Taxation Law 2 Cases for VAT

1. CIR vs. CA and Commonwealth Management and Services

[G.R. No. 125355. March 30, 2000]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND
SERVICES CORPORATION, respondents. Court
DECISION
PARDO, J.:
What is before the Court is a petition for review on certiorari of the decision of the Court of Appeals,[1] reversing that of the Court of Tax
Appeals,[2] which affirmed with modification the decision of the Commissioner of Internal Revenue ruling that Commonwealth
Management and Services Corporation, is liable for value added tax for services to clients during taxable year 1988.
Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly organized and existing under
the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the letter to perform
collection, consultative and other technical services, including functioning as an internal auditor, of Philamlife and its other affiliates.
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO for deficiency
value-added tax (VAT) amounting to P351,851.01, for taxable year 1988, computed as follows:
"Taxable sale/receipt P1,679,155.00
10% tax due thereon 167,915.50
25% surcharge 41,978.88
20% interest per annum 125,936.63
Compromise penalty for late payment 16,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P 351,831.01"[3]
COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its operations in the amount of
P6,077.00. J lexj
On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT. On August 20,
1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding payment of the deficiency VAT.
On September 29,1992, COMASERCO filed with the Court of Tax Appeals[4] a petition for review contesting the Commissioner's
assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections, consultative and
other technical assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-of-cost-only" basis. It
averred that it was not engaged id the business of providing services to Philamlife and its affiliates. COMASERCO was established to
ensure operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of services.
COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a
net loss in taxable year 1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.
On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal Revenue, the dispositive portion
of which reads:
"WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency value-added tax for the taxable
year 1988 is AFFIRMED with slight modifications. Accordingly, petitioner is ordered to pay respondent Commissioner of Internal
Revenue the amount of P335,831.01 inclusive of the 25% surcharge and interest plus 20% interest from January 24, 1992 until fully
paid pursuant to Section 248 and 249 of the Tax Code.
"The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be included in the payment as
there was no compromise agreement entered into between petitioner and respondent with respect to the value-added tax deficiency."[5]
On July 26, 1995, respondent filed with the Court of Appeals, petition for review of the decision of the Court of Appeals.
After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the Court of Tax Appeals, the
dispositive portion of which reads: Lexj uris
"WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING ASIDE the questioned Decision
promulgated on 22 June 1995. The assessment for deficiency value-added tax for the taxable year 1988 inclusive of surcharge, interest
and penalty charges are ordered CANCELLED for lack of legal and factual basis."[6]
The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same parties,[7] where it was held that
COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. The Court of
Appeals, in that case, reasoned that COMASERCO was not engaged in business of providing services to Philamlife and its affiliates. In
the same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not engaged in the business of
selling services.

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review on certiorari assailing the decision of
the Court of Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on September 26, 1996, COMASERCO
complied with the resolution.[8]
We give due course to the petition.
At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.
Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different things. Petitioner maintains that
the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the
value added by the performance of the service. It is immaterial whether profit is derived from rendering the service. Juri smis
We agree with the Commissioner.
Section 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E.O.) No. 273 in 1988, provides that:
"Section 99. Persons liable. - Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services,
or engages in similar transactions and any person who imports goods shall be subject to the value-added tax (VAT) imposed in
Sections 100 to 102 of this Code."[9]
COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried on with a view to profit
or livelihood. It avers that the activities of the entity must be profit- oriented. COMASERCO submits that it is not motivated by profit, as
defined by its primary purpose in the articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis, without
any profit." Private respondent argues that profit motive is material in ascertaining who to tax for purposes of determining liability for
VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections, Section
99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National Internal Revenue Code of 1997, took effect. The amended
law provides that:
"SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties,
renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and 108 of
this Code.
"The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services. This rule shall likewise apply to existing sale or lease of goods, properties or services at the time of the
effectivity of Republic Act No.7716.
"The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit
organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or
government entity. Jjj uris
"The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident
foreign persons shall be considered as being rendered in the course of trade or business."
Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit, organization or government
entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution
process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit
attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an
economic activity, regardless of whether or not the entity is profit-oriented.
The definition of the term "in the course of trade or business" incorporated in the present law applies to all transactions even to those
made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or
exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit
organization or government entity is liable to pay VAT for the sale of goods and services.
Section 108 of the National Internal Revenue Code of 1997[10] defines the phrase "sale of services" as the "performance of all kinds of
services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered
in connection with technical management or administration of any scientific, industrial or commercial undertaking or project."[11]
On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98[12] emphasizing that a domestic
corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments
on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such

corporation was organized without any intention of realizing profit, any income or profit generated by the entity in the conduct of its
activities was subject to income tax. lex
Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its
affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services
rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.
At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against
the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated
in the language of the law; it cannot be merely implied therefrom.[13] In the case of VAT, Section 109, Republic Act 8424 clearly
enumerates the transactions exempted from VAT. The services rendered by COMASERCO do not fall within the exemptions.
Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services rendered by COMASERCO
to Philamlife and its affiliates are subject to VAT. As pointed out by the Commissioner, the performance of all kinds of services for others
for a fee, remuneration or consideration is considered as sale of services subject to VAT. As the government agency charged with the
enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is
entitled to great weight.[14] Also, it has been the long standing policy and practice of this Court to respect the conclusions of quasijudicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and
consideration of tax cases and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident
exercise of its authority.[15]
There is no merit to respondent's contention that the Court of Appeals' decision in CA-G. R. No. 34042, declaring the COMASERCO as
not engaged in business and not liable for the payment of fixed and percentage taxes, binds petitioner. The issue in CA-G. R. No.
34042 is different from the present case, which involves COMASERCO's liability for VAT. As heretofore stated, every person who sells,
barters, or exchanges goods and services, in the course of trade or business, as defined by law, is subject to VAT. Jksm
WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in CA-G. R. SP No. 37930. The
Court hereby REINSTATES the decision of the Court of Tax Appeals in C. T. A. Case No. 4853.
No costs.
SO ORDERED.
Davide, Jr., C.J.,(Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.
2. CIR vs. Magsaysay Lines
G.R. No. 146984

July 28, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the National Development Company (NDC) of five (5) of its vessels to the
private respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax Code) then prevailing
at the time of the sale. The Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the sale is not subject to VAT. We
affirm, though on a more unequivocal rationale than that utilized by the rulings under review. The fact that the sale was not in the course
of the trade or business of NDC is sufficient in itself to declare the sale as outside the coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in its wholly-owned
subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which
are 3,700 DWT Tween-Decker, "Kloeckner" type vessels.1 The vessels were constructed for the NDC between 1981 and 1984, then
initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and
leased, on a bareboat basis, to the NMC.2
The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the public auction was
that the winning bidder was to pay "a value added tax of 10% on the value of the vessels."3 On 3 June 1988, private respondent
Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid was made by
Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the
Marden Group based in Hongkong (collectively, private respondents).4 The bid was approved by the Committee on Privatization, and a
Notice of Award dated 1 July 1988 was issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and Magsaysay Lines, Baliwag
Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated that "[v]alue-added tax, if any, shall be for the

account of the PURCHASER."5 Per arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders bond was
accepted by NDC as security for the payment of VAT, if any. By this time, a formal request for a ruling on whether or not the sale of the
vessels was subject to VAT had already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar
Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed that should no favorable ruling be
received from the BIR, NDC was authorized to draw on the Letter of Credit upon written demand the amount needed for the payment of
the VAT on the stipulated due date, 20 December 1988.6
In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14 December 1988 from the BIR,
holding that the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and
thus its "transactions incident to its normal VAT registered activity of leasing out personal property including sale of its own assets that
are movable, tangible objects which are appropriable or transferable are subject to the 10% [VAT]."7
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No. 395-88 (dated 18 August
1988), which made a similar ruling on the sale of the same vessels in response to an inquiry from the Chairman of the Senate Blue
Ribbon Committee. Their motion was denied when the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the
earlier VAT rulings. At this point, NDC drew on the Letter of Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes was
paid on 16 March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by a Supplemental Petition for
Review on 14 July 1989. They prayed for the reversal of VAT Rulings No. 395-88, 568-88 and 007-89, as well as the refund of the VAT
payment made amounting to P15,120,000.00.8 The Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that
private respondents were not the real parties in interest as they were not the transferors or sellers as contemplated in Sections 99 and
100 of the then Tax Code. The CIR also squarely defended the VAT rulings holding the sale of the vessels liable for VAT, especially
citing Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is imposed on any sale or transactions
deemed sale of taxable goods (including capital goods, irrespective of the date of acquisition)." The CIR argued that the sale of the
vessels were among those transactions "deemed sale," as enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR particularly
emphasized Section 4(E)(i) of the Regulation, which classified "change of ownership of business" as a circumstance that gave rise to a
transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the petition.9 The CTA ruled that the sale of a
vessel was an "isolated transaction," not done in the ordinary course of NDCs business, and was thus not subject to VAT, which under
Section 99 of the Tax Code, was applied only to sales in the course of trade or business. The CTA further held that the sale of the
vessels could not be "deemed sale," and thus subject to VAT, as the transaction did not fall under the enumeration of transactions
deemed sale as listed either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of
doubt should be resolved in favor of private respondents since Section 99 of the Tax Code which implemented VAT is not an exemption
provision, but a classification provision which warranted the resolution of doubts in favor of the taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals,10 which on 11 March 1997, rendered a Decision reversing the CTA.11
While the appellate court agreed that the sale was an isolated transaction, not made in the course of NDCs regular trade or business, it
nonetheless found that the transaction fell within the classification of those "deemed sale" under R.R. No. 5-87, since the sale of the
vessels together with the NMC shares brought about a change of ownership in NMC. The Court of Appeals also applied the principle
governing tax exemptions that such should be strictly construed against the taxpayer, and liberally in favor of the government.12
However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5 February 2001.13 This time,
the appellate court ruled that the "change of ownership of business" as contemplated in R.R. No. 5-87 must be a consequence of the
"retirement from or cessation of business" by the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of
Appeals also agreed with the CTA that the classification of transactions "deemed sale" was a classification statute, and not an
exemption statute, thus warranting the resolution of any doubt in favor of the taxpayer.14
To the mind of the Court, the arguments raised in the present petition have already been adequately discussed and refuted in the
rulings assailed before us. Evidently, the petition should be denied. Yet the Court finds that Section 99 of the Tax Code is sufficient
reason for upholding the refund of VAT payments, and the subsequent disquisitions by the lower courts on the applicability of Section
100 of the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even though it is assessed
on many levels of transactions on the basis of a fixed percentage.15 It is the end user of consumer goods or services which ultimately
shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services16 who in turn may
credit their own VAT liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT).17 The final
purchase by the end consumer represents the final link in a production chain that itself involves several transactions and several acts of
consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption,18 yet assuages
the manufacturers or providers of goods and services by enabling them to pass on their respective VAT liabilities to the next link of the
chain until finally the end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayers role or link in
the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations,19 the tax is levied only on the
sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These
transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter
of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such

goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated
VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both the CTA and the Court
of Appeals, the latter doing so even in its first decision which it eventually reconsidered.20 We cite with approval the CTAs explanation
on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the term "carrying on business" does
not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing
progressively all the acts normally incident thereof; while "doing business" conveys the idea of business being done, not from time to
time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)].
"Course of business" is what is usually done in the management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135
Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing business" connotes regularity of
activity. In the instant case, the sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared
policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal
VAT-registered activity of NDC is leasing personal property.21
This finding is confirmed by the Revised Charter22 of the NDC which bears no indication that the NDC was created for the primary
purpose of selling real property.23
The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this Court,24 should
have definitively settled the matter. Any sale, barter or exchange of goods or services not in the course of trade or business is not
subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon by the CIR, is captioned "Valueadded tax on sale of goods," and it expressly states that "[t]here shall be levied, assessed and collected on every sale, barter or
exchange of goods, a value added tax x x x." Section 100 should be read in light of Section 99, which lays down the general rule on
which persons are liable for VAT in the first place and on what transaction if at all. It may even be noted that Section 99 is the very first
provision in Title IV of the Tax Code, the Title that covers VAT in the law. Before any portion of Section 100, or the rest of the law for that
matter, may be applied in order to subject a transaction to VAT, it must first be satisfied that the taxpayer and transaction involved is
liable for VAT in the first place under Section 99.
It would have been a different matter if Section 100 purported to define the phrase "in the course of trade or business" as expressed in
Section 99. If that were so, reference to Section 100 would have been necessary as a means of ascertaining whether the sale of the
vessels was "in the course of trade or business," and thus subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the meaning of "in the course of
trade or business," but instead the identification of the transactions which may be deemed as sale. It would become necessary to
ascertain whether under those two provisions the transaction may be deemed a sale, only if it is settled that the transaction occurred in
the course of trade or business in the first place. If the transaction transpired outside the course of trade or business, it would be
irrelevant for the purpose of determining VAT liability whether the transaction may be deemed sale, since it anyway is not subject to
VAT.
Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in the course of trade or
business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of the Tax Code, no matter how the said sale
may hew to those transactions deemed sale as defined under Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the Court finds the discussions
offered on this point by the CTA and the Court of Appeals (in its subsequent Resolution) essentially correct. Section 4 (E)(i) of R.R. No.
5-87 does classify as among the transactions deemed sale those involving "change of ownership of business." However, Section 4(E)
of R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such "change of ownership" is only an attending circumstance to
"retirement from or cessation of business[, ] with respect to all goods on hand [as] of the date of such retirement or cessation."25
Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the "change of ownership of business" as only a "circumstance" that
attends those transactions "deemed sale," which are otherwise stated in the same section.26
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.
Quisumbing, Chairman, Carpio, Carpio-Morales, Velasco, Jr., J.J., concur.
3. CIR vs. Benguet Corporation
DIGEST: Benguet Corporation is a domestic corporation engaged in the exploration, development and operation of mineral resources,
and the sale or marketing thereof to various entities. It is a VAT registered enterprise.
The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of NIRC as amended by E.O. 273 s.
1987 then in effect, any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or

engages in similar transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0% (zero-rated)
depending on the classification of the transaction under Sec. 100 of the NIRC.
In January of 1988, Benguet applied for and was granted by the BIR zero-rated status on its sale of gold to Central Bank. On 28 August
1988 VAT Ruling No. 3788-88 was issued which declared that the sale of gold to Central Bank is considered as export sale subject to
zero-rate pursuant to Section 100 of the Tax Code, as amended by EO 273.
Relying on its zero-rated status and the above issuances, Benguet sold gold to the Central Bank during the period of 1 August 1989 to
31 July 1991 and entered into transactions that resulted in input VAT incurred in relation to the subject sales of gold. It then filed
applications for tax refunds/credits corresponding to input VAT.
However, such request was not granted due to BIR VAT Ruling No. 008-92 dated 23 January 1992 that was issued subsequent to the
consummation of the subject sales of gold to the Central Bank which provides that sales of gold to the Central Bank shall not be
considered as export sales and thus, shall be subject to 10% VAT. BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all
inconsistent BIR issuances.
Both petitioner and Benguet agree that the retroactive application of VAT Ruling No. 008-92 is valid only if such application would not
be prejudicial to the Benguet pursuant Sec. 246 of the NIRC.
Issues: (1) WON Benguets sale of gold to the Central Bank during the period when such was classified by BIR issuances as zero-rated
could be taxed validly at a 10% rate after the consummation of the transactions involved; (2) WON there was prejudice to Benguet Corp
due to the new BIR VAT Ruling.
Held: (1) NO. At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by Benguet
ordained that gold sales to the Central Bank were zero-rated. Benguet should not be faulted for relying on the BIRs interpretation of the
said laws and regulations.
While it is true, as CIR alleges, that government is not estopped from collecting taxes which remain unpaid on account of the errors or
mistakes of its agents and/or officials and there could be no vested right arising from an erroneous interpretation of law, these principles
must give way to exceptions based on and in keeping with the interest of justice and fair play. (then the Court cited the ABS-CBN case).
(2) YES. The adverse effect is that Benguet Corp became the unexpected and unwilling debtor to the BIR of the amount equivalent to
the total VAT cost of its product, a liability it previously could have recovered from the BIR in a zero-rated scenario or at least passed on
to the Central Bank had it known it would have been taxed at a 10% rate. Thus, it is clear that Benguet suffered economic prejudice
when it consummated sales of gold to the Central Bank were taken out of the zero-rated category. The change in the VAT rating of
Benguets transactions with the Central Bank resulted in the twin loss of its exemption from payment of output VAT and its opportunity
to recover input VAT, and at the same time subjected it to the 10% VAT sans the option to pass on this cost to the Central Bank, with the
total prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the Central Bank.
Even assuming that the right to recover Benguets excess payment of income tax has not yet prescribed, this relief would only address
Benguets overpayment of income tax but not the other burdens discussed above. Verily, this remedy is not a feasible option for
Benguet because the very reason why it was issued a deficiency tax assessment is that its input VAT was not enough to offset its
retroactive output VAT. Indeed, the burden of having to go through an unnecessary and cumbersome refund process is prejudice
enough.
ORIGINAL: Tinga, J.:
This is a petition for the review of a consolidated Decision of the Former Fourteenth Division of the Court of Appeals[1] ordering the
Commissioner of Internal Revenue to award tax credits to Benguet Corporation in the amount corresponding to the input value added
taxes that the latter had incurred in relation to its sale of gold to the Central Bank during the period of 01 August 1989 to 31 July 1991.
Petitioner is the Commissioner of Internal Revenue (petitioner) acting in his official capacity as head of the Bureau of Internal Revenue
(BIR), an attached agency of the Department of Finance,[2] with the authority, inter alia, to determine claims for refunds or tax credits as
provided by law.[3]
Respondent Benguet Corporation (respondent) is a domestic corporation organized and existing by virtue of Philippine laws, engaged
in the exploration, development and operation of mineral resources, and the sale or marketing thereof to various entities.[4]
Respondent is a value added tax (VAT) registered enterprise.[5]
The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of the National Internal Revenue Code
(NIRC),[6] as amended by Executive Order (E.O.) No. 273 s. 1987, then in effect, any person who, in the course of trade or business,
sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods is liable for
output VAT at rates of either 10% or 0% (zero-rated) depending on the classification of the transaction under Sec. 100 of the NIRC.
Persons registered under the VAT system[7] are allowed to recognize input VAT, or the VAT due from or paid by it in the course of its
trade or business on importation of goods or local purchases of goods or service, including lease or use of properties, from a VATregistered person.[8]

In January of 1988, respondent applied for and was granted by the BIR zero-rated status on its sale of gold to Central Bank.[9] On 28
August 1988, Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 3788-88, which declared that [t]he
sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to Section 100[[10]] of the Tax Code, as
amended by Executive Order No. 273. The BIR came out with at least six (6) other issuances[11] reiterating the zero-rating of sale of
gold to the Central Bank, the latest of which is VAT Ruling No. 036-90 dated 14 February 1990.[12]
Relying on its zero-rated status and the above issuances, respondent sold gold to the Central Bank during the period of 1 August 1989
to 31 July 1991 and entered into transactions that resulted in input VAT incurred in relation to the subject sales of gold. It then filed
applications for tax refunds/credits corresponding to input VAT for the amounts[13] of P46,177,861.12,[14]
P19,218,738.44,[15] and P84,909,247.96.[16] Respondents applications were either unacted upon or expressly disallowed by
petitioner.[17] In addition, petitioner issued a deficiency assessment against respondent when, after applying respondents creditable
input VAT costs against the retroactive 10% VAT levy, there resulted a balance of excess output VAT.[18]
The express disallowance of respondents application for refunds/credits and the issuance of deficiency assessments against it were
based on a BIR ruling-BIR VAT Ruling No. 008-92 dated 23 January 1992-that was issued subsequent to the consummation of the
subject sales of gold to the Central Bank which provides that sales of gold to the Central Bank shall not be considered as export sales
and thus, shall be subject to 10% VAT. In addition, BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all inconsistent BIR
issuances. The relevant portions of the ruling provides, thus:
1. In general, for purposes of the term export sales only direct export sales and foreign currency denominated sales, shall be qualified
for zero-rating.
....
4. Local sales of goods, which by fiction of law are considered export sales (e.g., the Export Duty Law considers sales of gold to the
Central Bank of the Philippines, as export sale). This transaction shall not be considered as export sale for VAT purposes.
....
[A]ll Orders and Memoranda issued by this Office inconsistent herewith are considered withdrawn, modified or superseded. (Emphasis
supplied)
The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and Revenue Memorandum Order No. 22-92 which decreed that the
revocation of VAT Ruling No. 3788-88 by VAT Ruling No. 008-92 would not unduly prejudice mining companies and, thus, could be
applied retroactively.[19]
Respondent filed three separate petitions for review with the Court of Tax Appeals (CTA), docketed as CTA Case No. 4945, CTA Case
No. 4627, and the consolidated cases of CTA Case Nos. 4686 and 4829.
In the three cases, respondent argued that a retroactive application of BIR VAT Ruling No. 008-92 would violate Sec. 246 of the NIRC,
which mandates the non-retroactivity of rulings or circulars issued by the Commissioner of Internal Revenue that would operate to
prejudice the taxpayer. Respondent then discussed in detail the manner and extent by which it was prejudiced by this retroactive
application.[20] Petitioner on the other hand, maintained that BIR VAT Ruling No. 008-92 is, firstly, not void and entitled to great respect,
having been issued by the body charged with the duty of administering the VAT law, and secondly, it may validly be given retroactive
effect since it was not prejudicial to respondent.
In three separate decisions,[21] the CTA dismissed respondents respective petitions. It held, with Presiding Judge Ernesto D. Acosta
dissenting, that no prejudice had befallen respondent by virtue of the retroactive application of BIR VAT Ruling No. 008-92, and that,
consequently, the application did not violate Sec. 246 of the NIRC.[22]
The CTA decisions were appealed by respondent to the Court of Appeals. The cases were docketed therein as CA-G.R. SP Nos.
37205, 38958, and 39435, and thereafter consolidated. The Court of Appeals, after evaluating the arguments of the parties, rendered
the questioned Decision reversing the Court of Tax Appeals insofar as the latter had ruled that BIR VAT Ruling No. 008-92 did not
prejudice the respondent and that the same could be given retroactive effect.
In its Decision, the appellate court held that respondent suffered financial damage equivalent to the sum of the disapproved claims. It
stated that had respondent known that such sales were subject to 10% VAT, which rate was not the prevailing rate at the time of the
transactions, respondent would have passed on the cost of the input taxes to the Central Bank. It also ruled that the remedies which the
CTA supposed would eliminate any resultant prejudice to respondent were not sufficient palliatives as the monetary values provided in
the supposed remedies do not approximate the monetary values of the tax credits that respondent lost after the implementation of the
VAT ruling in question. It cited
Manila Mining Corporation v. Commissioner of Internal Revenue,[23] in which the Court of Appeals held[24] that BIR VAT Ruling No.
008-92 cannot be given retroactive effect. Lastly, the Court of Appeals observed that R.A. 7716, the The New Expanded VAT Law,
reveals the intent of the lawmakers with regard to the treatment of sale of gold to the Central Bank since the amended version therein
of Sec. 100 of the NIRC expressly provides that the sale of gold to the Bangko Sentral ng Pilipinas is an export sale subject to 0% VAT
rate. The appellate court thus allowed respondents claims, decreeing in its dispositive portion, viz:

WHEREFORE, the appealed decision is hereby REVERSED. The respondent Commissioner of Internal Revenue is ordered to award
the following tax credits to petitioner.
1) In CA-G.R. SP No. 37209 P49,611,914.00
2) in CA-G.R. SP No. 38958 - P19,218,738.44
3) in CA-G.R. SP No. 39435 - P84,909,247.96[25]
Dissatisfied with the above ruling, petitioner filed the instant Petition for Review questioning the determination of the Court of Appeals
that the retroactive application of the subject issuance was prejudicial to respondent and could not be applied retroactively.
Apart from the central issue on the validity of the retroactive application of VAT Ruling No. 008-92, the question of the validity of the
issuance itself has been touched upon in the pleadings, including a reference made by respondent to a Court of Appeals Decision
holding that the VAT Ruling had no legal basis.[26] For its part, as the party that raised this issue, petitioner spiritedly defends the
validity of the issuance.[27] Effectively, however, the question is a non-issue and delving into it would be a needless exercise for, as
respondent emphatically pointed out in its Comment, unlike petitioners formulation of the issues, the only real issue in this case is
whether VAT Ruling No. 008-92 which revoked previous rulings of the petitioner which respondent heavily relied upon . . . may be
legally applied retroactively to respondent.[28] This Court need not invalidate the BIR issuances, which have the force and effect of law,
unless the issue of validity is so crucially at the heart of the controversy that the Court cannot resolve the case without having to strike
down the issuances. Clearly, whether the subject VAT ruling may validly be given retrospective effect is the lis mota in the case. Put in
another but specific fashion, the sole issue to be addressed is whether respondents sale of gold to the Central Bank during the period
when such was classified by BIR issuances as zero-rated could be taxed validly at a 10% rate after the consummation of the
transactions involved.
In a long line of cases,[29] this Court has affirmed that the rulings, circular, rules and regulations promulgated by the Commissioner of
Internal Revenue would have no retroactive application if to so apply them would be prejudicial to the taxpayers. In fact, both
petitioner[30] and respondent[31] agree that the retroactive application of VAT Ruling No. 008-92 is valid only if such application would
not be prejudicial to the respondent pursuant to the explicit mandate under Sec. 246 of the NIRC, thus:
Sec. 246. Non-retroactivity of rulings.- Any revocation, modification or reversal of any of the rules and regulations promulgated in
accordance with the preceding Section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive
application if the revocation, modification or reversal will be prejudicial to the taxpayers except in the following cases: (a) where the
taxpayer deliberately misstates or omits material facts from his return on any document required of him by the Bureau of Internal
Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different form the facts on which
the ruling is based; or (c) where the taxpayer acted in bad faith. (Emphasis supplied)
In that regard, petitioner submits that respondent would not be prejudiced by a retroactive application; respondent maintains the
contrary. Consequently, the determination of the issue of retroactivity hinges on whether respondent would suffer prejudice from the
retroactive application of VAT Ruling No. 008-92.
We agree with the Court of Appeals and the respondent.
To begin with, the determination of whether respondent had suffered prejudice is a factual issue. It is an established rule that in the
exercise of its power of review, the Supreme Court is not a trier of facts. Moreover, in the exercise of the Supreme Courts power of
review, the findings of facts of the Court of Appeals are conclusive and binding on the Supreme Court.[32] An exception to this rule is
when the findings of fact a quo are conflicting,[33] as is in this case.
VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, exchange or lease of goods or properties
and rendition of services in the course of trade or business, or the importation of goods.[34] It is an indirect tax, which may be shifted to
the buyer, transferee, or lessee of the goods, properties, or services.[35] However, the party directly liable for the payment of the tax is
the seller.[36]
In transactions taxed at a 10% rate, when at the end of any given taxable quarter the output VAT exceeds the input VAT, the excess
shall be paid to the government; when the input VAT exceeds the output VAT, the excess would be carried over to VAT liabilities for the
succeeding quarter or quarters.[37] On the other hand, transactions which are taxed at zero-rate do not result in any output tax. Input
VAT attributable to zero-rated sales could be refunded or credited against other internal revenue taxes at the option of the taxpayer.[38]
To illustrate, in a zero-rated transaction, when a VAT-registered person (taxpayer) purchases materials from his supplier at P80.00,
P7.30[39] of which was passed on to him by his supplier as the latters 10% output VAT, the taxpayer is allowed to recover P7.30 from
the BIR, in addition to other input VAT he had incurred in relation to the zero-rated transaction, through tax credits or refunds. When the
taxpayer sells his finished product in a zero-rated transaction, say, for P110.00, he is not required to pay any output VAT thereon. In the
case of a transaction subject to 10% VAT, the taxpayer is allowed to recover both the input VAT of P7.30 which he paid to his supplier
and his output VAT of P2.70 (10% the P30.00 value he has added to the P80.00 material) by passing on both costs to the buyer. Thus,
the buyer pays the total 10% VAT cost, in this case P10.00 on the product.
In both situations, the taxpayer has the option not to carry any VAT cost because in the zero-rated transaction, the taxpayer is allowed
to recover input tax from the BIR without need to pay output tax, while in 10% rated VAT, the taxpayer is allowed to pass on both input
and output VAT to the buyer. Thus, there is an elemental similarity between the two types of VAT ratings in that the taxpayer has the

option not to take on any VAT payment for his transactions by simply exercising his right to pass on the VAT costs in the manner
discussed above.
Proceeding from the foregoing, there appears to be no upfront economic difference in changing the sale of gold to the Central Bank
from a 0% to 10% VAT rate provided that respondent would be allowed the choice to pass on its VAT costs to the Central Bank. In the
instant case, the retroactive application of VAT Ruling No. 008-92 unilaterally forfeited or withdrew this option of respondent. The
adverse effect is that respondent became the unexpected and unwilling debtor to the BIR of the amount equivalent to the total VAT cost
of its product, a liability it previously could have recovered from the BIR in a zero-rated scenario or at least passed on to the Central
Bank had it known it would have been taxed at a 10% rate. Thus, it is clear that respondent suffered economic prejudice when its
consummated sales of gold to the Central Bank were taken out of the zero-rated category. The change in the VAT rating of respondents
transactions with the Central Bank resulted in the twin loss of its exemption from payment of output VAT and its opportunity to recover
input VAT, and at the same time subjected it to the 10% VAT sans the option to pass on this cost to the Central Bank, with the total
prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the Central Bank.
Petitioner had made its position hopelessly untenable by arguing that the deficiency 10% that may be assessable will only be equal to
1/11th of the amount billed to the [Central Bank] rather than 10% thereof. In short, [respondent] may only be charged based on the tax
amount actually and technically passed on to the [Central Bank] as part of the invoiced price.[40] To the Court, the aforequoted
statement is a clear recognition that respondent would suffer prejudice in the amount actually and technically passed on to the [Central
Bank] as part of the invoiced price. In determining the prejudice suffered by respondent, it matters little how the amount charged against
respondent is computed,[41] the point is that the amount (equal to 1/11th of the amount billed to the Central Bank) was charged against
respondent, resulting in damage to the latter.
Petitioner posits that the retroactive application of BIR VAT Ruling No. 008-92 is stripped of any prejudicial effect when viewed in
relation to several available options to recoup whatever liabilities respondent may have incurred, i.e., respondents input VAT may still
be used (1) to offset its output VAT on the sales of gold to the Central Bank or on its output VAT on other sales subject to 10% VAT, and
(2) as deductions on its income tax under Sec. 29 of the Tax Code.[42]
On petitioners first suggested recoupment modality, respondent counters that its other sales subject to 10% VAT are so minimal that
this mode is of little value. Indeed, what use would a credit be where there is nothing to set it off against? Moreover, respondent points
out that after having been imposed with 10% VAT sans the opportunity to pass on the same to the Central Bank, it was issued a
deficiency tax assessment because its input VAT tax credits were not enough to offset the retroactive 10% output VAT. The prejudice
then experienced by respondent lies in the fact that the tax refunds/credits that it expected to receive had effectively disappeared by
virtue of its newfound output VAT liability against which petitioner had offset the expected refund/credit. Additionally, the prejudice to
respondent would not simply disappear, as petitioner claims, when a liability (which liability was not there to begin with) is imposed
concurrently with an opportunity to reduce, not totally eradicate, the newfound liability. In sum, contrary to petitioners suggestion,
respondents net income still decreased corresponding to the amount it expected as its refunds/credits and the deficiency assessments
against it, which when summed up would be the total cost of the 10% retroactive VAT levied on respondent.
Respondent claims to have incurred further prejudice. In computing its income taxes for the relevant years, the input VAT cost that
respondent had paid to its suppliers was not treated by respondent as part of its cost of goods sold, which is deductible from gross
income for income tax purposes, but as an asset which could be refunded or applied as payment for other internal revenue taxes. In
fact, Revenue Regulation No. 5-87 (VAT Implementing Guidelines), requires input VAT to be recorded not as part of the cost of
materials or inventory purchased but as a separate entry called input taxes, which may then be applied against output VAT, other
internal revenue taxes, or refunded as the case may be.[43] In being denied the opportunity to deduct the input VAT from its gross
income, respondents net income was overstated by the amount of its input VAT. This overstatement was assessed tax at the 32%
corporate income tax rate, resulting in respondents overpayment of income taxes in the corresponding amount. Thus, respondent not
only lost its right to refund/ credit its input VAT and became liable for deficiency VAT, it also overpaid its income tax in the amount of
32% of its input VAT.
This leads us to the second recourse that petitioner has suggested to offset any resulting prejudice to respondent as a consequence of
giving retroactive effect to BIR VAT Ruling No. 008-92. Petitioner submits that granting that respondent has no other sale subject to
10% VAT against which its input taxes may be used in payment, then respondent is constituted as the final entity against which the
costs of the tax passes-on shall legally stop; hence, the input taxes may be converted as costs available as deduction for income tax
purposes.[44]
Even assuming that the right to recover respondents excess payment of income tax has not yet prescribed, this relief would only
address respondents overpayment of income tax but not the other burdens discussed above. Verily, this remedy is not a feasible option
for respondent because the very reason why it was issued a deficiency tax assessment is that its input VAT was not enough to offset its
retroactive output VAT. Indeed, the burden of having to go through an unnecessary and cumbersome refund process is prejudice
enough. Moreover, there is in fact nothing left to claim as a deduction from income taxes.
From the foregoing it is clear that petitioners suggested options by which prejudice would be eliminated from a retroactive application of
VAT Ruling No. 008-92 are either simply inadequate or grossly unrealistic.
At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by respondent ordained that
gold sales to the Central Bank were zero-rated. The BIR interpreted Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980
which prescribed that gold sold to the Central Bank shall be considered export and therefore shall be subject to the export and premium

duties. In coming out with this interpretation, the BIR also considered Sec. 169 of Central Bank Circular No. 960 which states that all
sales of gold to the Central Bank are considered constructive exports.[45] Respondent should not be faulted for relying on the BIRs
interpretation of the said laws and regulations.[46] While it is true, as petitioner alleges, that government is not estopped from collecting
taxes which remain unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested right arising
from an erroneous interpretation of law, these principles must give way to exceptions based on and in keeping with the interest of
justice and fairplay, as has been done in the instant matter. For, it is primordial that every person must, in the exercise of his rights and
in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.[47]
The case of ABS-CBN Broadcasting Corporation v. Court of Tax Appeals[48] involved a similar factual milieu. There the Commissioner
of Internal Revenue issued Memorandum Circular No. 4-71 revoking an earlier circular for being erroneous for lack of legal basis. When
the prior circular was still in effect, petitioner therein relied on it and consummated its transactions on the basis thereof. We held, thus:
. . . .Petitioner was no longer in a position to withhold taxes due from foreign corporations because it had already remitted all film rentals
and no longer had any control over them when the new Circular was issued. . . .
.. . .
This Court is not unaware of the well-entrenched principle that the [g]overnment is never estopped from collecting taxes because of
mistakes or errors on the part of its agents. But, like other principles of law, this also admits of exceptions in the interest of justice and
fairplay. . . .In fact, in the United States, . . . it has been held that the Commissioner [of Internal Revenue] is precluded from adopting a
position inconsistent with one previously taken where injustice would result therefrom or where there has been a misrepresentation to
the taxpayer.[49]
Respondent, in this case, has similarly been put on the receiving end of a grossly unfair deal. Before respondent was entitled to tax
refunds or credits based on petitioners own issuances. Then suddenly, it found itself instead being made to pay deficiency taxes with
petitioners retroactive change in the VAT categorization of respondents transactions with the Central Bank. This is the sort of unjust
treatment of a taxpayer which the law in Sec. 246 of the NIRC abhors and forbids.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals is AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
4. ABAKADA Guro vs. Ermita
DIGEST: On May 24, 2005, the President signed into law Republic Act 9337 or the VAT Reform Act. Before the law took effect on July
1, 2005, the Court issued a TRO enjoining government from implementing the law in response to a slew of petitions for certiorari and
prohibition questioning the constitutionality of the new law.
The challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6: That the President, upon the recommendation
of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to 12%, after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1%)
Petitioners allege that the grant of stand-by authority to the President to increase the VAT rate is an abdication by Congress of its
exclusive power to tax because such delegation is not covered by Section 28 (2), Article VI Consti. They argue that VAT is a tax levied
on the sale or exchange of goods and services which cant be included within the purview of tariffs under the exemption delegation
since this refers to customs duties, tolls or tribute payable upon merchandise to the government and usually imposed on
imported/exported goods. They also said that the President has powers to cause, influence or create the conditions provided by law to
bring about the conditions precedent. Moreover, they allege that no guiding standards are made by law as to how the Secretary of
Finance will make the recommendation.
Issue: Whether or not the RA 9337's stand-by authority to the Executive to increase the VAT rate, especially on account of the
recommendatory power granted to the Secretary of Finance, constitutes undue delegation of legislative power? NO
Held: 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 is the authority to make a complete law- complete as to the time when it shall
take effect and as to whom it shall be applicable, and to determine the expediency of its enactment. 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.
The exceptions are:
(a) delegation of tariff powers to President under Constitution
(b) delegation of emergency powers to President under Constitution
(c) delegation to the people at large
(d) delegation to local governments
(e) delegation to administrative bodies

For the delegation to be valid, it must be complete and it must fix a standard. A sufficient standard is one which defines legislative
policy, marks its limits, maps out its boundaries and specifies the public agency to apply it.
In this case, it is not a delegation of legislative power BUT a delegation of ascertainment of facts upon which enforcement and
administration of the increased 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.
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. It is a clear directive to impose the 12% VAT rate when the
specified conditions are present.
Congress just granted the Secretary of Finance the authority to ascertain the existence of a fact--- whether by December 31, 2005, the
VAT collection as a percentage of GDP of the previous year exceeds 2 4/5 % or the national government deficit as a percentage of
GDP of the previous year exceeds one and 1%. If either of these two instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President.
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. 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. The Secretary of Finance becomes the means or tool by which
legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has
a much broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent
information and verify if any of the two conditions laid out by Congress is present.
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.
There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally
permissible. Congress did not delegate the power to tax but the mere implementation of the law.
ORIGINAL: AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of all, should be borne by everyone, and the more man enjoys the
advantages of society, the more he ought to hold himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments for health workers, and
wider coverage for full value-added tax benefits these are the reasons why Republic Act No. 9337 (R.A. No. 9337) [1] was enacted.
Reasons, the wisdom of which, the Court even with its extensive constitutional power of review, cannot probe. The petitioners in these
cases, however, question not only the wisdom of the law, but also perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners failed to justify their call
for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate Bill No. 1950.
House Bill No. 3555[2] was introduced on first reading on January 7, 2005. The House Committee on Ways and Means approved the
bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced on August 8, 2004. The President
certified the bill on January 7, 2005 for immediate enactment. On January 27, 2005, the House of Representatives approved the bill on
second and third reading.
House Bill No. 3705[3] on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F. Baterina, and House Bill No.
3381 introduced by Rep. Jacinto V. Paras. Its mother bill is House Bill No. 3555. The House Committee on Ways and Means approved
the bill on February 2, 2005. The President also certified it as urgent onFebruary 8, 2005. The House of Representatives approved the
bill on second and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 1950[4] on March 7, 2005, in substitution of Senate
Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and 3705. Senator Ralph G. Recto sponsored Senate
Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N.
Pangilinan. The President certified the bill on March 11, 2005, and was approved by the Senate on second and third reading on April
13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a committee conference on the
disagreeing provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No. 3705, and Senate Bill No.
1950, after having met and discussed in full free and conference, recommended the approval of its report, which the Senate did on May
10, 2005, and with the House of Representatives agreeing thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the President, who signed the
same into law on May 24, 2005. Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337. [5] When said date came, the Court issued a temporary restraining order, effective
immediately and continuing until further orders, enjoining respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr. Justice Artemio V.
Panganiban, voiced the rationale for its issuance of the temporary restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little background. You know when the
law took effect on July 1, 2005, the Court issued a TRO at about 5 oclock in the afternoon. But before that, there was a lot of complaints
aired on television and on radio. Some people in a gas station were complaining that the gas prices went up by 10%. Some people
were complaining that their electric bill will go up by 10%. Other times people riding in domestic air carrier were complaining that the
prices that theyll have to pay would have to go up by 10%. While all that was being aired, per your presentation and per our own
understanding of the law, thats not true. Its not true that the e-vat law necessarily increased prices by 10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the Petroleum companies some subsidy . . .
interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise Tax and the import
duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-Vat tax. If you consider the
excise tax and the import duties, the Net Tax would probably be in the neighborhood of 7%? We are not going into exact figures I am
just trying to deliver a point that different industries, different products, different services are hit differently. So its not correct to say that
all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a Sales Tax of 3%. When this
E-Vat law took effect the Sales Tax was also removed as a mitigating measure. So, therefore, there is no justification to increase the
fares by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first day, were being increased arbitrarily by 10%.
And thats one reason among many others this Court had to issue TRO because of the confusion in the implementation. Thats why we
added as an issue in this case, even if its tangentially taken up by the pleadings of the parties, the confusion in the implementation of
the E-vat. Our people were subjected to the mercy of that confusion of an across the board increase of 10%, which you yourself now
admit and I think even the Government will admit is incorrect. In some cases, it should be 3% only, in some cases it should be 6%
depending on these mitigating measures and the location and situation of each product, of each service, of each company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the clarification of all these and we wish the
government will take time to clarify all these by means of a more detailed implementing rules, in case the law is upheld by this
Court. . . .[6]
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 valueadded tax to twelve percent (12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive authority to fix the rate of
taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the constitutionality of Sections 4, 5
and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on the ground that it amounts
to an undue delegation of legislative power, petitioners also contend that the increase in the VAT rate to 12% contingent on any of the
two conditions being satisfied violates the due process clause embodied in Article III, Section 1 of the Constitution, as it imposes an
unfair and additional tax burden on the people, in that: (1) the 12% increase is ambiguous because it does not state if the rate would be
returned to the original 10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of
the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to be an incentive to the President to
raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral Conference Committee is a
violation of the no-amendment rule upon last reading of a bill laid down in Article VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers, Inc., et al., assailing the
following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall be amortized over a 60month period, if the acquisition, excluding the VAT components, exceeds One Million Pesos (P1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be credited against the output
tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political subdivisions, instrumentalities or
agencies, including GOCCs, to deduct a 5% final withholding tax on gross payments of goods and services, which are subject to 10%
VAT under Sections 106 (sale of goods and properties) and 108 (sale of services and use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or property without due process of law
under Article III, Section 1 of the Constitution. According to petitioners, the contested sections impose limitations on the amount of input
tax that may be claimed. Petitioners also argue that the input tax partakes the nature of a property that may not be confiscated,
appropriated, or limited without due process of law. Petitioners further contend that like any other property or property right, the input tax
credit may be transferred or disposed of, and that by limiting the same, the government gets to tax a profit or value-added even if there
is no profit or value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law under Article III, Section
1 of the Constitution, as 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 60month amortization on the purchase or importation of capital goods exceeding P1,000,000.00, and the 5% final withholding tax by
government agencies, is arbitrary, oppressive, and confiscatory, and that it violates the constitutional principle on progressive taxation,
among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform agenda. A reform in the value-added
system of taxation is the core revenue measure that will tilt the balance towards a sustainable macroeconomic environment necessary
for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of
the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
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 singlestage system was subsequently modified, and a mixture of the cost deduction method and tax credit method was used to determine the
value-added tax payable.[13] Under the tax credit method, an entity can credit against or subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs and imports.[14]
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system was rationalized by
imposing a multi-stage tax rate of 0% or 10% on all sales using the tax credit method.[15]
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, [16] R.A. No. 8241 or the Improved VAT Law,[17] R.A. No. 8424 or
the Tax Reform Act of 1997, [18] and finally, the presently beleaguered R.A. No. 9337, also referred to by respondents as the VAT Reform
Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.
It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative body for, as unerringly
elucidated by Justice Story, [i]f the power did not exist, it would be utterly impracticable to transact the business of the nation,
either at all, or at least with decency, deliberation, and order.[19] Thus, Article VI, Section 16 (3) of the Constitution provides that
each House may determine the rules of its proceedings. Pursuant to this inherent constitutional power to promulgate and implement its
own rules of procedure, the respective rules of each house of Congress provided for the creation of a Bicameral Conference
Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:
Sec. 88. Conference Committee. In the event that the House does not agree with the Senate on the amendment to any bill or joint
resolution, the differences may be settled by the conference committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and support the House Bill. If the
differences with the Senate are so substantial that they materially impair the House Bill, the panel shall report such fact to the House for
the latters appropriate action.
Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently explicit statement of the changes in or
amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the voting thereon. The House
shall vote on the Conference Committee Report in the same manner and procedure as it votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:

Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any bill or joint resolution,
the differences shall be settled by a conference committee of both Houses which shall meet within ten (10) days after their composition.
The President shall designate the members of the Senate Panel in the conference committee with the approval of the Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in, or amendments to the
subject measure, and shall be signed by a majority of the members of each House panel, voting separately.
A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof with the explanatory
statement of the conference committee shall be attached to the report.
...
The creation of such conference committee was apparently in response to a problem, not addressed by any constitutional provision,
where the two houses of Congress find themselves in disagreement over changes or amendments introduced by the other house in a
legislative bill. Given that one of the most basic powers of the legislative branch is to formulate and implement its own rules of
proceedings and to discipline its members, may the Court then delve into the details of how Congress complies with its internal rules or
how it conducts its business of passing legislation? Note that in the present petitions, the issue is not whether provisions of the rules of
both houses creating the bicameral conference committee are unconstitutional, but whether the bicameral conference committee
has strictly complied with the rules of both houses, thereby remaining within the jurisdiction conferred upon it by Congress.
In the recent case of Farias vs. The Executive Secretary,[20] the Court En Banc, unanimously reiterated and emphasized its adherence
to the enrolled bill doctrine, thus, declining therein petitioners plea for the Court to go behind the enrolled copy of the bill. Assailed in
said case was Congresss creation of two sets of bicameral conference committees, the lack of records of said committees proceedings,
the alleged violation of said committees of the rules of both houses, and the disappearance or deletion of one of the provisions in the
compromise bill submitted by the bicameral conference committee. It was argued that such irregularities in the passage of the law
nullified R.A. No. 9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
Under the enrolled bill doctrine, the signing of a bill by the Speaker of the House and the Senate President and the certification of the
Secretaries of both Houses of Congress that it was passed are conclusive of its due enactment. A review of cases reveals the Courts
consistent adherence to the rule. The Court finds no reason to deviate from the salutary rule in this case where the irregularities
alleged by the petitioners mostly involved the internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference
Committee by the House. This Court is not the proper forum for the enforcement of these internal rules of Congress, whether
House or Senate. Parliamentary rules are merely procedural and with their observance the courts have no concern. Whatever
doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in its favor. The Court reiterates its ruling
inArroyo 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. InOsmea v. Pendatun, it was held: At any
rate, courts have declared that the rules adopted by deliberative bodies are subject to revocation, modification or waiver at the pleasure
of the body adopting them. And it has been said that Parliamentary rules are merely procedural, and with their observance, the
courts have no concern. They may be waived or disregarded by the legislative body. Consequently, mere failure to conform to
parliamentary usage will not invalidate the action (taken by a deliberative body) when the requisite number of members have
agreed to a particular measure.[21] (Emphasis supplied)
The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities committed by the conference
committee in introducing changes or deleting provisions in the House and Senate bills. Akin to the Farias case,[22] the present petitions
also raise an issue regarding the actions taken by the conference committee on matters regarding Congress compliance with its own
internal rules. As stated earlier, one of the most basic and inherent power of the legislature is the power to formulate rules for its
proceedings and the discipline of its members. Congress is the best judge of how it should conduct its own business expeditiously and
in the most orderly manner. It is also the sole concern of Congress to instill discipline among the members of its conference committee
if it believes that said members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to
questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the internal proceedings of a
co-equal branch of government.
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,[23] the Court already made
the pronouncement that [i]f a change is desired in the practice [of the Bicameral Conference Committee] it must be sought in
Congress since this question is not covered by any constitutional provision but is only an internal rule of each house. [24] To
date, Congress has not seen it fit to make such changes adverted to by the Court. It seems, therefore, that Congress finds the practices
of the bicameral conference committee to be very useful for purposes of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral conference committees,
the Court deems it necessary to dwell on the issue. The Court observes that there was a necessity for a conference committee because
a comparison of the provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the other, reveals that
there were indeed disagreements. As pointed out in the petitions, said disagreements were as follows:
House Bill No. 3555

House Bill No.3705

Senate Bill No. 1950

With regard to Stand-By Authority in favor of President

Provides for 12% VAT on every sale
of goods or properties (amending
Sec. 106 of NIRC); 12% VAT on
importation of goods (amending
Sec. 107 of NIRC); and 12% VAT
on sale of services and use or lease
of properties (amending Sec. 108 of
NIRC)

Provides for 12% VAT in general on sales

of goods or properties and reduced rates
for sale of certain locally manufactured
goods and petroleum products and raw
materials to be used in the manufacture
thereof (amending Sec. 106 of NIRC);
12% VAT on importation of goods and
reduced rates for certain imported
products including petroleum products
(amending Sec. 107 of NIRC); and 12%
VAT on sale of services and use or lease
of properties and a reduced rate for
certain
services
including
power
generation (amending Sec. 108 of NIRC)

Provides for a single rate of 10% VAT on

sale of goods or properties (amending
Sec. 106 of NIRC), 10% VAT on sale of
services including sale of electricity by
generation companies, transmission and
distribution companies, and use or lease of
properties (amending Sec. 108 of NIRC)

With regard to the no pass-on provision

No similar provision

Provides that the VAT imposed on power

generation and on the sale of petroleum
products shall be absorbed by generation
companies or sellers, respectively, and
shall not be passed on to consumers

Provides that the VAT imposed on sales of

electricity by generation companies and
services of transmission companies and
distribution companies, as well as those of
franchise grantees of electric utilities shall
not apply to residential
end-users. VAT shall be absorbed by
generation, transmission, and distribution
companies.

With regard to 70% limit on input tax credit

Provides that the input tax credit for
capital goods on which a VAT has
been paid shall be equally
distributed over 5 years or the
depreciable life of such capital
goods; the input tax credit for goods
and services other than capital
goods shall not exceed 5% of the
total amount of such goods and
services; and for persons engaged
in retail trading of goods, the
allowable input tax credit shall not
exceed 11% of the total amount of
goods purchased.

No similar provision

Provides that the input tax credit for capital

goods on which a VAT has been paid shall
be equally distributed over 5 years or the
depreciable life of such capital goods; the
input tax credit for goods and services
other than capital goods shall not exceed
90% of the output VAT.

With regard to amendments to be made to NIRC provisions regarding income and excise taxes
No similar provision

No similar provision

Provided for amendments to several NIRC

provisions regarding corporate income,
percentage, franchise and excise taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what rate of VAT is to be
imposed; (2) whether only the VAT imposed on electricity generation, transmission and distribution companies should not be passed on
to consumers, as proposed in the Senate bill, or both the VAT imposed on electricity generation, transmission and distribution
companies and the VAT imposed on sale of petroleum products should not be passed on to consumers, as proposed in the House bill;
(3) in what manner input tax credits should be limited; (4) and whether the NIRC provisions on corporate income taxes, percentage,
franchise and excise taxes should be amended.
There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the Bicameral Conference
Committee was mandated by the rules of both houses of Congress to act on the same by settling said differences and/or
disagreements. The Bicameral Conference Committee acted on the disagreeing provisions by making the following changes:
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference Committee Report that the
Bicameral Conference Committee tried to bridge the gap in the difference between the 10% VAT rate proposed by the Senate, and the
various rates with 12% as the highest VAT rate proposed by the House, by striking a compromise whereby the present 10% VAT rate
would be retained until certain conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of

the previous year exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year exceeds 1%, when the
President, upon recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective January 1, 2006.
2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission and distribution companies
should not be passed on to consumers or whether both the VAT imposed on electricity generation, transmission and distribution
companies and the VAT imposed on sale of petroleum products may be passed on to consumers, the Bicameral Conference
Committee chose to settle such disagreement by altogether deleting from its Report any no pass-on provision.
3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral Conference Committee decided
to adopt the position of the House by putting a limitation on the amount of input tax that may be credited against the output tax,
although it crafted its own language as to the amount of the limitation on input tax credits and the manner of computing the same by
providing thus:
(A) Creditable Input Tax. . . .
...
Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for
depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months
if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds one million Pesos (P1,000,000.00):
PROVIDED, however, that if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes,
then the input VAT shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the
VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters:
PROVIDED that the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarter shall
not exceed seventy percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales by a
VAT-registered person may at his option be refunded or credited against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise, percentage and excise taxes, the
conference committee decided to include such amendments and basically adopted the provisions found in Senate Bill No. 1950, with
some changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral Conference Committee is
mandated to settle the differences between the disagreeing provisions in the House bill and the Senate bill. The term settle is
synonymous to reconcile and harmonize. [25] To reconcile or harmonize disagreeing provisions, the Bicameral Conference Committee
may then (a) adopt the specific provisions of either the House bill or Senate bill, (b) decide that neither provisions in the House bill or
the provisions in the Senate bill would be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the
disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions were meant only to
reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent that is wholly foreign to the subject embraced
by the original provisions.
The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate is retained until such
time that certain conditions arise when the 12% VAT wanted by the House shall be imposed, appears to be a compromise to try to
bridge the difference in the rate of VAT proposed by the two houses of Congress. Nevertheless, such compromise is still totally within
the subject of what rate of VAT should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral Conference Committee held
on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained the reason for deleting the no pass-on provision in this
wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector should be a beneficiary of
legislative grace, neither should any sector be discriminated on. The VAT is an indirect tax. It is a pass on-tax. And lets keep it plain
and simple. Lets not confuse the bill and put a no pass-on provision. Two-thirds of the world have a VAT system and in this two-thirds of
the globe, I have yet to see a VAT with a no pass-though provision. So, the thinking of the Senate is basically simple, lets keep the VAT
simple.[26](Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision never really enjoyed the support of either House.[27]
With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee came to a compromise
on the percentage rate of the limitation or cap on such input tax credit, but again, the change introduced by the Bicameral Conference
Committee was totally within the intent of both houses to put a cap on input tax that may be
credited against the output tax. From the inception of the subject revenue bill in the House of Representatives, one of the major
objectives was to plug a glaring loophole in the tax policy and administration by creating vital restrictions on the claiming of input VAT
tax credits . . . and [b]y introducing limitations on the claiming of tax credit, we are capping a major leakage that has placed our
collection efforts at an apparent disadvantage.[28]
As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No. 1950, since said
provisions were among those referred to it, the conference committee had to act on the same and it basically adopted the version of the
Senate.

Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to subjects of the provisions
referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack or excess of
jurisdiction committed by the Bicameral Conference Committee. In the earlier cases of Philippine Judges Association vs.
Prado[29] and Tolentino vs. Secretary of Finance,[30] the Court recognized the long-standing legislative practice of giving said conference
committee ample latitude for compromising differences between the Senate and the House. Thus, in the Tolentino case, it was held
that:
. . . it is within the power of a conference committee to include in its report an entirely new provision that is not found either in the House
bill or in the Senate bill. If the committee can propose an amendment consisting of one or two provisions, there is no reason why it
cannot propose several provisions, collectively considered as an amendment in the nature of a substitute, so long as such amendment
is germane to the subject of the bills before the committee. After all, its report was not final but needed the approval of both houses of
Congress to become valid as an act of the legislative department. The charge that in this case the Conference Committee acted as
a third legislative chamber is thus without any basis. [31] (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the No-Amendment Rule
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in
its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of
its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be
allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal.
Petitioners argument that the practice where a bicameral conference committee is allowed to add or delete provisions in the House bill
and the Senate bill after these had passed three readings is in effect a circumvention of the no amendment rule (Sec. 26 (2), Art. VI of
the 1987 Constitution), fails to convince the Court to deviate from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committees 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
28(A)(1)
28(B)(1)
34(B)(1)
116
117
119
121
148
151
236
237
288

Rates of Income Tax on Domestic Corporation

Tax on Resident Foreign Corporation
Inter-corporate Dividends
Inter-corporate Dividends
Tax on Persons Exempt from VAT
Percentage Tax on domestic carriers and keepers of Garage
Tax on franchises
Tax on banks and Non-Bank Financial Intermediaries
Excise Tax on manufactured oils and other fuels
Excise Tax on mineral products
Registration requirements
Issuance of receipts or sales or commercial invoices
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 Senates power
not only to concur with amendments but also to propose amendments. It would be to violate the coequality of legislative power of
the two houses of Congress and in fact make the House superior to the Senate.
Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even with respect to
bills which are required by the Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the
public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they
are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the
other hand, the senators, who are elected at large, are expected to approach the same problems from the national
perspective. Both views are thereby made to bear on the enactment of such laws.[33] (Emphasis supplied)
Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate
income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition
or limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the House bills are still in
furtherance of the intent of the House in initiating the subject revenue bills. The Explanatory Note of House Bill No. 1468, the very first
House bill introduced on the floor, which was later substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is the urgent and daunting task of solving the countrys serious financial
problems. To do this, government expenditures must be strictly monitored and controlled and revenues must be significantly increased.
This may be easier said than done, but our fiscal authorities are still optimistic the government will be operating on a balanced budget
by the year 2009. In fact, several measures that will result to significant expenditure savings have been identified by the
administration. It is supported with a credible package of revenue measures that include measures to improve tax
administration and control the leakages in revenues from income taxes and the value-added tax (VAT). (Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of our agenda must be
the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget by the year 2009, we
need to seize windows of opportunities which might seem poignant in the beginning, but in the long run prove effective and
beneficial to the overall status of our economy. One such opportunity is a review of existing tax rates, evaluating the
relevance given our present conditions.[34] (Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in sizeable revenues for the
government
to supplement our countrys serious financial problems, and improve tax administration and control of the leakages in revenues from
income taxes and value-added taxes. As these house bills were transmitted to the Senate, the latter, approaching the measures from
the point of national perspective, can introduce amendments within the purposes of those bills. It can provide for ways that would soften
the impact of the VAT measure on the consumer, i.e., by distributing the burden across all sectors instead of putting it entirely on the

shoulders of the consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation were
included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in additional revenues annually even while
by mitigating prices of power, services and petroleum products.
However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the VAT on twelve goods and services. The
rest of the tab P10.5 billion- will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should the latter bear all the
pain? Why should the fiscal salvation be only on the burden of the consumer?
The corporate worlds equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up to 2008 only. This will
raise P10.5 billion a year. After that, the rate will slide back, not to its old rate of 32 percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that will be in effect for 1,200
days, while we put our fiscal house in order. This fiscal medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief. We would like to assure
them that not because there is a light at the end of the tunnel, this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to share the burden.[35]
As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions in the tax on income of
corporations are germane to the purpose of the house bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to the VAT system, as
these sections would cushion the effects of VAT on consumers. Considering that certain goods and services which were subject to
percentage tax and excise tax would no longer be VAT-exempt, the consumer would be burdened more as they would be paying the
VAT in addition to these taxes. Thus, there is a need to amend these sections to soften the impact of VAT. Again, in his sponsorship
speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen the effect of a VAT on
this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain, we will however bring down
the excise tax on socially sensitive products such as diesel, bunker, fuel and kerosene.
...
What do all these exercises point to? These are not contortions of giving to the left hand what was taken from the right. Rather, these
sprang from our concern of softening the impact of VAT, so that the people can cushion the blow of higher prices they will have to pay
as a result of VAT.[36]
The other sections amended by the Senate pertained to matters of tax administration which are necessary for the implementation of the
changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the house bills, which is to
supplement our countrys fiscal deficit, among others. Thus, the Senate acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the
Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common that Sections 4, 5 and 6 of
R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving the President the stand-by authority to raise the
VAT rate from 10% to 12% when a certain condition is met, constitutes undue delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a
value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor: provided, that the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied.
(i)
value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent
(10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise
taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided,
That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based
on the landed cost plus excise taxes, if any: provided, further, that the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the following
conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and fourfifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross
receipts derived from the sale or exchange of services: provided, that the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and fourfifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1
%). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual abdication by Congress of
its exclusive power to tax because such delegation is not within the purview of Section 28 (2), Article VI of the Constitution, which
provides:
The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government.
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of
services, which cannot be included within the purview of tariffs under the exempted delegation as the latter refers to customs duties,
tolls or tribute payable upon merchandise to the government and usually imposed on goods or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative power to tax is contrary to
republicanism. They insist that accountability, responsibility and transparency should dictate the actions of Congress and they should
not pass to the President the decision to impose taxes. They also argue that the law also effectively nullified the Presidents power of
control, which includes the authority to set aside and nullify the acts of her subordinates like the Secretary of Finance, by mandating the
fixing of the tax rate by the President upon the recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the conditions provided by the law to
bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the 12% rate would be
subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the principle of no taxation without representation.
They submit that the Secretary of Finance is not mandated to give a favorable recommendation and he may not even give his
recommendation. Moreover, they allege that no guiding standards are provided in the law on what basis and as to how he will make his
recommendation. They claim, nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter, such that, ultimately, it is the President who decides whether to impose the
increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.

The principle of separation of powers ordains that each of the three great branches of government has exclusive cognizance of and is
supreme in matters falling within its own constitutionally allocated sphere.[37] A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim: potestas
delegata non delegari potest which means what has been delegated, cannot be delegated.[38] This doctrine is based on the ethical
principle that such as delegated power constitutes not only a right but a duty to be performed by the delegate through the
instrumentality of his own judgment and not through the intervening mind of another.[39]
With respect to the Legislature, Section 1 of Article VI of the Constitution provides that the Legislative power shall be vested in the
Congress of the Philippines which shall consist of a Senate and a House of Representatives. The powers which Congress is prohibited
from delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be
delegated, has been described as the authority to make a complete law complete as to the time when it shall take effect and as
to whom it shall be applicable and to determine the expediency of its enactment.[40] Thus, the rule is that in order that a court may
be justified in holding a statute unconstitutional as a delegation of legislative power, it must appear that the power involved is purely
legislative in nature that is, one appertaining exclusively to the legislative department. It is the nature of the power, and not the liability
of its use or the manner of its exercise, which determines the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law (a) is
complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate; [41] and (b) fixes a standard
the limits of which are sufficiently determinate and determinable to which the delegate must conform in the performance of his
functions.[42] A sufficient standard is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the
public agency to apply it. It indicates the circumstances under which the legislative command is to be effected. [43] Both tests are
intended to prevent a total transference of legislative authority to the delegate, who is not allowed to step into the shoes of the
legislature and exercise a power essentially legislative.[44]
In People vs. Vera,[45] the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent of delegation of power in
this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire whether the statute was
complete in all its terms and provisions when it left the hands of the legislature so that nothing was left to the judgment of any other
appointee or delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the delegation of power to make the law, which necessarily involves a
discretion as to what it shall be, and conferring an authority or discretion as to its execution, to be exercised under and in
pursuance of the law. The first cannot be done; to the latter no valid objection can be made.
...
It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the legislature. It is true that
laws may be made effective on certain contingencies, as by proclamation of the executive or the adoption by the people of a particular
community. In Wayman vs. Southard, the Supreme Court of the United States ruled that the legislature may delegate a power not
legislative which it may itself rightfully exercise. The power to ascertain facts is such a power which may be delegated. There is
nothing essentially legislative in ascertaining the existence of facts or conditions as the basis of the taking into effect of a
law. That is a mental process common to all branches of the government.Notwithstanding the apparent tendency, however, to
relax the rule prohibiting delegation of legislative authority on account of the complexity arising from social and economic forces at work
in this modern industrial age, the orthodox pronouncement of Judge Cooley in his work on 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 valueadded tax to twelve percent (12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which
enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate
effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate
upon factual matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in the
common proviso. The use of the word shall connotes a mandatory order. Its use in a statute denotes an imperative obligation and is
inconsistent with the idea of discretion. [53] Where the law is clear and unambiguous, it must be taken to mean exactly what it says, and
courts have no choice but to see to it that the mandate is obeyed.[54]
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified
by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law specifically uses the word shall, the
exercise of discretion by the President does not come into play. It is a clear directive to impose the 12% VAT rate when the specified
conditions are present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain specified contingency,
or upon the ascertainment of certain facts or conditions by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law effectively nullified the
Presidents power of control over the Secretary of Finance by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance. The Court cannot also subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase upon the recommendation of the Secretary
of Finance. Neither does the Court find persuasive the submission of petitioners Escudero, et al. that any recommendation by the
Secretary of Finance can easily be brushed aside by the President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of the Department of
Finance he is the assistant and agent of the Chief Executive. The multifarious executive and administrative functions of the Chief
Executive are performed by and through the executive departments, and the acts of the secretaries of such departments, such as the
Department of Finance, performed and promulgated in the regular course of business, are, unless disapproved or reprobated by the
Chief Executive, presumptively the acts of the Chief Executive. The Secretary of Finance, as such, occupies a political position and
holds office in an advisory capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom confidence" and, in
the language of Attorney-General Cushing, is subject to the direction of the President."[55]
In the present case, in making his recommendation to the President on the existence of either of the two conditions, the Secretary of
Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to the power of
control and direction of the President. He is acting as the agent of the legislative department, to determine and declare the event upon
which its expressed will is to take effect. [56] The Secretary of Finance becomes the means or tool by which legislative policy is

determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader
perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if
any of the two conditions laid out by Congress is present. His personality in such instance is in reality but a projection of that of
Congress. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or nullify, or set aside the
findings of the Secretary of Finance and to substitute the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether by December 31,
2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth
percent (24/5%) or the national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1%).
If either of these two instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the
President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no undue delegation of
legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible .[57] Congress does
not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of
his authority; in our complex economy that is frequently the only way in which the legislative process can go forward.[58]
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the legislative power to tax is
contrary to the principle of republicanism, the same deserves scant consideration. Congress did not delegate the power to tax but the
mere implementation of the law. The intent and will to increase the VAT rate to 12% came from Congress and the task of the President
is to simply execute the legislative policy. That Congress chose to do so in such a manner is not within the province of the Court to
inquire into, its task being to interpret the law.[59]
The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the conditions to bring
about either or both the conditions precedent does not deserve any merit as this argument is highly speculative. The Court does not
rule on allegations which are manifestly conjectural, as these may not exist at all.The Court deals with facts, not fancies; on realities,
not appearances. When the Court acts on appearances instead of realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden
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 2 4/5 of the GDP of
the previous year or that the national government deficit as a percentage of GDP of the previous year does not exceed 1%.
Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be introduced where none is
provided for. Rewriting the law is a forbidden ground that only Congress may tread upon.[60]
Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds none, petitioners
argument is, at best, purely speculative. There is no basis for petitioners fear of a fluctuating VAT rate because the law itself does not
provide that the rate should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no longer present. The rule is that
where the provision of the law is clear and unambiguous, so that there is no occasion for the court's seeking the legislative intent, the
law must be taken as it is, devoid of judicial addition or subtraction.[61]
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to raise the VAT collection
to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another condition, i.e., the national
government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
Respondents explained the philosophy behind these alternative conditions:
1.

VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, it means that
government has weak or no capability of implementing the VAT or that VAT is not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12% because such action will also be ineffectual.
2.

Natl Govt Deficit/GDP >1.5%

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

That the first condition amounts to an incentive to the President to increase the VAT collection does not render it unconstitutional so
long as there is a public purpose for which the law was passed, which in this case, is mainly to raise revenue. In fact, fiscal
adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in his Canons of
Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and
above what it brings into the public treasury of the state.[63]
It simply means that sources of revenues must be adequate to meet government expenditures and their variations.[64]
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the Bicameral Conference
Committee hearing, then Finance Secretary Purisima bluntly depicted the countrys gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90 percent of our revenue is
used for debt service. So, for every peso of revenue that we currently raise, 90 goes to debt service. Thats interest plus amortization of
our debt. So clearly, this is not a sustainable situation. Thats the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow money from that
international financial markets. Our debt to GDP is approximately equal to our GDP. Again, that shows you that this is not a sustainable
situation.
The third thing that Id like to point out is the environment that we are presently operating in is not as benign as what it used to be the
past five years.
What do I mean by that?
In the past five years, weve been lucky because we were operating in a period of basically global growth and low interest rates. The
past few months, we have seen an inching up, in fact, a rapid increase in the interest rates in the leading economies of the world. And,
therefore, our ability to borrow at reasonable prices is going to be challenged. In fact, ultimately, the question is our ability to access the
financial markets.
When the President made her speech in July last year, the environment was not as bad as it is now, at least based on the forecast of
most financial institutions. So, we were assuming that raising 80 billion would put us in a position where we can then convince them to
improve our ability to borrow at lower rates. But conditions have changed on us because the interest rates have gone up. In fact, just
within this room, we tried to access the market for a billion dollars because for this year alone, the Philippines will have to borrow 4
billion dollars. Of that amount, we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We were trying
to access last week and the market was not as favorable and up to now we have not accessed and we might pull back because the
conditions are not very good.
So given this situation, we at the Department of Finance believe that we really need to front-end our deficit reduction. Because it is
deficit that is causing the increase of the debt and we are in what we call a debt spiral. The more debt you have, the more deficit you
have because interest and debt service eats and eats more of your revenue. We need to get out of this debt spiral. And the only way, I
think, we can get out of this debt spiral is really have a front-end adjustment in our revenue base.[65]
The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe. Whether the law is indeed
sufficient to answer the states economic dilemma is not for the Court to judge. In the Farias case, the Court refused to consider the
various arguments raised therein that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the political branches of the
government. It is not for this Court to look into the wisdom or propriety of legislative determination. Indeed, whether an enactment is
wise or unwise, whether it is based on sound economic theory, whether it is the best means to achieve the desired results, whether, in
short, the legislative discretion within its prescribed limits should be exercised in a particular manner are matters for the judgment of the
legislature, and the serious conflict of opinions does not suffice to bring them within the range of judicial cognizance.[66]
In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy, given that it is not for the
judiciary to "pass upon questions of wisdom, justice or expediency of legislation.[67]
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending
Section 114(C) of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending Sections 110 (A)(2), 110
(B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and confiscatory.

Their argument is premised on the constitutional right against deprivation of life, liberty of property without due process of law, as
embodied in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law.
The doctrine is that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather
broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail.[68]
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax that may be credited
against the output tax. It states, in part: [P]rovided, that the input tax inclusive of the input VAT carried over from the previous quarter
that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT:
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 taxdue on the sale or lease of taxable goods or properties
or services by any person registered or required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In effect, a portion of
the input tax that has already been paid cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and therefore, the input tax in excess
of 70% remains uncredited. However, to the extent that the input tax is less than 70% of the output tax, then 100% of such input tax is
still creditable.
More importantly, the excess input tax, if any, is retained in a businesss books of accounts and remains creditable in the succeeding
quarter/s. This is explicitly allowed by Section 110(B), which provides that if the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters. In addition, Section 112(B) allows a VAT-registered person to apply for the issuance
of a tax credit certificate or refund for any unused input taxes, to the extent that such input taxes have not been applied against the
output taxes. Such unused input tax may be used in payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly contend. Their analysis
of the effect of the 70% limitation is incomplete and one-sided. It ends at the net effect that there will be unapplied/unutilized inputs VAT
for a given quarter. It does not proceed further to the fact that such unapplied/unutilized input tax may be credited in the subsequent
periods as allowed by the carry-over provision of Section 110(B) or that it may later on be refunded through a tax credit certificate under
Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation on the input tax. According
to petitioner, the limitation on the creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes they
collect, which violates the principle that tax collection and revenue should be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output tax meanwhile is
the tax due to the person when he sells goods. In computing the VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid and passed on by
the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to the Bureau of
Internal Revenue (BIR);[69] and
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the
input taxes result from zero-rated or effectively zero-rated transactions, any excess over the output taxes shall instead be refunded to
the taxpayer or credited against other internal revenue taxes, at the taxpayers option.[70]
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input tax only up to the
extent of 70% of the output tax. In laymans term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller
can only be credited up to 70% of the value-added taxes that is due to him on a taxable transaction. There is no retention of any tax
collection because the person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such
input tax to the BIR. The party directly liable for the payment of the tax is the seller. [71] What only needs to be done is for the
person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a property that may not
be confiscated, appropriated, or limited without due process of law.
The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-registered persons
entitlement to the creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory
privileges. The state may change or take away rights, which were created by the law of the state, although it may not take away
property, which was vested by virtue of such rights.[72]
Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable from the taxes payable,
although it becomes part of the cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a
10% multi-stage tax on all sales, it was then that the crediting of the input tax paid on purchase or importation of goods and services by
VAT-registered persons against the output tax was introduced.[73] This was adopted by the Expanded VAT Law (R.A. No. 7716), [74] and
The Tax Reform Act of 1997 (R.A. No. 8424). [75] The right to credit input tax as against the output tax is clearly a privilege created by
law, a privilege that also the law can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A) of
the NIRC, which provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for
depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months
if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos
(P1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less than five (5) years, as used for
depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally, That in the case of purchase of
services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of the
compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or importation of capital
goods with acquisition cost of P1 Million pesos, exclusive of the VAT component. Such spread out only poses a delay in the crediting of
the input tax. Petitioners argument is without basis because the taxpayer is not permanently deprived of his privilege to credit the input
tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts to a 4-year interestfree 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 valueadded 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 Congresss intention to treat transactions with the
government differently. Since it has not been shown that the class subject to the 5% final withholding tax has been unreasonably
narrowed, there is no reason to invalidate the provision. Petitioners, as petroleum dealers, are not the only ones subjected to the 5%
final withholding tax. It applies to all those who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No. 14-2005 or the
Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the actual input tax exceed 5% of gross
payments, the excess may form part of the cost. Equally, should the actual input tax be less than 5%, the difference is treated as
income.[81]
Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a profit or value-added even if
there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a legal joust where
premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the Court on this point will only be, as
Shakespeare describes life in Macbeth,[82] full of sound and fury, signifying nothing.
Whats more, petitioners contention assumes the proposition that there is no profit or value-added. It need not take an astute
businessman to know that it is a matter of exception that a business will sell goods or services without profit or value-added. It cannot
be overstressed that a business is created precisely for profit.
The equal protection clause under the Constitution means that no person or class of persons shall be deprived of the same protection
of laws which is enjoyed by other persons or other classes in the same place and in like circumstances.[83]
The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established. Whether
it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment,
valuation and collection, the States power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power
absent a clear showing of unreasonableness, discrimination, or arbitrariness.[84]
Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or invests in capital
equipment, or has several transactions with the government, is not based on real and substantial differences to meet a valid
classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of taxation, the kind of
property, the rates to be levied or the amounts to be raised, the methods of assessment, valuation and collection. Petitioners alleged
distinctions are based on variables that bear different consequences. While the implementation of the law may yield varying end results
depending on ones profit margin and value-added, the Court cannot go beyond what the legislature has laid down and interfere with the
affairs of business.
The equal protection clause does not require the universal application of the laws on all persons or things without distinction. This might
in fact sometimes result in unequal protection. What the clause requires is equality among equals as determined according to a valid
classification. By classification is meant the grouping of persons or things similar to each other in certain particulars and different from
all others in these same particulars.[85]
Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmea III and Ma. Ana Consuelo A.S.
Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the 70%
limitation by increasing the same to 90%. This, according to petitioners, supports their stance that the 70% limitation is arbitrary and
confiscatory. On this score, suffice it to say that these are still proposed legislations. Until Congress amends the law, and absent any
unequivocal basis for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Different
articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times.[86]
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6
of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods
and properties, importation of goods, and sale of services and use or lease of properties. These same sections also provide for a 0%
rate on certain sales and transaction.
Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input tax,
5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. It must be
stressed that the rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and only demands
uniformity within the particular class.[87]
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to
sales of goods or services with gross annual sales or receipts not exceeding P1,500,000.00.[88] Also, basic marine and agricultural food
products in their original state are still not subject to the tax, [89] thus ensuring that prices at the grassroots level will remain accessible.
As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in business with an
aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from its application.
Likewise exempt from the tax are sales of farm and marine products, so that the costs of basic food and other necessities, spared as
they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those with high profit
margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law entails, the law, under Section 116, imposed
a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross annual sales and/or receipts not
exceeding P1.5 Million. This acts as a equalizer because in effect, bigger businesses that qualify for VAT coverage and VAT-exempt
taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those previously exempt.
Excise taxes on petroleum products [91]and natural gas[92] were reduced. Percentage tax on domestic carriers was removed. [93] Power
producers are now exempt from paying franchise tax.[94]
Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden of taxation. Domestic,
foreign, and non-resident corporations are now subject to a 35% income tax rate, from a previous 32%. [95] Intercorporate dividends of
non-resident foreign corporations are still subject to 15% final withholding tax but the tax credit allowed on the corporations domicile
was increased to 20%.[96] The Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore.
[97]
Even the sale by an artist of his works or services performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest largely on the consumers. It
cannot therefore be gainsaid that R.A. No. 9337 is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller business with higher
input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayers ability to pay. This principle was also lifted from Adam Smiths Canons of
Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their
respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the person affected.[98]
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. Avelino[101] holds true then, as it still holds true now. All things considered, there is no raison d'tre for
the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207, 168461, 168463, and
168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the temporary restraining order
issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.
SO ORDERED.
5. Diaz vs. Secretary of Finance
DIGEST: Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief assailing the validity of
the impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of sale of
services that are subject to VAT; that a toll fee is a users tax, not a sale of services; that to impose VAT on toll fees would amount to a
tax on public service; and that, since VAT was never factored into the formula for computing toll fees, its imposition would violate the
non-impairment clause of the constitution.
The government contends that the non-inclusion of VAT in the parametric formula for computing toll rates cannot exempt tollway
operators from VAT. In any event, it cannot be claimed that the rights of tollway operators to a reasonable rate of return will be impaired

by the VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would have very minimal effect on
motorists using the tollways.
ISSUES: (1) WON the government is unlawfully expanding VAT coverage by including tollway operators and tollway operations in the
terms franchise grantees and sale of services under Section 108 of the Code; and
(2) WON the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on services; b) will impair the tollway
operators right to a reasonable return of investment under their TOAs; and c) is not administratively feasible and cannot be
implemented.
HELD: No.
The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and collected, according to Section
108, on the gross receipts derived from the sale or exchange of services as well as from the use or lease of properties. The third
paragraph of Section 108 defines sale or exchange of services as follows:
The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors
on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers
by land relative to their transport of goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods
or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity by generation companies,
transmission, and distribution companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether
or not the performance thereof calls for the exercise or use of the physical or mental faculties.
And not only do tollway operators come under the broad term all kinds of services, they also come under the specific class described in
Section 108 as all other franchise grantees who are subject to VAT, except those under Section 119 of this Code.
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio and/or television broadcasting
companies with gross annual incomes of less than P10 million and gas and water utilities) that Section 119 spares from the payment of
VAT. The word franchise broadly covers government grants of a special right to do an act or series of acts of public concern.
RATIO RELATIVE TO ADMINISTRATIVE FEASIBILITY:
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be capable of being
effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not
render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired. Thus, even if the
imposition of VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is
shown to violate any law or the Constitution.
ORIGINAL: ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief[1] assailing the validity of the
impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular users of tollways in stopping the
BIR action. Additionally, Diaz claims that he sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law)
and Republic Act 8424 (the 1997 National Internal Revenue Code or the NIRC) at the House of Representatives. Timbol, on the other
hand, claims that she served as Assistant Secretary of the Department of Trade and Industry and consultant of the Toll Regulatory
Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-Arroyo to impose VAT on toll fees.
The imposition was deferred, however, in view of the consistent opposition of Diaz and other sectors to such move. But, upon President
Benigno C. Aquino IIIs assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll fees
beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of sale of
services that are subject to VAT; that a toll fee is a users tax, not a sale of services; that to impose VAT on toll fees would amount to a
tax on public service; and that, since VAT was never factored into the formula for computing toll fees, its imposition would violate the
non-impairment clause of the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation of the VAT. The Court required
the government, represented by respondents Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition within 10 days from notice.[2] Later, the Court issued another resolution
treating the petition as one for prohibition.[3]
On August 23, 2010 the Office of the Solicitor General filed the governments comment.[4] The government avers that the NIRC
imposes VAT on all kinds of services of franchise grantees, including tollway operations, except where the law provides otherwise; that
the Court should seek the meaning and intent of the law from the words used in the statute; and that the imposition of VAT on tollway
operations has been the subject as early as 2003 of several BIR rulings and circulars.[5]
The government also argues that petitioners have no right to invoke the non-impairment of contracts clause since they clearly have no
personal interest in existing toll operating agreements (TOAs) between the government and tollway operators. At any rate, the nonimpairment clause cannot limit the States sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll rates cannot exempt tollway
operators from VAT. In any event, it cannot be claimed that the rights of tollway operators to a reasonable rate of return will be impaired
by the VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would have very minimal effect on
motorists using the tollways.
In their reply[6] to the governments comment, petitioners point out that tollway operators cannot be regarded as franchise grantees
under the NIRC since they do not hold legislative franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and
putting any excess collection in an escrow account. But this would be illegal since only the Congress can modify VAT rates and
authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to
record an accumulated input VAT of zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which
grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this reason, the VAT on toll
fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators and tollway operations in the
terms franchise grantees and sale of services under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on services; b) will impair the
tollway operators right to a reasonable return of investment under their TOAs; and c) is not administratively feasible and cannot be
implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather than one for declaratory relief, the
characterization that petitioners Diaz and Timbol gave their action. The government has sought reconsideration of the Courts resolution,
[7] however, arguing that petitioners allegations clearly made out a case for declaratory relief, an action over which the Court has no
original jurisdiction. The government adds, moreover, that the petition does not meet the requirements of Rule 65 for actions for
prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial functions when it sought to impose VAT on toll fees.
Besides, petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in the ordinary course of law against the BIR action in
the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has far-reaching implications and
raises questions that need to be resolved for the public good.[8] The Court has also held that a petition for prohibition is a proper
remedy to prohibit or nullify acts of executive officials that amount to usurpation of legislative authority.[9]
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not only on the more than half a
million motorists who use the tollways everyday, but more so on the governments effort to raise revenue for funding various projects
and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed, could cause more mischief both to the
tax-paying public and the government. A belated declaration of nullity of the BIR action would make any attempt to refund to the
motorists what they paid an administrative nightmare with no solution. Consequently, it is not only the right, but the duty of the Court to
take cognizance of and resolve the issues that the petition raises.

Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample power to waive such technical
requirements when the legal questions to be resolved are of great importance to the public. The same may be said of the requirement
of locus standi which is a mere procedural requisite.[10]
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and collected, according to
Section 108, on the gross receipts derived from the sale or exchange of services as well as from the use or lease of properties. The
third paragraph of Section 108 defines sale or exchange of services as follows:
The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors
on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers
by land relative to their transport of goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods
or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity by generation companies,
transmission, and distribution companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether
or not the performance thereof calls for the exercise or use of the physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on all kinds of services rendered in the Philippines for a fee, including those
specified in the list. The enumeration of affected services is not exclusive.[11] By qualifying services with the words all kinds, Congress
has given the term services an all-encompassing meaning. The listing of specific services are intended to illustrate how pervasive and
broad is the VATs reach rather than establish concrete limits to its application. Thus, every activity that can be imagined as a form of
service rendered for a fee should be deemed included unless some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll Operation Decree establishes the legal
basis for the services that tollway operators render. Essentially, tollway operators construct, maintain, and operate expressways, also
called tollways, at the operators expense. Tollways serve as alternatives to regular public highways that meander through populated
areas and branch out to local roads. Traffic in the regular public highways is for this reason slow-moving. In consideration for
constructing tollways at their expense, the operators are allowed to collect government-approved fees from motorists using the tollways
until such operators could fully recover their expenses and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the tollway facilities over which the
operator enjoys private proprietary rights[12] that its contract and the law recognize. In this sense, the tollway operator is no different
from the following service providers under Section 108 who allow others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and
other domestic common carriers by land relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines.
It does not help petitioners cause that Section 108 subjects to VAT all kinds of services rendered for a fee regardless of whether or not
the performance thereof calls for the exercise or use of the physical or mental faculties. This means that services to be subject to VAT
need not fall under the traditional concept of services, the personal or professional kinds that require the use of human knowledge and
skills.
And not only do tollway operators come under the broad term all kinds of services, they also come under the specific class described in
Section 108 as all other franchise grantees who are subject to VAT, except those under Section 119 of this Code.
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio and/or television broadcasting
companies with gross annual incomes of less than P10 million and gas and water utilities) that Section 119[13] spares from the
payment of VAT. The word franchise broadly covers government grants of a special right to do an act or series of acts of public concern.
[14]
Petitioners of course contend that tollway operators cannot be considered franchise grantees under Section 108 since they do not hold
legislative franchises. But nothing in Section 108 indicates that the franchise grantees it speaks of are those who hold legislative

franchises. Petitioners give no reason, and the Court cannot surmise any, for making a distinction between franchises granted by
Congress and franchises granted by some other government agency. The latter, properly constituted, may grant franchises. Indeed,
franchises conferred or granted by local authorities, as agents of the state, constitute as much a legislative franchise as though the
grant had been made by Congress itself.[15] The term franchise has been broadly construed as referring, not only to authorizations that
Congress directly issues in the form of a special law, but also to those granted by administrative agencies to which the power to grant
franchises has been delegated by Congress.[16]
Tollway operators are, owing to the nature and object of their business, franchise grantees. The construction, operation, and
maintenance of toll facilities on public improvements are activities of public consequence that necessarily require a special grant of
authority from the state. Indeed, Congress granted special franchise for the operation of tollways to the Philippine National Construction
Company, the former tollway concessionaire for the North and South Luzon Expressways. Apart from Congress, tollway franchises may
also be granted by the TRB, pursuant to the exercise of its delegated powers under P.D. 1112.[17] The franchise in this case is
evidenced by a Toll Operation Certificate.[18]
Petitioners contend that the public nature of the services rendered by tollway operators excludes such services from the term sale of
services under Section 108 of the Code. But, again, nothing in Section 108 supports this contention. The reverse is true. In specifically
including by way of example electric utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered businesses,
Section 108 opens other companies rendering public service for a fee to the imposition of VAT. Businesses of a public nature such as
public utilities and the collection of tolls or charges for its use or service is a franchise.[19]
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of congressional deliberations of
the would-be law. As the Court said in South African Airways v. Commissioner of Internal Revenue,[20] statements made by individual
members of Congress in the consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law. The congressional will is ultimately determined by the language of the law that the lawmakers
voted on. Consequently, the meaning and intention of the law must first be sought in the words of the statute itself, read and considered
in their natural, ordinary, commonly accepted and most obvious significations, according to good and approved usage and without
resorting to forced or subtle construction.
Two. Petitioners argue that a toll fee is a users tax and to impose VAT on toll fees is tantamount to taxing a tax.[21] Actually, petitioners
base this argument on the following discussion in Manila International Airport Authority (MIAA) v. Court of Appeals:[22]
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like roads, canals, rivers, torrents,
ports and bridges constructed by the State, are owned by the State. The term ports includes seaports and airports. The MIAA Airport
Lands and Buildings constitute a port constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and
Buildings are properties of public dominion and thus owned by the State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the road as one for public use. Someone must pay
for the maintenance of the road, either the public indirectly through the taxes they pay the government, or only those among the public
who actually use the road through the toll fees they pay upon using the road. The tollway system is even a more efficient and equitable
manner of taxing the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is for public dominion or not. Article 420 of
the Civil Code defines property of public dominion as one intended for public use. Even if the government collects toll fees, the road is
still intended for public use if anyone can use the road under the same terms and conditions as the rest of the public. The charging of
fees, the limitation on the kind of vehicles that can use the road, the speed restrictions and other conditions for the use of the road do
not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines, constitute the bulk of the income
that maintains the operations of MIAA. The collection of such fees does not change the character of MIAA as an airport for public use.
Such fees are often termed users tax. This means taxing those among the public who actually use a public facility instead of taxing all
the public including those who never use the particular public facility. A users tax is more equitable a principle of taxation mandated in
the 1987 Constitution.[23] (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to a users tax must also pertain to tollway fees. But the main
issue in the MIAA case was whether or not Paraaque City could sell airport lands and buildings under MIAA administration at public
auction to satisfy unpaid real estate taxes. Since local governments have no power to tax the national government, the Court held that
the City could not proceed with the auction sale. MIAA forms part of the national government although not integrated in the department
framework.[24] Thus, its airport lands and buildings are properties of public dominion beyond the commerce of man under Article 420(1)
[25] of the Civil Code and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a rule that tollway fees are users
tax, but to make the point that airport lands and buildings are properties of public dominion and that the collection of terminal fees for
their use does not make them private properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR
and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a users tax, collectible from motorists, for the construction and
maintenance of certain roadways. The tax in such a case goes directly to the government for the replenishment of resources it spends
for the roadways. This is not the case here. What the government seeks to tax here are fees collected from tollways that are

constructed, maintained, and operated by private tollway operators at their own expense under the build, operate, and transfer scheme
that the government has adopted for expressways.[26] Except for a fraction given to the government, the toll fees essentially end up as
earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed under the taxing
power of the government principally for the purpose of raising revenues to fund public expenditures.[27] Toll fees, on the other hand,
are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and
operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public
facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the
government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an
attribute of ownership.[28]
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. In indirect
taxation, a distinction is made between the liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or
pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the sellers
liability but merely the burden of the VAT.[29]
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid
by the former is added to the selling price. Once shifted, the VAT ceases to be a tax[30] and simply becomes part of the cost that the
buyer must pay in order to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator. Under Section 105 of the
Code, [31] VAT is imposed on any person who, in the course of trade or business, sells or renders services for a fee. In other words, the
seller of services, who in this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the
tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a users tax. VAT is assessed against
the tollway operators gross receipts and not necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the
tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one
has to pay in order to use the tollways.[32]
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf of private investors in the tollway
projects. She will neither be prejudiced by nor be affected by the alleged diminution in return of investments that may result from the
VAT imposition. She has no interest at all in the profits to be earned under the TOAs. The interest in and right to recover investments
solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be adversely affected by imposing VAT on tollway operations is
purely speculative. Equally presumptuous is her assertion that a stipulation in the TOAs known as the Material Adverse Grantor Action
will be activated if VAT is thus imposed. The Court cannot rule on matters that are manifestly conjectural. Neither can it prohibit the
State from exercising its sovereign taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the VAT on tollway operations
impractical and incapable of implementation. They cite the fact that, in order to claim input VAT, the name, address and tax identification
number of the tollway user must be indicated in the VAT receipt or invoice. The manner by which the BIR intends to implement the VAT
by rounding off the toll rate and putting any excess collection in an escrow account is also illegal, while the alternative of giving change
to thousands of motorists in order to meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on
tollway operations is not administratively feasible.[33]
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be capable of being
effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not
render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired.[34] Thus, even if the
imposition of VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is
shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway operations. Any declaration by the Court
that the manner of its implementation is illegal or unconstitutional would be premature. Although the transcript of the August 12, 2010
Senate hearing provides some clue as to how the BIR intends to go about it,[35] the facts pertaining to the matter are not sufficiently
established for the Court to pass judgment on. Besides, any concern about how the VAT on tollway operations will be enforced must
first be addressed to the BIR on whom the task of implementing tax laws primarily and exclusively rests. The Court cannot preempt the
BIRs discretion on the matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which directs toll companies to record an
accumulated input VAT of zero balance in their books as of August 16, 2010, the date when the VAT imposition was supposed to take
effect. The issuance allegedly violates Section 111(A)[36] of the Code which grants first time VAT payers a transitional input VAT of 2%
on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations with tollway operators who have
been assessed VAT as early as 2005, but failed to charge VAT-inclusive toll fees which by now can no longer be collected. The tollway
operators agreed to waive the 2% transitional input VAT, in exchange for cancellation of their past due VAT liabilities. Notably, the right
to claim the 2% transitional input VAT belongs to the tollway operators who have not questioned the circulars validity. They are thus the
ones who have a right to challenge the circular in a direct and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT laws coverage when she sought
to impose VAT on tollway operations. Section 108(A) of the Code clearly states that services of all other franchise grantees are subject
to VAT, except as may be provided under Section 119 of the Code. Tollway operators are not among the franchise grantees subject to
franchise tax under the latter provision. Neither are their services among the VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then it would have been well for the
law to clearly say so. Tax exemptions must be justified by clear statutory grant and based on language in the law too plain to be
mistaken.[37] But as the law is written, no such exemption obtains for tollway operators. The Court is thus duty-bound to simply apply
the law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative of Congress. The Courts role is
to merely uphold this legislative policy, as reflected first and foremost in the language of the tax statute. Thus, any unwarranted burden
that may be perceived to result from enforcing such policy must be properly referred to Congress. The Court has no discretion on the
matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the Expanded Value-Added Tax law was
passed. It is only now, however, that the executive has earnestly pursued the VAT imposition against tollway operators. The executive
exercises exclusive discretion in matters pertaining to the implementation and execution of tax laws. Consequently, the executive is
more properly suited to deal with the immediate and practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal Revenues motion for
reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F. Timbols petition for lack
of merit, and SETS ASIDE the Courts temporary restraining order dated August 13, 2010.
SO ORDERED.