G.R. No.

168056 September 1, 2005

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.
ALCANTARA and ED VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and
HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO
PARAYNO, JR., Respondent.
x-------------------------x
G.R. No. 168207
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, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA,
SECRETARY OF FINANCE, GUILLERMO L. PARAYNO, JR., COMMISSIONER OF
THE BUREAU OF INTERNAL REVENUE, Respondent.
x-------------------------x
G.R. No. 168461
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 VicePresident for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HARVARD
CORPORATION represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HERITAGE CORPORATION represented by its VicePresident 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", Petitioners,
vs.
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, Respondent.
x-------------------------x
G.R. No. 168463
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,
Petitioners,
vs.
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, Respondent.
x-------------------------x
G.R. No. 168730
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,
vs.
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, Respondent.
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.

On the same date, April 13, 2005, the Senate agreed to the request of the House of
Representatives for a committee conference on the disagreeing provisions of the
proposed bills.

-Anne Robert Jacques Turgot (1727-1781)

Before long, the Conference Committee on the Disagreeing Provisions of House Bill
No. 3555, House Bill No. 3705, and Senate Bill No. 1950, "after having met and
discussed in full free and conference," recommended the approval of its report, which
the Senate did on May 10, 2005, and with the House of Representatives agreeing
thereto the next day, May 11, 2005.

French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation for
education, increased emoluments for health workers, and wider coverage for full
value-added tax benefits these are the reasons why Republic Act No. 9337 (R.A.
No. 9337)1 was enacted. Reasons, the wisdom of which, the Court even with its
extensive constitutional power of review, cannot probe. The petitioners in these
cases, however, question not only the wisdom of the law, but also perceived
constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments
notwithstanding, petitioners failed to justify their call for the invalidity of the law.
Hence, R.A. No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555
and 3705, and Senate Bill No. 1950.
House Bill No. 35552 was introduced on first reading on January 7, 2005. The House
Committee on Ways and Means approved the bill, in substitution of House Bill No.
1468, which Representative (Rep.) Eric D. Singson introduced on August 8, 2004.
The President certified the bill on January 7, 2005 for immediate enactment. On
January 27, 2005, the House of Representatives approved the bill on second and
third reading.
House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced
by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V.
Paras. Its "mother bill" is House Bill No. 3555. The House Committee on Ways and
Means approved the bill on February 2, 2005. The President also certified it as urgent
on February 8, 2005. The House of Representatives approved the bill on second and
third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No.
19504 on March 7, 2005, "in substitution of Senate Bill Nos. 1337, 1838 and 1873,
taking into consideration House Bill Nos. 3555 and 3705." Senator Ralph G. Recto
sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both
sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan.
The President certified the bill on March 11, 2005, and was approved by the Senate
on second and third reading on April 13, 2005.

On May 23, 2005, the enrolled copy of the consolidated House and Senate version
was transmitted to the President, who signed the same into law on May 24, 2005.
Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court
issued a temporary restraining order, effective immediately and continuing until further
orders, enjoining respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the
Court speaking through Mr. Justice Artemio V. Panganiban, voiced the rationale for its
issuance of the temporary restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just
tell you a little background. You know when the law took effect on July 1, 2005, the
Court issued a TRO at about 5 oclock in the afternoon. But before that, there was a
lot of complaints aired on television and on radio. Some people in a gas station were
complaining that the gas prices went up by 10%. Some people were complaining that
their electric bill will go up by 10%. Other times people riding in domestic air carrier
were complaining that the prices that theyll have to pay would have to go up by 10%.
While all that was being aired, per your presentation and per our own understanding
of the law, thats not true. Its not true that the e-vat law necessarily increased prices
by 10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that
granted the Petroleum companies some subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . .
interrupted
J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the
elimination of the Excise Tax and the import duties. That is why, it is not correct to say
that the VAT as to petroleum dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price
by 10% to cover the E-Vat tax. If you consider the excise tax and the import duties,
the Net Tax would probably be in the neighborhood of 7%? We are not going into
exact figures I am just trying to deliver a point that different industries, different
products, different services are hit differently. So its not correct to say that all prices
must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are
at present imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax
was also removed as a mitigating measure. So, therefore, there is no justification to
increase the fares by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that
first day, were being increased arbitrarily by 10%. And thats one reason among many
others this Court had to issue TRO because of the confusion in the implementation.
Thats why we added as an issue in this case, even if its tangentially taken up by the
pleadings of the parties, the confusion in the implementation of the E-vat. Our people
were subjected to the mercy of that confusion of an across the board increase of
10%, which you yourself now admit and I think even the Government will admit is
incorrect. In some cases, it should be 3% only, in some cases it should be 6%
depending on these mitigating measures and the location and situation of each
product, of each service, of each company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending
the clarification of all these and we wish the government will take time to clarify all
these by means of a more detailed implementing rules, in case the law is upheld by
this Court. . . .6

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed
a petition for prohibition on May 27, 2005. They question the constitutionality of
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10%
VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of
goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of
properties. These questioned provisions contain a uniformproviso authorizing the
President, upon recommendation of the Secretary of Finance, to raise the VAT rate to
12%, effective January 1, 2006, after any of the following conditions have been
satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of 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 %).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by
Congress of its exclusive authority to fix the rate of taxes under Article VI, Section
28(2) of the 1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition
for certiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A. No.
9337.
Aside from questioning the so-called stand-by authority of the President to increase
the VAT rate to 12%, on the ground that it amounts to an undue delegation of
legislative power, petitioners also contend that the increase in the VAT rate to 12%
contingent on any of the two conditions being satisfied violates the due process
clause embodied in Article III, Section 1 of the Constitution, as it imposes an unfair
and additional tax burden on the people, in that: (1) the 12% increase is ambiguous
because it does not state if the rate would be returned to the original 10% if the
conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the
people are unsure of the applicable VAT rate from year to year; and (3) the increase
in the VAT rate, which is supposed to be an incentive to the President to raise the VAT
collection to at least 2 4/5 of the GDP of the previous year, should only be based on
fiscal adequacy.

The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056

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 "noamendment 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

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative

power, in violation of Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no
pass on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117,
119, 121, 125,7 148, 151, 236, 237 and 288, which were present in Senate Bill No.
1950, violates Article VI, Section 24(1) of the Constitution, which provides that all
appropriation, revenue or tariff bills shall originate exclusively in the House of
Representatives
G.R. No. 168730

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or
any of its political subdivisions, instrumentalities or agencies, including GOCCs, to
deduct a 5% final withholding tax on gross payments of goods and services, which
are subject to 10% VAT under Sections 106 (sale of goods and properties) and 108
(sale of services and use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary,
oppressive, excessive, and confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation of life,
liberty or property without due process of law under Article III, Section 1 of the
Constitution. According to petitioners, the contested sections impose limitations on
the amount of input tax that may be claimed. Petitioners also argue that the input tax
partakes the nature of a property that may not be confiscated, appropriated, or limited
without due process of law. Petitioners further contend that like any other property or
property right, the input tax credit may be transferred or disposed of, and that by
limiting the same, the government gets to tax a profit or value-added even if there is
no profit or value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of
equal protection of the law under Article III, Section 1 of the Constitution, as the
limitation on the creditable input tax if: (1) the entity has a high ratio of input tax; or (2)
invests in capital equipment; or (3) has several transactions with the government, is
not based on real and substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of
Article VI, Section 28(1) of the Constitution, and that it is the smaller businesses with
higher input tax to output tax ratio that will suffer the consequences thereof for it
wipes out whatever meager margins the petitioners make.

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and
prohibition on July 20, 2005, alleging unconstitutionality of the law on the ground that
the limitation on the creditable input tax in effect allows VAT-registered establishments
to retain a portion of the taxes they collect, thus violating the principle that tax
collection and revenue should be solely allocated for public purposes and
expenditures. Petitioner Garcia further claims that allowing these establishments to
pass on the tax to the consumers is inequitable, in violation of Article VI, Section 28(1)
of the Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents.
Preliminarily, respondents contend that R.A. No. 9337 enjoys the presumption of
constitutionality and petitioners failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e.,
legality of the bicameral proceedings, exclusive origination of revenue measures and
the power of the Senate concomitant thereto, have already been settled. With regard
to the issue of undue delegation of legislative power to the President, respondents
contend that the law is complete and leaves no discretion to the President but to
increase the rate to 12% once any of the two conditions provided therein arise.
Respondents also refute petitioners argument that the increase to 12%, as well as
the 70% limitation on the creditable input tax, the 60-month amortization on the
purchase or importation of capital goods exceedingP1,000,000.00, and the 5% final
withholding tax by government agencies, is arbitrary, oppressive, and confiscatory,
and that it violates the constitutional principle on progressive taxation, among others.

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G.
Escudero filed this petition forcertiorari on June 30, 2005. They question the
constitutionality of R.A. No. 9337 on the following grounds:

Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments
fiscal reform agenda. A reform in the value-added system of taxation is the core
revenue measure that will tilt the balance towards a sustainable macroeconomic
environment necessary for economic growth.

ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)

It was only in 1987, when President Corazon C. Aquino issued Executive Order No.
273, that the VAT system was rationalized by imposing a multi-stage tax rate of 0% or
10% on all sales using the "tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,16 R.A. No.
8241 or the Improved VAT Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and
finally, the presently beleaguered R.A. No. 9337, also referred to by respondents as
the VAT Reform Act.
The Court will now discuss the issues in logical sequence.

SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and
108 of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of
the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC,
violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1

PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of
value-added tax (VAT), as the confusion and inevitably, litigation, breeds from a
fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter,
exchange or lease of goods or properties and services.8 Being an indirect tax on
expenditure, the seller of goods or services may pass on the amount of tax paid to the
buyer,9 with the seller acting merely as a tax collector.10 The burden of VAT is intended
to fall on the immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the
transaction or business it engages in, without transferring the burden to someone
else.11 Examples are individual and corporate income taxes, transfer taxes, and
residence taxes.12
In the Philippines, the value-added system of sales taxation has long been in
existence, albeit in a different mode. Prior to 1978, the system was a single-stage tax
computed under the "cost deduction method" and was payable only by the original
sellers. The single-stage system was subsequently modified, and a mixture of the
"cost deduction method" and "tax credit method" was used to determine the valueadded tax payable.13 Under the "tax credit method," an entity can credit against or
subtract from the VAT charged on its sales or outputs the VAT paid on its purchases,
inputs and imports.14

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral
Conference Committee exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of
R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate
bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to be
credited against the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other
kinds of taxes in addition to the value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference
Committee.
It should be borne in mind that the power of internal regulation and discipline are
intrinsic in any legislative body for, as unerringly elucidated by Justice Story, "[i]f the
power did not exist, it would be utterly impracticable to transact the business of
the nation, either at all, or at least with decency, deliberation, and order."19Thus,
Article VI, Section 16 (3) of the Constitution provides that "each House may determine

the rules of its proceedings." Pursuant to this inherent constitutional power to

promulgate and implement its own rules of procedure, the respective rules of each
house of Congress provided for the creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives
provides as follows:
Sec. 88. Conference Committee. In the event that the House does not agree with
the Senate on the amendment to any bill or joint resolution, the differences may be
settled by the conference committees of both chambers.

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.

Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed,
sufficiently explicit statement of the changes in or amendments to the subject
measure.

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:

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.

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.:

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.

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

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)

The foregoing declaration is exactly in point with the present cases, where petitioners
allege irregularities committed by the conference committee in introducing changes or
deleting provisions in the House and Senate bills. Akin to the Farias case,22 the
present petitions also raise an issue regarding the actions taken by the conference
committee on matters regarding Congress compliance with its own internal rules. As
stated earlier, one of the most basic and inherent power of the legislature is the power
to formulate rules for its proceedings and the discipline of its members. Congress is
the best judge of how it should conduct its own business expeditiously and in the
most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its conference
committee if it believes that said members violated any of its rules of proceedings.
Even the expanded jurisdiction of this Court cannot apply to questions regarding only
the internal operation of Congress, thus, the Court is wont to deny a review of the
internal proceedings of a co-equal branch of government.
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino
vs. Secretary of Finance,23the Court already made the pronouncement that "[i]f a
change is desired in the practice [of the Bicameral Conference Committee] it
must be sought in Congress since this question is not covered by any
constitutional provision but is only an internal rule of each house." 24 To date,
Congress has not seen it fit to make such changes adverted to by the Court. It
seems, therefore, that Congress finds the practices of the bicameral conference
committee to be very useful for purposes of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant irregularities tainted the
proceedings of the bicameral conference committees, the Court deems it necessary
to dwell on the issue. The Court observes that there was a necessity for a conference
committee because a comparison of the provisions of House Bill Nos. 3555 and 3705
on one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed
disagreements. As pointed out in the petitions, said disagreements were as follows:

With regard to 70% limit on input tax credit

Provides that the input tax credit for capital goods on which a VAT has been paid shall be equal
shall not exceed 5% of the total amount of such goods and services; and for persons engaged i

With regard to amendments to be made to NIRC provisions regarding income and

No similar provision

No similar provision

Provided for a
several NIRC
corporate inc
franchise and

The disagreements between the provisions in the House bills and the Senate bill were
with regard to (1) what rate of VAT is to be imposed; (2) whether only the VAT
imposed on electricity generation, transmission and distribution companies should not
be passed on to consumers, as proposed in the Senate bill, or both the VAT imposed
on electricity generation, transmission and distribution companies and the VAT
imposed on sale of petroleum products should not be passed on to consumers, as
proposed in the House bill; (3) in what manner input tax credits should be limited; (4)
and whether the NIRC provisions on corporate income taxes, percentage, franchise
and excise taxes should be amended.
There being differences and/or disagreements on the foregoing provisions of the
House and Senate bills, the Bicameral Conference Committee was mandated by the
rules of both houses of Congress to act on the same by settling said differences
and/or disagreements. The Bicameral Conference Committee acted on the
disagreeing provisions by making the following changes:

1. With regard to the disagreement on the rate of VAT to be imposed, it would appear
from the Conference Committee Report that the Bicameral Conference Committee
tried to bridge the gap in the difference between the 10% VAT rate proposed by the
With regard to "Stand-By Authority" in favor of President
Senate, and the various rates with 12% as the highest VAT rate proposed by the
House, by striking a compromise whereby the present 10% VAT rate would be
Provides for 12% VAT on every sale of goods or properties (amending Sec. 106 of NIRC); 12% retained
VAT on importation
goods (amending
of NIRC);tax
and
12% VATasona sale of services a
until certainofconditions
arise, i.e.,Sec.
the 107
value-added
collection
percentage of gross domestic product (GDP) of the previous year exceeds 2 4/5%, or
108 of NIRC)
National Government deficit as a percentage of GDP of the previous year exceeds
1%, when the President, upon recommendation of the Secretary of Finance shall
raise the rate of VAT to 12% effective January 1, 2006.
With regard to the "no pass-on" provision
No similar provision

2. With regard to the disagreement on whether only the VAT imposed on electricity
generation, transmission and distribution companies should not be passed on to
consumers or whether both the VAT imposed on electricity generation, transmission
and distribution companies and the VAT imposed on sale of petroleum products may
be passed on to consumers, the Bicameral Conference Committee chose to settle
such disagreement by altogether deleting from its Report any no pass-on provision.

3. With regard to the disagreement on whether input tax credits should be limited or
not, the Bicameral Conference Committee decided to adopt the position of the House
by putting a limitation on the amount of input tax that may be credited against the
output tax, although it crafted its own language as to the amount of the limitation on
input tax credits and the manner of computing the same by providing thus:

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.

(A) Creditable Input Tax. . . .

...
Provided, The input tax on goods purchased or imported in a calendar month for use
in trade or business for which deduction for depreciation is allowed under this Code,
shall be spread evenly over the month of acquisition and the fifty-nine (59)
succeeding months if the aggregate acquisition cost for such goods, excluding the
VAT component thereof, exceeds one million Pesos (P1,000,000.00): PROVIDED,
however, that if the estimated useful life of the capital good is less than five (5) years,
as used for depreciation purposes, then the input VAT shall be spread over such
shorter period: . . .
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax
exceeds the input tax, the excess shall be paid by the VAT-registered person. If the
input tax exceeds the output tax, the excess shall be carried over to the succeeding
quarter or quarters: PROVIDED that the input tax inclusive of input VAT carried over
from the previous quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT any input
tax attributable to zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions of the NIRC on corporate
income tax, franchise, percentage and excise taxes, the conference committee
decided to include such amendments and basically adopted the provisions found in
Senate Bill No. 1950, with some changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of Representatives and Senate
Rules, the Bicameral Conference Committee is mandated to settle the differences
between the disagreeing provisions in the House bill and the Senate bill. The term
"settle" is synonymous to "reconcile" and "harmonize."25 To reconcile or harmonize
disagreeing provisions, the Bicameral Conference Committee may then (a) adopt the
specific provisions of either the House bill or Senate bill, (b) decide that neither
provisions in the House bill or the provisions in the Senate bill would

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 passon 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.

be carried into the final form of the bill, and/or (c) try to arrive at a compromise
between the disagreeing provisions.

Thus, all the changes or modifications made by the Bicameral Conference Committee
were germane to subjects of the provisions referred

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.

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.
Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized the longstanding 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)

Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the
introduction by the Bicameral Conference Committee of amendments and
modifications to disagreeing provisions in bills that have been acted upon by both
houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on
Exclusive Origination of Revenue Bills
Coming to the issue of the validity of the amendments made regarding the NIRC
provisions on corporate income taxes and percentage, excise taxes. Petitioners refer
to the following provisions, to wit:

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the
"No-Amendment Rule"

Section 27

Rates of Income Tax on Domestic Corporation

Article VI, Sec. 26 (2) of the Constitution, states:

28(A)(1)

Tax on Resident Foreign Corporation

28(B)(1)

Inter-corporate Dividends

34(B)(1)

Inter-corporate Dividends

116

Tax on Persons Exempt from VAT

117

Percentage Tax on domestic carriers and keepers of Garage

119

Tax on franchises

121

Tax on banks and Non-Bank Financial Intermediaries

148

Excise Tax on manufactured oils and other fuels

151

Excise Tax on mineral products

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.

236

Registration requirements

237

Issuance of receipts or sales or commercial invoices

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.

288

Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all
originate from the House. They aver that House Bill No. 3555 proposed amendments
only regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No.
3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the
NIRC; thus, the other sections of the NIRC which the Senate amended but which
amendments were not found in the House bills are not intended to be amended by
the House of Representatives. Hence, they argue that since the proposed
amendments did not originate from the House, such amendments are a violation of
Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public
debt, bills of local application, and private bills shall originate exclusively in the House
of Representatives but the Senate may propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and
3705 that initiated the move for amending provisions of the NIRC dealing mainly with
the value-added tax. Upon transmittal of said House bills to the Senate, the Senate
came out with Senate Bill No. 1950 proposing amendments not only to NIRC
provisions on the value-added tax but also amendments to NIRC provisions on other
kinds of taxes. Is the introduction by the Senate of provisions not dealing directly with
the value- added tax, which is the only kind of tax being amended in the House bills,
still within the purview of the constitutional provision authorizing the Senate to
propose or concur with amendments to a revenue bill that originated from the House?
The foregoing question had been squarely answered in the Tolentino case, wherein
the Court held, thus:
. . . To begin with, it is not the law but the revenue bill which is required by the
Constitution to "originate exclusively" in the House of Representatives. It is important
to emphasize this, because a bill originating in the House may undergo such
extensive changes in the Senate that the result may be a rewriting of the whole. . . . At
this point, what is important to note is that, as a result of the Senate action, a distinct
bill may be produced. To insist that a revenue statute and not only the bill

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 valueadded taxes. As these house bills were transmitted to the Senate, the latter,
approaching the measures from the point of national perspective, can introduce
amendments within the purposes of those bills. It can provide for ways that would
soften the impact of the VAT measure on the consumer, i.e., by distributing the burden
across all sectors instead of putting it entirely on the shoulders of the consumers. The
sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on
corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3
billion in additional revenues annually even while by mitigating prices of power,
services and petroleum products.
However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is
from the VAT on twelve goods and services. The rest of the tab P10.5 billion- will be
picked by corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and
the consumer. Why should the latter bear all the pain? Why should the fiscal salvation
be only on the burden of the consumer?
The corporate worlds equity is in form of the increase in the corporate income tax
from 32 to 35 percent, but up to 2008 only. This will raise P10.5 billion a year. After
that, the rate will slide back, not to its old rate of 32 percent, but two notches lower, to
30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this
emergency provision that will be in effect for 1,200 days, while we put our fiscal house
in order. This fiscal medicine will have an expiry date.

For their assistance, a reward of tax reduction awaits them. We intend to keep the
length of their sacrifice brief. We would like to assure them that not because there is a
light at the end of the tunnel, this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big
business will be there to share the burden.35
As the Court has said, the Senate can propose amendments and in fact, the
amendments made on provisions in the tax on income of corporations are germane to
the purpose of the house bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes
germane to the reforms to the VAT system, as these sections would cushion the
effects of VAT on consumers. Considering that certain goods and services which were
subject to percentage tax and excise tax would no longer be VAT-exempt, the
consumer would be burdened more as they would be paying the VAT in addition to
these taxes. Thus, there is a need to amend these sections to soften the impact of
VAT. Again, in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise
tax on bunker fuel, to lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a
VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to
destroy the VAT chain, we will however bring down the excise tax on socially sensitive
products such as diesel, bunker, fuel and kerosene.
...
What do all these exercises point to? These are not contortions of giving to the left
hand what was taken from the right. Rather, these sprang from our concern of
softening the impact of VAT, so that the people can cushion the blow of higher prices
they will have to pay as a result of VAT.36
The other sections amended by the Senate pertained to matters of tax administration
which are necessary for the implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter
and purposes of the house bills, which is to supplement our countrys fiscal deficit,
among others. Thus, the Senate acted within its power to propose those
amendments.
SUBSTANTIVE ISSUES
I.

Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108
of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et
al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108, respectively, of the NIRC giving the President the stand-by
authority to raise the VAT rate from 10% to 12% when a certain condition is met,
constitutes undue delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read
as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every
sale, barter or exchange of goods or properties, a value-added tax equivalent to ten
percent (10%) of the gross selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor:provided, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%), after any of the following conditions has
been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to
read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and collected on every importation
of goods a value-added tax equivalent to ten percent (10%) based on the total value
used by the Bureau of Customs in determining tariff and customs duties, plus
customs duties, excise taxes, if any, and other charges, such tax to be paid by the
importer prior to the release of such goods from customs custody: Provided, That

where the customs duties are determined on the basis of the quantity or volume of
the goods, the value-added tax shall be based on the landed cost plus excise taxes, if
any: provided, further, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%) after any of the following conditions has
been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to
read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a valueadded tax equivalent to ten percent (10%) of gross receipts derived from the sale or
exchange of services: provided, that the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%), after any of the following conditions has
been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase
the VAT rate is a virtual abdication by Congress of its exclusive power to tax because
such delegation is not within the purview of Section 28 (2), Article VI of the
Constitution, which provides:
The Congress may, by law, authorize the President to fix within specified limits, and
may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and
other duties or imposts within the framework of the national development program of
the government.
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and
properties as well as on the sale or exchange of services, which cannot be included
within the purview of tariffs under the exempted delegation as the latter refers to
customs duties, tolls or tribute payable upon merchandise to the government and
usually imposed on goods or merchandise imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the
President the legislative power to tax is contrary to republicanism. They insist that
accountability, responsibility and transparency should dictate the actions of Congress
and they should not pass to the President the decision to impose taxes. They also
argue that the law also effectively nullified the Presidents power of control, which
includes the authority to set aside and nullify the acts of her subordinates like the
Secretary of Finance, by mandating the fixing of the tax rate by the President upon
the recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause,
influence or create the conditions provided by the law to bring about either or both the
conditions precedent.

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

On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation
that the imposition of the 12% rate would be subject to the whim of the Secretary of
Finance, an unelected bureaucrat, contrary to the principle of no taxation without
representation. They submit that the Secretary of Finance is not mandated to give a
favorable recommendation and he may not even give his recommendation. Moreover,
they allege that no guiding standards are provided in the law on what basis and as to
how he will make his recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter, such that, ultimately, it is
the President who decides whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great branches of
government has exclusive cognizance of and is supreme in matters falling within its
own constitutionally allocated sphere.37 A logical

(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:

corollary to the doctrine of separation of powers is the principle of non-delegation of

powers, as expressed in the Latin maxim: potestas delegata non
delegari potest which means "what has been delegated, cannot be delegated."38 This
doctrine is based on the ethical principle that such as delegated power constitutes not
only a right but a duty to be performed by the delegate through the instrumentality of
his own judgment and not through the intervening mind of another.39

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.

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that
"the Legislative power shall be vested in the Congress of the Philippines which shall
consist of a Senate and a House of Representatives." The powers which Congress is
prohibited from delegating are those which are strictly, or inherently and exclusively,
legislative. Purely legislative power, which can never be delegated, has been
described as theauthority to make a complete law complete as to the time
when it shall take effect and as to whom it shall be applicable and to
determine the expediency of its enactment.40 Thus, the rule is that in order that a
court may be justified in holding a statute unconstitutional as a delegation of
legislative power, it must appear that the power involved is purely legislative in nature
that is, one appertaining exclusively to the legislative department. It is the nature of
the power, and not the liability of its use or the manner of its exercise, which
determines the validity of its delegation.

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
47

In Edu vs. Ericta, the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to
alter and repeal them; the test is the completeness of the statute in all its terms and
provisions when it leaves the hands of the legislature. To determine whether or not
there is an undue delegation of legislative power, the inquiry must be directed to the
scope and definiteness of the measure enacted. The legislative does not abdicate
its functions when it describes what job must be done, who is to do it, and what
is the scope of his authority. For a complex economy, that may be the only way in
which the legislative process can go forward. A distinction has rightfully been
made between delegation of power to make the laws which necessarily involves
a discretion as to what it shall be, which constitutionally may not be done, and
delegation of authority or discretion as to its execution to be exercised under
and in pursuance of the law, to which no valid objection can be made. The
Constitution is thus not to be regarded as denying the legislature the necessary
resources of flexibility and practicability. (Emphasis supplied).48
Clearly, the legislature may delegate to executive officers or bodies the power to
determine certain facts or conditions, or the happening of contingencies, on which the
operation of a statute is, by its terms, made to depend, but the legislature must
prescribe sufficient standards, policies or limitations on their authority.49 While the

power to tax cannot be delegated to executive agencies, details as to the

enforcement and administration of an exercise of such power may be left to them,
including the power to determine the existence of facts on which its operation
depends.50
The rationale for this is that the preliminary ascertainment of facts as basis for the
enactment of legislation is not of itself a legislative function, but is simply ancillary to
legislation. Thus, the duty of correlating information and making recommendations is
the kind of subsidiary activity which the legislature may perform through its members,
or which it may delegate to others to perform. Intelligent legislation on the
complicated problems of modern society is impossible in the absence of accurate
information on the part of the legislators, and any reasonable method of securing
such information is proper.51 The Constitution as a continuously operative charter of
government does not require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself
detailed determinations which it has declared to be prerequisite to application of
legislative policy to particular facts and circumstances impossible for Congress itself
properly to investigate.52
In the present case, the challenged section of R.A. No. 9337 is the
common proviso in Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of 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 %).
The case before the Court is not a delegation of legislative power. It is simply a
delegation of ascertainment of facts upon which enforcement and administration of
the increase rate under the law is contingent. The legislature has made the operation
of the 12% rate effective January 1, 2006, contingent upon a specified fact or
condition. It leaves the entire operation or non-operation of the 12% rate upon factual
matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of
discretion is the fact that the wordshall is used in the common proviso. The use of the
word shall connotes a mandatory order. Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of discretion.53 Where the law is clear and
unambiguous, it must be taken to mean exactly what it says, and courts have no
choice but to see to it that the mandate is obeyed.54
Thus, it is the ministerial duty of the President to immediately impose the 12% rate
upon the existence of any of the conditions specified by Congress. This is a duty

which cannot be evaded by the President. Inasmuch as the law specifically uses the
word shall, the exercise of discretion by the President does not come into play. It is a
clear directive to impose the 12% VAT rate when the specified conditions are present.
The time of taking into effect of the 12% VAT rate is based on the happening of a
certain specified contingency, or upon the ascertainment of certain facts or conditions
by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List,
et al. that the law effectively nullified the Presidents power of control over the
Secretary of Finance by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance. The Court cannot also subscribe to the
position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the
phrase "upon the recommendation of the Secretary of Finance." Neither does the
Court find persuasive the submission of petitioners Escudero, et al. that any
recommendation by the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it
simply means that as head of the Department of Finance he is the assistant and
agent of the Chief Executive. The multifarious executive and administrative functions
of the Chief Executive are performed by and through the executive departments, and
the acts of the secretaries of such departments, such as the Department of Finance,
performed and promulgated in the regular course of business, are, unless
disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief
Executive. The Secretary of Finance, as such, occupies a political position and holds
office in an advisory capacity, and, in the language of Thomas Jefferson, "should be
of the President's bosom confidence" and, in the language of Attorney-General
Cushing, is "subject to the direction of the President."55
In the present case, in making his recommendation to the President on the existence
of either of the two conditions, the Secretary of Finance is not acting as the alter ego
of the President or even her subordinate. In such instance, he is not subject to the
power of control and direction of the President. He is acting as the agent of the
legislative department, to determine and declare the event upon which its expressed
will is to take effect.56The Secretary of Finance becomes the means or tool by which
legislative policy is determined and implemented, considering that he possesses all
the facilities to gather data and information and has a much broader perspective to
properly evaluate them. His function is to gather and collate statistical data and other
pertinent information and verify if any of the two conditions laid out by Congress is
present. His personality in such instance is in reality but a projection of that of
Congress. Thus, being the agent of Congress and not of the President, the President
cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance
and to substitute the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the
existence of a fact, namely, whether by December 31, 2005, the value-added tax
collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (24/5%) or the national government deficit as a

percentage of GDP of the previous year exceeds one and one-half percent (1%). If
either of these two instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then the 12% VAT rate must
be imposed by the President effective January 1, 2006. There is no undue
delegation of legislative power but only of the discretion as to the execution of
a law. This is constitutionally permissible.57 Congress does not abdicate its
functions or unduly delegate power when it describes what job must be done, who
must do it, and what is the scope of his authority; in our complex economy that is
frequently the only way in which the legislative process can go forward.58
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to
the President the legislative power to tax is contrary to the principle of republicanism,
the same deserves scant consideration. Congress did not delegate the power to tax
but the mere implementation of the law. The intent and will to increase the VAT rate to
12% came from Congress and the task of the President is to simply execute the
legislative policy. That Congress chose to do so in such a manner is not within the
province of the Court to inquire into, its task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the President has ample powers to
cause, influence or create the conditions to bring about either or both the conditions
precedent does not deserve any merit as this argument is highly speculative. The
Court does not rule on allegations which are manifestly conjectural, as these may not
exist at all. The Court deals with facts, not fancies; on realities, not appearances.
When the Court acts on appearances instead of realities, justice and law will be shortlived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary
Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an
unfair and additional tax burden on the people. Petitioners also argue that the 12%
increase, dependent on any of the 2 conditions set forth in the contested provisions,
is ambiguous because it does not state if the VAT rate would be returned to the
original 10% if the rates are no longer satisfied. Petitioners also argue that such rate
is unfair and unreasonable, as the people are unsure of the applicable VAT rate from
year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two
conditions set forth therein are satisfied, the President shall increase the VAT rate to
12%. The provisions of the law are clear. It does not provide for a return to the 10%
rate nor does it empower the President to so revert if, after the rate is increased to
12%, the VAT collection goes below the 24/5 of the GDP of the previous year or that
the national government deficit as a percentage of GDP of the previous year does not
exceed 1%.
Therefore, no statutory construction or interpretation is needed. Neither can
conditions or limitations be introduced where none is provided for. Rewriting the law is
a forbidden ground that only Congress may tread upon.60

Thus, in the absence of any provision providing for a return to the 10% rate, which in
this case the Court finds none, petitioners argument is, at best, purely speculative.
There is no basis for petitioners fear of a fluctuating VAT rate because the law itself
does not provide that the rate should go back to 10% if the conditions provided in
Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the
law is clear and unambiguous, so that there is no occasion for the court's seeking the
legislative intent, the law must be taken as it is, devoid of judicial addition or
subtraction.61
Petitioners also contend that the increase in the VAT rate, which was allegedly an
incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the
previous year, should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not
the only condition. There is another condition, i.e., the national government deficit as
a percentage of GDP of the previous year exceeds one and one-half percent (1 %).

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.

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If
VAT/GDP is less than 2.8%, it means that government has weak or no capability of
implementing the VAT or that VAT is not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12% because such action will also be
ineffectual.
2. Natl Govt Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5% or less means the
fiscal condition of government has reached a relatively sound position or is towards
the direction of a balanced budget position. Therefore, there is no need to increase
the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated,
if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate.62
That the first condition amounts to an incentive to the President to increase the VAT
collection does not render it unconstitutional so long as there is a public purpose for
which the law was passed, which in this case, is mainly to raise revenue. In
fact, fiscal adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was
originally stated by Adam Smith in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of the
pockets of the people as little as possible over and above what it brings into the public
treasury of the state.63

The third thing that Id like to point out is the environment that we are presently
operating in is not as benign as what it used to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we were operating in a period of
basically global growth and low interest rates. The past few months, we have seen an
inching up, in fact, a rapid increase in the interest rates in the leading economies of
the world. And, therefore, our ability to borrow at reasonable prices is going to be
challenged. In fact, ultimately, the question is our ability to access the financial
markets.
When the President made her speech in July last year, the environment was not as
bad as it is now, at least based on the forecast of most financial institutions. So, we
were assuming that raising 80 billion would put us in a position where we can then
convince them to improve our ability to borrow at lower rates. But conditions have
changed on us because the interest rates have gone up. In fact, just within this room,
we tried to access the market for a billion dollars because for this year alone, the
Philippines will have to borrow 4 billion dollars. Of that amount, we have borrowed 1.5
billion. We issued last January a 25-year bond at 9.7 percent cost. We were trying to
access last week and the market was not as favorable and up to now we have not
accessed and we might pull back because the conditions are not very good.
So given this situation, we at the Department of Finance believe that we really need
to front-end our deficit reduction. Because it is deficit that is causing the increase of
the debt and we are in what we call a debt spiral. The more debt you have, the more
deficit you have because interest and debt service eats and eats more of your
revenue. We need to get out of this debt spiral. And the only way, I think, we can get
out of this debt spiral is really have a front-end adjustment in our revenue base.65

The image portrayed is chilling. Congress passed the law hoping for rescue from an
inevitable catastrophe. Whether the law is indeed sufficient to answer the states
economic dilemma is not for the Court to judge. In theFarias case, the Court refused
to consider the various arguments raised therein that dwelt on the wisdom of Section
14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court. Government policy is within the
exclusive dominion of the political branches of the government. It is not for this Court
to look into the wisdom or propriety of legislative determination. Indeed, whether an
enactment is wise or unwise, whether it is based on sound economic theory, whether
it is the best means to achieve the desired results, whether, in short, the legislative
discretion within its prescribed limits should be exercised in a particular manner are
matters for the judgment of the legislature, and the serious conflict of opinions does
not suffice to bring them within the range of judicial cognizance.66
In the same vein, the Court in this case will not dawdle on the purpose of Congress or
the executive policy, given that it is not for the judiciary to "pass upon questions of
wisdom, justice or expediency of legislation."67

states, in part: "[P]rovided, that the input tax inclusive of the input VAT carried over
from the previous quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output VAT: "
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the valueadded tax due from or paid by a VAT-registered person on the importation of goods or
local purchase of good and services, including lease or use of property, in the course
of trade or business, from a VAT-registered person, and Output Tax is the valueadded tax due on the sale or lease of taxable goods or properties or services by any
person registered or required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of input
tax that may be claimed. In effect, a portion of the input tax that has already been paid
cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of
the output tax, and therefore, the input tax in excess of 70% remains uncredited.
However, to the extent that the input tax is less than 70% of the output tax, then 100%
of such input tax is still creditable.

II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the
NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC,
violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of
R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No.
9337, amending Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and
confiscatory. Their argument is premised on the constitutional right against
deprivation of life, liberty of property without due process of law, as embodied in
Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the constitutional guarantee of
equal protection of the law.
The doctrine is that where the due process and equal protection clauses are invoked,
considering that they are not fixed rules but rather broad standards, there is a need
for proof of such persuasive character as would lead to such a conclusion. Absent
such a showing, the presumption of validity must prevail.68
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a
limitation on the amount of input tax that may be credited against the output tax. It

More importantly, the excess input tax, if any, is retained in a businesss books of
accounts and remains creditable in the succeeding quarter/s. This is explicitly allowed
by Section 110(B), which provides that "if the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters." In addition,
Section 112(B) allows a VAT-registered person to apply for the issuance of a tax credit
certificate or refund for any unused input taxes, to the extent that such input taxes
have not been applied against the output taxes. Such unused input tax may be used
in payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as
petitioners exaggeratedly contend. Their analysis of the effect of the 70% limitation is
incomplete and one-sided. It ends at the net effect that there will be
unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the
fact that such unapplied/unutilized input tax may be credited in the subsequent
periods as allowed by the carry-over provision of Section 110(B) or that it may later on
be refunded through a tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the
operation of the 70% limitation on the input tax. According to petitioner, the limitation
on the creditable input tax in effect allows VAT-registered establishments to retain a
portion of the taxes they collect, which violates the principle that tax collection and
revenue should be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the
seller, when he buys goods. Output tax meanwhile is the tax due to the person when
he sells goods. In computing the VAT payable, three possible scenarios may arise:

First, if at the end of a taxable quarter the output taxes charged by the seller are equal
to the input taxes that he paid and passed on by the suppliers, then no payment is
required;

SEC. 110. Tax Credits.

Second, when the output taxes exceed the input taxes, the person shall be liable for
the excess, which has to be paid to the Bureau of Internal Revenue (BIR);69 and

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.

Third, if the input taxes exceed the output taxes, the excess shall be carried over to
the succeeding quarter or quarters. Should the input taxes result from zero-rated or
effectively zero-rated transactions, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue taxes, at the
taxpayers option.70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus,
a person can credit his input tax only up to the extent of 70% of the output tax. In
laymans term, the value-added taxes that a person/taxpayer paid and passed on to
him by a seller can only be credited up to 70% of the value-added taxes that is due to
him on a taxable transaction. There is no retention of any tax collection because the
person/taxpayer has already previously paid the input tax to a seller, and the seller
will subsequently remit such input tax to the BIR. The party directly liable for the
payment of the tax is the seller.71 What only needs to be done is for the
person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against
his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input
tax partakes the nature of a property that may not be confiscated, appropriated, or
limited without due process of law.
The input tax is not a property or a property right within the constitutional purview of
the due process clause. A VAT-registered persons entitlement to the creditable input
tax is a mere statutory privilege.
The distinction between statutory privileges and vested rights must be borne in mind
for persons have no vested rights in statutory privileges. The state may change or
take away rights, which were created by the law of the state, although it may not take
away property, which was vested by virtue of such rights.72

(A) Creditable Input Tax.

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
deterred.78 Again, for whatever is the purpose of the 60-month amortization, this
involves executive economic policy and legislative wisdom in which the Court cannot
intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the
government for taxable transactions, Section 12 of R.A. No. 9337, which amended
Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.

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:

(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.

government remains creditable against the tax liability of the seller or contractor, to
wit:

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.

SEC. 114. Return and Payment of Value-added Tax.

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

(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
becreditable 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 valueadded.
Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The
Court will not engage in a legal joust where premises are what ifs, arguments,
theoretical and facts, uncertain. Any disquisition by the Court on this point will only be,
as Shakespeare describes life in Macbeth,82 "full of sound and fury, signifying
nothing."
Whats more, petitioners contention assumes the proposition that there is no profit or
value-added. It need not take an astute businessman to know that it is a matter of

exception that a business will sell goods or services without profit or value-added. It
cannot be overstressed that a business is created precisely for profit.
The equal protection clause under the Constitution means that "no person or class of
persons shall be deprived of the same protection of laws which is enjoyed by other
persons or other classes in the same place and in like circumstances."83
The power of the State to make reasonable and natural classifications for the
purposes of taxation has long been established. Whether it relates to the subject of
taxation, the kind of property, the rates to be levied, or the amounts to be raised, the
methods of assessment, valuation and collection, the States power is entitled to
presumption of validity. As a rule, the judiciary will not interfere with such power
absent a clear showing of unreasonableness, discrimination, or arbitrariness.84
Petitioners point out that the limitation on the creditable input tax if the entity has a
high ratio of input tax, or invests in capital equipment, or has several transactions with
the government, is not based on real and substantial differences to meet a valid
classification.
The argument is pedantic, if not outright baseless. The law does not make any
classification in the subject of taxation, the kind of property, the rates to be levied or
the amounts to be raised, the methods of assessment, valuation and collection.
Petitioners alleged distinctions are based on variables that bear different
consequences. While the implementation of the law may yield varying end results
depending on ones profit margin and value-added, the Court cannot go beyond what
the legislature has laid down and interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws on
all persons or things without distinction. This might in fact sometimes result in unequal
protection. What the clause requires is equality among equals as determined
according to a valid classification. By classification is meant the grouping of persons
or things similar to each other in certain particulars and different from all others in
these same particulars.85
Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by
Sens. S.R. Osmea III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and
House Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to
amend the 70% limitation by increasing the same to 90%. This, according to
petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory.
On this score, suffice it to say that these are still proposed legislations. Until Congress
amends the law, and absent any unequivocal basis for its unconstitutionality, the 70%
limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.

Uniformity in taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. Different articles may be taxed at different
amounts provided that the rate is uniform on the same class everywhere with all
people at all times.86
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or
12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or
12%) on sale of goods and properties, importation of goods, and sale of services and
use or lease of properties. These same sections also provide for a 0% rate on certain
sales and transaction.
Neither does the law make any distinction as to the type of industry or trade that will
bear the 70% limitation on the creditable input tax, 5-year amortization of input tax
paid on purchase of capital goods or the 5% final withholding tax by the government.
It must be stressed that the rule of uniform taxation does not deprive Congress of the
power to classify subjects of taxation, and only demands uniformity within the
particular class.87
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The
VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with
gross annual sales or receipts not exceedingP1,500,000.00.88 Also, basic marine and
agricultural food products in their original state are still not subject to the tax,89 thus
ensuring that prices at the grassroots level will remain accessible. As was stated
in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on sales of goods or
services by persons engaged in business with an aggregate gross annual sales
exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from
its application. Likewise exempt from the tax are sales of farm and marine products,
so that the costs of basic food and other necessities, spared as they are from the
incidence of the VAT, are expected to be relatively lower and within the reach of the
general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit
margins, and unduly favors those with high profit margins. Congress was not
oblivious to this. Thus, to equalize the weighty burden the law entails, the law, under
Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section
109(v), i.e., transactions with gross annual sales and/or receipts not exceeding P1.5
Million. This acts as a equalizer because in effect, bigger businesses that qualify for
VAT coverage and VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the
imposition of the tax on those previously exempt. Excise taxes on petroleum
products91 and natural gas92 were reduced. Percentage tax on domestic carriers was
removed.93 Power producers are now exempt from paying franchise tax.94
Aside from these, Congress also increased the income tax rates of corporations, in
order to distribute the burden of taxation. Domestic, foreign, and non-resident

corporations are now subject to a 35% income tax rate, from a previous
32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to
15% final withholding tax but the tax credit allowed on the corporations domicile was
increased to 20%.96 The Philippine Amusement and Gaming Corporation (PAGCOR)
is not exempt from income taxes anymore.97 Even the sale by an artist of his works or
services performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which
would otherwise rest largely on the consumers. It cannot therefore be gainsaid that
R.A. No. 9337 is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but
regressive. It is the smaller business with higher input tax-output tax ratio that will
suffer the consequences.
Progressive taxation is built on the principle of the taxpayers ability to pay. This
principle was also lifted from Adam Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective abilities; that is, in
proportion to the revenue which they respectively enjoy under the protection of the
state.
Taxation is progressive when its rate goes up depending on the resources of the
person affected.98
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive.
The principle of progressive taxation has no relation with the VAT system inasmuch as
the VAT paid by the consumer or business for every goods bought or services
enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small.
The disparity lies in the income earned by a person or profit margin marked by a
business, such that the higher the income or profit margin, the smaller the portion of
the income or profit that is eaten by VAT. A converso, the lower the income or profit
margin, the bigger the part that the VAT eats away. At the end of the day, it is really
the lower income group or businesses with low-profit margins that is always hardest
hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes,
like the VAT. What it simply provides is that Congress shall "evolve a progressive
system of taxation." The Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall evolve a
progressive system of taxation. The constitutional provision has been interpreted to

mean simply that direct taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized. (E. FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is not to
prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which
perhaps are the oldest form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, 17 (1) of the 1973 Constitution from which the present Art.
VI, 28 (1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them by imposing such taxes according to the
taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive
effects of this imposition by providing for zero rating of certain transactions (R.A. No.
7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, 4 amending 103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just
an enema, a first-aid measure to resuscitate an economy in distress. The Court is
neither blind nor is it turning a deaf ear on the plight of the masses. But it does not
have the panacea for the malady that the law seeks to remedy. As in other cases, the
Court cannot strike down a law as unconstitutional simply because of its yokes.
Let us not be overly influenced by the plea that for every wrong there is a remedy, and
that the judiciary should stand ready to afford relief. There are undoubtedly many
wrongs the judicature may not correct, for instance, those involving political
questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary is the repository
of remedies for all political or social ills; We should not forget that the Constitution has
judiciously allocated the powers of government to three distinct and separate
compartments; and that judicial interpretation has tended to the preservation of the
independence of the three, and a zealous regard of the prerogatives of each, knowing
full well that one is not the guardian of the others and that, for official wrong-doing,
each may be brought to account, either by impeachment, trial or by the ballot box.100
The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now.
All things considered, there is no raison d'tre for the unconstitutionality of R.A. No.
9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R.
Nos. 168056, 168207, 168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement and implementation
of R.A. No. 9337, the temporary restraining order issued by the Court on July 1, 2005
is LIFTED upon finality of herein decision.
SO ORDERED.

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

G.R. No. 159796

July 17, 2007

ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and ENVIRONMENTALIST

CONSUMERS NETWORK, INC. (ECN), Petitioners,
vs.
DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY COMMISSION
(ERC), NATIONAL POWER CORPORATION (NPC), POWER SECTOR ASSETS
AND LIABILITIES MANAGEMENT GROUP (PSALM Corp.), STRATEGIC POWER
UTILITIES GROUP (SPUG), and PANAY ELECTRIC COMPANY INC.
(PECO),Respondents.
DECISION
NACHURA, J.:
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and 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,1and 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 directing the
respondents to refrain from implementing, charging, and collecting the said
charge.3 The assailed provision of law reads:
SECTION 34. Universal Charge. Within one (1) year from the effectivity of this Act,
a universal charge to be determined, fixed and approved by the ERC, shall be
imposed on all electricity end-users for the following purposes:
(a) Payment for the stranded debts4 in excess of the amount assumed by the
National Government and stranded contract costs of NPC5 and as well as
qualified stranded contract costs of distribution utilities resulting from the
restructuring of the industry;

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 Utilities
Group8 (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 Sector Assets and
Liabilities Management Group (PSALM)10 for the rehabilitation and management of
watershed areas.11

(b) Missionary electrification;6

(c) The equalization of the taxes and royalties applied to indigenous or
renewable sources of energy vis--vis 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

On December 20, 2002, the ERC issued an Order12 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 Decision13 (for ERC Case No. 2002-165)
modifying its Order of December 20, 2002, thus:

2. Location
3. Actual amount utilized to complete the project;

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 ofP0.0373 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 on the following
billing cycles:
(a) June 26-July 25, 2003 for National Transmission Corporation
(TRANSCO); and
(b) July 2003 for Distribution Utilities (Dus).
Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount
of P0.0373 per kilowatt-hour and remit the same to PSALM on or before the 15th day
of the succeeding month.
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
(percentage of completion) of the projects using the prescribed format.1avvphi1
Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities
(Dus).
SO ORDERED.
On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC,
among others,14 to set aside the above-mentioned Decision, which the ERC granted
in its Order dated October 7, 2003, disposing:
WHEREFORE, the foregoing premises considered, the "Motion for Reconsideration"
filed by petitioner National Power Corporation-Small Power Utilities Group (NPCSPUG) is hereby GRANTED. Accordingly, the Decision dated June 26, 2003 is
hereby modified accordingly.
Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:
1. Projects for CY 2002 undertaken;

4. Period of completion;
5. Start of Operation; and
6. Explanation of the reallocation of UC-ME funds, if any.
SO ORDERED.15
Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the
NPC to draw up toP70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation
Budget subject to the availability of funds for the Environmental Fund component of
the Universal Charge.16
On the basis of the said ERC decisions, respondent Panay Electric Company, Inc.
(PECO) charged petitioner Romeo P. Gerochi and all other end-users with the
Universal Charge as reflected in their respective electric bills starting from the month
of July 2003.17
Hence, this original action.
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 the characteristics of a tax and is
collected to fund the operations of the NPC. They argue that the cases19 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 funds20 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 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 possess the essential characteristics of a tax, that its imposition would
redound to the benefit of the electric power industry and not to the public, and that its
rate is uniformly levied on electricity end-users, unlike a tax which is imposed based
on the individual taxpayer's ability to pay. 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 to it. Lastly, respondents argue that the imposition of the Universal Charge 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 remit the
amount pertaining to the Missionary Electrification and Environmental Fund
components of the Universal Charge, pursuant to Sec. 34 of the EPIRA and the
Decisions in ERC Case Nos. 2002-194 and 2002-165. Otherwise, PECO could be
held liable under Sec. 4624 of the EPIRA, which imposes fines and penalties for any
violation of its provisions or its IRR.25
The Issues

The ultimate issues in the case at bar are:

1) Whether or not, the Universal Charge imposed under Sec. 34 of the
EPIRA is a tax; and
2) Whether or not there is undue delegation of legislative power to tax on the
part of the ERC.26
Before we discuss the issues, the Court shall first deal with an obvious procedural
lapse.
Petitioners filed before us an original action particularly denominated as a Complaint
assailing the constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge
and Rule 18 of the EPIRA's IRR. No doubt, petitioners have locus standi. They
impugn the constitutionality of Sec. 34 of the EPIRA because they sustained a direct
injury as a result of the imposition of the Universal Charge as reflected in their electric
bills.
However, petitioners violated the doctrine of hierarchy of courts 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 as a petition for certiorari or prohibition.
Article VIII, Section 5(1) and (2) of the 1987 Constitution27 categorically provides that:
SECTION 5. The Supreme Court shall have the following powers:
1. Exercise original jurisdiction over cases affecting ambassadors, other
public ministers and consuls, and over petitions for certiorari, prohibition,
mandamus, quo warranto, and habeas corpus.
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.
But this Court's jurisdiction to issue writs of certiorari, 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 resort to it unless the redress desired cannot be obtained in the
appropriate courts, or where exceptional and compelling circumstances justify
availment of a remedy within and call for the exercise of our primary
jurisdiction.29 This circumstance alone warrants the outright dismissal of the present
action.
This procedural infirmity notwithstanding, we opt to resolve the constitutional issue
raised herein. We are aware that if the constitutionality of Sec. 34 of the EPIRA is not
resolved now, the issue will certainly resurface in the near future, resulting in a repeat
of this litigation, and probably involving the same parties. In the public interest and to
avoid unnecessary delay, this Court renders its ruling now.
The instant complaint is bereft of merit.
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
imposed37 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.

This feature of the Universal Charge further boosts the position that the same is an
exaction imposed primarily in pursuit of the State's police objectives. The STF
reasonably serves and assures the attainment and perpetuity of the purposes for
which the Universal Charge is imposed, i.e., to ensure the viability of the country's
electric power industry.
The Second Issue

Moreover, it is a well-established doctrine that the taxing power may be used as an

implement of police power.38In 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. Orbos41 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
The OSG is in point when it asseverates:
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 nonwaivable power and responsibility of the government to secure the physical and
economic survival and well-being of the community, that comprehensive sovereign
authority we designate as the police power of the State.46

The principle of separation of powers ordains that each of the three branches of
government has exclusive cognizance of and is supreme in matters falling within its
own constitutionally allocated sphere. A logical corollary to the doctrine of separation
of powers is the principle of non-delegation of powers, as expressed in the Latin
maxim potestas delegata non delegari potest (what has been delegated cannot be
delegated). This is based on the ethical principle that such delegated power
constitutes not only a right but a duty to be performed by the delegate through the
instrumentality of his own judgment and not through the intervening mind of
another. 47
In the face of the increasing complexity of modern life, delegation of legislative power
to various specialized administrative agencies is allowed as an exception to this
principle.48 Given the volume and variety of interactions in today's society, it is
doubtful if the legislature can promulgate laws that will deal adequately with and
respond promptly to the minutiae of everyday life. Hence, the need to delegate to
administrative bodies - the principal agencies tasked to execute laws in their
specialized fields - the authority to promulgate rules and regulations to implement a
given statute and effectuate its policies. All that is required for the valid 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 not in contradiction to, but in
conformity with, the standards prescribed by the law. These requirements are
denominated as the completeness test and the sufficient standard test.
Under the first test, the law must be complete in all its terms and conditions when it
leaves the legislature such that when it reaches the delegate, the only thing he will
have to do is to enforce it. The second test mandates adequate guidelines or
limitations in the law to determine the boundaries of the delegate's authority and
prevent the delegation from running riot.49
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 EPIRA50 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 and efficiency;"56 "standardization and regulation of medical
education;"57and "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.
In his Concurring and Dissenting Opinion62 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 Commission63 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 Resolution64 of August 3, 2004.65Moreover, 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 capitalintensive 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 inability to develop a
clear strategy for overcoming these shortcomings.
Thus, the EPIRA provides a framework for the 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 private entities. The law ordains the division of the industry into four
(4) distinct sectors, namely: generation, transmission, distribution and supply.
Corollarily, the NPC generating plants have to privatized and its transmission
business spun off and privatized thereafter.67
Finally, every law has in its favor the presumption of constitutionality, and to justify its
nullification, there must be a clear and unequivocal breach of the Constitution and not
one that is doubtful, speculative, or argumentative.68Indubitably, petitioners failed to
overcome this presumption in favor of the EPIRA. We find no clear violation of the
Constitution which would warrant a pronouncement that Sec. 34 of the EPIRA and
Rule 18 of its IRR are unconstitutional and void.
WHEREFORE, the instant case is hereby DISMISSED for lack of merit.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice

[G.R. No. 125704. August 28, 1998]

2nd Qtr.,
1992

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL

REVENUE, COURT OF APPEALS, and THE COURT OF TAX
APPEALS, respondents.

19,671,691.76

4,917,922.94 215,580.18

24,805,194.88

43,013,541.70

10,753,385.43 1,926,250.00 55,693,177.1

90,325,895.64

22,581,473.91 10,914,612.97 123,821,982.

DECISION
52
ROMERO, J.:

==========
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals
promulgated on April 8, 1996 in CA-G.R. SP No. 36975 [1] affirming the Court of Tax
Appeals decision in CTA Case No. 4872 dated March 16, 1995[2] ordering it to pay the
amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter
of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until
fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to
settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and
2nd quarter of 1992 in the total amount of P123,821,982.52 computed as follows:
PERIOD COVERED BASIC TAX
25%
SURCHARGE
INTEREST

TOTAL EXCISE TAX DUE

2nd Qtr.,
1991

12,911,124.60

3,227,781.15 3,378,116.16 19,517,021.91

3rd Qtr.,
1991

14,994,749.21

3,748,687.30 2,978,409.09 21,721,845.60

4th Qtr.,
1991

19,406,480.13

4,851,620.03 2,631,837.72 26,889,937.88

-------------------

-----------------

-----------------

--------------

------47,312,353.94

11,828,088.48 8,988,362.97 68,128,805.3

9
1st Qtr.,
1992

23,341,849.94

5,835,462.49 1,710,669.82 30,887,982.25

========== ===========

=======

====[3]
In a letter dated August 20, 1992, [4] Philex protested the demand for payment of
the tax liabilities stating that it has pending claims for VAT input credit/refund for the
taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus
interest. Therefore, these claims for tax credit/refund should be applied against the
tax liabilities, citing our ruling inCommissioner of Internal Revenue v. Itogon-Suyoc
Mines, Inc.[5]
In reply, the BIR, in a letter dated September 7, 1992, [6] found no merit in
Philexs position. Since these pending claims have not yet been established or
determined with certainty, it follows that no legal compensation can take
place. Hence, he BIR reiterated its demand that Philex settle the amount plus interest
within 30 days from the receipt of the letter.
In view of the BIRs denial of the offsetting of Philexs claim for VAT input
credit/refund against its exercise tax obligation, Philex raised the issue to the Court of
Tax Appeals on November 6, 1992.[7] In the course of the proceedings, the BIR issued
a Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to
the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latters tax
obligation of P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the
remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. Liquidated debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p.
259). In the instant case, the claims of the Petitioner for VAT refund is still pending
litigation, and still has to be determined by this Court (C.T.A. Case No.
4707). A fortiori, the liquidated debt of the Petitioner to the government cannot,
therefore, be set-off against the unliquidated claim which Petitioner conceived to exist

in its favor (see Compaia General de Tabacos vs. French and Unson, No. 14027,
November 8, 1918, 39 Phil. 34).[8]

1990-1991
1996

Moreover, the Court of Tax Appeals ruled that taxes cannot be subject to set-off
on compensation since claim for taxes is not a debt or contract.[9] The dispositive
portion of the CTA decision[10] provides:

1992 (1st-3rd Quarter) 007755

1996
P36,501,147.95

In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and
Petitioner is hereby ORDERED to PAY the Respondent the amount
of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter
of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until
fully paid pursuant to Section 248 and 249 of the Tax Code, as amended.
Aggrieved with the decision, Philex appealed the case before the Court of
Appeals docketed as CA-G.R. CV No. 36975. [11] Nonetheless, on April 8, 1996, the
Court of Appeals affirmed the Court of Tax Appeals observation. The pertinent portion
of which reads:[12]

007751

16 July

P84,662,787.46
23 July

In view of the grant of its VAT input credit/refund, Philex now contends that the
same should, ipso jure, off-set its excise tax liabilities[15] since both had already
become due and demandable, as well as fully liquidated;[16] hence, legal
compensation can properly take place.
We see no merit in this contention.

WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and
the decision dated March 16, 1995 is AFFIRMED.

In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple reason
that the government and the taxpayer are not creditors and debtors of each other.
[17]
There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity.[18] We find no cogent reason to deviate from the aforementioned
distinction.

Philex filed a motion for reconsideration which was, nevertheless, denied in a

Resolution dated July 11, 1996.[13]

Prescinding from this premise, in Francia v. Intermediate Appellate Court,[19] we

categorically held that taxes cannot be subject to set-off or compensation, thus:

However, a few days after the denial of its motion for reconsideration, Philex
was able to obtain its VAT input credit/refund not only for the taxable year 1989 to
1991 but also for 1992 and 1994, computed as follows:[14]

We have consistently ruled that there can be no off-setting of taxes against the
claims that the taxpayer may have against the government. A person cannot refuse
to pay a tax on the ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of tax cannot await the results of
a lawsuit against the government.

Period Covered By
Issue
Amount
Claims For Vat

Tax Credit Certificate

Date Of

The ruling in Francia has been applied to the subsequent case of Caltex
Philippines, Inc. v. Commission on Audit,[20] which reiterated that:

Number

refund/credit
1994 (2nd Quarter)
007730
1996
P25,317,534.01

11 July

1994 (4th Quarter)

007731
1996
P21,791,020.61

11 July

1989
1996

007732
P37,322,799.19

11 July

x x x a taxpayer may not offset taxes due from the claims that he may have against
the government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off.
Further, Philexs reliance on our holding in Commissioner of Internal Revenue v.
Itogon-Suyoc Mines, Inc., wherein we ruled that a pending refund may be set off
against an existing tax liability even though the refund has not yet been approved by
the Commissioner,[21] is no longer without any support in statutory law.

It is important to note that the premise of our ruling in the aforementioned case
was anchored on Section 51(d) of the National Revenue Code of 1939. However,
when the National Internal Revenue Code of 1977 was enacted, the same provision
upon which the Itogon-Suyoc pronouncement was based was omitted.[22] Accordingly,
the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philexs position, it asserts that
the imposition of surcharge and interest for the non-payment of the excise taxes
within the time prescribed was unjustified. Philex posits the theory that it had no
obligation to pay the excise liabilities within the prescribed period since, after all, it still
has pending claims for VAT input credit/refund with BIR.[23]
We fail to see the logic of Philexs claim for this is an outright disregard of the
basic principle in tax law that taxes are the lifeblood of the government and so should
be collected without unnecessary hindrance.[24] Evidently, to countenance Philexs
whimsical reason would render ineffective our tax collection system. Too simplistic, it
finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on
the ground that it has a pending tax claim for refund or credit against the government
which has not yet been granted. It must be noted that a distinguishing feature of a tax
is that it is compulsory rather than a matter of bargain. [25] Hence, a tax does not
depend upon the consent of the taxpayer.[26] If any payer can defer the payment of
taxes by raising the defense that it still has a pending claim for refund or credit, this
would adversely affect the government revenue system. A taxpayer cannot refuse to
pay his taxes when they fall due simply because he has a claim against the
government or that the collection of the tax is contingent on the result of the lawsuit it
filed against the government.[27] Moreover, Philex's theory that would automatically
apply its VAT input credit/refund against its tax liabilities can easily give rise to
confusion and abuse, depriving the government of authority over the manner by
which taxpayers credit and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund
with the government is immaterial for the imposition of charges and penalties
prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the
surcharge is mandatory and the BIR is not vested with any authority to waive the
collection thereof.[28] The same cannot be condoned for flimsy reasons, [29] similar to
the one advanced by Philex in justifying its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106(e)[30] of the National
Internal Revenue Code of 1977, which requires the refund of input taxes within 60
days,[31] when it took five years for the latter to grant its tax claim for VAT input
credit/refund.[32]

In this regard, we agree with Philex. While there is no dispute that a claimant
has the burden of proof to establish the factual basis of his or her claim for tax credit
or refund,[33]however, once the claimant has submitted all the required documents, it is
the function of the BIR to assess these documents with purposeful dispatch. After all,
since taxpayers owe honesty to government it is but just that government render fair
service to the taxpayers.[34]
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the
refund of these erroneously paid taxes was only granted in 1996. Obviously, had the
BIR been more diligent and judicious with their duty, it could have granted the refund
earlier. We need not remind the BIR that simple justice requires the speedy refund of
wrongly-held taxes.[35] Fair dealing and nothing less, is expected by the taxpayer from
the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax
Appeals:[36]
"The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collectot kill the
'hen that lays the golden egg.' And, in the order to maintain the general public's trust
and confidence in the Government this power must be used justly and not
treacherously."
Despite our concern with the lethargic manner by which the BIR handled
Philex's tax claim, it is a settled rule that in the performance of governmental function,
the State is not bound by the neglect of its agents and officers. Nowhere is this more
true than in the field of taxation.[37] Again, while we understand Philex's predicament, it
must be stressed that the same is not valid reason for the non- payment of its tax
liabilities.
To be sure, this is not state that the taxpayer is devoid of remedy against public
servants or employees especially BIR examiners who, in investigating tax claims are
seen to drag their feet needlessly. First, if the BIR takes time in acting upon the
taxpayer's claims for refund, the latter can seek judicial remedy before the Court of
Tax Appeals in the manner prescribed by law.[38] Second, if the inaction can be
characterized as willful neglect of duty, then recourse under the Civil Code and the
Tax Code can also be availed of.
Article 27 of the Civil Code provides:
"Art. 27. Any person suffering material or moral loss because a public servant or
employee refuses or neglects, without just cause, to perform his official duty may file
an action for damages and other relief against the latter, without prejudice to any
disciplinary action that may be taken."

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997
states:
"xxx xxx

xxx

(c) wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform, any other duties enjoined by
law."
Simply put, both provisions abhor official inaction, willful neglect and unreasonable
delay in the performance of official duties.[39] In no uncertain terms must we stress that
every public employee or servant must strive to render service to the people with
utmost diligence and efficiency. Insolence and delay have no place in government
service. The BIR, being the government collecting arm, must and should do no less. It
simply cannot be apathetic and laggard in rendering service to the taxpayer if it
wishes to remain true to its mission of hastening the country's development. We take
judicial notice of the taxpayer's generally negative perception towards the BIR; hence,
it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in
performing its duties, still, the same cannot justify Philex's non-payment of its tax
liabilities. The adage "no one should take the law into his own hands" should have
guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is
hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., (Chairman), Kapunan and Purisima, JJ., concur.

G.R. No. 178788

September 29, 2010

UNITED AIRLINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, of the Decision1 dated July 5, 2007 of the Court of Tax
Appeals En Banc (CTA En Banc) in C.T.A. EB No. 227 denying petitioners claim for
tax refund of P5.03 million.
The undisputed facts are as follows:
Petitioner United Airlines, Inc. is a foreign corporation organized and existing under
the laws of the State of Delaware, U.S.A., engaged in the international airline
business.
Petitioner used to be an online international carrier of passenger and cargo, i.e., it
used to operate passenger and cargo flights originating in the Philippines. Upon
cessation of its passenger flights in and out of the Philippines beginning February 21,
1998, petitioner appointed a sales agent in the Philippines -- Aerotel Ltd. Corp., an
independent general sales agent acting as such for several international airline
companies.2 Petitioner continued operating cargo flights from the Philippines until
January 31, 2001.3
On April 12, 2002, petitioner filed with respondent Commissioner a claim for income
tax refund, pursuant to Section 28(A)(3)(a)4 of the National Internal Revenue Code of
1997 (NIRC) in relation to Article 4(7)5 of the Convention between the Government of
the Republic of the Philippines and the Government of the United States of America
with respect to Income Taxes (RP-US Tax Treaty). Petitioner sought to refund the total
amount ofP15,916,680.69 pertaining to income taxes paid on gross passenger and
cargo revenues for the taxable years 1999 to 2001, which included the amount
of P5,028,813.23 allegedly representing income taxes paid in 1999 on passenger
revenue from tickets sold in the Philippines, the uplifts of which did not originate in the
Philippines. Citing the change in definition of Gross Philippine Billings (GPB) in the
NIRC, petitioner argued that since it no longer operated passenger flights originating
from the Philippines beginning February 21, 1998, its passenger revenue for 1999,
2000 and 2001 cannot be considered as income from sources within the Philippines,
and hence should not be subject to Philippine income tax under Article 96 of the RPUS Tax Treaty.7

As no resolution on its claim for refund had yet been made by the respondent and in
view of the two (2)-year prescriptive period (from the time of filing the Final
Adjustment Return for the taxable year 1999) which was about to expire on April 15,
2002, petitioner filed on said date a petition for review with the Court of Tax Appeals
(CTA).8
Petitioner asserted that under the new definition of GPB under the 1997 NIRC and
Article 4(7) of the RP-US Tax Treaty, Philippine tax authorities have jurisdiction to tax
only the gross revenue derived by US air and shipping carriers from outgoing traffic in
the Philippines. Since the Bureau of Internal Revenue (BIR) erroneously imposed and
collected income tax in 1999 based on petitioners gross passenger revenue, as
beginning 1998 petitioner no longer flew passenger flights to and from the Philippines,
petitioner is entitled to a refund of such erroneously collected income tax in the
amount of P5,028,813.23.9
In its Decision10 dated May 18, 2006, the CTAs First Division11 ruled that no excess or
erroneously paid tax may be refunded to petitioner because the income tax on GPB
under Section 28(A)(3)(a) of the NIRC applies as well to gross revenue from carriage
of cargoes originating from the Philippines. It agreed that petitioner cannot be taxed
on its 1999 passenger revenue from flights originating outside the Philippines.
However, in reporting a cargo revenue of P740.33 million in 1999, it was found that
petitioner deducted two (2) items from its gross cargo revenue of P2.84
billion: P141.79 million as commission and P1.98 billion as other incentives of its
agent. These deductions were erroneous because the gross revenue referred to in
Section 28(A)(3)(a) of the NIRC was total revenue before any deduction of
commission and incentives. Petitioners gross cargo revenue in 1999, beingP2.84
billion, the GPB tax thereon was P42.54 million and not P11.1 million, the amount
petitioner paid for the reported net cargo revenue of P740.33 million. The CTA First
Division further noted that petitioner even underpaid its taxes on cargo revenue
by P31.43 million, which amount was much higher than the P5.03 million it asked to
be refunded.
A motion for reconsideration was filed by petitioner but the First Division denied the
same. It held that petitioners claim for tax refund was not offset with its tax liability;
that petitioners tax deficiency was due to erroneous deductions from its gross cargo
revenue; that it did not make an assessment against petitioner; and that it merely
determined if petitioner was entitled to a refund based on the undisputed facts and
whether petitioner had paid the correct amount of tax.12
Petitioner elevated the case to the CTA En Banc which affirmed the decision of the
First Division.
Hence, this petition anchored on the following grounds:

I. THE CTA EN BANC GROSSLY ERRED IN DENYING THE

PETITIONERS CLAIM FOR REFUND OF ERRONEOUSLY PAID INCOME
TAX ON GROSS PHILIPPINE BILLINGS [GPB] BASED ON ITS FINDING
THAT PETITIONERS UNDERPAYMENT OF [P31.43 MILLION] GPB TAX
ON CARGO REVENUES IS A LOT HIGHER THAN THE GPB TAX OF
[P5.03 MILLION] ON PASSENGER REVENUES, WHICH IS THE SUBJECT
OF THE INSTANT CLAIM FOR REFUND. THE DENIAL OF PETITIONERS
CLAIM ON SUCH GROUND CLEARLY AMOUNTS TO AN OFF-SETTING
OF TAX LIABILITIES, CONTRARY TO WELL-SETTLED JURISPRUDENCE.
II. THE DECISION OF THE CTA EN BANC VIOLATED PETITIONERS
RIGHT TO DUE PROCESS.
III. THE CTA EN BANC ACTED IN EXCESS OF ITS JURISDICTION BY
DENYING PETITIONERS CLAIM FOR REFUND OF ERRONEOUSLY PAID
INCOME TAX ON GROSS PHILIPPINE BILLINGS BASED ON ITS FINDING
THAT PETITIONER UNDERPAID GPB TAX ON CARGO REVENUES IN
THE AMOUNT OF [P31.43 MILLION] FOR THE TAXABLE YEAR 1999.
IV. THE CTA EN BANC HAS NO AUTHORITY UNDER THE LAW TO MAKE
ANY ASSESSMENTS FOR DEFICIENCY TAXES. THE AUTHORITY TO
MAKE ASSESSMENTS FOR DEFICIENCY NATIONAL INTERNAL
REVENUE TAXES IS VESTED BY THE 1997 NIRC UPON RESPONDENT.
V. ANY ASSESSMENT AGAINST PETITIONER FOR DEFICIENCY INCOME
TAX FOR THE TAXABLE YEAR 1999 IS ALREADY BARRED BY
PRESCRIPTION.13
The main issue to be resolved is whether the petitioner is entitled to a refund of the
amount of P5,028,813.23 it paid as income tax on its passenger revenues in 1999.
Petitioner argues that its claim for refund of erroneously paid GPB tax on off-line
passenger revenues cannot be denied based on the finding of the CTA that petitioner
allegedly underpaid the GPB tax on cargo revenues byP31,431,171.09, which
underpayment is allegedly higher than the GPB tax of P5,028,813.23 on passenger
revenues, the amount of the instant claim. The denial of petitioners claim for refund
on such ground is tantamount to an offsetting of petitioners claim for refund of
erroneously paid GPB against its alleged tax liability. Petitioner thus cites the wellentrenched rule in taxation cases that internal revenue taxes cannot be the subject of
set-off or compensation.14
According to petitioner, the offsetting of the liabilities is very clear in the instant case
because the amount of petitioners claim for refund of erroneously paid GPB tax
of P5,028,813.23 for the taxable year 1999 is being offset against petitioners alleged

deficiency GPB tax liability on cargo revenues for the same year, which was not even
the subject of an investigation nor any valid assessment issued by respondent
against the petitioner. Under Section 22815 of the NIRC, the "taxpayer shall be
informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void." This administrative process of issuing an
assessment is part of procedural due process enshrined in the 1987 Constitution.
Records do not show that petitioner has been assessed by the BIR for any deficiency
GBP tax for 1999, nor was there any finding or investigation being conducted by
respondent of any liability of petitioner for GPB tax for the said taxable period. Clearly,
petitioners right to due process was violated.16
Petitioner further argues that the CTA acted in excess of its jurisdiction because the
exclusive appellate jurisdiction of the CTA covers only decisions or inactions of the
respondent in cases involving disputed assessments. The CTA has effectively
assessed petitioner with a P31.43 million tax deficiency when it concluded that
petitioner underpaid its GPB tax on cargo revenue. Since respondent did not issue an
assessment for any deficiency tax, the alleged deficiency tax on its cargo revenue in
1999 cannot be considered a disputed assessment that may be passed upon by the
CTA. Petitioner stresses that the authority to issue an assessment for deficiency
internal revenue taxes is vested by law on respondent, not with the CTA.17
Lastly, petitioner argues that any assessment against it for deficiency income tax for
taxable year 1999 is barred by prescription. Petitioner claims that the prescriptive
period within which an assessment for deficiency income tax may be made has
prescribed on April 17, 2003, three (3) years after it filed its 1999 tax return.18
Respondent Commissioner maintains that the CTA acted within its jurisdiction in
denying petitioners claim for tax refund. It points out that the objective of the CTAs
determination of whether petitioner correctly paid its GPB tax for the taxable year
1999 was to ascertain the latters entitlement to the claimed refund and not for the
purpose of imposing any deficiency tax. Hence, petitioners arguments regarding the
propriety of the CTAs determination of its deficiency tax on its GPB for gross cargo
revenues for 1999 are clearly misplaced.19
The petition has no merit.
As correctly pointed out by petitioner, inasmuch as it ceased operating passenger
flights to or from the Philippines in 1998, it is not taxable under Section 28(A)(3)(a) of
the NIRC for gross passenger revenues. This much was also found by the CTA. In
South African Airways v. Commissioner of Internal Revenue,20 we ruled that the
correct interpretation of the said provisions is that, if an international air carrier
maintains flights to and from the Philippines, it shall be taxed at the rate of 2% of its
GPB, while international air carriers that do not have flights to and from the

Philippines but nonetheless earn income from other activities in the country will be
taxed at the rate of 32% of such income.
Here, the subject of claim for tax refund is the tax paid on passenger revenue for
taxable year 1999 at the time when petitioner was still operating cargo flights
originating from the Philippines although it had ceased passenger flight operations.
The CTA found that petitioner had underpaid its GPB tax for 1999 because petitioner
had made deductions from its gross cargo revenues in the income tax return it filed
for the taxable year 1999, the amount of underpayment even greater than the refund
sought for erroneously paid GPB tax on passenger revenues for the same taxable
period. Hence, the CTA ruled petitioner is not entitled to a tax refund.
Petitioners arguments regarding the propriety of such determination by the CTA are
misplaced.
Under Section 72 of the NIRC, the CTA can make a valid finding that petitioner made
erroneous deductions on its gross cargo revenue; that because of the erroneous
deductions, petitioner reported a lower cargo revenue and paid a lower income tax
thereon; and that petitioner's underpayment of the income tax on cargo revenue is
even higher than the income tax it paid on passenger revenue subject of the claim for
refund, such that the refund cannot be granted.
Section 72 of the NIRC reads:
SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an
assessment is made in case of any list, statement or return, which in the opinion of
the Commissioner was false or fraudulent or contained any understatement or
undervaluation, no tax collected under such assessment shall be recovered by any
suit, unless it is proved that the said list, statement or return was not false nor
fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines.
In the afore-cited case of South African Airways, this Court rejected similar arguments
on the denial of claim for tax refund, as follows:
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)
(3)(a) with their liability under Sec. 28(A)(1), considering that there has not yet been
any assessment of their obligation under the latter provision. Petitioner argues that
such offsetting is in the nature of legal compensation, which cannot be applied under
the circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, thus:
In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple reason
that the government and the taxpayer are not creditors and debtors of each other.
There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity. We find no cogent reason to deviate from the aforementioned
distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we
categorically held that taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or greater than
the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines,
Inc. v. Commission on Audit, which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for
taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

Verily, petitioners argument is correct that the offsetting of its tax refund with its
alleged tax deficiency is unavailing under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the
offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying
petitioners supplemental motion for reconsideration alleging bringing to said courts
attention the existence of the deficiency income and business tax assessment against
Citytrust. The fact of such deficiency assessment is intimately related to and
inextricably intertwined with the right of respondent bank to claim for a tax refund for
the same year. To award such refund despite the existence of that deficiency
assessment is an absurdity and a polarity in conceptual effects. Herein private
respondent cannot be entitled to refund and at the same time be liable for a tax
deficiency assessment for the same year.1avvphi1
The grant of a refund is founded on the assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The deficiency assessment, although not
yet final, created a doubt as to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of
the Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was
not false nor fraudulent and did not contain any understatement or undervaluation;
but this provision shall not apply to statements or returns made or to be made in good
faith regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the
tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to
institute anew a proceeding for the recovery of erroneously refunded taxes which
recourse must be filed within the prescriptive period of ten years after discovery of the
falsity, fraud or omission in the false or fraudulent return involved. This would
necessarily require and entail additional efforts and expenses on the part of the
Government, impose a burden on and a drain of government funds, and impede or
delay the collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both
logically necessary and legally appropriate that the issue of the deficiency tax

assessment against Citytrust be resolved jointly with its claim for tax refund, to
determine once and for all in a single proceeding the true and correct amount of tax
due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only
just and fair that the taxpayer and the Government alike be given equal opportunities
to avail of remedies under the law to defeat each others claim and to determine all
matters of dispute between them in one single case. It is important to note that in
determining whether or not petitioner is entitled to the refund of the amount paid, it
would [be] necessary to determine how much the Government is entitled to collect as
taxes. This would necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would constitute res judicata on
both parties as to all the matters subject thereof or necessarily involved therein.
(Emphasis supplied.)
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997
NIRC. The above pronouncements are, therefore, still applicable today.
Here, petitioners similar tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable
under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the
correctness of the return filed by petitioner is now put in doubt. As such, we cannot
grant the prayer for a refund.21 (Additional emphasis supplied.)
In the case at bar, the CTA explained that it merely determined whether petitioner is
entitled to a refund based on the facts. On the assumption that petitioner filed a
correct return, it had the right to file a claim for refund of GPB tax on passenger
revenues it paid in 1999 when it was not operating passenger flights to and from the
Philippines. However, upon examination by the CTA, petitioners return was found
erroneous as it understated its gross cargo revenue for the same taxable year due to
deductions of two (2) items consisting of commission and other incentives of its
agent. Having underpaid the GPB tax due on its cargo revenues for 1999, petitioner is
not entitled to a refund of its GPB tax on its passenger revenue, the amount of the
former being even much higher (P31.43 million) than the tax refund sought (P5.2
million). The CTA therefore correctly denied the claim for tax refund after determining
the proper assessment and the tax due. Obviously, the matter of prescription raised
by petitioner is a non-issue. The prescriptive periods under Sections 20322 and
22223 of the NIRC find no application in this case.
We must emphasize that tax refunds, like tax exemptions, are construed strictly
against the taxpayer and liberally in favor of the taxing authority.24 In any event,
petitioner has not discharged its burden of proof in establishing the factual basis for
its claim for a refund and we find no reason to disturb the ruling of the CTA. It has
been a long-standing policy and practice of the Court to respect the conclusions of

quasi-judicial agencies such as the CTA, a highly specialized body specifically

created for the purpose of reviewing tax cases.25
WHEREFORE, we DENY the petition for lack of merit and AFFIRM the Decision
dated July 5, 2007 of the Court of Tax Appeals En Banc in C.T.A. EB No. 227.
With costs against the petitioner.
SO ORDERED.
MARTIN S. VILLARAMA, JR.
Associate Justice

[G.R. No. 131359. May 5, 1999]

MANILA ELECTRIC COMPANY, petitioner vs. PROVINCE OF LAGUNA and
BENITO R. BALAZO, in his capacity as Provincial Treasurer of
Laguna,respondents.
DECISION
VITUG, J.:
On various dates, certain municipalities of the Province of Laguna including,
Bian, Sta Rosa, San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing
laws then in effect, issued resolutions through their respective municipal councils
granting franchise in favor of petitioner Manila Electric Company (MERALCO) for the
supply of electric light, heat and power within their concerned areas. On 19 January
1983, MERALCO was likewise granted a franchise by the National Electrification
Administration to operate an electric light and power service in the Municipality of
Calamba, Laguna.
On 12 September 1991, Republic Act No. 7160, otherwise known as the Local
Government Code of 1991, was enacted to take effect on 01 January 1992 enjoining
local government units to create their own sources of revenue and to levy taxes, fees
and charges, subject to the limitations expressed therein, consistent with the basic
policy of local autonomy. Pursuant to the provisions of the Code, respondent
province enacted Laguna Provincial Ordinance No. 01-92, effective 01 January 1993,
providing, in part, as follows:
Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a
franchise, at a rate of fifty percent (50%) of one percent (1%) of the gross annual
receipts, which shall include both cash sales and sales on account realized during the
preceding calendar year within this province, including the territorial limits on any city
located in the province[1]
On the basis of the above ordinance, respondent Provincial Treasurer sent a
demand letter to MERALCO for the corresponding tax payment. Petitioner
MERALCO paid the tax, which then amounted to P19,520,628.42, under protest. A
formal claim for refund was thereafter sent by MERALCO to the Provincial Treasurer
of Laguna claiming that the franchise tax it had paid and continued to pay to the
National Government pursuant to P.D. 551 already included the franchise tax imposed
by the Provincial Tax Ordinance. MERALCO contended that the imposition of a
franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar
as it concerned MERALCO, contravened the provisions of Section 1 of P.D. 551
which read:

Any provision of law or local ordinance to the contrary notwithstanding, the franchise
tax payable by all grantees of franchises to generate, distribute and sell electric
current for light, heat and power shall be two per cent (2%) of their gross receipts
received from the sale of electric current and from transactions incident to the
generation, distribution and sale of electric current.
Such franchise tax shall be payable to the Commissioner of Internal Revenue or his
duly authorized representative on or before the twentieth day of the month following
the end of each calendar quarter or month, as may be provided in the respective
franchise or pertinent municipal regulation and shall, any provision of the Local Tax
Code or any other law to the contrary notwithstanding, be in lieu of all taxes and
assessments of whatever nature imposed by any national or local authority on
earnings, receipts, income and privilege of generation, distribution and sale of electric
current.
On 28 August 1995, the claim for refund of petitioner was denied in a letter
signed by Governor Jose D. Lina. In denying the claim, respondents relied on a more
recent law, i.e., Republic Act No. 7160 or the Local Government Code of 1991, than
the old decree invoked by petitioner.
On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of
Sta Cruz, Laguna, a complaint for refund, with a prayer for the issuance of a writ of
preliminary injunction and/or temporary restraining order, against the Province of
Laguna and also Benito R. Balazo in his capacity as the Provincial Treasurer of
Laguna. Aside from the amount of P19,520,628.42 for which petitioner MERALCO
had priority made a formal request for refund, petitioner thereafter likewise made
additional payments under protest on various dates totaling P27,669,566.91.
The trial court, in its assailed decision of 30 September 1997, dismissed the
complaint and concluded:
WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS,
JUDGMENT is hereby rendered in favor of the defendants and against the plaintiff,
by:
1.

Ordering the dismissal of the Complaint; and

2.
Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding,
reasonable and enforceable.[2]
In the instant petition, MERALCO assails the above ruling and brings up the
following issues; viz:

1.
Whether the imposition of a franchise tax under Section 2.09 of Laguna
Provincial Ordinance No. 01-92, insofar as petitioner is concerned, is violative of
the non-impairment clause of the Constitution and Section 1 of Presidential Decree
No. 551.

that time by statute to local governments was confined and defined (outside of which
the power was deemed withheld), the present constitutional rule (starting with the
1973 Constitution), however, would broadly confer such tax powers subject only to
specific exceptions that the law might prescribe.

2.
Whether Republic Act. No. 7160, otherwise known as the Local
Government Code of 1991, has repealed, amended or modified Presidential Decree
No. 551.

Under the now prevailing Constitution, where there is neither a grant nor a
prohibition by statute, the tax power must be deemed to exist although Congress
may provide statutory limitations and guidelines. The basic rationale for the current
rule is to safeguard the viability and self-sufficiency of local government units by
directly granting them general and broad tax powers. Nevertheless, the fundamental
law did not intend the delegation to be absolute and unconditional; the constitutional
objective obviously is to ensure that, while the local government units are being
strengthened and made more autonomous,[6] the legislature must still see to it that (a)
the taxpayer will not be over-burdened or saddled with multiple and unreasonable
impositions; (b) each local government unit will have its fair share of available
resources; (c) the resources of the national government will not be unduly disturbed;
and (d) local taxation will be fair, uniform, and just.

3.
Whether the doctrine of exhaustion of administrative remedies is applicable
in this case.[3]
The petition lacks merit.
Prefatorily, it might be well to recall that local governments do not have
the inherent power to tax[4] except to the extent that such power might
be delegated to them either by the basic law or by statute. Presently, under Article X
of the 1987 Constitution, a general delegation of that power has been given in favor of
local government units. Thus:
Sec. 3. The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a
system of decentralization with effective mechanisms of recall, initiative, and
referendum, allocate among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications, election,
appointment and removal, term, salaries, powers and functions, and duties of local
officials, and all other matters relating to the organization and operation of the local
units.
x x x

xxx

xxx

Sec. 5. Each local government shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees and charges shall accrue exclusively to the local
governments.

The Local Government Code of 1991 has incorporated and adopted, by and
large the provisions of the now repealed Local Tax Code, which had been in effect
since 01 July 1973, promulgated into law by Presidential Decree No. 231 [7] pursuant
to the then provisions of Section 2, Article XI, of the 1973 Constitution. The 1991
Code explicitly authorizes provincial governments, notwithstanding any exemption
granted by any law or other special law, x x x (to) impose a tax on businesses
enjoying a franchise. Section 137 thereof provides:
Sec. 137. Franchise Tax Notwithstanding any exemption granted by any law or
other special law, the province may impose a tax on businesses enjoying a franchise,
at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual
receipts for the preceding calendar year based on the incoming receipt, or realized,
within its territorial jurisdiction. In the case of a newly started business, the tax shall
not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the
succeeding calendar year, regardless of when the business started to operate, the tax
shall be based on the gross receipts for the preceding calendar year, or any fraction
thereof, as provided herein. (Underscoring supplied for emphasis)

The 1987 Constitution has a counterpart provision in the 1973 Constitution which did
come out with a similar delegation of revenue making powers to local governments.[5]

Indicative of the legislative intent to carry out the Constitutional mandate of

vesting broad tax powers to local government units, the Local Government Code has
effectively withdrawn under Section 193 thereof, tax exemptions or incentives
theretofore enjoyed by certain entities. This law states:

Under the regime of the 1935 Constitution no similar delegation of tax powers
was provided, and local government units instead derived their tax powers under a
limited statutory authority. Whereas, then, the delegation of tax powers granted at

Section 193 Withdrawal of Tax Exemption Privileges Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled

corporations, except local water districts, cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Underscoring supplied for emphasis)
The Code, in addition, contains a general repealing clause in its Section 534;

Similarly, we ruled that the provision: shall be in lieu of all taxes of every name and
nature in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No.
1510) exempts the Manila Railroad from payment of internal revenue tax for its
importations of coal and oil under Act No. 2432 and the Amendatory Acts of the
Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

thus:
Section 534. Repealing Clause. x x x.
(f) All general and special laws, acts, city charters, decrees, executive orders,
proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby repealed or modified
accordingly. (Underscoring supplied for emphasis)[8]
To exemplify, in Mactan Cebu International Airport Authority vs. Marcos,[9] the
Court upheld the withdrawal of the real estate tax exemption previously enjoyed by
Mactan Cebu International Airport Authority. The Court ratiocinated:
x x x These policy considerations are consistent with the State policy to ensure
autonomy to local governments and the objective of the LGC that they enjoy genuine
and meaningful local autonomy to enable them to attain their fullest development as
self-reliant communities and make them effective partners in the attainment of
national goals. The power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of local government units for the
delivery of basic service essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people. It may also be
relevant to recall that the original reasons for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other
units of government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and there was a need
for these entities to share in the requirements of development, fiscal or otherwise, by
paying the taxes and other charges due from them.[10]
Petitioner in its complaint before the Regional Trial Court cited the ruling of this
Court in Province of Misamis Oriental vs. Cagayan Electric Power and Light
Company, Inc.;[11] thus:
In an earlier case, the phrase shall be in lieu of all taxes and at any time levied,
established by, or collected by any authority found in the franchise of the Visayan
Electric Company was held to exempt the company from payment of the 5% tax on
corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan
Electric Co. vs. David, 49 O.G. [No. 4] 1385)

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act
No. 1497) justified the exemption of the Philippine Railway Company from payment of
the tax on its corporate franchise under Section 259 of the Internal Revenue Code, as
amended by R.A. No. 39 (Philippine Railway Co vs. Collector of Internal Revenue, 91
Phil. 35).
Those magic words, shall be in lieu of all taxes also excused the Cotabato Light and
Ice Plant Company from the payment of the tax imposed by Ordinance No. 7 of the
City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).
So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company
when it was required to pay the corporate franchise tax under Section 259 of the
Internal Revenue Code as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs.
Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that
such exemption is part of the inducement for the acceptance of the franchise and the
rendition of public service by the grantee.[12]
In the recent case of the City Government of San Pablo, etc., et al. vs. Hon.
Bienvenido V. Reyes, et al.,[13] the Court has held that the phrase in lieu of all
taxes have to give way to the peremptory language of the Local Government Code
specifically providing for the withdrawal of such exemptions, privileges, and that
upon the effectivity of the Local Government Code all exemptions except only as
provided therein can no longer be invoked by MERALCO to disclaim liability for the
local tax. In fine, the Court has viewed its previous rulings as laying stress
more on the legislative intent of the amendatory law whether the tax
exemption privilege is to be withdrawn or not rather than on whether the law
can withdraw, without violating the Constitution, the tax exemption or not.
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.[14] 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.
[15]
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.
WHEREFORE, the instant petition is hereby DISMISSED. No costs.
SO ORDERED.
Romero, Panganiban, Purisima, and Gonzaga-Reyes, JJ., concur.

G.R. No. 145559

July 14, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BENGUET CORPORATION, respondent.
DECISION

as zero-rated that is, subject to the 0% VAT. During the same period,
[respondent] thus incurred input taxes attributable to said sales to the
Central Bank. Consequently, [respondent] filed with the Commissioner of
Internal Revenue applications for the issuance of Tax Credit Certificates for
input VAT Credits attributable to its export sales - that is, inclusive of direct
export sales and sale of gold to the Central Bank corresponding to the same
taxable periods, to wit:

GARCIA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioner
Commissioner of Internal Revenue seeks the reversal and setting aside of the
following Resolutions of the Court of Appeals (CA) in CA-G.R. SP No. 38413, to wit:
1. Resolution dated May 10, 20001 insofar as it ordered petitioner to issue a
tax credit to respondent Benguet Corporation in the amount
of P49,749,223.31 representing input VAT/tax attributable to its sales of gold
to the Central Bank (now Bangko Sentral ng Pilipinas or BSP) covering the
period from January 1, 1988 to July 31, 1989; and

AMOUNT OF TAX CREDIT

APPLIED FOR

TAXABLE PERIOD

P34,449,817.71

01Jan88 to 30 Apr88

P30,382,666.86

01May88 to 31Jul88

P13,467,663.41 01

Nov88 to 31Jan89

P7,030,261.29 01

Feb89 to 30Apr89

P18,263,960.28

01May89 to 31Jul89

2. Resolution dated October 16, 2000 denying petitioner's motion for

reconsideration.
The facts, as narrated by the CA in its basic Resolution of May 10, 2000, are:
[Respondent] is a domestic corporation engaged in mining business,
specifically the exploration, development and operation of mining properties
for purposes of commercial production and the marketing of mine products.
It is a VAT-registered enterprise, with VAT Registration No. 31-0-000027
issued on January 1, 1988. Sometime in January 1988, [respondent] filed an
application for zero-rating of its sales of mine products, which application
was duly approved by the [petitioner] Commissioner of Internal Revenue.
On August 28, 1988, then Deputy Commissioner of Internal Revenue
Eufracio D. Santos issued VAT Ruling No. 378-88 which declared that the
sale of gold to the Central Bank is considered an export sale and therefore
subject to VAT at 0% rate. On December 14, 1988, then Deputy
Commissioner Santos also issued Revenue Memorandum Circular (RMC)
No. 59-88, again declaring that the sale of gold by a VAT-registered taxpayer
to the Central Bank is subject to the zero-rate VAT. No less than five Rulings
were subsequently issued by [petitioner] from 1988 to 1990 reiterating and
confirming its position that the sale of gold by a VAT-registered taxpayer to
the Central Bank is subject to the zero-rate VAT.
As a corollary, and in reliance, of the foregoing issuances, [respondent],
during the six (6) taxable quarters in question covering the period January 1,
1988 to July 31, 1989, sold gold to the Central Bank and treated these sales

(CTA Decision dated March 23, 1995; Pages 83-86, rollo)

Meanwhile, on January 23, 1992, then Commissioner Jose U. Ong issued
VAT Ruling No. 008-92 declaring and holding that the sales of gold to the
Central Bank are considered domestic sales subject to 10% VAT instead of
0% VAT as previously held in BIR Issuances from 1998 to 1990.
Subsequently, VAT Ruling No. 59-92, dated April 28, 1992, x x x were issued
by [petitioner] reiterating the treatment of sales of gold to the Central Bank
as domestic sales, and expressly countenancing the Retroactive application
of VAT Ruling No. 008-92 to all such sales made starting January 1, 1988,
ratiocinating, inter alia, that the mining companies will not be unduly
prejudiced by a retroactive application of VAT Ruling 008-92 because their

claim for refund of input taxes are not lost because the same are allowable
on its output taxes on the sales of gold to Central Bank; on its output taxes
on other sales; and as deduction to income tax under Section 29 of the Tax
Code.
On the basis of the aforequoted BIR Issuances, [petitioner] thus treated
[respondent's] sales of gold to the Central Bank as domestic sales subject to
10% VAT but allowed [respondent] a total tax credit of onlyP81,991,810.91
which corresponded to VAT input taxes attributable to its direct export sales
(CTA Decision dated March 23, 1995; Page 87). Notwithstanding this finding
of the [petitioner], [respondent] was not refunded the said amounts of tax
credit claimed. Thus, to suspend the running of the two-year prescriptive
period (Sec. 106, NIRC) for claiming refunds or tax credits, [respondent]
instituted x x x consolidated Petitions for Review with the Court of Tax
Appeals, praying for the issuance of "Tax Credit Certificates" for the following
input VAT credits attributable to export sales transacted during the taxable
quarters or periods in question, to wit:

CTA Case

Amount of Tax Credit

Applied for

Taxable Period

Number

4429

P64,832,374.67

01JAN 88 to 31JUL88

4495

P43,614,437.88

01AUG 88to 31JAN89

4575

P23,294,221.77

01FEB 89 to 31JUL89

P131,741,034.22 = TOTAL

Significantly, the total amount of P131,741,034.22, as hereinabove

computed, corresponds to the total input VAT credits attributable to export
sales made by [respondent] during the taxable periods set forth and
therefore, represents a combination of input tax attributable to both (1) direct
export sales and (2) sales of gold to the Central Bank. (Words in brackets
added).3

In a decision dated March 23, 1995,4 the Court of Tax Appeals (CTA) dismissed
respondent's aforementioned consolidated Petitions for Review and denied the whole
amount of its claim for tax credit of P131,741,034.22. The tax court held that the
alleged prejudice to respondent as a result of the retroactive application of VAT Ruling
No. 008-92 issued on January 23, 1992 to the latter's gold sales to the Central Bank
(CB) from January 1, 1988 to July 31, 1989 is merely speculative and not actual and
imminent so as to proscribe said Ruling's retroactivity. The CTA further held that
respondent would not be unduly prejudiced considering that VAT Ruling No. 59-92
which mandates the retroactivity of VAT Ruling No. 008-92 likewise provides for
alternative remedies for the recovery of the input VAT.
Its motion for reconsideration having been denied by the tax court, respondent
appealed to the CA whereat its recourse was docketed as CA-G.R. SP No. 38413.
At first, the CA, in a decision dated May 30, 1996,5 affirmed in toto that of the tax
court.
However, upon respondent's motion for reconsideration, the CA, in the herein
assailed basic Resolution dated May 10, 2000, reversed itself by setting aside its
earlier decision of May 30, 1996 and ordering herein petitioner to issue in
respondent's favor a tax credit in the amount of P131,741,034.22, to wit:
IN THE LIGHT OF ALL THE FOREGOING, [respondent's] Motion for
Reconsideration, x x x as supplemented, is GRANTED. The Decision of this
Court, dated May 30, 1996, affirming the Decision of the Court of Tax
Appeals x x x is SET ASIDE. The [petitioner Commissioner of Internal
Revenue] is hereby ordered to issue [respondent] a TAX CREDIT in the
amount of P131,741,034.22.
SO ORDERED.
In its reversal action, the CA ruled that the tax credit in the total amount
of P131,741,034.22 consists of (1)P81,991,810.91, representing input VAT credits
attributable to direct export sales subject to 0% VAT, and (2)P49,749,223.31,
representing input VAT attributable to sales of gold to the CB which were subject to
0% when said sales were made in 1988 and 1989. In effect, the CA rejected the
retroactive application of VAT Ruling No. 008-92 to the subject gold sales of
respondent because of the resulting prejudice to the latter despite the existence of
alternative modes for the recovery of the input VAT.
This time, it was petitioner who moved for a reconsideration but his motion was
denied by the CA in its subsequent Resolution of October 16, 2000.
Hence, petitioner's present recourse assailing only that portion of the CA Resolution
of May 10, 2000 allowing respondent the amount of P49,749,223.31 as tax credit
corresponding to the input VAT attributable to its sales of gold to the CB for the period
January 1, 1988 to July 31, 1989. It is petitioner's sole contention that the CA erred in
rejecting the retroactive application of VAT Ruling No. 008-92, dated January 23,
1992, subjecting sales of gold to the CB to 10% VAT to respondent's sales of gold

during the period from January 1, 1988 to July 31, 1989. Petitioner posits that,
contrary to the ruling of the appellate court, the retroactive application of VAT Ruling
No. 008-92 to respondent would not prejudice the latter.
Initially, the Court, in its Resolution of January 24, 2001, 6 denied the Petition for lack
of verification and certification against forum shopping. However, upon petitioner's
manifestation and motion for reconsideration, the Court reinstated the Petition in its
subsequent Resolution of March 5, 2001.7
The petition must have to fall.
We start with the well-entrenched rule that rulings and circulars, rules and regulations,
promulgated by the Commissioner of Internal Revenue, would have no retroactive
application if to so apply them would be prejudicial to the taxpayers.8
And this is as it should be, for the Tax Code, specifically Section 246 thereof, is
explicit that:
x x x Any revocation, modification, or reversal of any rules and regulations
promulgated in accordance with the preceding section or any of the rulings
or circulars promulgated by the Commissioner of Internal Revenue shall not
be given retroactive application if the revocation, modification, or reversal will
be prejudicial to the taxpayers except in the following cases: a) where the
taxpayer deliberately misstates or omits material facts from his return or in
any document required of him by the Bureau of Internal Revenue; b) where
the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or c) where
the taxpayer acted in bad faith.
There is no question, therefore, as to the prohibition against the retroactive
application of the revocation, modification or reversal, as the case maybe, of
previously established Bureau on Internal Revenue (BIR) Rulings when the taxpayer's
interest would be prejudiced thereby. But even if prejudicial to a taxpayer, retroactive
application is still allowed where: (a) a taxpayer deliberately misstates or omits
material facts from his return or any document required by the BIR; (b) where
subsequent facts gathered by the BIR are materially different from which the ruling is
based; and (c) where the taxpayer acted in bad faith.

On the other hand, when that person or entity sells his/its products or services, the
VAT-registered taxpayer generally becomes liable for 10% of the selling price as
output VAT or output tax.10 Hence, "output tax" is the value-added tax on the sale of
taxable goods or services by any person registered or required to register under
Section 107 of the (old) Tax Code.11
The VAT system of taxation allows a VAT-registered taxpayer to recover its input VAT
either by (1) passing on the 10% output VAT on the gross selling price or gross
receipts, as the case may be, to its buyers, or (2) if the input tax is attributable to the
purchase of capital goods or to zero-rated sales, by filing a claim for a refund or tax
credit with the BIR.12
Simply stated, a taxpayer subject to 10% output VAT on its sales of goods and
services may recover its input VAT costs by passing on said costs as output VAT to its
buyers of goods and services but it cannot claim the same as a refund or tax credit,
while a taxpayer subject to 0% on its sales of goods and services may only recover its
input VAT costs by filing a refund or tax credit with the BIR.
Here, the claimed tax credit of input tax amounting to P49,749,223.31 represents the
costs or expenses incurred by respondent in connection with its gold production.
Relying on BIR Rulings, specifically VAT Ruling No. 378-88, dated August 28, 1988,
and VAT Ruling No. 59-88, dated December 14, 1988, both of which declared that
sales of gold to the CB are considered export sales subject to 0%, respondent sold
gold to the CB from January 1, 1988 to July 31, 1989 without passing on to the latter
its input VAT costs, obviously intending to obtain a refund or credit thereof from the
BIR at the end of the taxable period. However, by the time respondent applied for
refund/credit of its input VAT costs, VAT Ruling No. 008-92 dated January 23, 1992,
treating sales of gold to the CB as domestic sales subject to 10% VAT, and VAT
Ruling No. 059-92 dated April 28, 1992, retroactively applying said VAT Ruling No.
008-92 to such sales made from January 1, 1988 onwards, were issued. As a result,
respondent's application for refund/credit was denied and, as likewise found by the
CA, it was even subsequently assessed deficiency output VAT on October 19, 1992 in
the total amounts of P252,283,241.95 for the year 1988, and P244,318,148.56 for the
year 1989.13
Clearly, from the foregoing, the prejudice to respondent by the retroactive application
of VAT Ruling No. 008-92 to its sales of gold to the CB from January 1, 1988 to July
31, 1989 is patently evident.

As admittedly, respondent's case does not fall under any of the above exceptions,
what is crucial to determine then is whether the retroactive application of VAT Ruling
No. 008-92 would be prejudicial to respondent Benguet Corporation.

Verily, by reason of the denial of its claim for refund/credit, respondent has been
precluded from recovering its input VAT costs attributable to its sales of gold to the CB
during the period mentioned, for the following reasons:

The Court resolves the question in the affirmative.

First, because respondent could not pass on to the CB the 10% output VAT which
would be retroactively imposed on said transactions, not having passed the same at
the time the sales were made on the assumption that said sales are subject to 0%,
and, hence, maybe refunded or credited later. And second, because respondent could
not claim the input VAT costs as a refund/credit as it has been prevented such option,
the sales in question having been retroactively subjected to 10% VAT, ergo limiting

Input VAT or input tax represents the actual payments, costs and expenses incurred
by a VAT-registered taxpayer in connection with his purchase of goods and services.
Thus, "input tax" means the value-added tax paid by a VAT-registered person/entity in
the course of his/its trade or business on the importation of goods or local purchases
of goods or services from a VAT-registered person.9

recovery of said costs to the application of the same against the output tax which will
result therefrom.
Indeed, respondent stands to suffer substantial economic prejudice by the retroactive
application of the VAT Ruling in question.
But petitioner maintains otherwise, arguing that respondent will not be unduly
prejudiced since there are still other available remedies for it to recover its input VAT
costs. Said remedies, so petitioner points out, are for respondent to either (1) use
said input taxes in paying its output taxes in connection with its other sales
transactions which are subject to the 10% VAT or (2) if there are no other sales
transactions subject to 10% VAT, treat the input VAT as cost and deduct the same
from income for income tax purposes.
We are not persuaded.
The first remedy cannot be applied in this case. As correctly found by the CA,
respondent has clearly shown that it has no "other transactions" subject to 10% VAT,
and petitioner has failed to prove the existence of such "other transactions" against
which to set off respondent's input VAT.14
Anent the second remedy, prejudice will still, indubitably, result because treating the
input VAT as an income tax deductible expense will yield only a partial and not full
financial benefit of having the input VAT refunded or used as a tax credit. We quote
with approval the CA's observations in this respect, thus:
x x x even assuming that input VAT is still available for deduction,
[respondent] still suffers prejudice. As a zero-rated taxpayer (pursuant to the
1988 to 1990 BIR issuances), [respondent] could have claimed a cash
refund or tax credit of the input VAT in the amount of P49,749,223.31. If it
had been allowed a cash refund or tax credit, it could have used the full
amount thereof to pay its other tax obligations (or, in the case of a cash
refund, to fund its operations). With VAT Ruling No. 059-92, [respondent] is
precluded from claiming the cash refund or tax credit and is limited to the socalled remedy of deducting the input VAT from gross income. But a cash
refund or tax credit is not the same as a tax deduction. A tax deduction has
less benefits than a tax credit. Consider the following differences;
2.42.1 A tax credit may be used to pay any national internal revenue tax
liability. Section 104(b) of the Tax Code states;
"(b) Excess output or input tax. xxx Any input tax attributable to xxx zerorated sales by a VAT-registered person may at his option be refunded or
credited against other internal revenue taxes, subject to the provisions of
Section 106."

On the other hand, a tax deduction may be used only against gross income
for purposes of income tax. A tax deduction is not allowed against other
internal revenue taxes such as excise taxes, documentary stamp taxes, and
output VAT.
2.42.2 In terms of income tax, a tax deduction is only an expense item in
computing income tax liabilities (Sections 27 to 29, Tax Code) while a tax
credit is a direct credit against final income tax due (Section 106[b], Tax
Code). This is illustrated in the example below:
Assume that in 1988, respondent had a gross income of P1,000,000,000
and deductible expenses in general (such as salaries, utilities,
transportation, fuel and costs of sale) of P500,000,000. Assume also that
[respondent] had input VAT of P131,741,034.22, the amount being claimed
in the instant case. [Respondent's] income tax liability, depending on
whether it utilized the input tax as tax credit or tax deduction, would be as
follows:

a. Tax credit

Gross Income (Section 28, Tax Code)

P1,000,000,0

Deductions (Section 29, Tax Code)

( 500,000,000

Taxable Income (Section 27, Tax Code)

P 500,000.00

Tax rate (Section 24[a], Tax Code)

x 35%

Tax Payable

P 175,000,00

Tax Credit

(131,741,034

Tax due

P 43,258,965

b. Tax deduction

Gross income (Section 28, Tax Code)

P1,000,000,000.00

Deductions

General (Section 29, Tax Code)

P500,000,000.00

Input VAT (VAT Ruling No. 059-92)

P131,741,034.22

P 631,741,034.22)

Taxable income (Section 27, Tax Code)

P 368,258,966.78

Tax rate (Section 24[a], Tax Code)

x 35%

Tax payable

P 128,890,638.02

Tax Credit

Tax due

______________

the part of its agents.16 But, like other principles of law, this also admits of exceptions
in the interest of justice and fair play, as where injustice will result to the taxpayer.17
P 128,890,638.02
As this Court has said in ABS-CBN Broadcasting Corporation v. Court of Tax Appeals
and the Commissioner of Internal Revenue:18
Thus, if the input VAT of P131,741,034.22 were to be credited against the
income tax due, the income tax payable is only P43,258,965.78. On the
other hand, if the input VAT were to be deducted from gross income before
arriving at the net income, the income tax payable is P128,890,638.02. This
is almost three (3) times the income tax payable if the input VAT were to be
deducted from the income tax payable.
As can be seen from above, there is a substantial difference between a tax
credit and a tax deduction. A tax credit reduces tax liability while a tax
deduction only reduces taxable income (emphasis supplied).
A tax credit of input VAT fully utilizes the entire amount of P131,741,034.22,
since tax liability is reduced by the said amount. A tax deduction is not fully
utilized because the savings is only 35% or P46,109,361.98. In the above
case, therefore, the use of input VAT as a tax deduction results in a loss of
65% of the input VAT, or P85,631,672.24, which [respondent] could have
otherwise fully utilized as a tax credit.
xxx

xxx

xxx

x x x the deduction of an expense under Section 29 of the Tax Code is not

tantamount to a recovery of the expense. The deduction of a bad debt, for
instance, does not result in the recovery of the debt. On the other hand, a tax
credit, because it can be fully utilized to reduce tax liability, is as good as
cash and is thus effectively a full recovery of the input VAT cost.15 (Emphasis
in the original; Words in brackets supplied).
We may add that the prejudice which befell respondent is all the more highlighted by
the fact that it has been issued assessments for deficiency output VAT on the basis of
the same sales of gold to the CB.
On a final note, the Court is fully cognizant of the well-entrenched principle that the
Government is not estopped from collecting taxes because of mistakes or errors on

The insertion of Sec. 338-A [now Sec. 246] into the National Internal
Revenue Code x x x is indicative of legislative intention to support the
principle of good faith. In fact, in the United States x x x it has been held that
the Commissioner or Collector is precluded from adopting a position
inconsistent with one previously taken where injustice would result
therefrom, or where there has been a misrepresentation to the taxpayer.
[Word in brackets supplied].
Here, when respondent sold gold to the CB, it relied on the formal assurances of the
BIR, i.e., VAT Ruling No. 378-88 dated August 28, 1988 and VAT Ruling RMC No. 5988 dated December 14, 1988, that such sales are zero-rated. To retroact a later ruling
VAT Ruling No. 008-92 - revoking the grant of zero-rating status to the sales of gold
to the CB and applying a new and contrary position that such sales are now subject to
10%, is clearly inconsistent with justice and the elementary requirements of fair play.
Accordingly, we find that the CA did not commit a reversible error in holding that VAT
Ruling No. 008-92 cannot be retroactively applied to respondent's sales of gold to the
CB during the period January 1, 1988 to July 31, 1989, hence, it is entitled to tax
credit in the amount of P49,749,223.31 attributable to such sales.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed CA Resolutions
are AFFIRMED.
No costs.
SO ORDERED.
Puno, Chairperson, Sandoval-Gutierrez, Corona, Azcuna, J.J., concur.