HAPTER III

INHERENT LIMITATIONS ON TAXATION

“The power to tax involves the power to destroy.”

- Mr. Chief Justice Marshall
Extent of power of taxation
The extent of the power of taxation is as wide as the range of subjects over which the
power of government extends. As to such subjects, and except insofar as it is limited or
restrained by the provisions of the Constitution, a state's power of taxation, if exercised for
public purposes, is, in general, unlimited and absolute, extending to all persons, property and
business within its jurisdiction, the only security against an abuse of the power being found in
the structure of the government itself in that in imposing a tax the legislature acts upon its
constituents. This is, in general, a sufficient security against erroneous and oppressive taxation.
The people of a state, therefore, give to their government a right of taxing themselves and their
property, and as the exigencies of government cannot be limited, they prescribed no limit to the
exercise of this right, resting confidently on the interest of the legislature and on the influence of
the constituents over their representatives to guard themselves against its abuse.
Meaning of inherent limitations on taxation
The inherent limitations on the power of taxation are the natural restrictions on the
exercise thereof which must necessarily accompany the birth of such inherent power of state.
Even in the absence of constitutional or statutory provisions limiting the exercise of the power of
taxation, the inherent limitations thereon are adequate safeguards ensuring that the power of
taxation shall be utilized by government only for betterment, not destruction, of the people
whose interest it is bound to serve, enhance and protect.
The inherent limitations on the power of taxation
In the Philippines, the inherent limitations on the power of taxation as originally setforth
by Mr. Justice Malcolm and recognized as such eversince are as follows:
(1) The tax must be for a public purpose;
(2) Either the person, property or interest taxed must be within the jurisdiction of the
taxing authority. be uniform:
(3) The rule of taxation must
(4) In the assessment and collection of certain kinds of taxes, certain guaranties against
injustice to individuals, especially by way of notice and opportunity of hearing must be
provided;"
(5) Properties constitutionally exempt from taxation cannot be taxed and
(6) In proper cases, the impairment clause should not be violated.
Public purpose, a question of law
The question of what is a public purpose is one of law. Thus, the determination of the
legislature on this question is not, like its decision on ordinary questions of public policy,
conclusive either on the other departments of the government or on the people? Therefore, it is
the judiciary vehicle should decide the question of whether the purpose of a tax law is public or
not.
R.A. 920, Appropriating funds for private purpose, unconstitutional
Republic Act No. 920 appropriates funds for a private subdivision feeder roads in Pasig,
Rizal. According to the Supreme Court, since the subdivision is of private ownership, the
legislature is without power to appropriate funds for the construction and extension of the subject
feeder roads. Because the legislature cannot appropriate public revenue for a private purposes.
 In this connection, the United States Supreme Court has ruled that an attempted levy of a
tax for a privilege purpose is void because it violates the implied limitations in governmental
power which grow out of the essential nature of the governments."
Effect of taxes partly public and partly private
If a tax is laid for a public and also for a private purpose, it is VOID where the amount to
be raised for each purpose cannot be distinguished and severed. Furthermore, if the tax statute
invalid in part is so mutually connected as to warrant a belief that the legislature intended them
to stand or fall together as a whole, the statute is invalid in toto.
However, if a tax is laid for a public purpose and the private purpose is merely incidental
to the public purpose, the tax is VALID. Because, in this case, the public purpose is clear.

Jurisdiction to tax
A state's jurisdiction to tax, as understood before the 1970's, refer to persons, property or
property rights which are found within its territorial jurisdiction. As a matter of fact, the Civil
Code of the Philippines has enunciated the public policy that "real property as well as personal
property shall be governed by the law of the country where it is situated." Thus, before the
effectivity of Presidential Decree No. 1457, real property located outside of the Philippines was
not subjected to local transfer taxes.
The oil and other crises, however, has not spared the Philippine government. Hence, its
need for more sources of revenue. So that from June 11, 1978, even real property located outside
the Philippines was subjected to transfer taxes. Much earlier than that of course, from January 1,
1973, income of Filipino citizens residing abroad are, aside from being taxable in the country
where said income is derived, was likewise subjected to a more comprehensive, definite and
detailed Philippine income tax system. The basis for taxation of real or personal property outside
of Philippine territorial jurisdiction is the fact that, even if said properties are located in foreign
countries, its owners who are citizens nevertheless enjoy the protective mantle of the Philippine
Government which maintains embassies, consulates and attaches in most parts of the world for,
among others, the protection of its citizens. A state's jurisdiction to tax persons, property and
property rights at present, therefore, extends even beyond its territorial jurisdiction in view of the
enjoyment of its citizens of its protective mantle in foreign countries.
Actual enjoyment of protective mantle not a condition on prior to tax
Actual enjoyment, however, of its protective mantle is not a condition precedent before a
state may subject its citizens and their property or property rights outside of its territorial
jurisdiction to taxation. Whether or not there is such actual enjoyment of the protective mantle of
the state, the citizen cannot special escape his country's taxes. Because the protective mantle of a
state is practically inherent in all its citizens like or not. Thus, enjoyment of such protective
mantle is presumed. And that presumption is irrebutable, irrefutable and conclusive.
Uniformity on taxation both inherent and constitutional limitation
The rule on uniformity is both an inherent and a constitutional limitation on the exercise
of the power of taxation." It was from this fundamental doctrine that the sound tax principle of
theoretical justice evolved. This rule is satisfied so long as all of those belonging to the same
class are taxed alike. It is just like the equal protection clause of the Bill of Rights.
Due process of law also both an inherent and constitutional limitation
The most essential elements of due process of law are notice and opportunity for hearing.
Said notice and opportunity of hearing are not only explicity stated in the due process clause of
the Bill of Rights" but are inherent limitations on the exercise of the power of taxation in order
that people in government may not arbitrarily, capriciously and unjustly deprive those who are
subject to taxes of their liberty and property. Because such arbitrarives, capriciousness and
injustice unduly delay if tot sabotage the attainment of the best possible common good which is
the aim of all governments. After all, governments exists for its people. tot the people for their
government.
Nature of Constitutional tax exemptions
Tax exemptions provided for in the Constitution cannot be altered by any law. Only a
valid constitutional amendment can revoke such tax exemptions. The properties constitutionally
exempted from taxation cannot be taxed is a mere reiteration of the basic maxim that the
Constitution is the Supreme law of the land to which all other laws must conform.
Prohibition on impairment of contracts also both inherent and constitutional limitation
The prohibition on impairment of contracts is both an inherent and a constitutional
limitation. Once a valid and binding contract is entered into, even the state is prohibited from
destroying that contract. Because if it were otherwise, that is contracts can be impugned at the
instance of the state, everyone would fear transacting business with government that is, no one
would care transacting business therewith at all and that is enough to paralize governmental
operations.
In fact, it is an accepted principle that contracts have the force and effect of law between
the contracting parties, so long as they are not contrary to law, morals, good customs, public
order and public policy.
Impairment clause is now no longer inviolate
"The petitioner complains that the retroactive application of the law would violate the
impairment clause. The argument does not impress. The impairment clause is now no longer
inviolate; in fact, there are many who now believe it is an anachrosim in the present-day society.
It was quite useful before in protecting the integrity of private agreements from government
meddling, but that was when such agreements did not affect the community in general. They
were indeed purely private agreements then. Any interference with them at that time was really
an unwarranted intrusion that could be properly struck down.
"But things are different now. More and more, the interests of the public have become
involved in what are supposed to be still private agreements, which have as a result been
removed from the protection of the impairment clause. These agreements have come within the
embrace of the police power, that obtrusive protector of the public interest. It is a ubiquitous
policeman indeed. As long as the contract affects the public welfare one way or another so as to
require the interference of the State, then must the police power be asserted, and prevail, over the
impairment clause.
As we held in Philippine Veterans Bank Employees Union vs Philippine Veterans Bank.
Even if it be conceded that the charter of the Bank constitutes a contract between the
Government and the stockholders of the Bank, it would not follow that the relationship cannot be
altered without violating the impairment clause. This is too simplistic conclusion that loses sight
of the vulnerability of this "precious little clause," as it is called, to the inherent powers of the
State when the public interest demands their exercise. The clause, according to Corwin, "is lately
of negligible importance, and might well be stricken from the Constitution. For most practical
purposes, in fact, it has been."
The undeniable fact is that the notion of public interest has made such considerable
inroads into the constitutional guaranty that one could validly say now that it has become the
exception rather than the rule. The impact of the modern society upon hitherto private
agreements has left the clause in a shambles, as it were, making practically every contract
susceptible to change on behalf of the public. The modern understanding is that the contract is
protected by the guaranty only if it does not affect public interest, but there is hardly any contract
now that does not somehow or other affect public interest, as not to come under the powers of
the State. Part of that understanding therefore is that, conversely, the contract may be altered
validly if it involves the public interest, to which private interests must yield "as a postulate of
the existing social order."
 "And so it must be in the case at bar. Housing is one of the most serious social problems
of the country. The regulation of rentals, especially in the urban areas, has long been the
continuing concern of the government, as manifested by the succession of laws on the subject,
beginning with Rep. Act No. 6359, the original House Rentals Law. This Court has consistently
recognized the need for such legislation, to prevent the lessor from imposing arbitrary conditions
on the lessee while at the same time deterring the lessee from abusing the statutory benefits
accorded to him."
Purpose of BP 877 in interferring with lease contracts
The purpose of the law (BP 877) in interfering with such contracts is to protect both
landlord and tenant from their mutual impositions that can cause detriment to society as a whole.
The practices above discussed have to be the subject of government regulation and cannot seek
legitimate refuge in the impairment clause." In effect, therefore, the Supreme Court ruling in the
Juarez case acknowledges the superiority of the inherent police power of the State over the
impairment clause in the 1987 Constitution.
Taxation should not be exercised to derogate the impairment clause of the 1987 Constitution
Section 10 of the 1987 Constitution clearly provides that: No law impairing the
obligation of contracts shall be passed." Can the power of taxation, therefore, be exercised to
impair the obligation of contracts? "Taxation" is an absolute power which acknowledges no other
limits than those expressly prescribed in the Constitution and, like the sovereign power of every
description, is intrusted in the discretion of those who use it" Although an incident of
sovereignty, the power of taxation, therefore, should not be exercised to derogate the impairment
clause of the Constitution, if only to uphold the sanctity of what is written there.
What is written in the fundamental law should not be brushed aside even in the name of
exigency of the times except, perhaps, when it involves the very survival of the State itself. For
every time what is written in any law is broken, for whatever altruistic reason, a crack on the rule
of law happens and even the lawmaker can be interpreted himself as the lawbreaker and that,
certainly, is not good for whatever society as a whole.