIC I: FUNDAMENTAL PRINCIPLES (Part 1)

expenses; and that for these means, it has a right to compel all its citizens
and property within its limits to contribute.

c. Benefits Received or Reciprocity Theory

The basis is the reciprocal duties of protection and support between
the state and its inhabitants. The state collects taxes from the subjects of
taxation in order that it may be able to perform the functions of government.
The citizens on the other hand, pay taxes in order that they may be secured
in the enjoyment of the benefits of organized society.

4.1. In what instances is Lifeblood Theory manifested in Philippine

Taxation?

Here are some common instances where this theory is manifested:

a. Payment or collection of taxes cannot be enjoined(stopped) by the
court through injunction;
b. Taxes could not be subject of compensation or set-off;

5. What are the essential elements of tax?

a. It is an enforced contribution, hence, mandatory.

b. It is generally payable in money.
c. It is proportionate in character.
d. It is levied on persons, property, or the exercise of right or privileges.
e. It is levied by the legislative body of the government.
f. It is levied for public purpose(s).

5.1. What is the significance of knowing the essential elements?

The essential elements determine the validity of the tax law imposed,
and thus, absence of any of the essential elements warrants the challenge for
the invalidity of the said imposition of tax.
Example:
A tax law was passed imposing an additional 10% tax on income from
“Online Sabong”. The said tax law was not passed and made by the Congress
but directly made by the President himself.
Question: Is the tax law valid?
Answer: No, because it was not passed and made by the legislative body
(Congress), but was passed and made by the executive body (President).
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TOPIC I: FUNDAMENTAL PRINCIPLES (Part 1)

5.2. What does “for public purpose” mean?

Taxes are exacted only for a public purpose. They cannot be used for
purely private purposes or for the exclusive benefit of private persons. 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
The term "public purpose" is not defined. It is an elastic concept that
can be hammered to fit modern standards. 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. (PLANTERS PRODUCTS, INC. vs. FERTIPHIL CORPORATION, G.R. No.
166006, March 14, 2008)
Example:
The Congress enacted a law increasing the excise tax on tobacco by an
additional 25%. The said additional taxes shall be used to fund the
implementation of free tertiary education for students in public universities
and colleges.
Question: Is the tax law valid provided that the said fund will only benefit
private individuals - the students - and not the general public?
Answer: Yes, because the purpose of the said law is still for the public as
giving aid to the students is designed to promote social justice by giving
every poor but deserving student a chance to pursue higher education.

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References:
1. Taxation by De Leon
2. Taxation by Tabag
3. Supreme Court Rulings and Decisions
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End of Part I