What is an 'Indirect Tax'

An indirect tax is collected by one entity in the supply chain (usually a producer or retailer) and
paid to the government, but it is passed on to the consumer as part of the purchase price of a
good or service. The consumer is ultimately paying the tax by paying more for the product.

Maceda v Macaraig
GR No 88291, May 31, 1991

FACTS:
Commonwealth Act 120 created NAPOCOR as a public corporation to undertake the
development of hydraulic power and the production of power from other sources. RA 358
granted NAPOCOR tax and duty exemption privileges. RA 6395 revised the charter of the
NAPOCOR, tasking it to carry out the policy of the national electrification and provided in
detail NAPOCOR’s tax exceptions. PD 380 specified that NAPOCOR’s exemption includes
all taxes, etc. imposed “directly or indirectly.” PD 938 dated May 27, 1976 further
amended the aforesaid provision by integrating the tax exemption in general terms under
one paragraph.

ISSUE:
Whether or not NPC has ceased to enjoy indirect tax and duty exemption with the
enactment of PD 938 on May 27, 1976 which amended PD 380 issued on January 11, 1974

RULING:
No, it is still exempt.
NAPOCOR is a non-profit public corporation created for the general good and welfare,
and wholly owned by the government of the Republic of the Philippines. From the very
beginning of the corporation’s existence, NAPOCOR enjoyed preferential tax treatment
“to enable the corporation to pay the indebtedness and obligation” and effective
implementation of the policy enunciated in Section 1 of RA 6395.

From the preamble of PD 938, it is evident that the provisions of PD 938 were not
intended to be interpreted liberally so as to enhance the tax exempt status of NAPOCOR.

It is recognized that the rule on strict interpretation does not apply in the case of
exemptions in favor of government political subdivision or instrumentality. In the case of
property owned by the state or a city or other public corporations, the express exception
should not be construed with the same degree of strictness that applies to exemptions
contrary to the policy of the state, since as to such property “exception is the rule and
taxation the exception.”
The amount of revenue received or expected to be received by this tax exemption is,
however, not going to any of the oil companies. There would be no loss to the
government. The said amount shall accrue to the benefit of the NPC, a government
corporation, so as to enable it to sustain its tremendous task of providing electricity for
the country and at the least cost to the consumers. Denying this tax exemption would
mean hampering if not paralyzing the operations of the NPC. The resulting increased
revenue in the government will also mean increased power rates to be shouldered by the
consumers if the NPC is to survive and continue to provide our power requirements. The
greater interest of the people must be paramount.

CIR v Gotamco
GR No L-31092, February 27, 1987

FACTS:
The World Health Organization (WHO) decided to construct a building to house its offices,
as well as the other United
Nations Offices in Manila. Inviting bids for the construction of the building, the WHO
informed the bidders of its tax exemptions. The contract was awarded to John Gotamco
and sons. The Commissioner opined that a 3% contractor’s tax should be due from the
contractor. The WHO issued a certification that Gotamco should be exempted, but the
Commissioner insisted on the tax. Raised in the Court of Tax Appeals, the Court ruled in
favor of Gotamco.

ISSUE:
Is Gotamco liable for the tax?

RULING:
No. Direct taxes are those that are demanded from the very person who, it is intended or
desired, should pay them; while indirect taxes are those that are demanded in the first
instance from one person in the expectation and intention that he can shift the burden
to someone else.

Herein, the contractor’s tax is payable by the contractor but it is the owner of the building
that shoulders the burden of the tax because the same is shifted by the contractor to the
owner as a matter of self-preservation. Such tax is an “indirect tax” on the organization,
as the payment thereof or its inclusion in the bid price would have meant an increase in
the construction cost of the building.

Hence, WHO’s exemption from “indirect taxes” implies that Gotamco is exempt from
contractor’s tax.
 CIR v American Rubber Company GR No L-19667, November 29, 1966

FACTS:
American Rubber Company sold its rubber products locally and as prescribed by the
Commissioner’s regulation, the company declared the same for tax purposes in which the
Commissioner accordingly assessed. The company paid under protest the corresponding
sales taxes thereon, claiming exemption under Section 188b of the Tax Code, and
subsequently claimed refund. With the Commissioner refusing to do so, the case was
brought before the Court of Tax Appeals, which upheld the Commissioner’s stand that
the company is not entitled to recover the sales tax that had been separately billed to its
customers, and paid by the latter.

ISSUE:
Whether plaintiff is or is not entitled to recover the sales tax paid by it, but passed on to
and paid by the buyers of its products

RULING:
Refund is proper. The sales tax is by law imposed directly, not on the thing sold, but on
the act (sale) of the manufacturer, producer or importer who is exclusively made liable
for its time payment. There is no proof that the tax paid by plaintiff is the very money paid
by its customers. Where the tax money paid by the plaintiff came from is really no concern
of the Government. Anyway, once recovered, the plaintiff must hold the refund taxes in
trust for the individual purchasers who advanced payment thereof, and whose names
must appear in plaintiff’s records.
It would need to tend to perpetuate illegal taxation; for the individual customers to whom
the tax is ultimately shifted will ordinarily not care to sue for its recovery, in view of the
small amount paid by each and the high cost of litigation for the reclaiming of an illegal
tax. Insofar, therefore, as it favors the imposition, collection and retention of illegal taxes,
and encourages a multiplicity of suits, the tax court’s ruling under appeal violates morals
and public policy.
 Philippine Acetylene Co. Inc. v CIR GR No L-19707, August 17, 1967

FACTS:
Philippine Acetylene Co. Inc. is engaged in the manufacture and sale of oxygen and
acetylene gases. It sold its products to the National Power Corporation (Napocor), an
agency of the Philippine Government, and the Voice of America (VOA), an agency of the
United States Government. When the commissioner assessed deficiency sales tax and
surcharges against the company, the company denied liability for the payment of tax on
the ground that both Napocor and VOA are exempt from taxes.

ISSUE:
Is Philippine Acetylene Co. liable for tax?

RULING:
Yes. Sales tax are paid by the manufacturer or producer who must make a true and
complete return of the amount of his, her or its gross monthly sales, receipts or earnings
or gross value of output actually removed from the factory or mill, warehouse and to pay
the tax due thereon. The tax imposed by Section 186 of the Tax Code is a tax on the
manufacturer or producer and not a tax on the purchaser except probably in a very
remote and inconsequential sense. Accordingly, its levy on the sales made to tax- exempt
entities like the Napocor is permissible.

On the other hand, there is nothing in the language of the Military Bases Agreement to
warrant the general exemption granted by General Circular V-41 (1947). Thus, the
expansive construction of the tax exemption is void; and the sales to the VOA are subject
to the payment of percentage taxes under Section 186 of the Tax Code. Therefore, tax
exemption is strictly construed and exemption will not be held to conferred unless the
terms under which it is granted clearly and distinctly show that such was the intention.