1. Planters Products Inc. v.

Fertiphil Corporation
The principle is relevant in this petition for review on certiorari of
PLANTERS PRODUCTS, INC., G.R. No. 166006 the Decision[1] of the Court of Appeals (CA) affirming with modification
Petitioner,
Present: that of
YNARES-SANTIAGO, J., the RTC in Makati City,[2] finding petitioner Planters Products, Inc. (PPI)
C
hair liable to private respondent Fertiphil Corporation (Fertiphil) for the levies it
pers paid under Letter of Instruction (LOI) No. 1465.
on,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
The Facts
NACHURA,
and
REYES, JJ.
Petitioner PPI and private respondent Fertiphil are private
corporations incorporated under Philippine laws.[3] They are both engaged
Promulgated:
FERTIPHIL CORPORATION, in the importation and distribution of fertilizers, pesticides and agricultural
Respondent. March 14, 2008 chemicals.
x--------------------------------------------------x
On June 3, 1985, then President Ferdinand Marcos, exercising his
DECISION
legislative powers, issued LOI No. 1465 which provided, among others, for
the imposition of a capital recovery component (CRC) on the domestic sale
REYES, R.T., J.:
of all grades of fertilizers in the Philippines.[4] The LOI provides:

THE Regional Trial Courts (RTC) have the authority and jurisdiction to
consider the constitutionality of statutes, executive orders, presidential
decrees and other issuances. The Constitution vests that power not only in
the Supreme Court but in all Regional Trial Courts.
3. The Administrator of the Fertilizer Pesticide Authority
to include in its fertilizer pricing formula a capital
contribution component of not less than P10 per
bag. This capital contribution shall be collected until
adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all
 domestic sales of fertilizers in
the Philippines.[5] (Underscoring supplied) of the State in ensuring the stability of the fertilizer industry in the
country. It also averred that Fertiphil did not sustain any damage from the
LOI because the burden imposed by the levy fell on the ultimate consumer,
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it
not the seller.
sold in the domestic market to the Fertilizer and Pesticide Authority
(FPA). FPA then remitted the amount collected to the Far East Bank and
Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to RTC Disposition

FPA from July 8, 1985 to January 24, 1986.[6]

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil,
disposing as follows:
After the 1986 Edsa Revolution, FPA voluntarily stopped the
imposition of the P10 levy. With the return of democracy, Fertiphil
WHEREFORE, in view of the foregoing, the
demanded from PPI a refund of the amounts it paid under LOI No. 1465, Court hereby renders judgment in favor of the plaintiff
and against the defendant Planters Product, Inc., ordering
but PPI refused to accede to the demand.[7] the latter to pay the former:

1) the sum of P6,698,144.00 with

Fertiphil filed a complaint for collection and damages[8] against interest at 12% from the time of
FPA and PPI with the RTC in Makati. It questioned the constitutionality of judicial demand;
2) the sum of P100,000 as attorneys
LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an fees;
unlawful imposition that amounted to a denial of due process of 3) the cost of suit.

law.[9] Fertiphil alleged that the LOI solely favored PPI, a privately owned SO ORDERED.[11]
corporation, which used the proceeds to maintain its monopoly of the
fertilizer industry.

In its Answer,[10] FPA, through the Solicitor General, countered

that the issuance of LOI No. 1465 was a valid exercise of the police power

Ruling that the imposition of the P10 CRC was an exercise of the States
inherent power of taxation, the RTC invalidated the levy for violating the
basic principle that taxes can only be levied for public purpose, viz.:
It is apparent that the imposition of P10 per
fertilizer bag sold in the country by LOI 1465 is
purportedly in the exercise of the power of taxation. It is a
settled principle that the power of taxation by the state is
plenary. Comprehensive and supreme, the principal check
upon its abuse resting in the responsibility of the members
of the legislature to their constituents. However, there are
two kinds of limitations on the power of taxation: the
inherent limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied
only for public purposes:
The power to tax can be resorted to only
for a constitutionally valid public
purpose. By the same token, taxes may
not be levied for purely private
purposes, for building up of private
fortunes, or for the redress of private
wrongs. They cannot be levied for the
improvement of private property, or for
the benefit, and promotion of private
enterprises, except where the aid is
incident to the public benefit. It is well-
settled principle of constitutional law
that no general tax can be levied except
for the purpose of raising money which
is to be expended for public use. Funds
cannot be exacted under the guise of
taxation to promote a purpose that is not
of public interest. Without such
limitation, the power to tax could be
exercised or employed as an authority
to destroy the economy of the people. A
tax, however, is not held void on the
ground of want of public interest unless
the want of such interest is clear. (71
Am. Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount
of P6,698,144.00 to the Fertilizer and Pesticide Authority
pursuant to the P10 per bag of fertilizer sold imposition
under LOI 1465 which, in turn, remitted the amount to the
defendant Planters Products, Inc. thru the latters
depository bank, Far East Bank and Trust Co. Thus, by
virtue of LOI 1465 the plaintiff, Fertiphil Corporation,
which is a private domestic corporation, became poorer
by the amount of P6,698,144.00 and the defendant,
Planters Product, Inc., another private domestic
corporation, became richer by the amount
of P6,698,144.00.
Tested by the standards of constitutionality as set forth in
the afore-quoted jurisprudence, it is quite evident that LOI
1465 insofar as it imposes the amount of P10 per fertilizer
bag sold in the country and orders that the said amount
should go to the defendant Planters Product, Inc. is
unlawful because it violates the mandate that a tax can be
levied only for a public purpose and not to benefit, aid
and promote a private enterprise such as Planters Product,
Inc.[12]
PPI moved for reconsideration but its motion was denied. [13] PPI then filed a
notice of appeal with the RTC but it failed to pay the requisite appeal

docket fee. In a separate but related proceeding, this Court[14] allowed the
appeal of PPI and remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with
modification that of the RTC, with the following fallo:
IN VIEW OF ALL THE FOREGOING, the
decision appealed from is hereby AFFIRMED, subject to
the MODIFICATION that the award of attorneys fees is
hereby DELETED.[15]
In affirming the RTC decision, the CA ruled that the lis mota of the
complaint for collection was the constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial
court to exercise its power to judicially determine the
constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other
grounds, the courts will not resolve the constitutionality
of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The
policy of the courts is to avoid ruling on constitutional
questions and to presume that the acts of political
departments are valid, absent a clear and unmistakable
showing to the contrary.
However, the courts are not precluded from exercising
such power when the following requisites are obtaining in
a controversy before it: First, there must be before the
court an actual case calling for the exercise of judicial
review. Second, the question must be ripe for
adjudication. Third, the person challenging the validity of
the act must have standing to challenge. Fourth, the
question of constitutionality must have been raised at the
earliest opportunity; and lastly, the issue of
constitutionality must be the very lis mota of the case
(Integrated Bar of the Philippines v. Zamora, 338 SCRA
81 [2000]).
Indisputably, the present case was primarily instituted for
collection and damages. However, a perusal of the
complaint also reveals
that the instant action is founded on the claim that the
levy imposed was an unlawful and unconstitutional
special assessment. Consequently, the requisite that the
constitutionality of the law in question be the very lis
mota of the case is present, making it proper for the trial
court to rule on the constitutionality of LOI 1465. [16]
The CA held that even on the assumption that LOI No. 1465 was issued
under the police power of the state, it is still unconstitutional because it did
not promote public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial
court held that the levy imposed under the said law was
an invalid exercise of the States power of taxation
inasmuch as it violated the inherent and constitutional
prescription that taxes be levied only for public
purposes. It reasoned out that the amount collected under
the levy was remitted to the depository bank of PPI,
which the latter used to advance its private interest.
On the other hand, appellant submits that the subject
statutes passage was a valid exercise of police power. In
addition, it disputes the court a quos findings arguing that
the collections under LOI 1465 was for the benefit of
Planters Foundation, Incorporated (PFI), a foundation
created by law to hold in trust for millions of farmers, the
stock ownership of PPI.
Of the three fundamental powers of the State, the exercise
of police power has been characterized as the most
essential, insistent and the least limitable of powers,
extending as it does to all the great public needs. It may
be exercised as long as the activity or the property sought
to be regulated has some relevance to public welfare
(Constitutional Law, by Isagani A. Cruz, p. 38, 1995
Edition).
Vast as the power is, however, it must be exercised within
the limits set by the Constitution, which requires the
concurrence of a lawful subject and a lawful
method. Thus, our courts have laid down the test to
determine the validity of a police measure as follows: (1)
the interests of the public generally, as distinguished from
those of a particular class, requires its exercise; and (2)
the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive
upon individuals (National Development Company v.
Philippine Veterans Bank, 192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain
the trial courts holding LOI 1465 unconstitutional. To be
sure, ensuring the continued supply and distribution of
fertilizer in the country is an undertaking imbued with
public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will
promote the public welfare. The governments
commitment to support the successful rehabilitation and
continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statutes
impartiality. There is no way to treat the self-interest of a
favored entity,
like PPI, as identical with the general interest of the
countrys farmers or even the Filipino people in
general. Well to stress, substantive due process exacts
fairness and equal protection disallows distinction where
none is needed. When a statutes public purpose is spoiled
by private interest, the use of police power becomes a
travesty which must be struck down for being an arbitrary
exercise of government power. To rule in favor of
appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private
individuals.[17]
The CA did not accept PPIs claim that the levy imposed under LOI No.
1465 was for the benefit of Planters Foundation, Inc., a foundation created
to hold in trust the stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465
was for the benefit of Planters Foundation, Incorporated
(PFI), a foundation created by law to hold in trust for
millions of farmers, the stock ownership of PFI on the
strength of Letter of Undertaking (LOU) issued by then
Prime Minister Cesar Virata on April 18, 1985 and
affirmed by the Secretary of Justice in an Opinion
dated October 12, 1987, to wit:
2. Upon the effective date of this Letter
of Undertaking, the Republic shall
cause FPA to include in its fertilizer
pricing formula a capital recovery
component, the proceeds of which will
be used initially for the purpose of
funding the unpaid portion of the
outstanding capital stock of Planters
presently held in trust by Planters
Foundation, Inc. (Planters Foundation),
which unpaid capital is estimated at
approximately P206 million (subject to
validation by Planters and Planters
Foundation) (such unpaid portion of the
outstanding capital stock of Planters
being hereafter referred to as the
Unpaid Capital), and subsequently for
such capital increases as may be
required for the continuing viability of
Planters.
The capital recovery component shall
be in the minimum amount of P10 per
bag, which will be added to the price of
all domestic sales of fertilizer in
the Philippines by any importer and/or
fertilizer mother company. In this
connection, the Republic hereby
acknowledges that the advances by
Planters to Planters Foundation which
were applied to the payment of the
Planters shares now held in trust by
Planters Foundation, have been
assigned to, among others, the
Creditors. Accordingly, the Republic,
through FPA, hereby agrees to deposit
the proceeds of the capital recovery
component in the special trust account
designated in the notice dated April 2,
1985, addressed by counsel for the
Creditors to Planters Foundation. Such
proceeds shall be deposited by FPA on
or before the 15th day of each month.
The capital recovery component shall
continue to be charged and collected
until payment in full of (a) the Unpaid
Capital and/or (b) any shortfall in the
payment of the Subsidy Receivables, (c)
any carrying cost accruing from the date
hereof on the amounts which may be
outstanding from time to time of the
Unpaid Capital and/or the Subsidy
Receivables and (d) the capital
increases contemplated in paragraph 2
hereof. For the purpose of the foregoing
clause (c), the carrying cost shall be at
such rate as will represent the full and
reasonable cost to Planters of servicing
its debts, taking into account both its
peso and foreign currency-denominated
obligations. (Records, pp. 42-43)
Appellants proposition is open to question, to say the
least. The LOU issued by then Prime Minister Virata
taken together with the Justice Secretarys Opinion does
not preponderantly demonstrate that the collections made
were held in trust in favor of millions of
farmers. Unfortunately for appellant, in the absence of
sufficient evidence to establish its claims, this Court is
constrained to rely on what is explicitly provided in LOI
1465 that one of the primary aims in imposing the levy is
to support the successful rehabilitation and continued
viability of PPI.[18]
 GOVERNMENT FUNDS PURSUANT TO AN
PPI moved for reconsideration but its motion was denied. [19] It then EFFECTIVE AND VALIDLY ENACTED LAW
filed the present petition with this Court. WHICH IMPOSED DUTIES AND CONFERRED
RIGHTS BY VIRTUE OF THE PRINCIPLE OF
OPERATIVE FACT PRIOR TO ANY DECLARATION
Issues OF UNCONSTITUTIONALITY OF LOI 1465.

IV
Petitioner PPI raises four issues for Our consideration, viz.: THE PRINCIPLE OF UNJUST VEXATION (SHOULD
BE ENRICHMENT) FINDS NO APPLICATION IN
THE INSTANT CASE.[20] (Underscoring supplied)
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT
BE COLLATERALLY ATTACKED AND BE Our Ruling
DECREED VIA A DEFAULT JUDGMENT IN A CASE
FILED FOR COLLECTION AND DAMAGES WHERE
THE ISSUE OF CONSTITUTIONALITY IS NOT THE We shall first tackle the procedural issues of locus standi and the
VERY LIS MOTA OF THE CASE. NEITHER CAN LOI
1465 BE CHALLENGED BY ANY PERSON OR jurisdiction of the RTC to resolve constitutional issues.
ENTITY WHICH HAS NO STANDING TO DO SO.
Fertiphil has locus
II
standi because it
LOI 1465, BEING A LAW IMPLEMENTED FOR THE
suffered direct
PURPOSE OF ASSURING THE FERTILIZER
injury; doctrine of
SUPPLY AND DISTRIBUTION IN THE
standing is a mere
COUNTRY, AND FOR BENEFITING A
procedural
FOUNDATION CREATED BY LAW TO HOLD IN
technicality which
TRUST FOR MILLIONS OF FARMERS THEIR
may be waived.
STOCK OWNERSHIP IN PPI CONSTITUTES A
VALID LEGISLATION PURSUANT TO THE
EXERCISE OF TAXATION AND POLICE POWER
FOR PUBLIC PURPOSES. PPI argues that Fertiphil has no locus standi to question the
constitutionality of LOI No. 1465 because it does not have a personal and
III
THE AMOUNT COLLECTED UNDER THE CAPITAL substantial interest in the case or will sustain direct injury as a result of its
RECOVERY COMPONENT WAS REMITTED TO enforcement.[21] It asserts that Fertiphil did not suffer any damage from
THE GOVERNMENT, AND BECAME
the CRC imposition because incidence of the levy fell on the ultimate
consumer or the farmers themselves, not on the seller fertilizer company.[22]
We cannot agree. The doctrine of locus standi or the right of
appearance in a court of justice has been adequately discussed by this Court
in a catena of cases. Succinctly put, the doctrine requires a litigant to have a
material interest in the outcome of a case. In private suits, locus
standi requires a litigant to be a real party in interest, which is defined
as the
party who stands to be benefited or injured by the judgment in the suit or
the party entitled to the avails of the suit.[23]
In public suits, this Court recognizes the difficulty of applying the
doctrine especially when plaintiff asserts a public right on behalf of the
general public because of conflicting public policy issues. [24] On one end,
there is the right of the ordinary citizen to petition the courts to be freed
from unlawful government intrusion and illegal official action. At the other
end, there is the public policy precluding excessive judicial interference in
official acts, which may unnecessarily hinder the delivery of basic public
services.
In this jurisdiction, We have adopted the direct injury test to
determine locus standi in public suits. In People v. Vera,[25] it was held that
a person who impugns the validity of a statute must have a personal and
substantial interest in the case such that he has sustained, or will sustain
direct injury as a result. The direct injury test in public suits is similar to the
real party in interest rule for private suits under Section 2, Rule 3 of the
1997 Rules of Civil Procedure.[26]
Recognizing that a strict application of the direct injury test may
hamper public interest, this Court relaxed the requirement in cases of
transcendental importance or with far reaching implications. Being a mere
procedural technicality, it has also been held that locus standi may be
waived in the public interest.[27]
Whether or not the complaint for collection is characterized as a
private or public suit, Fertiphil has locus standi to file it. Fertiphil suffered a
direct injury from the enforcement of LOI No. 1465. It was required, and it
did pay, the P10 levy imposed for every bag of fertilizer sold on the
domestic market. It may be true that Fertiphil has passed some or all of
the levy to the ultimate consumer, but that does not disqualify it from
attacking the constitutionality of the LOI or from seeking a refund. As
seller, it bore the ultimate burden of paying the levy. It faced the possibility
of severe sanctions for failure to pay the levy. The fact of payment is
sufficient injury to Fertiphil.
 The constitutionality of the levy is already in doubt on a plain reading of the
Moreover, Fertiphil suffered harm from the enforcement of the statute. It is Our constitutional duty to squarely resolve the issue as the final
LOI because it was compelled to factor in its product the levy. The levy arbiter of all justiciable controversies. The doctrine of standing, being a
certainly rendered the fertilizer products of Fertiphil and other domestic mere procedural technicality, should be waived, if at all, to adequately
sellers much more expensive. The harm to their business consists not only thresh out an important constitutional issue.
in fewer clients because of the increased price, but also in adopting
RTC may resolve
alternative corporate strategies to meet the demands of LOI No.
constitutional issues;
1465. Fertiphil and other fertilizer sellers may have shouldered all or part of the constitutional
issue was adequately
the levy just to be competitive in the market. The harm occasioned on the raised in the
business of Fertiphil is sufficient injury for purposes of locus standi. complaint; it is the lis
mota of the case.

Even assuming arguendo that there is no direct injury, We find that

PPI insists that the RTC and the CA erred in ruling on the
the liberal policy consistently adopted by this Court on locus standi must
constitutionality of the LOI. It asserts that the constitutionality of the LOI
apply. The issues raised by Fertiphil are of paramount public importance. It
cannot be collaterally attacked in a complaint for
involves not only the constitutionality of a tax law but, more importantly,
[28]
collection. Alternatively, the resolution of the constitutional issue is not
the use of taxes for public purpose. Former President Marcos issued LOI
necessary for a determination of the complaint for collection. [29]
No. 1465 with the intention of rehabilitating an ailing private
company. This is clear from the text of the LOI. PPI is expressly named in
Fertiphil counters that the constitutionality of the LOI was
the LOI as the direct beneficiary of the levy. Worse, the levy was made
adequately pleaded in its complaint. It claims that the constitutionality of
dependent and conditional upon PPI becoming financially viable. The LOI
LOI No. 1465 is the very lis mota of the case because the trial court cannot
provided that the capital contribution shall be collected until adequate
determine its claim without resolving the issue.[30]
capital is raised to make PPI viable.

It is settled that the RTC has jurisdiction to resolve the
constitutionality of a statute, presidential decree or an executive order. This
is clear from Section 5, Article VIII of the 1987 Constitution, which
provides:
SECTION 5. The Supreme Court shall have the
following powers:
xxxx
(2) Review, revise, reverse, modify, or affirm on
appeal or certiorari, as the law or the Rules of Court may
provide, final judgments and orders of lower courts in:
(a) All cases in which
the constitutionality or validity of
any treaty, international or executive
agreement, law, presidential decree,
proclamation, order, instruction,
ordinance, or regulation is in question.
(Underscoring supplied)
In Mirasol v. Court of Appeals,[31] this Court recognized the power
of the RTC to resolve constitutional issues, thus:
On the first issue. It is settled that Regional Trial
Courts have the authority and jurisdiction to consider the
constitutionality of a statute, presidential decree, or
executive order. The Constitution vests the power of
judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation not only in this
Court, but in all Regional Trial Courts.[32]
In the recent case of Equi-Asia Placement, Inc. v. Department of
Foreign Affairs,[33] this Court reiterated:
There is no denying that regular courts have
jurisdiction over cases involving the validity or
constitutionality of a rule or regulation issued by
administrative agencies. Such jurisdiction, however, is not
limited to the Court of Appeals or to this Court alone for
even the regional trial courts can take cognizance of
actions assailing a specific rule or set of rules
promulgated by administrative bodies. Indeed, the
Constitution vests the power of judicial review or the
power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction,
ordinance, or regulation in the courts, including the
regional trial courts.[34]
Judicial review of official acts on the ground of unconstitutionality
may be sought or availed of through any of the actions cognizable by courts
of justice, not necessarily in a suit for declaratory relief. Such review may
be had in criminal actions, as in People v. Ferrer[35] involving the
constitutionality of the now defunct Anti-Subversion law, or in ordinary
actions, as in Krivenko v. Register of Deeds[36] involving the

constitutionality of laws prohibiting aliens from acquiring public lands. The
constitutional issue, however, (a) must be properly raised and presented in
the case, and (b) its resolution is necessary to a determination of the case,
i.e., the issue of constitutionality must be the very lis motapresented.[37]
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was
properly and adequately raised in the complaint for collection filed with
the RTC. The pertinent portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI
1465 on domestic sales of all grades of fertilizer in the
Philippines, is unlawful, unjust, uncalled for,
unreasonable, inequitable and oppressivebecause:
xxxx
(c) It favors only one private
domestic corporation, i.e., defendant
PPPI, and imposed at the expense and
disadvantage of the other fertilizer
importers/distributors who were
themselves in tight business situation
and were then exerting all efforts and
maximizing management and marketing
skills to remain viable;
xxxx
(e) It was a glaring example of
crony capitalism, a forced program
through which the PPI, having been
presumptuously masqueraded as the
fertilizer industry itself, was the sole
and anointed beneficiary;
7. The CRC was an unlawful; and
unconstitutional special assessment and its imposition is
tantamount to illegal exaction amounting to a denial of
due process since the persons of entities which had to bear
the burden of paying the CRC derived no benefit
therefrom; that on the contrary it was used by PPI in
trying to regain its former despicable monopoly of the
fertilizer industry to the detriment of other distributors
and importers.[38] (Underscoring supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of
the complaint for collection. Fertiphil filed the complaint to compel PPI to
refund the levies paid under the statute on the ground that the law imposing
the levy is unconstitutional. The thesis is that an unconstitutional law is
void. It has no legal effect. Being void, Fertiphil had no legal obligation to
pay the levy. Necessarily, all levies duly paid pursuant to an
unconstitutional law should be refunded under the civil code principle
against unjust enrichment. The refund is a mere consequence of the law
being declared unconstitutional. The RTC surely cannot order PPI to refund
Fertiphil if it does not declare the LOI unconstitutional. It is the
unconstitutionality of the LOI which triggers the refund. The issue of
constitutionality is the very lis mota of the complaint with the RTC.
The P10 levy under
LOI No. 1465 is an
exercise of the
behavior or conduct, while taxation is revenue generation. The lawful
power of taxation.
subjects and lawful means tests are used to determine the validity of a law
enacted under the police power.[40] The power of taxation, on the other
At any rate, the Court holds that the RTC and the CA did not err in ruling
hand, is circumscribed by inherent and constitutional limitations.
against the constitutionality of the LOI.

We agree with the RTC that the imposition of the levy was an
PPI insists that LOI No. 1465 is a valid exercise either of the police
exercise by the State of its taxation power. While it is true that the power of
power or the power of taxation. It claims that the LOI was implemented for
taxation can be used as an implement of police power, [41] the primary
the purpose of assuring the fertilizer supply and distribution in the country
purpose of the levy is revenue generation. If the purpose is primarily
and for benefiting a foundation created by law to hold in trust for millions
revenue, or if revenue is, at least, one of the real and substantial purposes,
of farmers their stock ownership in PPI.
then the exaction is properly called a tax.[42]

Fertiphil counters that the LOI is unconstitutional because it was

In Philippine Airlines, Inc. v. Edu,[43] it was held that the
enacted to give benefit to a private company. The levy was imposed to pay
imposition of a vehicle registration fee is not an exercise by the State of its
the corporate debt of PPI. Fertiphil also argues that, even if the LOI is
police power, but of its taxation power, thus:
enacted under the police power, it is still unconstitutional because it did not
promote the general welfare of the people or public interest.
It is clear from the provisions of Section 73 of
Commonwealth Act 123 and Section 61 of the Land
Transportation and Traffic Code that the legislative intent
Police power and the power of taxation are inherent powers of the and purpose behind the law requiring owners of vehicles
State. These powers are distinct and have different tests for validity. Police to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much
power is the power of the State to enact legislation that may interfere with lesser degree, pay for the operating expenses of the
personal liberty or property in order to promote the general administering agency. x x x Fees may be properly
regarded as taxes even though they also serve as an
welfare,[39] while the power of taxation is the power to levy taxes to be used instrument of regulation.
for public purpose. The main purpose of police power is the regulation of a
 Taxation may be made the implement of the
state's police power (Lutz v. Araneta, 98 Phil. 148). If the
purpose is primarily revenue, or if revenue is, at least, one
of the real and substantial purposes, then the exaction is
properly called a tax. Such is the case of motor vehicle
registration fees. The same provision appears as Section
59(b) in the Land Transportation Code. It is patent
therefrom that the legislators had in mind a regulatory tax
as the law refers to the imposition on the registration,
operation or ownership of a motor vehicle as a tax or
fee. x x x Simply put, if the exaction under Rep. Act 4136
were merely a regulatory fee, the imposition in Rep. Act
5448 need not be an additional tax. Rep. Act 4136 also
speaks of other fees such as the special permit fees for
certain types of motor vehicles (Sec. 10) and additional
fees for change of registration (Sec. 11). These are not to
be understood as taxes because such fees are very
minimal to be revenue-raising. Thus, they are not
mentioned by Sec. 59(b) of the Code as taxes like the
motor vehicle registration fee and chauffeurs license
fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last
proviso of Sec. 61.[44] (Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere
regulatory purpose. The levy, no doubt, was a big burden on the seller or the
ultimate consumer. It increased the price of a bag of fertilizer by as much as
five percent.[45] A plain reading of the LOI also supports the conclusion that
the levy was for revenue generation. The LOI expressly provided that the
levy was imposed until adequate capital is raised to make PPI viable.
Taxes are exacted
only for a public
purpose. The P10
levy is
unconstitutional
because it was not for
a public purpose. The
levy was imposed to
give undue benefit to
PPI.
An inherent limitation on the power of taxation is public
purpose. Taxes are exacted only for a public purpose. They cannot be used
for purely private purposes or for the exclusive benefit of private
persons.[46] The reason for this is simple. The power to tax exists for the
general welfare; hence, implicit in its power is the limitation that it should
be used only for a public purpose. It would be a robbery for the State to tax
its citizens and use the funds generated for a private purpose. As an old
United States case bluntly put it: To lay with one hand, the power of the
government on the property of the citizen, and with the other to bestow it
upon favored individuals to aid private enterprises and build up private
fortunes, is nonetheless a robbery because it is done under the forms of law
and is called taxation.[47]
The term public purpose is not defined. It is an elastic concept that
can be hammered to fit modern standards. Jurisprudence states that public
purpose should be given a broad interpretation. It does not only pertain to
those purposes which are traditionally viewed as essentially government
 adequate capital is raised to make PPI viable. Such
functions, such as building roads and delivery of basic services, but also capital contribution shall be applied by FPA to all
includes those purposes designed to promote social justice. Thus, public domestic sales of fertilizers in
the Philippines.[48] (Underscoring supplied)
money may now be used for the relocation of illegal settlers, low-cost
housing and urban or agrarian reform.

While the categories of what may constitute a public purpose are

It is a basic rule of statutory construction that the text of a statute
continually expanding in light of the expansion of government functions,
should be given a literal meaning. In this case, the text of the LOI is plain
the inherent requirement that taxes can only be exacted for a public purpose
that the levy was imposed in order to raise capital for PPI. The framers of
still stands. Public purpose is the heart of a tax law. When a tax law is only
the LOI did not even hide the insidious purpose of the law. They were
a mask to exact funds from the public when its true intent is to give undue
cavalier enough to name PPI as the ultimate beneficiary of the taxes levied
benefit and advantage to a private enterprise, that law will not satisfy the
under the LOI. We find it utterly repulsive that a tax law would expressly
requirement of public purpose.
name a private company as the ultimate beneficiary of the taxes to be levied
from the public. This is a clear case of crony capitalism.
The purpose of a law is evident from its text or inferable from
other secondary sources. Here, We agree with the RTC and that CA that the
Second, the LOI provides that the imposition of the P10 levy was
levy imposed under LOI No. 1465 was not for a public purpose.
conditional and dependent upon PPI becoming financially viable. This
suggests that the levy was actually imposed to benefit PPI. The LOI notably
First, the LOI expressly provided that the levy be imposed to
does not fix a maximum amount when PPI is deemed financially
benefit PPI, a private company. The purpose is explicit from Clause 3 of the
viable. Worse, the liability of Fertiphil and other domestic sellers of
law, thus:
fertilizer to pay the levy is made indefinite. They are required to
3. The Administrator of the Fertilizer Pesticide Authority continuously pay the levy until adequate capital is raised for PPI.
to include in its fertilizer pricing formula a capital
contribution component of not less than P10 per
bag. This capital contribution shall be collected until

Third, the RTC and the CA held that the levies paid under the LOI
were directly remitted and deposited by FPA to Far East Bank and Trust
Company, the depositary bank of PPI.[49] This proves that PPI benefited
from the LOI. It is also proves that the main purpose of the law was to give
undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A
reading of the Letter of Understanding[50] dated May 18, 1985 signed by
then Prime Minister Cesar Virata reveals that PPI was in deep financial
problem because of its huge corporate debts. There were pending petitions
for rehabilitation against PPI before the Securities and Exchange
Commission. The government guaranteed payment of PPIs debts to its
foreign creditors. To fund the payment, President Marcos issued LOI No.
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
OF PLANTERS PRODUCTS, INC. (PLANTERS)
Gentlemen:
This has reference to Planters which is the principal
importer and distributor of fertilizer, pesticides and
agricultural chemicals in the Philippines. As regards
Planters, the Philippine Government confirms its
awareness of the following: (1) that Planters has
outstanding obligations in foreign currency and/or pesos,
to the Creditors, (2) that Planters is currently experiencing
financial difficulties, and (3) that there are presently
pending with the Securities and Exchange Commission of
the Philippines a petition filed at Planters own behest for
the suspension of payment of all its obligations, and a
separate petition filed by Manufacturers Hanover Trust
Company, Manila Offshore Branch for the appointment of
a rehabilitation receiver for Planters.

1465. The pertinent portions of the letter of understanding read: In connection with the foregoing, the Republic of the
Philippines (the Republic) confirms that it considers and
continues to consider Planters as a major fertilizer
Republic of the Philippines
distributor. Accordingly, for and in consideration of your
Office of the Prime Minister
expressed willingness to consider and participate in the
Manila
effort to rehabilitate Planters, the Republic hereby
manifests its full and unqualified support of the successful
LETTER OF UNDERTAKING
rehabilitation and continuing viability of Planters, and to
that end, hereby binds and obligates itself to the creditors
M
and Planters, as follows:
ay
18,
xxxx
198
5
2. Upon the effective date of this Letter of
Undertaking, the Republic shall cause FPA to include in
TO: THE BANKING AND FINANCIAL
its fertilizer pricing formula a capital recovery
INSTITUTIONS
 component, the proceeds of which will be used initially
for the purpose of funding the unpaid portion of the It is clear from the Letter of Understanding that the levy was
outstanding capital stock of Planters presently held in imposed precisely to pay the corporate debts of PPI. We cannot agree with
trust by Planters Foundation, Inc. (Planters Foundation),
which unpaid capital is estimated at approximately P206 PPI that the levy was imposed to ensure the stability of the fertilizer
million (subject to validation by Planters and Planters industry in the country. The letter of understanding and the plain text of the
Foundation) such unpaid portion of the outstanding
capital stock of Planters being hereafter referred to as the LOI clearly indicate that the levy was exacted for the benefit of a private
Unpaid Capital), and subsequently for such capital corporation.
increases as may be required for the continuing viability
of Planters.
All told, the RTC and the CA did not err in holding that the levy
xxxx
imposed under LOI No. 1465 was not for a public purpose. LOI No. 1465
The capital recovery component shall continue to
be charged and collected until payment in full of (a) the failed to comply with the public purpose requirement for tax laws.
Unpaid Capital and/or (b) any shortfall in the payment of
the Subsidy Receivables, (c) any carrying cost accruing The LOI is still
from the date hereof on the amounts which may be unconstitutional even
outstanding from time to time of the Unpaid Capital if enacted under the
and/or the Subsidy Receivables, and (d) the capital police power; it did
increases contemplated in paragraph 2 hereof. For the not promote public
purpose of the foregoing clause (c), the carrying cost shall interest.
be at such rate as will represent the full and reasonable
cost to Planters of servicing its debts, taking into account
both its peso and foreign currency-denominated Even if We consider LOI No. 1695 enacted under the police power of the
obligations.
State, it would still be invalid for failing to comply with the test of lawful
REPUBLIC OF THE
subjects and lawful means. Jurisprudence states the test as follows: (1) the
PHILIPPINES
By: interest of the public generally, as distinguished from those of particular
(signed)
CESAR E. A. class, requires its exercise; and (2) the means employed are reasonably
VIRATA necessary for the accomplishment of the purpose and not unduly oppressive
Prime Minister and Minister of Finance[51]
upon individuals.[52]
 of operative fact is
For the same reasons as discussed, LOI No. 1695 is invalid because it did
inapplicable.
not promote public interest. The law was enacted to give undue advantage
to a private corporation. We quote with approval the CA ratiocination on
PPI also argues that Fertiphil cannot seek a refund even if LOI No.
this point, thus:
1465 is declared unconstitutional. It banks on the doctrine of operative fact,
which provides that an unconstitutional law has an effect before being
It is upon applying this established tests that We
sustain the trial courts holding LOI 1465 unconstitutional. declared unconstitutional. PPI wants to retain the levies paid under LOI No.
To be sure, ensuring the continued supply and distribution
of fertilizer in the country is an undertaking imbued with 1465 even if it is subsequently declared to be unconstitutional.
public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will
promote the public welfare. The governments We cannot agree. It is settled that no question, issue or argument
commitment to support the successful rehabilitation and will be entertained on appeal, unless it has been raised in the court a
continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statutes quo.[53] PPI did not raise the applicability of the doctrine of operative fact
impartiality. There is no way to treat the self-interest of a with the RTC and the CA. It cannot belatedly raise the issue with Us in
favored entity, like PPI, as identical with the general
interest of the countrys farmers or even the Filipino order to extricate itself from the dire effects of an unconstitutional law.
people in general. Well to stress, substantive due process
exacts fairness and equal protection disallows distinction
where none is needed. When a statutes public purpose is At any rate, We find the doctrine inapplicable. The general rule is
spoiled by private interest, the use of police power
becomes a travesty which must be struck down for being that an unconstitutional law is void. It produces no rights, imposes no duties
an arbitrary exercise of government power. To rule in and affords no protection. It has no legal effect. It is, in legal contemplation,
favor of appellant would contravene the general principle
that revenues derived from taxes cannot be used for inoperative as if it has not been passed.[54] Being void, Fertiphil is not
purely private purposes or for the exclusive benefit of required to pay the levy. All levies paid should be refunded in accordance
private individuals. (Underscoring supplied)
with the general civil code principle against unjust enrichment. The general
The general rule is rule is supported by Article 7 of the Civil Code, which provides:
that an
unconstitutional law
is void; the doctrine
 ART. 7. Laws are repealed only by subsequent
ones, and their violation or non-observance shall not be unjust not to order a refund. To do so would unjustly enrich PPI at the
excused by disuse or custom or practice to the contrary. expense of Fertiphil. Article 22 of the Civil Code explicitly provides that

When the courts declare a law to be inconsistent every person who, through an act of performance by another comes into
with the Constitution, the former shall be void and the possession of something at the expense of the latter without just or legal
latter shall govern.
ground shall return the same to him. We cannot allow PPI to profit from an
unconstitutional law. Justice and equity dictate that PPI must refund the
The doctrine of operative fact, as an exception to the general rule,
amounts paid by Fertiphil.
only applies as a matter of equity and fair play.[55] It nullifies the effects of
an unconstitutional law by recognizing that the existence of a statute prior
WHEREFORE, the petition is DENIED. The Court of Appeals Decision
to a determination of unconstitutionality is an operative fact and may have
dated November 28, 2003 is AFFIRMED.
consequences which cannot always be ignored. The past cannot always be
erased by a new judicial declaration.[56] SO ORDERED.

The doctrine is applicable when a declaration of unconstitutionality ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS
will impose an undue burden on those who have relied on the invalid SAMSON S. ALCANTARA and ED VINCENT S. ALBANO,
G.R. No. 168056
law. Thus, it was applied to a criminal case when a declaration of Petitioners, Present:
unconstitutionality would put the accused in double jeopardy[57] or would
DAVIDE, JR., C.J.,
put in limbo the acts done by a municipality in reliance upon a law creating PUNO,
PANGANIBAN,
it.[58] QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
Here, We do not find anything iniquitous in ordering PPI to refund - versus - CARPIO,
the amounts paid by Fertiphil under LOI No. 1465. It unduly benefited from AUSTRIA-MARTINEZ,
CORONA,
the levy. It was proven during the trial that the levies paid were remitted and CARPIO-MORALES,
CALLEJO, SR.,
deposited to its bank account. Quite the reverse, it would be inequitable and
AZCUNA,
 TINGA,
CHICO-NAZARIO, and
GARCIA, JJ.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO
ERMITA; HONORABLE SECRETARY OF THE DEPARTMENT
OF FINANCE CESAR PURISIMA; and HONORABLE
COMMISSIONER OF INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents.
x-------------------------x
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA,
JINGGOY E. ESTRADA, PANFILO M. LACSON, ALFREDO S.
LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEA III,
G.R. No. 168207
Petitioners,
- versus -
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V.
PURISIMA, SECRETARY OF FINANCE, GUILLERMO L.
PARAYNO, JR., COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE,
Respondents.
x-------------------------x
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented
by its President, ROSARIO ANTONIO; PETRON DEALERS
ASSOCIATION represented by its President, RUTH E. BARBIBI;
ASSOCIATION OF CALTEX DEALERS OF THE PHILIPPINES
represented by its President, MERCEDITAS A. GARCIA; ROSARIO
ANTONIO doing business under the name and style of ANB NORTH
SHELL SERVICE STATION; LOURDES MARTINEZ doing business
under the name and style of SHELL GATE N. DOMINGO;
BETHZAIDA TAN doing business under the name and style of
ADVANCE SHELL STATION; REYNALDO P. MONTOYA doing
business under the name and style of NEW LAMUAN SHELL
SERVICE STATION; EFREN SOTTO doing business under the name
and style of RED FIELD SHELL SERVICE STATION; DONICA
CORPORATION represented by its President, DESI TOMACRUZ;
RUTH E. MARBIBI doing business under the name and style of R&R
PETRON STATION; PETER M. UNGSON doing business under the
name and style of CLASSIC STAR GASOLINE SERVICE STATION;
MARIAN SHEILA A. LEE doing business under the name and style of
NTE GASOLINE & SERVICE STATION; JULIAN CESAR P.
POSADAS doing business under the name and style of STARCARGA
ENTERPRISES; ADORACION MAEBO doing business under the
name and style of CMA MOTORISTS CENTER; SUSAN M.
ENTRATA doing business under the name and style of LEONAS
GASOLINE STATION and SERVICE CENTER; CARMELITA
BALDONADO doing business under the name and style of FIRST
CHOICE SERVICE CENTER; MERCEDITAS A. GARCIA doing
business under the name and style of LORPED SERVICE CENTER;
RHEAMAR A. RAMOS doing business under the name and style of
RJRAM PTT GAS STATION; MA. ISABEL VIOLAGO doing
business under the name and style of VIOLAGO-PTT SERVICE
CENTER; MOTORISTS HEART CORPORATION represented by its
Vice-President for Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HARVARD CORPORATION represented by its Vice-
President for Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HERITAGE CORPORATION represented by its Vice-
President for Operations, JOSELITO F. FLORDELIZA; PHILIPPINE
STANDARD OIL CORPORATION represented by its Vice-President
for Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL
doing business under the name and style of ROMMAN GASOLINE
STATION; ANTHONY ALBERT CRUZ III doing business under the
name and style of TRUE SERVICE STATION, G.R. No.
168461
Petitioners,
- versus -
CESAR V. PURISIMA, in his capacity as Secretary of the Department
of Finance and GUILLERMO L. PARAYNO, JR., in his capacity as
Commissioner of Internal Revenue,
Respondents.
x-------------------------x
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO,
EMMANUEL JOEL J. VILLANUEVA, RODOLFO G. PLAZA,
DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN,
BENJAMIN C. AGARAO, JR. JUAN EDGARDO M. ANGARA,
JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S.
HATAMAN, RENATO B. MAGTUBO, JOSEPH A. SANTIAGO,
TEOFISTO DL. GUINGONA III, RUY ELIAS C. LOPEZ,
RODOLFO Q. AGBAYANI and TEODORO A. CASIO,
G.R. No. 168463
Petitioners,
- versus -
CESAR V. PURISIMA, in his capacity as Secretary of Finance,
GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of
Internal Revenue, and EDUARDO R. ERMITA, in his capacity as
Executive Secretary,
Respondents.
x-------------------------x
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR.
G.R. No. 168730
Petitioner,
- versus -
HON. EDUARDO R. ERMITA, in his capacity as the Executive
Secretary; HON. MARGARITO TEVES, in his capacity as Secretary
of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC
Commissioner of the Bureau of Internal Revenue; and HON.
ALEXANDER AREVALO, in his capacity as the OIC Commissioner of
the Bureau of Customs,
Promulgated:
Respondents. September 1, 2005
x---------------------------------------------------
--------x
DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their
object the interest of all, should be borne by everyone,
and the more man enjoys the advantages of society, the
more he ought to hold himself honored in contributing to
those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal
allocation for education, increased emoluments for health workers, and
wider coverage for full value-added tax benefits these are the reasons why House Bill No. 3705[3] on the other hand, substituted House Bill

Republic Act No. 9337 (R.A. No. 9337) [1] was enacted. Reasons, the No. 3105 introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381
wisdom of which, the Court even with its extensive constitutional power of introduced by Rep. Jacinto V. Paras. Its mother bill is House Bill No. 3555.

review, cannot probe. The petitioners in these cases, however, question not The House Committee on Ways and Means approved the bill on February 2,

only the wisdom of the law, but also perceived constitutional infirmities in 2005. The President also certified it as urgent on February 8, 2005. The

its passage. House of Representatives approved the bill on second and third reading

on February 28, 2005.

Every law enjoys in its favor the presumption of constitutionality.

Their arguments notwithstanding, petitioners failed to justify their call for Meanwhile, the Senate Committee on Ways and Means

the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional. 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
LEGISLATIVE HISTORY
Nos. 3555 and 3705. Senator Ralph G. Recto sponsored Senate Bill No.

R.A. No. 9337 is a consolidation of three legislative bills namely, 1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens.

House Bill Nos. 3555 and 3705, and Senate Bill No. 1950. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The
President certified the bill on March 11, 2005, and was approved by the
[2]
House Bill No. 3555 was introduced on first reading on January
Senate on second and third reading on April 13, 2005.
7, 2005. The House Committee on Ways and Means approved the bill, in

substitution of House Bill No. 1468, which Representative (Rep.) Eric D. On the same date, April 13, 2005, the Senate agreed to the request

Singson introduced on August 8, 2004. The President certified the bill of the House of Representatives for a committee conference on the

on January 7, 2005 for immediate enactment. On January 27, 2005, the disagreeing provisions of the proposed bills.

House of Representatives approved the bill on second and third reading.

 Court issued a TRO at about 5
Before long, the Conference Committee on the Disagreeing oclock in the afternoon. But
before that, there was a lot of
Provisions of House Bill No. 3555, House Bill No. 3705, and Senate Bill
complaints aired on television
No. 1950, after having met and discussed in full free and conference, and on radio. Some people in a
gas station were complaining
recommended the approval of its report, which the Senate did on May 10, that the gas prices went up by
10%. Some people were
2005, and with the House of Representatives agreeing thereto the next day, complaining that their electric
bill will go up by 10%. Other
May 11, 2005.
times people riding in
domestic air carrier were
On May 23, 2005, the enrolled copy of the consolidated House and complaining that the prices
that theyll have to pay would
Senate version was transmitted to the President, who signed the same into have to go up by 10%. While
all that was being aired, per
law on May 24, 2005. Thus, came R.A. No. 9337. your presentation and per our
own understanding of the law,
July 1, 2005 is the effectivity date of R.A. No. 9337.[5] When said thats not true. Its not true that
the e-vat law necessarily
date came, the Court issued a temporary restraining order, effective increased prices by 10%
uniformly isnt it?
immediately and continuing until further orders, enjoining respondents from
ATTY. BANIQUED : No, Your Honor.
enforcing and implementing the law.
J. PANGANIBAN : It is not?
Oral arguments were held on July 14, 2005. Significantly, during
ATTY. BANIQUED : Its not, because, Your Honor, there
the hearing, the Court speaking through Mr. Justice Artemio V. Panganiban, is an Executive Order that
granted the Petroleum
voiced the rationale for its issuance of the temporary restraining order companies some subsidy . . .
interrupted
on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of
your presentation, let me just J. PANGANIBAN : Thats correct . . .
tell you a little background.
You know when the law took
effect on July 1, 2005, the
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 properties, Section 5 imposes a 10% VAT on importation of goods, and
situation of each product, of
Section 6 imposes a 10% VAT on sale of services and use or lease of
each service, of each company,
isnt it? properties. These questioned provisions contain a

ATTY. BANIQUED : Yes, Your Honor. uniform proviso authorizing the President, upon recommendation of the

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.
Secretary of Finance, to raise the VAT rate to 12%, effective January 1,
2006, after any of the following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation
of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage
of GDP of the previous year exceeds one and one-half
percent (1 %).

G.R. No. 168056

Petitioners argue that the law is unconstitutional, as it constitutes
Before R.A. No. 9337 took effect, petitioners ABAKADA
abandonment by Congress of its exclusive authority to fix the rate of taxes
GURO Party List, et al., filed a petition for prohibition on May 27, 2005.
under Article VI, Section 28(2) of the 1987 Philippine Constitution.
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 G.R. No. 168207

Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and
 On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a
petition for certiorari likewise assailing the constitutionality of Sections 4,
5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the
President to increase the VAT rate to 12%, on the ground that it amounts to
an undue delegation of legislative power, petitioners also contend that the
increase in the VAT rate to 12% contingent on any of the two conditions
being satisfied violates the due process clause embodied in Article III,
Section 1 of the Constitution, as it imposes an unfair and additional tax
burden on the people, in that: (1) the 12% increase is ambiguous because it
does not state if the rate would be returned to the original 10% if the
conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as
the people are unsure of the applicable VAT rate from year to year; and (3)
the increase in the VAT rate, which is supposed to be an incentive to the
President to raise the VAT collection to at least 2 4/5 of the GDP of the
previous year, should only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by
authority granted to the President by the Bicameral Conference Committee
is a violation of the no-amendment rule upon last reading of a bill laid down
in Article VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by
the Association of Pilipinas Shell Dealers, Inc., et al., assailing the
following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC,
requiring that the input tax on depreciable goods
shall be amortized over a 60-month period, if the
acquisition, excluding the VAT components,
exceeds One Million Pesos (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 G.R. No. 168463
contested sections impose limitations on the amount of input tax that may
Several members of the House of Representatives led by Rep.
be claimed. Petitioners also argue that the input tax partakes the nature of a
Francis Joseph G. Escudero filed this petition for certiorari on June 30,
property that may not be confiscated, appropriated, or limited without due
2005. They question the constitutionality of R.A. No. 9337 on the following
process of law. Petitioners further contend that like any other property or
grounds:
property right, the input tax credit may be transferred or disposed of, and
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an
that by limiting the same, the government gets to tax a profit or value-added
undue delegation of legislative power, in
even if there is no profit or value-added. violation of Article VI, Section 28(2) of the
Constitution;

Petitioners also believe that these provisions violate the 2) The Bicameral Conference Committee acted without
jurisdiction in deleting the no pass on provisions
constitutional guarantee of equal protection of the law under Article III, present in Senate Bill No. 1950 and House Bill
Section 1 of the Constitution, as the limitation on the creditable input tax if: No. 3705; and

(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
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

that it is the smaller businesses with higher input tax to output tax ratio that G.R. No. 168730

will suffer the consequences thereof for it wipes out whatever meager
On the eleventh hour, Governor Enrique T. Garcia filed a petition
margins the petitioners make.
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 complete and leaves no discretion to the President but to increase the rate to

effect allows VAT-registered establishments to retain a portion of the taxes 12% once any of the two conditions provided therein arise.
they collect, thus violating the principle that tax collection and revenue
Respondents also refute petitioners argument that the increase to
should be solely allocated for public purposes and expenditures. Petitioner
12%, as well as the 70% limitation on the creditable input tax, the 60-month
Garcia further claims that allowing these establishments to pass on the tax
amortization on the purchase or importation of capital goods
to the consumers is inequitable, in violation of Article VI, Section 28(1) of
exceeding P1,000,000.00, and the 5% final withholding tax by government
the Constitution.
agencies, is arbitrary, oppressive, and confiscatory, and that it violates the

RESPONDENTS COMMENT constitutional principle on progressive taxation, among others.

The Office of the Solicitor General (OSG) filed a Comment in Finally, respondents manifest that R.A. No. 9337 is the anchor of

behalf of respondents. Preliminarily, respondents contend that R.A. No. the governments fiscal reform agenda. A reform in the value-added system

9337 enjoys the presumption of constitutionality and petitioners failed to of taxation is the core revenue measure that will tilt the balance towards a

cast doubt on its validity. sustainable macroeconomic environment necessary for economic growth.

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

SCRA
The Court defined the issues, as follows:
630 (1994), respondents argue that the procedural issues raised by
PROCEDURAL ISSUE
petitioners, i.e., legality of the bicameral proceedings, exclusive origination

of revenue measures and the power of the Senate concomitant thereto, have Whether R.A. No. 9337 violates the following
provisions of the Constitution:
already been settled. With regard to the issue of undue delegation of
a. Article VI, Section 24, and
legislative power to the President, respondents contend that the law is b. Article VI, Section 26(2)
 SUBSTANTIVE ISSUES
collector.[10] The burden of VAT is intended to fall on the immediate buyers
1. Whether Sections 4, 5 and 6 of R.A. No. 9337,
and ultimately, the end-consumers.
amending Sections 106, 107 and 108 of the NIRC, violate
the following provisions of the Constitution:
In contrast, a direct tax is a tax for which a taxpayer is directly
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2) liable on the transaction or business it engages in, without transferring the

2. Whether Section 8 of R.A. No. 9337, amending burden to someone else.[11]Examples are individual and corporate income
Sections 110(A)(2) and 110(B) of the NIRC; and Section
taxes, transfer taxes, and residence taxes.[12]
12 of R.A. No. 9337, amending Section 114(C) of the
NIRC, violate the following provisions of the
Constitution: In the Philippines, the value-added system of sales taxation has

a. Article VI, Section 28(1), and long been in existence, albeit in a different mode. Prior to 1978, the system
b. Article III, Section 1
was a single-stage tax computed under the cost deduction method and was

payable only by the original sellers. The single-stage system was

RULING OF THE COURT 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
As a prelude, the Court deems it apt to restate the general
the tax credit method, an entity can credit against or subtract from the VAT
principles and concepts of value-added tax (VAT), as the confusion and
charged on its sales or outputs the VAT paid on its purchases, inputs and
inevitably, litigation, breeds from a fallacious notion of its nature.
imports.[14]
The VAT is a tax on spending or consumption. It is levied on the
It was only in 1987, when President Corazon C. Aquino issued
sale, barter, exchange or lease of goods or properties and services.[8] Being
Executive Order No. 273, that the VAT system was rationalized by
an indirect tax on expenditure, the seller of goods or services may pass on
imposing a multi-stage tax rate of 0% or 10% on all sales using the tax
the amount of tax paid to the buyer,[9] with the seller acting merely as a tax
credit method.[15]
 3) Inserting the provision imposing a 70% limit on the
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded amount of input tax to be credited against the output tax;
and
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 4) Including the amendments introduced only by Senate
Bill No. 1950 regarding other kinds of taxes in addition to
R.A. No. 9337, also referred to by respondents as the VAT Reform Act. the value-added tax.

The Court will now discuss the issues in logical sequence.

Petitioners now beseech the Court to define the powers of the
PROCEDURAL ISSUE Bicameral Conference Committee.
I.
Whether R.A. No. 9337 violates the following provisions of the It should be borne in mind that the power of internal regulation and
Constitution:
discipline are intrinsic in any legislative body for, as unerringly elucidated
a. Article VI, Section 24, and
by Justice Story, [i]f the power did not exist, it would be utterly
b. Article VI, Section 26(2)
impracticable to transact the business of the nation, either at all, or at
least with decency, deliberation, and order.[19] Thus, Article VI, Section
A. The Bicameral Conference
16 (3) of the Constitution provides that each House may determine the rules

Committee of its proceedings. Pursuant to this inherent constitutional power to

promulgate and implement its own rules of procedure, the respective rules
Petitioners Escudero, et al., and Pimentel, et al., allege that the
of each house of Congress provided for the creation of a Bicameral
Bicameral Conference Committee exceeded its authority by:
Conference Committee.
1) Inserting the stand-by authority in favor of the
President in Sections 4, 5, and 6 of R.A. No. 9337; Thus, Rule XIV, Sections 88 and 89 of the Rules of House of
2) Deleting entirely the no pass-on provisions found in Representatives provides as follows:
both the House and Senate bills;
 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 in Arroyo vs. De Venecia, viz.:
But the cases, both here and
abroad, in varying forms of
expression, all deny to the courts the
power to inquire into allegations that,
in enacting a law, a House of
Congress failed to comply with its
own rules, in the absence of showing
that there was a violation of a
constitutional provision or the rights
of private individuals. In Osmea 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)
 this question is not covered by any constitutional provision but is only
The foregoing declaration is exactly in point with the present
an internal rule of each house. [24] To date, Congress has not seen it fit to
cases, where petitioners allege irregularities committed by the conference
make such changes adverted to by the Court. It seems, therefore, that
committee in introducing changes or deleting provisions in the House and
Congress finds the practices of the bicameral conference committee to be
Senate bills. Akin to the Farias case,[22] the present petitions also raise an
very useful for purposes of prompt and efficient legislative action.
issue regarding the actions taken by the conference committee on matters

regarding Congress compliance with its own internal rules. As stated Nevertheless, just to put minds at ease that no blatant irregularities

earlier, one of the most basic and inherent power of the legislature is the tainted the proceedings of the bicameral conference committees, the Court

power to formulate rules for its proceedings and the discipline of its deems it necessary to dwell on the issue. The Court observes that there was

members. Congress is the best judge of how it should conduct its own a necessity for a conference committee because a comparison of the

business expeditiously and in the most orderly manner. It is also the sole provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill

concern of Congress to instill discipline among the members of its No. 1950 on the other, reveals that there were indeed disagreements. As

conference committee if it believes that said members violated any of its pointed out in the petitions, said disagreements were as follows:

rules of proceedings. Even the expanded jurisdiction of this Court cannot House Bill No. House Bill No.3705 Senate Bill No. 1950
3555
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. With regard to Stand-By Authority in favor of President

Moreover, as far back as 1994 or more than ten years ago, in the Provides for 12% Provides for 12% Provides for a single
VAT on every sale VAT in general on rate of 10% VAT on
case of Tolentino vs. Secretary of Finance,[23] the Court already made the of goods or sales of goods or sale of goods or
properties properties and properties (amending
pronouncement that [i]f a change is desired in the practice [of the (amending Sec. reduced rates for sale Sec. 106 of NIRC),
Bicameral Conference Committee] it must be sought in Congress since 106 of NIRC); of certain locally 10% VAT on sale of
12% VAT on manufactured goods services including sale
importation of and petroleum of electricity by shall not be passed on those of franchise
goods (amending products and raw generation companies, to consumers grantees of electric
Sec. 107 of materials to be used transmission and utilities shall not apply
NIRC); and 12% in the manufacture distribution to residential
VAT on sale of thereof (amending companies, and use or end-users. VAT shall
services and use or Sec. 106 of NIRC); lease of properties be absorbed by
lease of properties 12% VAT on (amending Sec. 108 of generation,
(amending Sec. importation of goods NIRC) transmission, and
108 of NIRC) and reduced rates for distribution
certain imported companies.
products including With regard to 70% limit on input tax credit
petroleum products
(amending Sec. 107
of NIRC); and 12% Provides that the No similar provision Provides that the input
VAT on sale of input tax credit for tax credit for capital
services and use or capital goods on goods on which a
lease of properties which a VAT has VAT has been paid
and a reduced rate for been paid shall be shall be equally
certain services equally distributed distributed over 5
including power over 5 years or the years or the
generation (amending depreciable life of depreciable life of
Sec. 108 of NIRC) such capital such capital goods; the
goods; the input input tax credit for
tax credit for goods and services
goods and services other than capital
With regard to the no pass-on provision other than capital goods shall not exceed
goods shall not 90% of the output
exceed 5% of the VAT.
No similar Provides that the Provides that the VAT total amount of
provision VAT imposed on imposed on sales of such goods and
power generation and electricity by services; and for
on the sale of generation companies persons engaged
petroleum products and services of in retail trading of
shall be absorbed by transmission goods, the
generation companies companies and allowable input
or sellers, distribution tax credit shall not
respectively, and companies, as well as exceed 11% of the
total amount of
goods purchased. 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
With regard to amendments to be made to NIRC provisions regarding
income and excise taxes the same by settling said differences and/or disagreements. The Bicameral

Conference Committee acted on the disagreeing provisions by making the

No similar No similar provision Provided for following changes:
provision amendments to several
NIRC provisions
regarding corporate
income, percentage, 1. With regard to the disagreement on the rate of VAT to be
franchise and excise
taxes imposed, it would appear from the Conference Committee Report that

the Bicameral Conference Committee tried to bridge the gap in the

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; difference between the 10% VAT rate proposed by the Senate, and the

(2) whether only the VAT imposed on electricity generation, transmission various rates with 12% as the highest VAT rate proposed by the House,
and distribution companies should not be passed on to consumers, as
by striking a compromise whereby the present 10% VAT rate would be
proposed in the Senate bill, or both the VAT imposed on electricity

generation, transmission and distribution companies and the VAT imposed retained until certain conditions arise, i.e., the value-added tax

on sale of petroleum products should not be passed on to consumers, as

collection as a percentage of gross domestic product (GDP) of the
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, previous year exceeds 2 4/5%, or National Government deficit as a

percentage, franchise and excise taxes should be amended. percentage of GDP of the previous year exceeds 1%, when the
 (A) Creditable Input Tax. . . .
President, upon recommendation of the Secretary of Finance shall raise
...
the rate of VAT to 12% effective January 1, 2006.
Provided, The input tax on goods
purchased or imported in a calendar
2. With regard to the disagreement on whether only the VAT month for use in trade or business for
which deduction for depreciation is
imposed on electricity generation, transmission and distribution companies allowed under this Code, shall be spread
evenly over the month of acquisition
should not be passed on to consumers or whether both the VAT imposed on and the fifty-nine (59) succeeding
electricity generation, transmission and distribution companies and the VAT months if the aggregate acquisition cost
for such goods, excluding the VAT
imposed on sale of petroleum products may be passed on to consumers, the component thereof, exceeds one million
Pesos (P1,000,000.00): PROVIDED,
Bicameral Conference Committee chose to settle such disagreement by however, that if the estimated useful life
of the capital good is less than five (5)
altogether deleting from its Report any no pass-on provision.
years, as used for depreciation purposes,
then the input VAT shall be spread over
such shorter period: . . .
3. With regard to the disagreement on whether input tax
(B) Excess Output or Input Tax. If at
the end of any taxable quarter the output
credits should be limited or not, the Bicameral Conference Committee tax exceeds the input tax, the excess
shall be paid by the VAT-registered
decided to adopt the position of the House by putting a limitation on person. If the input tax exceeds the
output tax, the excess shall be carried
over to the succeeding quarter or
the amount of input tax that may be credited against the output tax, quarters: PROVIDED that the input tax
inclusive of input VAT carried over
although it crafted its own language as to the amount of the limitation from the previous quarter that may be
credited in every quarter shall not
exceed seventy percent (70%) of the
on input tax credits and the manner of computing the same by output VAT: PROVIDED, HOWEVER,
THAT any input tax attributable to
providing thus: 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
 151 Excise Tax on
Coming to the issue of the validity of the amendments made mineral products
regarding the NIRC provisions on corporate income taxes and percentage, 236 Registration
requirements
excise taxes. Petitioners refer to the following provisions, to wit:
237 Issuance of receipts
Section or sales or
27 commercial
Rates of Income invoices
Tax on Domestic
Corporation 288 Disposition of
Incremental
28(A)(1) Tax on Resident Revenue
Foreign
Corporation
28(B)(1) Inter-corporate
Dividends Petitioners claim that the amendments to these provisions of the
34(B)(1) Inter-corporate NIRC did not at all originate from the House. They aver that House Bill No.
Dividends
3555 proposed amendments only regarding Sections 106, 107, 108, 110 and
116 Tax on Persons
Exempt from VAT 114 of the NIRC, while House Bill No. 3705 proposed amendments only to
117 Percentage Tax on Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other
domestic carriers
and keepers of sections of the NIRC which the Senate amended but which amendments
Garage
were not found in the House bills are not intended to be amended by the
119 Tax on franchises
121 Tax on banks and House of Representatives. Hence, they argue that since the proposed
Non-Bank amendments did not originate from the House, such amendments are a
Financial
Intermediaries violation of Article VI, Section 24 of the Constitution.
148 Excise Tax on
manufactured oils The argument does not hold water.
and other fuels

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 Customs in determining tariff and
equivalent to ten percent (10%) of the customs duties, plus customs duties,
gross selling price or gross value in excise taxes, if any, and other charges,
money of the goods or properties sold, such tax to be paid by the importer prior
bartered or exchanged, such tax to be to the release of such goods from
paid by the seller or customs custody: Provided, That where
transferor: provided, that the the customs duties are determined on
President, upon the recommendation the basis of the quantity or volume of
of the Secretary of Finance, shall, the goods, the value-added tax shall be
effective January 1, 2006, raise the based on the landed cost plus excise
rate of value-added tax to twelve taxes, if any: provided, further, that
percent (12%), after any of the the President, upon the
following conditions has been recommendation of the Secretary of
satisfied. Finance, shall, effective January 1,
2006, raise the rate of value-added
(i) value-added tax tax to twelve percent (12%) after any
collection as a percentage of of the following conditions has been
Gross Domestic Product satisfied.
(GDP) of the previous year
exceeds two and four-fifth (i) value-added tax collection as a
percent (2 4/5%) or percentage of Gross
Domestic Product (GDP) of
(ii) national government deficit as a the previous year exceeds
percentage of GDP of the two and four-fifth percent (2
previous year exceeds one 4/5%) or
and one-half percent (1 %). (ii) national government deficit as a
percentage of GDP of the
SEC. 5. Section 107 of the same Code, as previous year exceeds one
amended, is hereby further amended to read as follows: and one-half percent (1 %).

SEC. 107. Value-Added Tax on Importation of SEC. 6. Section 108 of the same Code, as
Goods. amended, is hereby further amended to read as follows:
(A) In General. There shall be levied,
assessed and collected on every
importation of goods a value-added tax SEC. 108. Value-added Tax on Sale of
equivalent to ten percent (10%) based Services and Use or Lease of Properties
on the total value used by the Bureau of
 (A) Rate and Base of Tax. There shall framework of the national development program of the
be levied, assessed and collected, a government.
value-added tax equivalent to ten
percent (10%) of gross receipts derived
from the sale or exchange of
services: provided, that the President, They argue that the VAT is a tax levied on the sale, barter or
upon the recommendation of the
exchange of goods and properties as well as on the sale or exchange of
Secretary of Finance, shall, effective
January 1, 2006, raise the rate of services, which cannot be included within the purview of tariffs under the
value-added tax to twelve percent
(12%), after any of the following exempted delegation as the latter refers to customs duties, tolls or tribute
conditions has been satisfied.
payable upon merchandise to the government and usually imposed on goods
(i) value-added tax collection as a or merchandise imported or exported.
percentage of Gross
Domestic Product (GDP) of
the previous year exceeds Petitioners ABAKADA GURO Party List, et al., further contend
two and four-fifth percent (2
4/5%) or that delegating to the President the legislative power to tax is contrary to
(ii) national government deficit as a
percentage of GDP of the republicanism. They insist that accountability, responsibility and
previous year exceeds one transparency should dictate the actions of Congress and they should not
and one-half percent (1
%). (Emphasis supplied) pass to the President the decision to impose taxes. They also argue that the
law also effectively nullified the Presidents power of control, which
Petitioners allege that the grant of the stand-by authority to the
includes the authority to set aside and nullify the acts of her subordinates
President to increase the VAT rate is a virtual abdication by Congress of its
like the Secretary of Finance, by mandating the fixing of the tax rate by the
exclusive power to tax because such delegation is not within the purview of
President upon the recommendation of the Secretary of Finance.
Section 28 (2), Article VI of the Constitution, which provides:

The Congress may, by law, authorize the Petitioners Pimentel, et al. aver that the President has ample
President to fix within specified limits, and may impose,
tariff rates, import and export quotas, tonnage and powers to cause, influence or create the conditions provided by the law to
wharfage dues, and other duties or imposts within the bring about either or both the conditions precedent.
 corollary to the doctrine of separation of powers is the principle of non-
On the other hand, petitioners Escudero, et al. find bizarre and
delegation of powers, as expressed in the Latin maxim: potestas delegata
revolting the situation that the imposition of the 12% rate would be subject
non delegari potest which means what has been delegated, cannot be
to the whim of the Secretary of Finance, an unelected bureaucrat, contrary
delegated.[38] This doctrine is based on the ethical principle that such as
to the principle of no taxation without representation. They submit that the
delegated power constitutes not only a right but a duty to be performed by
Secretary of Finance is not mandated to give a favorable recommendation
the delegate through the instrumentality of his own judgment and not
and he may not even give his recommendation. Moreover, they allege that
through the intervening mind of another.[39]
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 With respect to the Legislature, Section 1 of Article VI of the

recommendation of the Secretary of Finance can easily be brushed aside by Constitution provides that the Legislative power shall be vested in the

the President since the former is a mere alter ego of the latter, such that, Congress of the Philippines which shall consist of a Senate and a House of

ultimately, it is the President who decides whether to impose the increased Representatives. The powers which Congress is prohibited from delegating

tax rate or not. are those which are strictly, or inherently and exclusively, legislative.

Purely legislative power, which can never be delegated, has been described
A brief discourse on the principle of non-delegation of powers is
as the authority to make a complete law complete as to the time when it
instructive.
shall take effect and as to whom it shall be applicable and to determine

The principle of separation of powers ordains that each of the three the expediency of its enactment.[40] Thus, the rule is that in order that a

great branches of government has exclusive cognizance of and is supreme court may be justified in holding a statute unconstitutional as a delegation

in matters falling within its own constitutionally allocated sphere. [37] A of legislative power, it must appear that the power involved is purely

logical 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 In the present case, the challenged section of R.A. No. 9337 is the

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]
common proviso in Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%),
after any of the following conditions has been satisfied:

(i) Value-added tax collection

The rationale for this is that the preliminary ascertainment of facts as a percentage of Gross Domestic
Product (GDP) of the previous year
as basis for the enactment of legislation is not of itself a legislative function, exceeds two and four-fifth percent (2
but is simply ancillary to legislation. Thus, the duty of correlating 4/5%); or

information and making recommendations is the kind of subsidiary activity (ii) National government
deficit as a percentage of GDP of the
which the legislature may perform through its members, or which it may previous year exceeds one and one-half
percent (1 %).
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 The case before the Court is not a delegation of legislative
[51]
securing such information is proper. The Constitution as a continuously
power. It is simply a delegation of ascertainment of facts upon which
operative charter of government does not require that Congress find for

itself enforcement and administration of the increase rate under the law is

every fact upon which it desires to base legislative action or that it make for
contingent. The legislature has made the operation of the 12% rate
itself detailed determinations which it has declared to be prerequisite to

application of legislative policy to particular facts and circumstances effective January 1, 2006, contingent upon a specified fact or condition.

impossible for Congress itself properly to investigate. [52]

 The Court finds no merit to the contention of
It leaves the entire operation or non-operation of the 12% rate upon
petitioners ABAKADA GURO Party List, et al. that the law effectively
factual matters outside of the control of the executive. nullified the Presidents power of control over the Secretary of Finance by

mandating the fixing of the tax rate by the President upon the
No discretion would be exercised by the President. Highlighting
recommendation of the Secretary of Finance. The Court cannot also
the absence of discretion is the fact that the word shall is used in the
subscribe to the position of petitioners
common proviso. The use of the word shall connotes a mandatory
Pimentel, et al. that the word shall should be interpreted to mean may in
order. Its use in a statute denotes an imperative obligation and is
view of the phrase upon the recommendation of the Secretary of Finance.
inconsistent with the idea of discretion.[53] Where the law is clear and
Neither does the Court find persuasive the submission of petitioners
unambiguous, it must be taken to mean exactly what it says, and courts have
Escudero, et al. that any recommendation by the Secretary of Finance can
no choice but to see to it that the mandate is obeyed.[54]
easily be brushed aside by the President since the former is a mere alter ego
Thus, it is the ministerial duty of the President to immediately of the latter.
impose the 12% rate upon the existence of any of the conditions specified
When one speaks of the Secretary of Finance as the alter ego of the
by Congress. This is a duty which cannot be evaded by the President.
President, it simply means that as head of the Department of Finance he is
Inasmuch as the law specifically uses the word shall, the exercise of
the assistant and agent of the Chief Executive. The multifarious executive
discretion by the President does not come into play. It is a clear directive to
and administrative functions of the Chief Executive are performed by and
impose the 12% VAT rate when the specified conditions are present. The
through the executive departments, and the acts of the secretaries of such
time of taking into effect of the 12% VAT rate is based on the happening of
departments, such as the Department of Finance, performed and
a certain specified contingency, or upon the ascertainment of certain facts or
promulgated in the regular course of business, are, unless disapproved or
conditions by a person or body other than the legislature itself.
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
conditions set forth in the contested provisions, is ambiguous because it
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 does not state if the VAT rate would be returned to the original 10% if

policy. That Congress chose to do so in such a manner is not within the the rates are no longer satisfied. Petitioners also argue that such rate is
province of the Court to inquire into, its task being to interpret the law. [59]
unfair and unreasonable, as the people are unsure of the applicable
The insinuation by petitioners Pimentel, et al. that the President has ample
VAT rate from year to year.
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 Under the common provisos of Sections 4, 5 and 6 of R.A. No.

highly speculative. The Court does not rule on allegations which are 9337, if any of the two conditions set forth therein are satisfied, the

manifestly conjectural, as these may not exist at all. The Court deals with President shall increase the VAT rate to 12%. The provisions of the law are

facts, not fancies; on realities, not appearances. When the Court acts on clear. It does not provide for a return to the 10% rate nor does it empower

appearances instead of realities, justice and law will be short-lived. the President to so revert if, after the rate is increased to 12%, the VAT

B. The 12% Increase VAT Rate Does collection goes below the 24/5 of the GDP of the previous year or that the
Not Impose an Unfair and
national government deficit as a percentage of GDP of the previous year
Unnecessary Additional Tax
Burden does not exceed 1%.

Therefore, no statutory construction or interpretation is

Petitioners Pimentel, et al. argue that the 12% increase in the needed. Neither can conditions or limitations be introduced where none is

provided for. Rewriting the law is a forbidden ground that only Congress
VAT rate imposes an unfair and additional tax burden on the people.
may tread upon.[60]
Petitioners also argue that the 12% increase, dependent on any of the 2

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
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]

least 2 4/5 of the GDP of the previous year, should be based on fiscal

adequacy. That the first condition amounts to an incentive to the President to

increase the VAT collection does not render it unconstitutional so long as

Petitioners obviously overlooked that increase in VAT collection is
there is a public purpose for which the law was passed, which in this case, is
not the only condition. There is another condition, i.e., the national
mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise
government deficit as a percentage of GDP of the previous year exceeds one
in revenue.
and one-half percent (1 %).

The principle of fiscal adequacy as a characteristic of a sound tax

Respondents explained the philosophy behind these alternative
system was originally stated by Adam Smith in his Canons of
conditions:
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
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

judge. In the Farias case, the Court refused to consider the various
A. Due Process and Equal Protection Clauses
arguments raised therein that dwelt on the wisdom of Section 14 of R.A.

No. 9006 (The Fair Election Act), pronouncing that:

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue
. . . policy matters are not the concern of the
Court. Government policy is within the exclusive that Section 8 of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B),
dominion of the political branches of the government. It is
not for this Court to look into the wisdom or propriety of and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC
legislative determination. Indeed, whether an enactment is
are arbitrary, oppressive, excessive and confiscatory. Their argument is
wise or unwise, whether it is based on sound economic
theory, whether it is the best means to achieve the desired premised on the constitutional right against deprivation of life, liberty of
results, whether, in short, the legislative discretion within
its prescribed limits should be exercised in a particular property without due process of law, as embodied in Article III, Section 1 of
manner are matters for the judgment of the legislature,
and the serious conflict of opinions does not suffice to the Constitution.
bring them within the range of judicial cognizance.[66]
Petitioners also contend that these provisions violate the
constitutional guarantee of equal protection of the law.
In the same vein, the Court in this case will not dawdle on the
The doctrine is that where the due process and equal protection
purpose of Congress or the executive policy, given that it is not for the
clauses are invoked, considering that they are not fixed rules but rather
judiciary to "pass upon questions of wisdom, justice or expediency of
broad standards, there is a need for proof of such persuasive character as
legislation.[67]
would lead to such a conclusion. Absent such a showing, the presumption

II. of validity must prevail.[68]

 Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC remains uncredited. However, to the extent that the input tax is less than

imposes a limitation on the amount of input tax that may be credited against 70% of the output tax, then 100% of such input tax is still creditable.
the output tax. It states, in part: [P]rovided, that the input tax inclusive of
More importantly, the excess input tax, if any, is retained in a
the input VAT carried over from the previous quarter that may be credited
businesss books of accounts and remains creditable in the succeeding
in every quarter shall not exceed seventy percent (70%) of the output VAT:
quarter/s. This is explicitly allowed by Section 110(B), which provides that

Input Tax is defined under Section 110(A) of the NIRC, as if the input tax exceeds the output tax, the excess shall be carried over to the

amended, as the value-added tax due from or paid by a VAT-registered succeeding quarter or quarters. In addition, Section 112(B) allows a VAT-

person on the importation of goods or local purchase of good and services, registered person to apply for the issuance of a tax credit certificate or

including lease or use of property, in the course of trade or business, from a refund for any unused input taxes, to the extent that such input taxes have

VAT-registered person, and Output Tax is the value-added tax due on the not been applied against the output taxes. Such unused input tax may be

sale or lease of taxable goods or properties or services by any person used in payment of his other internal revenue taxes.

registered or required to register under the law.

The non-application of the unutilized input tax in a given quarter is

not ad infinitum, as petitioners exaggeratedly contend. Their analysis of the

Petitioners claim that the contested sections impose limitations on effect of the 70% limitation is incomplete and one-sided. It ends at the net

the amount of input tax that may be claimed. In effect, a portion of the input effect that there will be unapplied/unutilized inputs VAT for a given

tax that has already been paid cannot now be credited against the output tax. 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-
Petitioners argument is not absolute. It assumes that the input tax
over provision of Section 110(B) or that it may later on be refunded through
exceeds 70% of the output tax, and therefore, the input tax in excess of 70%
a tax credit certificate under Section 112(B).
 Therefore, petitioners argument must be rejected. 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
On the other hand, it appears that petitioner Garcia failed to
result from zero-rated or effectively zero-rated transactions, any excess over
comprehend the operation of the 70% limitation on the input tax. According
the output taxes shall instead be refunded to the taxpayer or credited against
to petitioner, the limitation on the creditable input tax in effect allows VAT-
other internal revenue taxes, at the taxpayers option.[70]
registered establishments to retain a portion of the taxes they collect, which

violates the principle that tax collection and revenue should be for public Section 8 of R.A. No. 9337 however, imposed a 70% limitation on

purposes and expenditures 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
As earlier stated, the input tax is the tax paid by a person, passed
person/taxpayer paid and passed on to him by a seller can only be credited
on to him by the seller, when he buys goods. Output tax meanwhile is the
up to 70% of the value-added taxes that is due to him on a taxable
tax due to the person when he sells goods. In computing the VAT payable,
transaction. There is no retention of any tax collection because the
three possible scenarios may arise:
person/taxpayer has already previously paid the input tax to a seller, and the

First, if at the end of a taxable quarter the output taxes charged by seller will subsequently remit such input tax to the BIR. The party directly

the seller are equal to the input taxes that he paid and passed on by the liable for the payment of the tax is the seller.[71] What only needs to be done

suppliers, then no payment is required; is for the person/taxpayer to apply or credit these input taxes, as evidenced

by receipts, against his output taxes.

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 Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also

Revenue (BIR);[69] and 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 interest-free loan
to the government.[76] In the same breath, Congress also justified its move
by saying that the provision was designed to raise an annual revenue of 22.6
billion.[77] The legislature also dispelled the fear that the provision will fend
off foreign investments, saying that foreign investors have other tax
incentives provided by law, and citing the case of China, where despite a
17.5% non-creditable VAT, foreign investments were not
[78]
deterred. Again, for whatever is the purpose of the 60-month
amortization, this involves executive economic policy and legislative
wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on
payments made by the government for taxable transactions, Section 12 of
R.A. No. 9337, which amended Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added
Tax.
(C) Withholding of Value-added Tax. The
Government or any of its political subdivisions,
instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods
and services which are subject to the value-added tax
imposed in Sections 106 and 108 of this Code, deduct and
withhold a final value-added tax at the rate of five percent
(5%) of the gross payment thereof: Provided, That the
payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For purposes of
this Section, the payor or person in control of the payment
shall be considered as the withholding agent.
The value-added tax withheld under this Section
shall be remitted within ten (10) days following the end of
the month the withholding was made.
Section 114(C) merely provides a method of collection, or as
stated by respondents, a more simplified VAT withholding system. The
government in this case is constituted as a withholding agent with respect to
their payments for goods and services.
Prior to its amendment, Section 114(C) provided for different rates
of value-added taxes to be withheld -- 3% on gross payments for purchases
of goods; 6% on gross payments for services supplied by contractors other
than by public works contractors; 8.5% on gross payments for services
supplied by public work contractors; or 10% on payment for the lease or use
of properties or property rights to nonresident owners. Under the present
Section 114(C), these different rates, except for the 10% on lease or

property rights payment to nonresidents, were deleted, and a uniform rate of
5% is applied.
The Court observes, however, that the law the used the word final.
In tax usage, final, as opposed to creditable, means full. Thus, it is provided
in Section 114(C): final value-added tax at the rate of five percent (5%).
In Revenue Regulations No. 02-98, implementing R.A. No. 8424
(The Tax Reform Act of 1997), the concept of final withholding tax on
income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final
withholding tax system the amount of income tax
withheld by the withholding agent is constituted as full
and final payment of the income tax due from the payee
on the said income. The liability for payment of the tax
rests primarily on the payor as a withholding agent. Thus,
in case of his failure to withhold the tax or in case of
underwithholding, the deficiency tax shall be collected
from the payor/withholding agent.
(B) Creditable Withholding Tax. Under the
creditable withholding tax system, taxes withheld on
certain income payments are intended to equal or at least
approximate the tax due of the payee on said income.
Taxes withheld on income payments covered by the
expanded withholding tax (referred to in Sec. 2.57.2 of
these regulations) and compensation income (referred to
in Sec. 2.78 also of these regulations) are creditable in
nature.
As applied to value-added tax, this means that taxable transactions
with the government are subject to a 5% rate, which constitutes as full
payment of the tax payable on the transaction. This represents the net VAT
payable of the seller. The other 5% effectively accounts for the standard
input VAT (deemed input VAT), in lieu of the actual input VAT directly or
attributable to the taxable transaction.[79]
The Court need not explore the rationale behind the provision. It is
clear that Congress intended to treat differently taxable transactions with the
government.[80] This is supported by the fact that under the old provision,
the 5% tax withheld by the government remains creditable against the tax
liability of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added
Tax.
(C) Withholding of Creditable Value-added
Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods
from sellers and services rendered by contractors which
are subject to the value-added tax imposed in Sections
106 and 108 of this Code, deduct and withhold the value-
added tax due at the rate of three percent (3%) of the
 gross payment for the purchase of goods and six percent
(6%) on gross receipts for services rendered by
contractors on every sale or installment payment which
shall be creditable against the value-added tax liability
of the seller or contractor: Provided, however, That in
the case of government public works contractors, the
withholding rate shall be eight and one-half percent
(8.5%): Provided, further, That the payment for lease or
use of properties or property rights to nonresident owners
shall be subject to ten percent (10%) withholding tax at
the time of payment. For this purpose, the payor or person
in control of the payment shall be considered as the
withholding agent.
The valued-added tax withheld under this
Section shall be remitted within ten (10) days following
the end of the month the withholding was made.
(Emphasis supplied)
As amended, the use of the word final and the deletion of the
word creditable exhibits 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 profit margin and value-added, the Court cannot go beyond what the

like circumstances.[83] legislature has laid down and interfere with the affairs of business.
The equal protection clause does not require the universal
The power of the State to make reasonable and natural
application of the laws on all persons or things without distinction. This
classifications for the purposes of taxation has long been established.
might in fact sometimes result in unequal protection. What the clause
Whether it relates to the subject of taxation, the kind of property, the rates
requires is equality among equals as determined according to a valid
to be levied, or the amounts to be raised, the methods of assessment,
classification. By classification is meant the grouping of persons or things
valuation and collection, the States power is entitled to presumption of
similar to each other in certain particulars and different from all others in
validity. As a rule, the judiciary will not interfere with such power absent a
these same particulars.[85]
clear showing of unreasonableness, discrimination, or arbitrariness. [84]

Petitioners point out that the limitation on the creditable input tax Petitioners brought to the Courts attention the introduction of

if the entity has a high ratio of input tax, or invests in capital equipment, or Senate Bill No. 2038 by Sens. S.R. Osmea III and Ma. Ana Consuelo
has several transactions with the government, is not based on real and
A.S. Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric
substantial differences to meet a valid classification.

D. Singson. The proposed legislation seeks to amend the 70%

The argument is pedantic, if not outright baseless. The law does

not make any classification in the subject of taxation, the kind of property, limitation by increasing the same to 90%. This, according to

the rates to be levied or the amounts to be raised, the methods of

petitioners, supports their stance that the 70% limitation is arbitrary and
assessment, valuation and collection. Petitioners alleged distinctions are
confiscatory. On this score, suffice it to say that these are still proposed
based on variables that bear different consequences. While the

implementation of the law may yield varying end results depending on ones

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 rate, from a previous 32%.[95] Intercorporate dividends of non-resident
necessities, spared as they are from the incidence of the
foreign corporations are still subject to 15% final withholding tax but the
VAT, are expected to be relatively lower and within the
reach of the general public. tax credit allowed on the corporations domicile was increased to

20%.[96] The Philippine Amusement and Gaming Corporation (PAGCOR) is

It is admitted that R.A. No. 9337 puts a premium on businesses not exempt from income taxes anymore.[97] Even the sale by an artist of his

with low profit margins, and unduly favors those with high profit margins. works or services performed for the production of such works was not

Congress was not oblivious to this. Thus, to equalize the weighty burden the spared.

law entails, the law, under Section 116, imposed a 3% percentage tax on
All these were designed to ease, as well as spread out, the burden
VAT-exempt persons under Section 109(v), i.e., transactions with gross
of taxation, which would otherwise rest largely on the consumers. It cannot
annual sales and/or receipts not exceeding P1.5 Million. This acts as a
therefore be gainsaid that R.A. No. 9337 is equitable.
equalizer because in effect, bigger businesses that qualify for VAT coverage
C. Progressivity of Taxation
and VAT-exempt taxpayers stand on equal-footing.

Moreover, Congress provided mitigating measures to cushion the

Lastly, petitioners contend that the limitation on the creditable
impact of the imposition of the tax on those previously exempt. Excise taxes
input tax is anything but regressive. It is the smaller business with higher
on petroleum products[91] and natural gas[92] were reduced. Percentage tax
input tax-output tax ratio that will suffer the consequences.
on domestic carriers was removed.[93] Power producers are now exempt

from paying franchise tax.[94] Progressive taxation is built on the principle of the taxpayers

ability to pay. This principle was also lifted from Adam Smiths Canons of
Aside from these, Congress also increased the income tax rates of
Taxation, and it states:
corporations, in order to distribute the burden of taxation. Domestic,
I. The subjects of every state ought to contribute towards
foreign, and non-resident corporations are now subject to a 35% income tax 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
There being no constitutional impediment to the full enforcement
the law seeks to remedy. As in other cases, the Court cannot strike down a
and implementation of R.A. No. 9337, the temporary restraining order
law as unconstitutional simply because of its yokes.
issued by the Court on July 1, 2005 is LIFTED upon finality of herein
Let us not be overly influenced by the plea that
for every wrong there is a remedy, and that the judiciary decision.
should stand ready to afford relief. There are undoubtedly
many wrongs the judicature may not correct, for instance,
SO ORDERED.
those involving political questions. . . .
EN BANC
Let us likewise disabuse our minds from the
notion that the judiciary is the repository of remedies for
ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and
all political or social ills; We should not forget that the
ENVIRONMENTALIST CONSUMERS NETWORK, INC. (ECN),
Constitution has judiciously allocated the powers of
Petitioners,
government to three distinct and separate compartments;
and that judicial interpretation has tended to the
-versus-
preservation of the independence of the three, and a
zealous regard of the prerogatives of each, knowing full
DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY
well that one is not the guardian of the others and that, for
COMMISSION (ERC), NATIONAL POWER CORPORATION
official wrong-doing, each may be brought to account,
(NPC), POWER SECTOR ASSETS AND LIABILITIES
either by impeachment, trial or by the ballot box. [100]
MANAGEMENT GROUP (PSALM Corp.), STRATEGIC POWER
UTILITIES GROUP (SPUG), and PANAYELECTRIC COMPANY
INC. (PECO),
The words of the Court in Vera vs. Avelino[101] holds true then, as it Respondents.
G.R. No. 159796
still holds true now. All things considered, there is no raison d'tre for the
Present:
unconstitutionality of R.A. No. 9337.
PUNO, C.J.,
QUISUMBING,
WHEREFORE, Republic Act No. 9337 not being unconstitutional,
YNARES-SANTIAGO,
the petitions in G.R. Nos. 168056, 168207, 168461, 168463, and 168730, SANDOVAL-GUTIERREZ,
CARPIO,
are hereby DISMISSED. AUSTRIA-MARTINEZ,
 CORONA,
CARPIO MORALES, directing the respondents to refrain from implementing, charging, and
AZCUNA, collecting the said charge.[3] The assailed provision of law reads:
TINGA,
CHICO-NAZARIO,
GARCIA, SECTION 34. Universal Charge. Within one (1)
VELASCO, JR. and year from the effectivity of this Act, a universal charge to
NACHURA, JJ. be determined, fixed and approved by the ERC, shall be
imposed on all electricity end-users for the following
Promulgated: purposes:

July 17, 2007 (a) Payment for the stranded debts[4] in excess of the
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - amount assumed by the National Government and
x stranded contract costs of NPC[5] and as well as
qualified stranded contract costs of distribution
utilities resulting from the restructuring of the
DECISION industry;

NACHURA, J.: (b) Missionary electrification;[6]

(c) The equalization of the taxes and royalties applied to

Petitioners Romeo P. Gerochi, Katulong Ng
Environmentalist Consumers Network, Inc. (ECN) (petitioners), come
before this Court in this original action praying that Section 34 of Republic
Act (RA) 9136, otherwise known as the Electric Power Industry Reform
Act of 2001 (EPIRA), imposing the Universal Charge, [1] and Rule 18 of the
Rules and Regulations (IRR)[2] which seeks to implement the said
imposition, be declared unconstitutional. Petitioners also pray that the
Universal Charge imposed upon the consumers be refunded and that a
preliminary injunction and/or temporary restraining order (TRO) be issued
indigenous or renewable sources of energy vis--vis
Bayan (KB), and imported energy fuels;
(d) An environmental charge equivalent to one-fourth of
one centavo per kilowatt-hour (P0.0025/kWh),
which shall accrue to an environmental fund to be
used solely for watershed rehabilitation and
management. Said fund shall be managed by NPC
under existing arrangements; and
(e) A charge to account for all forms of cross-subsidies
for a period not exceeding three (3) years.
The universal charge shall be a non-bypassable charge
which shall be passed on and collected from all end-users
on a monthly basis by the distribution utilities.
 Collections by the distribution utilities and the
TRANSCO in any given month shall be remitted to the
PSALM Corp. on or before the fifteenth (15th) of the
succeeding month, net of any amount due to the
distribution utility. Any end-user or self-generating entity
not connected to a distribution utility shall remit its
corresponding universal charge directly to the
TRANSCO. The PSALM Corp., as administrator of the
fund, shall create a Special Trust Fund which shall be
disbursed only for the purposes specified herein in an
open and transparent manner. All amount collected for the
universal charge shall be distributed to the respective
beneficiaries within a reasonable period to be provided by
the ERC.
The Facts
Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took
effect.[7]
On April 5, 2002, respondent National Power Corporation-Strategic Power
[8]
Utilities Group (NPC-SPUG) filed with respondent Energy Regulatory
Commission (ERC) a petition for the availment from the Universal Charge
of its share for Missionary Electrification, docketed as ERC Case No. 2002-
165.[9]
On May 7, 2002, NPC filed another petition with ERC, docketed as ERC
Case No. 2002-194, praying that the proposed share from the Universal
Charge for the Environmental charge of P0.0025 per kilowatt-hour (/kWh),
or a total of P119,488,847.59, be approved for withdrawal from the Special
Trust Fund (STF) managed by respondent Power SectorAssets and
Liabilities Management Group (PSALM)[10] for the rehabilitation and
management of watershed areas.[11]
On December 20, 2002, the ERC issued an Order [12] in ERC Case No. 2002-
165 provisionally approving the computed amount of P0.0168/kWh as the
share of the NPC-SPUG from the Universal Charge for Missionary
Electrification and authorizing the National Transmission Corporation
(TRANSCO) and Distribution Utilities to collect the same from its end-
users on a monthly basis.
On June 26, 2003, the ERC rendered its Decision[13] (for ERC Case No.
2002-165) modifying its Order of December 20, 2002, thus:
WHEREFORE, the foregoing premises
considered, the provisional authority granted to petitioner
National Power Corporation-Strategic Power Utilities
Group (NPC-SPUG) in the Order dated December 20,
2002 is hereby modified to the effect that an additional
amount of P0.0205 per kilowatt-hour should be added to
the P0.0168 per kilowatt-hour provisionally authorized by
the Commission in the said Order. Accordingly, a total
amount of P0.0373 per kilowatt-hour is hereby
APPROVED for withdrawal from the Special Trust Fund
 managed by PSALM as its share from the Universal
Charge for Missionary Electrification (UC-ME) effective Relative thereto, NPC-SPUG is directed to submit a
on the following billing cycles: quarterly report on the following:

(a) June 26-July 25, 2003 for National 1. Projects for CY 2002 undertaken;
Transmission Corporation (TRANSCO); 2. Location
and 3. Actual amount utilized to
(b) July 2003 for Distribution Utilities (Dus). complete the project;
4. Period of completion;
Relative thereto, TRANSCO and Dus are 5. Start of Operation; and
directed to collect the UC-ME in the amount of P0.0373 6. Explanation of the reallocation of
per kilowatt-hour and remit the same to PSALM on or UC-ME funds, if any.
before the 15th day of the succeeding month. SO ORDERED.[15]

In the meantime, NPC-SPUG is directed to

submit, not later than April 30, 2004, a detailed report to
include Audited Financial Statements and physical status Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194,
(percentage of completion) of the projects using the authorizing the NPC to draw up to P70,000,000.00 from PSALM for its
prescribed format.
2003 Watershed Rehabilitation Budget subject to the availability of funds
Let copies of this Order be furnished petitioner for the Environmental Fund component of the Universal Charge.[16]
NPC-SPUG and all distribution utilities (Dus).

SO ORDERED. On the basis of the said ERC decisions, respondent Panay Electric
Company, Inc. (PECO) charged petitioner Romeo P. Gerochi and all other
On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking
the ERC, among others,[14] to set aside the above-mentioned Decision, end-users with the Universal Charge as reflected in their respective electric
which the ERC granted in its Order dated October 7, 2003, disposing: bills starting from the month of July 2003.[17]
Hence, this original action.
WHEREFORE, the foregoing premises considered, the
Motion for Reconsideration filed by petitioner National
Power Corporation-Small Power Utilities Group (NPC-
SPUG) is hereby GRANTED. Accordingly, the Decision
dated June 26, 2003 is hereby modified accordingly.
Petitioners submit that the assailed provision of law and its IRR which
sought to implement the same are unconstitutional on the following
grounds:
1) The universal charge provided for under Sec. 34 of
the EPIRA and sought to be implemented under Sec.
2, Rule 18 of the IRR of the said law is a tax which is
to be collected from all electric end-users and self-
generating entities. The power to tax is strictly a
legislative function and as such, the delegation of
said power to any executive or administrative agency
like the ERC is unconstitutional, giving the same
unlimited authority. The assailed provision clearly
provides that the Universal Charge is to be
determined, fixed and approved by the ERC, hence
leaving to the latter complete discretionary legislative
authority.
2) The ERC is also empowered to approve and
determine where the funds collected should be used.
3) The imposition of the Universal Charge on all end-
users is oppressive and confiscatory and amounts to
taxation without representation as the consumers
were not given a chance to be heard and
represented.[18]
Petitioners contend that the Universal Charge has
characteristics of a tax and is collected to fund the operations of the
NPC. They argue that the cases[19] invoked by the respondents clearly show
the regulatory purpose of the charges imposed therein, which is not so in the
case at bench. In said cases, the respective funds[20] were created in order to
balance and stabilize the prices of oil and sugar, and to act as buffer to
counteract the changes and adjustments in prices, peso devaluation, and
other variables which cannot be adequately and timely monitored by the
legislature. Thus, there was a need to delegate powers to administrative
bodies.[21] Petitioners posit that the Universal Charge is imposed not for a
similar purpose.
On the other hand, respondent PSALM through the Office of the
Government Corporate Counsel (OGCC) contends that unlike a tax which is
imposed to provide income for public purposes, such as support of the
government, administration of the law, or payment of public expenses, the
assailed Universal Charge is levied for a specific regulatory purpose, which
is to ensure the viability of the country's electric power industry. Thus, it is
exacted by the State in the exercise of its inherent police power. On this
premise, PSALM submits that there is no undue delegation of legislative
power to the ERC since the latter merely exercises a limited authority or
discretion as to the execution and implementation of the provisions of the
EPIRA.[22]
Respondents Department of Energy (DOE), ERC, and NPC, through the
the
Office of the Solicitor General (OSG), share the same view that the
Universal Charge is not a tax because it is levied for a specific regulatory
purpose, which is to ensure the viability of the country's electric power
industry, and is, therefore, an exaction in the exercise of the State's police
power. Respondents further contend that said Universal Charge does not The ultimate issues in the case at bar are:
possess the essential characteristics of a tax, that its imposition would
1) Whether or not, the Universal Charge imposed
redound to the benefit of the electric power industry and not to the public, under Sec. 34 of the EPIRA is a tax; and
and that its rate is uniformly levied on electricity end-users, unlike a tax
2) Whether or not there is undue delegation of
which is imposed based on the individual taxpayer's ability to pay. legislative power to tax on the part of the ERC.[26]
Moreover, respondents deny that there is undue delegation of legislative
power to the ERC since the EPIRA sets forth sufficient determinable
standards which would guide the ERC in the exercise of the powers granted Before we discuss the issues, the Court shall first deal with an
to it. Lastly, respondents argue that the imposition of the Universal Charge obvious procedural lapse.
is not oppressive and confiscatory since it is an exercise of the police power
of the State and it complies with the requirements of due process. [23]

On its part, respondent PECO argues that it is duty-bound to collect and Petitioners filed before us an original action particularly

remit the amount pertaining to the Missionary Electrification and denominated as a Complaint assailing the constitutionality of Sec. 34 of the

Environmental Fund components of the Universal Charge, pursuant to Sec. EPIRA imposing the Universal Charge and Rule 18 of the EPIRA's IRR. No

34 of the EPIRA and the Decisions in ERC Case Nos. 2002-194 and 2002- doubt, petitioners have locus standi. They impugn the constitutionality of

165. Otherwise, PECO could be held liable under Sec. 46 [24] of the EPIRA, Sec. 34 of the EPIRA because they sustained a direct injury as a result of

which imposes fines and penalties for any violation of its provisions or its the imposition of the Universal Charge as reflected in their electric bills.

IRR.[25]

However, petitioners violated the doctrine of hierarchy of courts

The Issues when they filed this Complaint directly with us. Furthermore, the Complaint
is bereft of any allegation of grave abuse of discretion on the part of the
ERC or any of the public respondents, in order for the Court to consider it But this Court's jurisdiction to issue writs of certiorari,
as a petition for certiorari or prohibition. prohibition, mandamus, quo warranto, and habeas corpus, while concurrent
with that of the regional trial courts and the Court of Appeals, does not give
litigants unrestrained freedom of choice of forum from which to seek such
relief.[28] It has long been established that this Court will not entertain direct
Article VIII, Section 5(1) and (2) of the 1987
resort to it unless the redress desired cannot be obtained in the appropriate
Constitution[27] categorically provides that:
courts, or where exceptional and compelling circumstances justify
availment of a remedy within and call for the exercise of our primary

SECTION 5. The Supreme Court shall have the jurisdiction.[29] This circumstance alone warrants the outright dismissal of
following powers: the present action.

1. Exercise original jurisdiction over cases affecting

ambassadors, other public ministers and consuls, and
over petitions for certiorari, prohibition, mandamus, This procedural infirmity notwithstanding, we opt to resolve the
quo warranto, and habeas corpus. constitutional issue raised herein. We are aware that if the constitutionality
2. Review, revise, reverse, modify, or affirm on appeal of Sec. 34 of the EPIRA is not resolved now, the issue will certainly
or certiorari, as the law or the rules of court may
provide, final judgments and orders of lower courts resurface in the near future, resulting in a repeat of this litigation, and
in:
probably involving the same parties. In the public interest and to avoid
unnecessary delay, this Court renders its ruling now.
(a) All cases in which
the constitutionality or validity of
any treaty, international or
executive agreement, law,
The instant complaint is bereft of merit.
presidential decree, proclamation,
order, instruction, ordinance, or
regulation is in question.
The First Issue
 To resolve the first issue, it is necessary to distinguish the States
power of taxation from the police power.
The power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse
is to be found only in the responsibility of the legislature which imposes the
tax on the constituency that is to pay it.[30] It is based on the principle that
taxes are the lifeblood of the government, and their prompt and certain
availability is an imperious need.[31] Thus, the theory behind the exercise of
the power to tax emanates from necessity; without taxes, government
cannot fulfill its mandate of promoting the general welfare and well-being
of the people.[32]
On the other hand, police power is the power of the state to promote public
welfare by restraining and regulating the use of liberty and property. [33] It is
the most pervasive, the least limitable, and the most demanding of the three
fundamental powers of the State. The justification is found in the Latin
maxims salus populi est suprema lex (the welfare of the people is the
supreme law) and sic utere tuo ut alienum non laedas (so use your property
as not to injure the property of others). As an inherent attribute of
sovereignty which virtually extends to all public needs, police power grants
a wide panoply of instruments through which the State, as parens
patriae, gives effect to a host of its regulatory powers.[34] We have held that
the power to "regulate" means the power to protect, foster, promote,
preserve, and control, with due regard for the interests, first and foremost,
of the public, then of the utility and of its patrons. [35]
The conservative and pivotal distinction between these two powers
rests in the purpose for which the charge is made. If generation of revenue
is the primary purpose and regulation is merely incidental, the imposition is
a tax; but if regulation is the primary purpose, the fact that revenue is
incidentally raised does not make the imposition a tax.[36]
In exacting the assailed Universal Charge through Sec. 34 of the EPIRA,
the State's police power, particularly its regulatory dimension, is invoked.
Such can be deduced from Sec. 34 which enumerates the purposes for
which the Universal Charge is imposed[37] and which can be amply
discerned as regulatory in character. The EPIRA resonates such regulatory
purposes, thus:
SECTION 2. Declaration of Policy. It is hereby declared
the policy of the State:
(a) To ensure and accelerate the total electrification of the
country;
(b) To ensure the quality, reliability, security and
affordability of the supply of electric power;
(c) To ensure transparent and reasonable prices of
electricity in a regime of free and fair competition
and full public accountability to achieve greater
operational and economic efficiency and enhance
the competitiveness of Philippine products in the
global market;
 (d) To enhance the inflow of private capital and broaden
the ownership base of the power generation,
transmission and distribution sectors;
(e) To ensure fair and non-discriminatory treatment of
public and private sector entities in the process of
restructuring the electric power industry;
(f) To protect the public interest as it is affected by the
rates and services of electric utilities and other
providers of electric power;
(g) To assure socially and environmentally compatible
energy sources and infrastructure;
(h) To promote the utilization of indigenous and new and
renewable energy resources in power generation in
order to reduce dependence on imported energy;
(i) To provide for an orderly and transparent privatization
of the assets and liabilities of the National Power
Corporation (NPC);
(j) To establish a strong and purely independent
regulatory body and system to ensure consumer
protection and enhance the competitive operation of
the electricity market; and
(k) To encourage the efficient use of energy and other
modalities of demand side management.
From the aforementioned purposes, it can be gleaned that the assailed
Universal Charge is not a tax, but an exaction in the exercise of the State's
police power. Public welfare is surely promoted.
Moreover, it is a well-established doctrine that the taxing power may be
used as an implement of police power.[38] In Valmonte v. Energy Regulatory
Board, et al.[39] and in Gaston v. Republic Planters Bank,[40] this Court held
that the Oil Price Stabilization Fund (OPSF) and the Sugar Stabilization
Fund (SSF) were exactions made in the exercise of the police power. The
doctrine was reiterated in Osmea v. Orbos[41] with respect to the
OPSF. Thus, we disagree with petitioners that the instant case is different
from the aforementioned cases. With the Universal Charge, a Special Trust
Fund (STF) is also created under the administration of PSALM. [42] The STF
has some notable characteristics similar to the OPSF and the SSF, viz.:
1) In the implementation of stranded cost recovery, the
ERC shall conduct a review to determine whether
there is under-recovery or over recovery and adjust
(true-up) the level of the stranded cost recovery
charge. In case of an over-recovery, the ERC shall
ensure that any excess amount shall be remitted to the
STF. A separate account shall be created for these
amounts which shall be held in trust for any future
claims of distribution utilities for stranded cost
recovery. At the end of the stranded cost recovery
period, any remaining amount in this account shall be
used to reduce the electricity rates to the end-users.[43]
2) With respect to the assailed Universal Charge, if the
total amount collected for the same is greater than the
actual availments against it, the PSALM shall retain
the balance within the STF to pay for periods where a
shortfall occurs.[44]
3) Upon expiration of the term of PSALM, the
administration of the STF shall be transferred to the
DOF or any of the DOF attached agencies as
designated by the DOF Secretary.[45]
 instrumentality of his own judgment and not through the intervening mind
The OSG is in point when it asseverates:
of another. [47]
Evidently, the establishment and maintenance of the
Special Trust Fund, under the last paragraph of Section
34, R.A. No. 9136, is well within the pervasive and non- In the face of the increasing complexity of modern life, delegation of
waivable power and responsibility of the government to
secure the physical and economic survival and well-being legislative power to various specialized administrative agencies is allowed
of the community, that comprehensive sovereign as an exception to this principle.[48] Given the volume and variety of
authority we designate as the police power of the State.[46]
interactions in today's society, it is doubtful if the legislature can
promulgate laws that will deal adequately with and respond promptly to the
This feature of the Universal Charge further boosts the position that the
minutiae of everyday life. Hence, the need to delegate to administrative
same is an exaction imposed primarily in pursuit of the State's police
bodies - the principal agencies tasked to execute laws in their specialized
objectives. The STF reasonably serves and assures the attainment and
fields - the authority to promulgate rules and regulations to implement a
perpetuity of the purposes for which the Universal Charge is imposed, i.e.,
given statute and effectuate its policies. All that is required for the valid
to ensure the viability of the country's electric power industry.
exercise of this power of subordinate legislation is that the regulation be
germane to the objects and purposes of the law and that the regulation be
The Second Issue not in contradiction to, but in conformity with, the standards prescribed by
the law. These requirements are denominated as the completeness test and
The principle of separation of powers ordains that each of the three
the sufficient standard test.
branches of government has exclusive cognizance of and is supreme in
matters falling within its own constitutionally allocated sphere. A logical
Under the first test, the law must be complete in all its terms and conditions
corollary to the doctrine of separation of powers is the principle of non-
when it leaves the legislature such that when it reaches the delegate, the
delegation of powers, as expressed in the Latin maxim potestas delegata
only thing he will have to do is to enforce it. The second test mandates
non delegari potest (what has been delegated cannot be delegated). This is
adequate guidelines or limitations in the law to determine the boundaries of
based on the ethical principle that such delegated power constitutes not only
the delegate's authority and prevent the delegation from running riot. [49]
a right but a duty to be performed by the delegate through the

The Court finds that the EPIRA, read and appreciated in its entirety, in
relation to Sec. 34 thereof, is complete in all its essential terms and
conditions, and that it contains sufficient standards.
Although Sec. 34 of the EPIRA merely provides that within one (1) year
from the effectivity thereof, a Universal Charge to be determined, fixed and
approved by the ERC, shall be imposed on all electricity end-users, and
therefore, does not state the specific amount to be paid as Universal Charge,
the amount nevertheless is made certain by the legislative parameters
provided in the law itself. For one, Sec. 43(b)(ii) of the EPIRA provides:
SECTION 43. Functions of the ERC. The ERC shall
promote competition, encourage market development,
ensure customer choice and penalize abuse of market
power in the restructured electricity industry. In
appropriate cases, the ERC is authorized to issue cease
and desist order after due notice and hearing. Towards
this end, it shall be responsible for the following key
functions in the restructured industry:
xxxx
(b) Within six (6) months from the effectivity of this Act,
promulgate and enforce, in accordance with law, a
National Grid Code and a Distribution Code which shall
include, but not limited to the following:
xxxx
(ii) Financial capability standards for the generating
companies, the TRANSCO, distribution utilities and
suppliers: Provided, That in the formulation of the
financial capability standards, the nature and function of
the entity shall be considered: Provided, further, That
such standards are set to ensure that the electric power
industry participants meet the minimum financial
standards to protect the public interest. Determine, fix,
and approve, after due notice and public hearings the
universal charge, to be imposed on all electricity end-
users pursuant to Section 34 hereof;
Moreover, contrary to the petitioners contention, the ERC does not enjoy a
wide latitude of discretion in the determination of the Universal
Charge. Sec. 51(d) and (e) of the EPIRA[50] clearly provides:
SECTION 51. Powers. The PSALM Corp. shall, in the
performance of its functions and for the attainment of its
objective, have the following powers:
xxxx
(d) To calculate the amount of the stranded debts and
stranded contract costs of NPC which shall form
the basis for ERC in the determination of the
universal charge;
(e) To liquidate the NPC stranded contract costs,
utilizing the proceeds from sales and other property
contributed to it, including the proceeds from the
universal charge.

Thus, the law is complete and passes the first test for valid
delegation of legislative power.
As to the second test, this Court had, in the past, accepted as sufficient
standards the following: "interest of law and order;" [51] "adequate and
efficient instruction;"[52] "public interest;"[53] "justice and equity;"[54] "public
convenience and welfare;"[55] "simplicity, economy
efficiency;"[56] "standardization and regulation of medical education;" [57]and
"fair and equitable employment practices." [58] Provisions of the EPIRA such
as, among others, to ensure the total electrification of the country and the
quality, reliability, security and affordability of the supply of electric
power[59] and watershed rehabilitation and management[60] meet the
requirements for valid delegation, as they provide the limitations on the
ERCs power to formulate the IRR. These are sufficient standards.
It may be noted that this is not the first time that the ERC's conferred
powers were challenged. In Freedom from Debt Coalition v. Energy
Regulatory Commission,[61] the Court had occasion to say:
In determining the extent of powers possessed by the
ERC, the provisions of the EPIRA must not be read in
separate parts. Rather, the law must be read in its entirety,
because a statute is passed as a whole, and is animated by
one general purpose and intent. Its meaning cannot to be
extracted from any single part thereof but from a general
consideration of the statute as a whole. Considering the
intent of Congress in enacting the EPIRA and reading the
statute in its entirety, it is plain to see that the law has
expanded the jurisdiction of the regulatory body, the ERC
in this case, to enable the latter to implement the reforms
sought to be accomplished by the EPIRA. When the
legislators decided to broaden the jurisdiction of the ERC,
they did not intend to abolish or reduce the powers
already conferred upon ERC's predecessors. To sustain
the view that the ERC possesses only the powers and
functions listed under Section 43 of the EPIRA is to
frustrate the objectives of the law.
and
In his Concurring and Dissenting Opinion[62] in the same case, then
Associate Justice, now Chief Justice, Reynato S. Puno described the
immensity of police power in relation to the delegation of powers to the
ERC and its regulatory functions over electric power as a vital public utility,
to wit:
Over the years, however, the range of police
power was no longer limited to the preservation of public
health, safety and morals, which used to be the primary
social interests in earlier times. Police power now
requires the State to "assume an affirmative duty to
eliminate the excesses and injustices that are the
concomitants of an unrestrained industrial economy."
Police power is now exerted "to further the public welfare
a concept as vast as the good of society itself." Hence,
"police power is but another name for the governmental
authority to further the welfare of society that is the basic
end of all government." When police power is delegated
 to administrative bodies with regulatory functions, its
exercise should be given a wide latitude. Police power
takes on an even broader dimension in developing
countries such as ours, where the State must take a more
active role in balancing the many conflicting interests in
society. The Questioned Order was issued by the ERC,
acting as an agent of the State in the exercise of police
power. We should have exceptionally good grounds to
curtail its exercise. This approach is more compelling in
the field of rate-regulation of electric power rates. Electric
power generation and distribution is a traditional
instrument of economic growth that affects not only a few
but the entire nation. It is an important factor in
encouraging investment and promoting business. The
engines of progress may come to a screeching halt if the
delivery of electric power is impaired. Billions of pesos
would be lost as a result of power outages or unreliable
electric power services. The State thru the ERC should be
able to exercise its police power with great flexibility,
when the need arises.
This was reiterated in National Association of Electricity Consumers for
Reforms v. Energy Regulatory Commission[63] where the Court held that the
ERC, as regulator, should have sufficient power to respond in real time to
changes wrought by multifarious factors affecting public utilities.
From the foregoing disquisitions, we therefore hold that there is no undue
delegation of legislative power to the ERC.
Petitioners failed to pursue in their Memorandum the contention in
the Complaint that the imposition of the Universal Charge on all end-users
is oppressive and confiscatory, and amounts to taxation without
representation. Hence, such contention is deemed waived or abandoned per
Resolution[64] of August 3, 2004.[65] Moreover, the determination of whether
or not a tax is excessive, oppressive or confiscatory is an issue which
essentially involves questions of fact, and thus, this Court is precluded from
reviewing the same.[66]
As a penultimate statement, it may be well to recall what this Court said of
EPIRA:
One of the landmark pieces of legislation enacted by
Congress in recent years is the EPIRA. It established a
new policy, legal structure and regulatory framework for
the electric power industry. The new thrust is to tap
private capital for the expansion and improvement of the
industry as the large government debt and the highly
capital-intensive character of the industry itself have long
been acknowledged as the critical constraints to the
program. To attract private investment, largely foreign,
the jaded structure of the industry had to be addressed.
While the generation and transmission sectors were
centralized and monopolistic, the distribution side was
fragmented with over 130 utilities, mostly small and
uneconomic. The pervasive flaws have caused a low
utilization of existing generation capacity; extremely high
and uncompetitive power rates; poor quality of service to
consumers; dismal to forgettable performance of the
 government power sector; high system losses; and an FIRST DIVISION
inability to develop a clear strategy for overcoming these
shortcomings. COMMISSIONER OF
INTERNAL REVENUE,
Thus, the EPIRA provides a framework for the Petitioner,
restructuring of the industry, including the privatization of
the assets of the National Power Corporation (NPC), the
transition to a competitive structure, and the delineation
of the roles of various government agencies and the - versus - G.R. No. 184428
private entities. The law ordains the division of the
industry into four (4) distinct Present:
sectors, namely: generation, transmission, distribution and
supply. CORONA, C.J.,
Corollarily, the NPC generating plants have to privatized Chairperson,
and its transmission business spun off and privatized LEONARDO-DE CASTRO,
thereafter.[67] BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR., JJ.
Finally, every law has in its favor the presumption of constitutionality, and
SAN MIGUEL CORPORATION,
to justify its nullification, there must be a clear and unequivocal breach of Respondent. Promulgated:
the Constitution and not one that is doubtful, speculative, or November 23, 2011
argumentative. [68]
Indubitably, petitioners failed to overcome this x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

presumption in favor of the EPIRA. We find no clear violation of the DECISION

Constitution which would warrant a pronouncement that Sec. 34 of the
EPIRA and Rule 18 of its IRR are unconstitutional and void. VILLARAMA, JR., J.:

WHEREFORE, the instant case is hereby DISMISSED for lack of merit. Elevated before us via a petition for review on certiorari under Rule 45 of
the 1997 Rules of Civil Procedure, as amended, is the Decision[1]of the
Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 360 on a pure
SO ORDERED.
question of law, that is, whether the last paragraph of Section 1 of Bureau of

Internal Revenue (BIR) Revenue Regulations No. 17-99faithfully complies
with the mandate of Section 143 of the Tax Reform Act of 1997.
The facts are undisputed:
Respondent San Miguel Corporation, a domestic corporation
engaged in the manufacture and sale of fermented liquor, produces as one of
its products Red Horse beer which is sold in 500-ml. and 1-liter bottle
variants.
On January 1, 1998, Republic Act (R.A.) No. 8424 or the Tax
Reform Act of 1997 took effect. It reproduced, as Section 143 thereof, the
provisions of Section 140 of the old National Internal Revenue Code as
[2]
amended by R.A. No. 8240 which became effective on January 1,
1997. Section 143 of the Tax Reform Act of 1997 reads:
SEC. 143. Fermented Liquor. - There shall be
levied, assessed and collected an excise tax on beer, lager
beer, ale, porter and other fermented liquors except tuba,
basi, tapuy and similar domestic fermented liquors in
accordance with the following schedule:
(a) If the net retail price (excluding the excise tax
and value-added tax) per liter of volume capacity is less
than Fourteen pesos and fifty centavos (P14.50), the tax
shall be Six pesos and fifteen centavos (P6.15) per liter;
(b) If the net retail price (excluding the excise tax
and the value-added tax) per liter of volume capacity is
Fourteen pesos and fifty centavos (P14.50) up to Twenty-
two pesos (P22.00), the tax shall be Nine pesos and
fifteen centavos (P9.15) per liter;
(c) If the net retail price (excluding the excise tax
and the value-added tax) per liter of volume capacity is
more than Twenty-two pesos (P22.00), the tax shall be
Twelve pesos and fifteen centavos (P12.15) per liter.
Variants of existing brands which are introduced
in the domestic market after the effectivity of Republic
Act No. 8240 shall be taxed under the highest
classification of any variant of that brand.
Fermented liquor which are brewed and sold at
micro-breweries or small establishments such as pubs and
restaurants shall be subject to the rate in paragraph (c)
hereof.
The excise tax from any brand of fermented
liquor within the next three (3) years from the
effectivity of Republic Act No. 8240 shall not be lower
than the tax which was due from each brand on
October 1, 1996.
The rates of excise tax on fermented liquor
under paragraphs (a), (b) and (c) hereof shall be
increased by twelve percent (12%) on January 1, 2000.
x x x x (Emphasis and underscoring supplied.)
Thereafter, on December 16, 1999, the Secretary of Finance
issued Revenue Regulations No. 17-99 increasing the applicable tax rates
on fermented liquor by 12% as follows:
 SECTION DESCRIPTION PRESENT NEW SPECIFIC Provided, however, that the new specific tax rate
OF ARTICLES SPECIFIC TAX for any existing brand of cigars, cigarettes packed by
TAX RATES(Effective machine, distilled spirits, wines and fermented
RATES January 1, 2000) liquors shall not be lower than the excise tax that is
(Prior to actually being paid prior to January 1, 2000.
January 1, (Emphasis and underscoring supplied.)
2000)
xxxx
Now, for the period June 1, 2004 to December 31, 2004, respondent was
143 FERMENTED
LIQUORS assessed and paid excise taxes amounting to P2,286,488,861.58[3]for the
(a) Net Retail
323,407,194 liters of Red Horse beer products removed from its plants. Said
Price per
liter(excluding P6.15/liter P6.89/liter amount was computed based on the tax rate of P7.07/liter or the tax rate
VAT & Excise)
is less which was being applied to its products prior to January 1, 2000, as the last
than P14.50 paragraph of Section 1 of Revenue Regulations No. 17-99 provided that the
(b) Net Retail new specific tax rate for fermented liquors shall not be lower than the
Price per
liter (excluding excise tax that is actually being paid prior to January 1,
VAT & Excise) P9.15/liter P10.25/liter 2000.[4]Respondent, however, later contended that the said qualification in
is P14.50 up
to P22.00 the last paragraph of Section 1 of Revenue Regulations No. 17-99 has no
(c) Net Retail basis in the plain wording of Section 143. Respondent argued that the
Price per
liter (excluding applicable tax rate was only the P 6.89/liter tax rate stated in Revenue
VAT & Excise) P12.15/liter P13.61/liter Regulations No. 17-99, and that accordingly, its excise taxes should have
is more
than P22.00 been only P2,228,275,566.66.
xxxx

On May 22, 2006, respondent filed before the BIR a claim for
refund or tax credit of the amount of P60,778,519.56[5]as erroneously paid
This increase, however, was qualified by the last paragraph of Section 1
excise taxes for the period of May 22, 2004 to December 31, 2004. Later,
of Revenue Regulations No. 17-99 which reads:
 existing brand of cigars, cigarettes packed by machine,
said amount was reduced to P58,213,294.92 because of prescription. As the
distilled spirits, wines and fermented liquors shall not
petitioner Commissioner of Internal Revenue (CIR) failed to act on the be lower than the excise tax that is actually being paid
prior to January 1, 2000. This is indeed a situation not
claim, respondent filed a petition for review with the CTA.[6] intended by Section 143 of the [Tax Reform Act] of 1997,
as amended, both in letter and in spirit. Rather, it is a clear
contradiction to the import of the law.[8] (Emphasis
On September 26, 2007,[7]the CTA Second Division granted the supplied.)
petition and ordered petitioner to refund P58,213,294.92 to respondent or to
issue in the latters favor a Tax Credit Certificate for the said amount for the
Petitioner sought reconsideration[9]of the above decision, but the
erroneously paid excise taxes. The CTA held that Revenue Regulations No.
CTA Second Division denied petitioners motion in a Resolution[10]dated
17-99 modified or altered the mandate of Section 143 of the Tax Reform
January 17, 2008. Petitioner then filed a Petition for Review[11]with the
Act of 1997. The CTA Second Division held,
CTA En Banc.
A reading of Section 143 of the [Tax Reform
Act] of 1997, as amended, clearly shows that the law
contemplated two periods with applicable excise tax On August 7, 2008,[12]the CTA En Banc affirmed the Decision and
rate for each one: the first is the three-year transition Resolution of the CTA Second Division. The CTA En Banc held that
period beginning January 1, 1997, the date when RA 8240
took effect, until December 31, [1999]; and the second is [c]onsidering that there is nothing in the law that allows the BIR to extend
the period thereafter. During the transition period, the
the three-year transitory period, and considering further that there is no
excise tax rate shall not be lower than the tax rate
which is due from each brand on October 1, provision in the law mandating that the new specific tax rate should not be
1996. After the transitory period, the excise tax rate shall
be the figures provided under paragraphs (a), (b) and lower than the excise tax that is actually being paid prior to January 1, 2000,
(c) of Section 143 of the [Tax Reform Act] of 1997, as the last paragraph of [BIR Revenue Regulations No.] 17-99 has no basis in
amended, but increased by 12%, regardless of
whether such rate is lower or higher than the tax rate law and is inconsistent with the situation contemplated under the provisions
that is actually being paid prior to January 1, 2000. of Section 143 of the [Tax Reform Act of 1997]. It is an unauthorized
On the other hand, an analysis of the last administrative legislation and, therefore, invalid.[13]
paragraph of [Revenue Regulations No.] 17-99 would
reveal that it created a new tax rate or a new requirement
when it provided that the new specific tax rate for any
Undaunted, petitioner filed the instant petition for review on certiorari,
raising the sole issue of whether the CTA committed reversible error in
ruling that the provision in the last paragraph of Section 1 of Revenue
Regulations No. 17-99 is an invalid administrative interpretation of Section
143 of the Tax Reform Act of 1997.
Petitioner contends that the last paragraph of Section 1 of Revenue
Regulations No. 17-99 providing that the new specific tax rate for any brand
of cigars, cigarettes packed by machine, distilled spirits, wines and
fermented liquors shall not be lower than the excise tax that is actually
being paid prior to January 1, 2000, is a valid administrative interpretation
of Section 143 of the Tax Reform Act of 1997. It carries out the legislative
intent behind the enactment of R.A. No. 8240, which is to increase
government revenues through the collection of higher excise taxes on
fermented liquor.
Petitioner further points out that Section 143 of the Tax Reform
Act of 1997 provides that for 3 years after the effectivity of R.A. No.
8240, i.e., from January 1, 1997 to December 31, 1999, the excise tax from
any brand of fermented liquor shall not be lower than the tax due on
October 1, 1996. In the case of respondents Red Horse beer brand, the
applicable tax rate was the applicable tax rate as of October 1,
1996, i.e., P7.07/liter, which was higher than the rate of P6.15/liter imposed
under Section 143 of the Tax Reform Act of 1997. However, the CTA ruled
that after the 3-year transition period, the 12% increase in the excise tax on
fermented liquors should be based on the rates stated in paragraphs (a), (b),
and (c) of Section 143. Applying this interpretation, the rate of excise tax
that may be collected on respondents Red Horse beer brand after the 3-year
period would only be P6.89/liter, the figure arrived at after adding 12% to
the rate of P6.15/liter imposed in paragraph (a) of Section 143. Petitioner
argues that said literal interpretation of Section 143 defeats the legislative
intent behind the shift from the ad valorem system to the specific tax
system, i.e., to raise more revenues from the collection of taxes on the so-
called sin products like alcohol and cigarettes.
Respondent, for its part, maintains the correctness of the CTAs
interpretation and stresses that as already held by this Court
in Commissioner of Internal Revenue v. Fortune Tobacco
Corporation,[14]the last paragraph of Section 1 of Revenue Regulations No.
17-99 finds no support in the clear and plain wording of Section 143 of
the Tax Reform Act of 1997.
We deny the petition for utter lack of merit.
Section 143 of the Tax Reform Act of 1997 is clear and
unambiguous. It provides for two periods: the first is the 3-year transition
period beginning January 1, 1997, the date when R.A. No. 8240 took effect,
until December 31, 1999; and the second is the period thereafter. During the
3-year transition period, Section 143 provides that the excise tax from any
brand of fermented liquorshall not be lower than the tax which was due
from each brand on October 1, 1996. After the transitory period, Section
143 provides that the excise tax rate shall be the figures provided under
paragraphs (a), (b) and (c) of Section 143 but increased by 12%, without
regard to whether such rate is lower or higher than the tax rate that is
actually being paid prior to January 1, 2000 and therefore, without regard to
whether the revenue collection starting January 1, 2000 may turn out to be
lower than that collected prior to said date. Revenue Regulations No. 17-99,
however, created a new tax rate when it added in the last paragraph of
Section 1 thereof, the qualification that the tax due after the 12% increase
becomes effective shall not be lower than the tax actually paid prior to
January 1, 2000. As there is nothing in Section 143 of the Tax Reform Act
of 1997which clothes the BIR with the power or authority to rule that the
new specific tax rate should not be lower than the excise tax that is actually
being paid prior to January 1, 2000, such interpretation is clearly an invalid
exercise of the power of the Secretary of Finance to interpret tax laws and to
promulgate rules and regulations necessary for the effective enforcement of
the Tax Reform Act of 1997.[15]Said qualification must, perforce, be struck
down as invalid and of no effect.[16]
It bears reiterating that tax burdens are not to be imposed, nor
presumed to be imposed beyond what the statute expressly and clearly
imports, tax statutes being construed strictissimi juris against
government.[17]In case of discrepancy between the basic law and a rule or
regulation issued to implement said law, the basic law prevails as said rule
or regulation cannot go beyond the terms and provisions of the basic
law.[18] It must be stressed that the objective of issuing BIR Revenue
Regulations is to establish parameters or guidelines within which our tax
laws should be implemented, and not to amend or modify its substantive
meaning and import. As held in Commissioner of Internal Revenue v.
Fortune Tobacco Corporation,[19]
x x x The rule in the interpretation of tax laws is
that a statute will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously. A
tax cannot be imposed without clear and express words
for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by
implication. x x x As burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning of the tax
laws.[20]
Hence, while it may be true that the interpretation advocated by
petitioner CIR is in furtherance of its desire to raise revenues for the
government, such noble objective must yield to the clear provisions of the
law, particularly since, in this case, the terms of the said law are clear and
leave no room for interpretation.
the

WHEREFORE, the petition for review on certiorari is DENIED. The
Decision dated August 7, 2008 of the Court of Tax Appeals in C.T.A. EB
No. 360 is AFFIRMED. 3No costs.
SO ORDERED.
G.R. No. 172087 March 15, 2011
PHILIPPINE AMUSEMENT AND GAMING CORPORATION
(PAGCOR), Petitioner,
vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented
herein by HON. JOSE MARIO BUAG, in his official capacity as
COMMISSIONER OF INTERNAL REVENUE, Public Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in
behalf, or under the authority of Respondent.Public and Private
Respondents.
DECISION
PERALTA, J.:
For resolution of this Court is the Petition for Certiorari and
Prohibition1 with prayer for the issuance of a Temporary Restraining
Order and/or Preliminary Injunction, dated April 17, 2006, of
petitioner Philippine Amusement and Gaming Corporation
(PAGCOR), seeking the declaration of nullity of Section 1 of
Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of
the National Internal Revenue Code of 1997, by excluding petitioner
from exemption from corporate income tax for being repugnant to
Sections 1 and 10 of Article III of the Constitution. Petitioner further
seeks to prohibit the implementation of Bureau of Internal Revenue
(BIR) Revenue Regulations No. 16-2005 for being contrary to law.
The undisputed facts follow.
PAGCOR was created pursuant to Presidential Decree (P.D.) No.
1067-A2 on January 1, 1977. Simultaneous to its creation, P.D. No.
1067-B3 (supplementing P.D. No. 1067-A) was issued exempting
PAGCOR from the payment of any type of tax, except a franchise tax
of five percent (5%) of the gross revenue.4 Thereafter, on June 2,
1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's
exemption.5
To consolidate the laws pertaining to the franchise and powers of
PAGCOR, P.D. No. 18696 was issued. Section 13 thereof reads as
follows:
Sec. 13. Exemptions. x x x
(1) Customs Duties, taxes and other imposts on
importations. - All importations of equipment, vehicles,
automobiles, boats, ships, barges, aircraft and such other
gambling paraphernalia, including accessories or related
facilities, for the sole and exclusive use of the casinos, the
proper and efficient management and administration thereof
and such other clubs, recreation or amusement places to be
established under and by virtue of this Franchise shall be
exempt from the payment of duties, taxes and other imposts,
including all kinds of fees, levies, or charges of any kind or
nature.
Vessels and/or accessory ferry boats imported or to be
imported by any corporation having existing contractual
arrangements with the Corporation, for the sole and
exclusive use of the casino or to be used to service the
operations and requirements of the casino, shall likewise be
totally exempt from the payment of all customs duties, taxes
and other imposts, including all kinds of fees, levies,
assessments or charges of any kind or nature, whether
National or Local.
(2) Income and other taxes. - (a) Franchise Holder: No tax of
any kind or form, income or otherwise, as well as fees,
charges, or levies of whatever nature, whether National or
Local, shall be assessed and collected under this Franchise
from the Corporation; nor shall any form of tax or charge
attach in any way to the earnings of the Corporation, except
a Franchise Tax of five percent (5%)of the gross revenue or
earnings derived by the Corporation from its operation under
this Franchise. Such tax shall be due and payable quarterly
to the National Government and shall be in lieu of all kinds of
taxes, levies, fees or assessments of any kind, nature or
description, levied, established, or collected by any
municipal, provincial or national government authority.
(b) Others: The exemption herein granted for
earnings derived from the operations conducted
under the franchise, specifically from the payment of
any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of
and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the
Corporation or operator has any contractual
relationship in connection with the operations of the
casino(s) authorized to be conducted under this
Franchise and to those receiving compensation or
other remuneration from the Corporation as a result
of essential facilities furnished and/or technical
services rendered to the Corporation or operator.
The fee or remuneration of foreign entertainers contracted
by the Corporation or operator in pursuance of this provision
shall be free of any tax.
(3) Dividend Income. Notwithstanding any provision of law
to the contrary, in the event the Corporation should declare a
cash dividend income corresponding to the participation of
the private sector shall, as an incentive to the beneficiaries,
be subject only to a final flat income rate of ten percent
(10%) of the regular income tax rates. The dividend income
shall not in such case be considered as part of the
beneficiaries' taxable income; provided, however, that such
dividend income shall be totally exempted from income or
other form of taxes if invested within six (6) months from the
date the dividend income is received in the following:
(a) operation of the casino(s) or investments in any
affiliate activity that will ultimately redound to the
benefit of the Corporation; or any other corporation
with whom the Corporation has any existing
arrangements in connection with or related to the
operations of the casino(s);
(b) Government bonds, securities, treasury notes, or
government debentures; or
(c) BOI-registered or export-oriented corporation(s).7
PAGCOR's tax exemption was removed in June 1984 through P.D.
No. 1931, but it was later restored by Letter of Instruction No. 1430,
which was issued in September 1984.
On January 1, 1998, R.A. No. 8424,8 otherwise known as
the National Internal Revenue Code of 1997, took effect. Section 27
(c) of R.A. No. 8424 provides that government-owned and controlled
corporations (GOCCs) shall pay corporate income tax, except
petitioner PAGCOR, the Government Service and Insurance
Corporation, the Social Security System, the Philippine Health
Insurance Corporation, and the Philippine Charity Sweepstakes
Office, thus:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special general laws to
the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except
the Government Service and Insurance Corporation (GSIS), the
Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes Office
(PCSO), and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as
are imposed by this Section upon corporations or associations
engaged in similar business, industry, or activity.9
With the enactment of R.A. No. 933710 on May 24, 2005, certain
sections of the National Internal Revenue Code of 1997 were
amended. The particular amendment that is at issue in this case is
Section 1 of R.A. No. 9337, which amended Section 27 (c) of the
National Internal Revenue Code of 1997 by excluding PAGCOR from
the enumeration of GOCCs that are exempt from payment of
corporate income tax, thus:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special general laws to
the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned and controlled by the Government, except
the Government Service and Insurance Corporation (GSIS), the
Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the Philippine Charity Sweepstakes Office
(PCSO), shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations engaged
in similar business, industry, or activity.
Different groups came to this Court via petitions for certiorari and
prohibition11 assailing the validity and constitutionality of R.A. No.
9337, in particular:
1) Section 4, which imposes a 10% Value Added Tax (VAT)
on sale of goods and properties; Section 5, which imposes a
10% VAT on importation of goods; and Section 6, which
imposes a 10% VAT on sale of services and use or lease of
properties, all contain a uniform proviso authorizing the
President, upon the recommendation of the Secretary of
Finance, to raise the VAT rate to 12%. The said provisions
were alleged to be violative of Section 28 (2), Article VI of
the Constitution, which section vests in Congress the
exclusive authority to fix the rate of taxes, and of Section 1,
Article III of the Constitution on due process, as well as of
Section 26 (2), Article VI of the Constitution, which section
provides for the "no amendment rule" upon the last reading
of a bill;
2) Sections 8 and 12 were alleged to be violative of Section
1, Article III of the Constitution, or the guarantee of equal
protection of the laws, and Section 28 (1), Article VI of the
Constitution; and
3) other technical aspects of the passage of the law,
questioning the manner it was passed.
On September 1, 2005, the Court dismissed all the petitions and
upheld the constitutionality of R.A. No. 9337.12
On the same date, respondent BIR issued Revenue Regulations
(RR) No. 16-2005,13 specifically identifying PAGCOR as one of the
franchisees subject to 10% VAT imposed under Section 108 of the
National Internal Revenue Code of 1997, as amended by R.A. No.
9337. The said revenue regulation, in part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected
Services.
xxxx
(h) x x x
Gross Receipts of all other franchisees, other than those covered by
Sec. 119 of the Tax Code, regardless of how their franchisees may
have been granted, shall be subject to the 10% VAT imposed under
Sec.108 of the Tax Code. This includes, among others, the
Philippine Amusement and Gaming Corporation (PAGCOR), and its
licensees or franchisees.
Hence, the present petition for certiorari.
PAGCOR raises the following issues:
I
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND
VOID AB INITIO FOR BEING REPUGNANT TO THE EQUAL
PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III
OF THE 1987 CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND
VOID AB INITIO FOR BEING REPUGNANT TO THE NON-
IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III
OF THE 1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH
(H) IS NULL AND VOID AB INITIO FOR BEING BEYOND THE
SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR
AS THE SAID REGULATION IMPOSED VAT ON THE SERVICES
OF THE PETITIONER AS WELL AS PETITIONERS LICENSEES
OR FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED
BY APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON
PETITIONER OR ON PETITIONERS LICENSEES OR
FRANCHISEES.14
The BIR, in its Comment15 dated December 29, 2006, counters:
I
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869
ARE BOTH VALID AND CONSTITUTIONAL PROVISIONS OF
LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED
TOGETHER SO AS TO GIVE EFFECT TO ALL OF THEIR
PROVISIONS WHENEVER POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1
AND SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND
CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL
AUTHORITIES.
The Office of the Solicitor General (OSG), by way of Manifestation
In Lieu of Comment,16 concurred with the arguments of the
petitioner. It added that although the State is free to select the
subjects of taxation and that the inequity resulting from singling out a
particular class for taxation or exemption is not an infringement of the
constitutional limitation, a tax law must operate with the same force
and effect to all persons, firms and corporations placed in a similar
situation. Furthermore, according to the OSG, public respondent BIR
exceeded its statutory authority when it enacted RR No. 16-2005,
because the latter's provisions are contrary to the mandates of P.D.
No. 1869 in relation to R.A. No. 9337.
The main issue is whether or not PAGCOR is still exempt from
corporate income tax and VAT with the enactment of R.A. No. 9337.
After a careful study of the positions presented by the parties, this
Court finds the petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the
National Internal Revenue Code of 1977, petitioner is no longer
exempt from corporate income tax as it has been effectively omitted
from the list of GOCCs that are exempt from it. Petitioner argues that
such omission is unconstitutional, as it is violative of its right to equal
protection of the laws under Section 1, Article III of the Constitution:
Sec. 1. No person shall be deprived of life, liberty, or property without
due process of law, nor shall any person be denied the equal
protection of the laws.
In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning
and scope of equal protection, thus:
Equal protection requires that all persons or things similarly situated
should be treated alike, both as to rights conferred and
responsibilities imposed. Similar subjects, in other words, should not
be treated differently, so as to give undue favor to some and unjustly
discriminate against others. The guarantee means that no person or
class of persons shall be denied the same protection of laws which is
enjoyed by other persons or other classes in like circumstances. The
"equal protection of the laws is a pledge of the protection of equal
laws." It limits governmental discrimination. The equal protection
clause extends to artificial persons but only insofar as their property
is concerned.
xxxx
Legislative bodies are allowed to classify the subjects of legislation. If
the classification is reasonable, the law may operate only on some
and not all of the people without violating the equal protection clause.
The classification must, as an indispensable requisite, not be
arbitrary. To be valid, it must conform to the following requirements:
1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.18
It is not contested that before the enactment of R.A. No. 9337,
petitioner was one of the five GOCCs exempted from payment of
corporate income tax as shown in R.A. No. 8424, Section 27 (c) of
which, reads:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special or general laws
to the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except
the Government Service and Insurance Corporation (GSIS), the
Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes Office
(PCSO), and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as
are imposed by this Section upon corporations or associations
engaged in similar business, industry, or activity.19
A perusal of the legislative records of the Bicameral Conference
Meeting of the Committee on Ways on Means dated October 27,
1997 would show that the exemption of PAGCOR from the payment
of corporate income tax was due to the acquiescence of the
Committee on Ways on Means to the request of PAGCOR that it be
exempt from such tax.20 The records of the Bicameral Conference
Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a
tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.
HON. R. DIAZ. Tinanggal na ba natin yon?
CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether we covered the
tax on --- Whether on a universal basis, we included a tax on
cockfighting winnings.
CHAIRMAN ENRILE. No, we removed the ---
HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.
CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon
ang request ng Chairman, I will accept. (laughter) Pag-Pag-ibig yon,
maliliit na sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we
factored in an amount that would reflect the VAT and other sales
taxes---
CHAIRMAN ENRILE. No, were talking of this measure only. We will
not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the
exemption. Assuming that when we release the money into the
hands of the public, they will not use that to --- for wallpaper. They
will spend that eh, Mr. Chairman. So when they spend that---
CHAIRMAN ENRILE. Theres a VAT.
HON. ROXAS. There will be a VAT and there will be other sales
taxes no. Is there a quantification? Is there an approximation?
CHAIRMAN JAVIER. Not anything.
HON. ROXAS. So, in effect, we have sterilized that entire seven
billion. In effect, it is not circulating in the economy which is
unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken and
spent by government, somebody receives it in the form of wages and
supplies and other services and other goods. They are not being
taken from the public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That
will be extra income for the taxpayers.
HON. ROXAS. Precisely, so they will be spending it.21
The discussion above bears out that under R.A. No. 8424, the
exemption of PAGCOR from paying corporate income tax was not
based on a classification showing substantial distinctions which
make for real differences, but to reiterate, the exemption was granted
upon the request of PAGCOR that it be exempt from the payment of
corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A.
No. 8424, PAGCOR has been excluded from the enumeration of
GOCCs that are exempt from paying corporate income tax. The
records of the Bicameral Conference Meeting dated April 18, 2005,
of the Committee on the Disagreeing Provisions of Senate Bill No.
1950 and House Bill No. 3555, show that it is the legislative intent
that PAGCOR be subject to the payment of corporate income tax,
thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent of
the amendment.
SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why we're
even considering this VAT bill is we want to show the world who our
creditors, that we are increasing official revenues that go to the
national budget. Unfortunately today, Pagcor is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a net
income of 9.7 billion after paying some small taxes that they are
subjected to. Of the 9.7 billion, they claim they remitted to national
government seven billion. Pagkatapos, there are other specific
remittances like to the Philippine Sports Commission, etc., as
mandated by various laws, and then about 400 million to the
President's Social Fund. But all in all, their net profit today should be
about 12 billion. That's why I am questioning this two
billion. Because while essentially they claim that the money goes
to government, and I will accept that just for the sake of
argument. It does not pass through the appropriation process.
And I think that at least if we can capture 35 percent or 32
percent through the budgetary process, first, it is reflected in
our official income of government which is applied to the
national budget, and secondly, it goes through what is
constitutionally mandated as Congress appropriating and
defining where the money is spent and not through a board of
directors that has absolutely no accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman,
follow up lang.
There is wisdom in the comments of my good friend from Cebu,
Senator Osmea.
SEN. OSMEA. And Negros.
REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa.
But I would not want to put my friends from the Department of
Finance in a difficult position, but may we know your comments on
this knowing that as Senator Osmea just mentioned, he said, "I
accept that that a lot of it is going to spending for basic services," you
know, going to most, I think, supposedly a lot or most of it should go
to government spending, social services and the like. What is your
comment on this? This is going to affect a lot of services on the
government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEA. It goes from pocket to the other, Monico.
REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr.
Senator, because you may have your own pre-judgment on this and I
don't blame you. I don't blame you. And I know you have your own
research. But will this not affect a lot, the disbursements on social
services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that
question also. Wouldn't it be easier for you to explain to, say, foreign
creditors, how do you explain to them that if there is a fiscal gap
some of our richest corporations has [been] spared [from] taxation by
the government which is one rich source of revenues. Now, why do
you save, why do you spare certain government corporations on
that, like Pagcor? So, would it be easier for you to make an
argument if everything was exposed to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to
those before we call Congressman Teves?
MR. PURISIMA. Thank you, Mr. Chair.
Yes, from definitely improving the collection, it will help us
because it will then enter as an official revenue although when
dividends declare it also goes in as other income. (sic)
xxxx
REP. TEVES. Mr. Chairman.
xxxx
THE CHAIRMAN (REP. LAPUS). Congressman Teves.
REP. TEVES. Yeah. Pagcor is controlled under Section 27, that
is on income tax. Now, we are talking here on value-added tax.
Do you mean to say we are going to amend it from income tax
to value-added tax, as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending that
section with regard to the exemption from income tax of
Pagcor.
xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point of inquiry from the Chair. What
exactly are the functions of Pagcor that are VATable? What will we
VAT in Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is
Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya.
Sale of what?
xxxx
REP. VILLAFUERTE. Mr. Chairman, my question is, what are we
VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement or the
way they craft their contract, which basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the
Senate version does not discuss a VAT on Pagcor but it just
takes away their exemption from non-payment of income tax.22
Taxation is the rule and exemption is the exception.23 The burden of
proof rests upon the party claiming exemption to prove that it is, in
fact, covered by the exemption so claimed.24 As a rule, tax
exemptions are construed strongly against the
claimant.25 Exemptions must be shown to exist clearly and
categorically, and supported by clear legal provision. 26
In this case, PAGCOR failed to prove that it is still exempt from the
payment of corporate income tax, considering that Section 1 of R.A.
No. 9337 amended Section 27 (c) of the National Internal Revenue
Code of 1997 by omitting PAGCOR from the exemption. The
legislative intent, as shown by the discussions in the Bicameral
Conference Meeting, is to require PAGCOR to pay corporate income
tax; hence, the omission or removal of PAGCOR from exemption
from the payment of corporate income tax. It is a basic precept of
statutory construction that the express mention of one person, thing,
act, or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius.27 Thus, the express
mention of the GOCCs exempted from payment of corporate income
tax excludes all others. Not being excepted, petitioner PAGCOR
must be regarded as coming within the purview of the general rule
that GOCCs shall pay corporate income tax, expressed in the
maxim: exceptio firmat regulam in casibus non exceptis.28
PAGCOR cannot find support in the equal protection clause of the
Constitution, as the legislative records of the Bicameral Conference
Meeting dated October 27, 1997, of the Committee on Ways and
Means, show that PAGCORs exemption from payment of corporate
income tax, as provided in Section 27 (c) of R.A. No. 8424, or the
National Internal Revenue Code of 1997, was not made pursuant to
a valid classification based on substantial distinctions and the other
requirements of a reasonable classification by legislative bodies, so
that the law may operate only on some, and not all, without violating
the equal protection clause. The legislative records show that the
basis of the grant of exemption to PAGCOR from corporate income
tax was PAGCORs own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null
and void ab initio for violating the non-impairment clause of the
Constitution. Petitioner avers that laws form part of, and is read into,
the contract even without the parties expressly saying so. Petitioner
states that the private parties/investors transacting with it considered
the tax exemptions, which inure to their benefit, as the main
consideration and inducement for their decision to transact/invest
with it. Petitioner argues that the withdrawal of its exemption from
corporate income tax by R.A. No. 9337 has the effect of changing
the main consideration and inducement for the transactions of
private parties with it; thus, the amendatory provision is violative of
the non-impairment clause of the Constitution.
Petitioners contention lacks merit.
The non-impairment clause is contained in Section 10, Article III of
the Constitution, which provides that no law impairing the obligation
of contracts shall be passed. The non-impairment clause is limited in
application to laws that derogate from prior acts or contracts by
enlarging, abridging or in any manner changing the intention of the
parties.29 There is impairment if a subsequent law changes the terms
of a contract between the parties, imposes new conditions,
dispenses with those agreed upon or withdraws remedies for the
enforcement of the rights of the parties.30
As regards franchises, Section 11, Article XII of the
Constitution31 provides that no franchise or right shall be granted
except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so
requires.32
In Manila Electric Company v. Province of Laguna, 33 the Court held
that a franchise partakes the nature of a grant, which is beyond the
purview of the non-impairment clause of the Constitution.34 The
pertinent portion of the case states:
While the Court has, not too infrequently, referred to tax exemptions
contained in special franchises as being in the nature of contracts
and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in
nature. Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts,
such as those contained in government bonds or debentures,
lawfully entered into by them under enabling laws in which the
government, acting in its private capacity, sheds its cloak of authority
and waives its governmental immunity. Truly, tax exemptions of this
kind may not be revoked without impairing the obligations of
contracts. These contractual tax exemptions, however, are not to be
confused with tax exemptions granted under franchises. A franchise
partakes the nature of a grant which is beyond the purview of the
non-impairment clause of the Constitution. Indeed, Article XII,
Section 11, of the 1987 Constitution, like its precursor provisions in
the 1935 and the 1973 Constitutions, is explicit that no franchise for
the operation of a public utility shall be granted except under the
condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good so
requires.35
In this case, PAGCOR was granted a franchise to operate and
maintain gambling casinos, clubs and other recreation or amusement
places, sports, gaming pools, i.e., basketball, football, lotteries, etc.,
whether on land or sea, within the territorial jurisdiction of the
Republic of the Philippines.36 Under Section 11, Article XII of the
Constitution, PAGCORs franchise is subject to amendment,
alteration or repeal by Congress such as the amendment under
Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A.
No. 9337, amending Section 27 (c) of R.A. No. 8424 by withdrawing
the exemption of PAGCOR from corporate income tax, which may
affect any benefits to PAGCORs transactions with private parties, is
not violative of the non-impairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the
provision subjecting PAGCOR to 10% VAT is invalid for being
contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided
that petitioner can be subjected to VAT. R.A. No. 9337 is clear only
as to the removal of petitioner's exemption from the payment of
corporate income tax, which was already addressed above by this
Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner
from VAT pursuant to Section 7 (k) thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby
further amended to read as follows:
Section 109. Exempt Transactions. - (1) Subject to the provisions of
Subsection (2) hereof, the following transactions shall be exempt
from the value-added tax:
xxxx
(k) Transactions which are exempt under international agreements to
which the Philippines is a signatory or under special laws, except
Presidential Decree No. 529.37
Petitioner is exempt from the payment of VAT, because PAGCORs
charter, P.D. No. 1869, is a special law that grants petitioner
exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by
Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of
R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No.
8424), 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, including the
use or lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent (0%) Rate. The
following services performed in the Philippines by VAT-registered
persons shall be subject to zero percent (0%) rate;
xxxx
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero
percent (0%) rate;
x x x x38
As pointed out by petitioner, although R.A. No. 9337 introduced
amendments to Section 108 of R.A. No. 8424 by imposing VAT on
other services not previously covered, it did not amend the portion of
Section 108 (B) (3) that subjects to zero percent rate services
performed by VAT-registered persons to persons or entities whose
exemption under special laws or international agreements to which
the Philippines is a signatory effectively subjects the supply of such
services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A.
No. 8424 has been thoroughly and extensively discussed
in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation.39 Acesite was the owner and operator of the Holiday Inn
Manila Pavilion Hotel. It leased a portion of the hotels premises to
PAGCOR. It incurred VAT amounting to 30,152,892.02 from its
rental income and sale of food and beverages to PAGCOR from
January 1996 to April 1997. Acesite tried to shift the said taxes to
PAGCOR by incorporating it in the amount assessed to PAGCOR.
However, PAGCOR refused to pay the taxes because of its tax-
exempt status. PAGCOR paid only the amount due to Acesite minus
VAT in the sum of 30,152,892.02. Acesite paid VAT in the amount
of 30,152,892.02 to the Commissioner of Internal Revenue, fearing
the legal consequences of its non-payment. In May 1998, Acesite
sought the refund of the amount it paid as VAT on the ground that its
transaction with PAGCOR was subject to zero rate as it was
rendered to a tax-exempt entity. The Court ruled that PAGCOR and
Acesite were both exempt from paying VAT, thus:
xxxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants
the latter an exemption from the payment of taxes. Section 13 of
P.D. 1869 pertinently provides:
Sec. 13. Exemptions.
xxxx
(2) Income and other taxes. - (a) Franchise Holder: No tax of any
kind or form, income or otherwise, as well as fees, charges or levies
of whatever nature, whether National or Local, shall be assessed
and collected under this Franchise from the Corporation; nor shall
any form of tax or charge attach in any way to the earnings of the
Corporation, except a Franchise Tax of five (5%) percent of the
gross revenue or earnings derived by the Corporation from its
operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds
of taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any municipal,
provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings derived from
the operations conducted under the franchise specifically from the
payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to
corporation(s), association(s), agency(ies), or individual(s) with
whom the Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation
or other remuneration from the Corporation or operator as a result of
essential facilities furnished and/or technical services rendered to the
Corporation or operator.
Petitioner contends that the above tax exemption refers only to
PAGCOR's direct tax liability and not to indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a
blanket exemption to taxes with no distinction on whether the taxes
are direct or indirect. We are one with the CA ruling that PAGCOR is
also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term
"Corporation" or operator refers to PAGCOR. Although the law does
not specifically mention PAGCOR's exemption from indirect taxes,
PAGCOR is undoubtedly exempt from such taxes because the law
exempts from taxes persons or entities contracting with PAGCOR in
casino operations. Although, differently worded, the provision clearly
exempts PAGCOR from indirect taxes. In fact, it goes one step
further by granting tax exempt status to persons dealing with
PAGCOR in casino operations. The unmistakable conclusion is that
PAGCOR is not liable for the P30, 152,892.02 VAT and neither is
Acesite as the latter is effectively subject to zero percent rate under
Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or individuals dealing
with PAGCOR, the legislature clearly granted exemption also from
indirect taxes. It must be noted that the indirect tax of VAT, as in the
instant case, can be shifted or passed to the buyer, transferee, or
lessee of the goods, properties, or services subject to VAT. Thus, by
extending the tax exemption to entities or individuals dealing
with PAGCOR in casino operations, it is exempting PAGCOR
from being liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to
said tax.
It is true that VAT can either be incorporated in the value of the
goods, properties, or services sold or leased, in which case it is
computed as 1/11 of such value, or charged as an additional 10% to
the value. Verily, the seller or lessor has the option to follow either
way in charging its clients and customer. In the instant case, Acesite
followed the latter method, that is, charging an additional 10% of the
gross sales and rentals. Be that as it may, the use of either method,
and in particular, the first method, does not denigrate the fact that
PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT
charged by Acesite, the latter is not liable for the payment of it as it is
exempt in this particular transaction by operation of law to pay the
indirect tax. Such exemption falls within the former Section 102 (b)
(3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A.
8424), which provides:
Section 102. Value-added tax on sale of services.- (a) Rate and base
of tax - There shall be levied, assessed and collected, a value-added
tax equivalent to 10% of gross receipts derived by any person
engaged in the sale of services x x x; Provided, that the following
services performed in the Philippines by VAT registered persons
shall be subject to 0%.
xxxx
(3) Services rendered to persons or entities whose exemption under authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005;
special laws or international agreements to which the Philippines is a hence, the said regulatory provision is hereby nullified.
signatory effectively subjects the supply of such services to zero
(0%) rate (emphasis supplied). WHEREFORE, the petition is PARTLY GRANTED. Section 1 of
Republic Act No. 9337, amending Section 27 (c) of the National
The rationale for the exemption from indirect taxes provided for in Internal Revenue Code of 1997, by excluding petitioner Philippine
P.D. 1869 and the extension of such exemption to entities or Amusement and Gaming Corporation from the enumeration of
individuals dealing with PAGCOR in casino operations are best government-owned and controlled corporations exempted from
elucidated from the 1987 case of Commissioner of Internal corporate income tax is valid and constitutional, while BIR Revenue
Revenue v. John Gotamco & Sons, Inc., where the absolute tax Regulations No. 16-2005 insofar as it subjects PAGCOR to 10%
exemption of the World Health Organization (WHO) upon an VAT is null and void for being contrary to the National Internal
international agreement was upheld. We held in said case that the Revenue Code of 1997, as amended by Republic Act No. 9337.
exemption of contractee WHO should be implemented to mean that
the entity or person exempt is the contractor itself who constructed No costs.
the building owned by contractee WHO, and such does not violate
the rule that tax exemptions are personal because the manifest
SO ORDERED.
intention of the agreement is to exempt the contractor so that no
contractor's tax may be shifted to the contractee WHO. Thus, the
proviso in P.D. 1869, extending the exemption to entities or
individuals dealing with PAGCOR in casino operations, is clearly to
proscribe any indirect tax, like VAT, that may be shifted to
PAGCOR.40

Although the basis of the exemption of PAGCOR and Acesite from

VAT in the case of The Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax
Code, as amended, which section was retained as Section 108 (B)
(3) in R.A. No. 8424,41 it is still applicable to this case, since the
provision relied upon has been retained in R.A. No. 9337.421avvphi1

It is settled rule that in case of discrepancy between the basic law

and a rule or regulation issued to implement said law, the basic law
prevails, because the said rule or regulation cannot go beyond the
terms and provisions of the basic law.43 RR No. 16-2005, therefore,
cannot go beyond the provisions of R.A. No. 9337. Since PAGCOR
is exempt from VAT under R.A. No. 9337, the BIR exceeded its