Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109446 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO
O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in
his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income
Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and,
in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public
respondents pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the continued implementation of the
amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) Every bill passed by the Congress shall embrace only
one subject which shall be expressed in the title thereof.
Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
Article III, Section 1 No person shall be deprived of . . . property without due
process of law, nor shall any person be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that
public respondents have exceeded their rule-making authority in applying SNIT to general
professional partnerships.

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The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's
directive, have filed their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a
misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for
the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed
and Professionals Engaged In The Practice of Their Profession, Amending Sections
21 and 29 of the National Internal Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue
Code, as now amended, provide:
Sec. 21. Tax on citizens or residents.
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in
the Practice of Profession. A tax is hereby imposed upon the taxable net income
as determined in Section 27 received during each taxable year from all sources,
other than income covered by paragraphs (b), (c), (d) and (e) of this section by every
individual whether
a citizen of the Philippines or an alien residing in the Philippines who is selfemployed or practices his profession herein, determined in accordance with the
following schedule:
Not over P10,000 3%
Over P10,000 P300 + 9%
but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%
but not over P120,00 of excess over P30,000
Over P120,000 P15,600 + 20%
but not over P350,000 of excess over P120,000
Over P350,000 P61,600 + 30%
of excess over P350,000
Sec. 29. Deductions from gross income. In computing taxable income subject to
tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this
section: Provided, however, That in computing taxable income subject to tax under
Section 21 (f) in the case of individuals engaged in business or practice of
profession, only the following direct costs shall be allowed as deductions:
(a) Raw materials, supplies and direct labor;

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(b) Salaries of employees directly engaged in activities in the course of or pursuant to

the business or practice of their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans contracted from accredited
financial institutions which must be proven to have been incurred in connection with
the conduct of a taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as
deductions to answer for business or professional expenses as the case may be.
On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having
still retained the netincome, taxation scheme. The allowance for deductible items, it is true, may
have significantly been reduced by the questioned law in comparison with that which has prevailed
prior to the amendment; limiting, however, allowable deductions from gross income is neither
discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that
various deductions, which are by no means inconsequential, continue to be well provided under the
new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling
legislation intended to unite the members of the legislature who favor any one of unrelated subjects
in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly
apprise the people, through such publications of its proceedings as are usually made, of the subjects
of legislation. 1 The above objectives of the fundamental law appear to us to have been sufficiently met.
Anything else would be to require a virtual compendium of the law which could not have been the
intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that
taxation "shall be uniform and equitable" in that the law would now attempt to tax single
proprietorships and professionals differently from the manner it imposes the tax on corporations and
partnerships. The contention clearly forgets, however, that such a system of income taxation has
long been the prevailing rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects
or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan
Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as:
(1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both
present and future conditions, and (4) the classification applies equally well to all those belonging to
the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach 2 in the income taxation of
individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable corporations.
We certainly do not view this classification to be arbitrary and inappropriate.

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Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process,
what he believes to be an imbalance between the tax liabilities of those covered by the amendatory
law and those who are not. With the legislature primarily lies the discretion to determine the nature
(kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court
cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative
judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to
confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the
power to tax cannot override constitutional proscriptions. This stage, however, has not been
demonstrated to have been reached within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for
being violative of due process must perforce fail. The due process clause may correctly be invoked
only when there is a clear contravention of inherent or constitutional limitations in the exercise of the
tax power. No such transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of whether or not
public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations
No. 2-93, to carry out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership The general professional partnership
(GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in
determining the net profit of the partnership, only the direct costs mentioned in said
law are to be deducted from partnership income. Also, the expenses paid or incurred
by partners in their individual capacities in the practice of their profession which are
not reimbursed or paid by the partnership but are not considered as direct cost, are
not deductible from his gross income.
The real objection of petitioners is focused on the administrative interpretation of public respondents
that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent
deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the
Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's
privilege speech by way of commenting on the questioned implementing regulation of public
respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct
impression of this bill. Do we speak here of individuals who are
earning, I mean, who earn through business enterprises and
therefore, should file an income tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to
corporations. It applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from
Batangas say that this bill is intended to increase collections as far as
individuals are concerned and to make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).

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In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate

version of the SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or
to partnerships; it is only with respect to individuals and professionals.
(Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax
treatment between individuals engaged in business or in the practice of their respective professions
and partners in general professional partnerships. The fact of the matter is that a general
professional partnership, unlike an ordinary business partnership (which is treated as a corporation
for income tax purposes and so subject to the corporate income tax), is not itself an income
taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on
the partners themselves in their individual capacity computed on their distributive shares of
partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act
7496, is explicit:
Sec. 23. Tax liability of members of general professional partnerships. (a) Persons
exercising a common profession in general partnership shall be liable for income tax
only in their individual capacity, and the share in the net profits of the general
professional partnership to which any taxable partner would be entitled whether
distributed or otherwise, shall be returned for taxation and the tax paid in accordance
with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership, each
partner
(1) Shall take into account separately his distributive share of the
partnership's income, gain, loss, deduction, or credit to the extent
provided by the pertinent provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless
he declares his distributive share of the gross income undiminished
by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or not)
with others in the exercise of a common profession. Indeed, outside of the gross compensation
income tax and the final tax on passive investment income, under the present income tax system all
individuals deriving income from any source whatsoever are treated in almost invariably the same
manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act
No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view
can easily become myopic, however, when the law is understood, as it should be, as only forming
part of, and subject to, the whole income tax concept and precepts long obtaining under the National
Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term
used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in
levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer
(that renders citizens, regardless of residence, and resident aliens subject to income tax liability on
their income from all sources) and of the generally accepted and internationally recognized income
taxable base (that can subject non-resident aliens and foreign corporations to income tax on their
income from Philippine sources). In the process, the Code classifies taxpayers into four main
groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4)
Irrevocable Trusts (irrevocable both as to corpusand as to income).

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Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as
"taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be
within the context of, and so legally contemplated as, corporations. Except for few variances, such
as in the application of the "constructive receipt rule" in the derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so
correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496,
aforequoted, to cover corporations and partnerships which are independently subject to the payment
of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. A
general professional partnership is such an example. 4Here, the partners themselves, not the
partnership (although it is still obligated to file an income tax return [mainly for administration and data]),
are liable for the payment of income tax in their individual capacity computed on their respective and
distributive shares of profits. In the determination of the tax liability, a partner does so as an individual,
and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general
professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such income to, respectively, each of the
individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing
rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income
taxpayers on their non-compensation income. There is no evident intention of the law, either before
or after the amendatory legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective professions individually and of
those who do it through a general professional partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA,
Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner,
Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO,
Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of
Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.

FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding

1 on the
validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends
Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable
compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the

Petitioner 3as taxpayer alleges that by virtue thereof, "he

would be unduly discriminated against by the imposition of higher rates of tax upon his income arising
net profits of taxable partnership, (f) adjusted gross income.

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from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to class legislation,
oppressive and capricious in character 5 For petitioner, therefore, there is a transgression of both the
equal protection and due process clauses 6 of the Constitution as well as of the rule requiring uniformity in
taxation. 7

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days
from notice. Such an answer, after two extensions were granted the Office of the Solicitor General,
was filed on May 28, 1982.8 The facts as alleged were admitted but not the allegations which to their
mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being
those stated [in their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa
Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited while correctly
quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so
clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private
enterprise and initiative and which the government was called upon to enter optionally, and only
'because it was better equipped to administer for the public welfare than is any private individual or
group of individuals,' continue to lose their well-defined boundaries and to be absorbed within
activities that the government must undertake in its sovereign capacity if it is to meet the increasing
social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be
availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes
being the lifeblood of the government, their prompt and certain availability is of the essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the
strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is
not unconfined. There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due
process and equal protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it
were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In
a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a
flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that
it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from
Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while
this Court sits." 17 So it is in the Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental law overrides any
legislative or executive, act that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision as petitioner here alleges fails to abide by
its command, then this Court must so declare and adjudge it null. The injury thus is centered on the
question of whether the imposition of a higher tax rate on taxable net income derived from business
or profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation,
as here. does not suffice. There must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as void or its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that were the due process
and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad
standards, there is a need for of such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary
that it finds no support in the Constitution. An obvious example is where it can be shown to amount
to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of
this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred.
That properly calls for the application of the Holmes dictum. It has also been held that where the
assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case
of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process
grounds. 19

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6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this
constitutional mandate whether the assailed act is in the exercise of the lice power or the power of
eminent domain is to demonstrated that the governmental act assailed, far from being inspired by
the attainment of the common weal was prompted by the spirit of hostility, or at the very least,
discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different, both in the privileges conferred and the liabilities
imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal
protection and security shall be given to every person under circumtances which if not Identical are
analogous. If law be looked upon in terms of burden or charges, those that fall within a class should
be treated in the same fashion, whatever restrictions cast on some in the group equally binding on
the rest." 20 That same formulation applies as well to taxation measures. The equal protection clause is,
of course, inspired by the noble concept of approximating the Ideal of the laws benefits being available to
all and the affairs of men being governed by that serene and impartial uniformity, which is of the very
essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice
Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The
Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions.
They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific
difficulties, address to the attainment of specific ends by the use of specific remedies. The Constitution
does not require things which are different in fact or opinion to be treated in law as though they were the
same." 21 Hence the constant reiteration of the view that classification if rational in character is allowable.
As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went
so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no constitutional limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The
rule of taxation shag be uniform and equitable." 24 This requirement is met according to Justice Laurel
in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates with the same force and
effect in every place where the subject may be found. " 26 He likewise added: "The rule of uniformity does
not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem of
classification did not present itself in that case. It did not arise until nine years later, when the Supreme
Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore uniform." 29 There is quite a similarity then
to the standard of equal protection for all that is required is that the tax "applies equally to all persons,
firms and corporations placed in similar situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the
distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or
taxable income by eliminating all deductible items and at the same time reducing the applicable tax
rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the
gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification
is the susceptibility of the income to the application of generalized rules removing all deductible
items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of
them. Taxpayers who are recipients of compensation income are set apart as a class. As there is
practically no overhead expense, these taxpayers are e not entitled to make deductions for income
tax purposes because they are in the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is no uniformity in the costs or
expenses necessary to produce their income. It would not be just then to disregard the disparities by
giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the
gross system of income taxation to compensation income, while continuing the system of net income
taxation as regards professional and business income.

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9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of
factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of
controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the
reasonableness of the distinction between compensation and taxable net income of professionals and
businessman certainly not a suspect classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.
Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente
and Cuevas, JJ., concur.
Teehankee, J., concurs in the result.
Plana, J., took no part.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 81311 June 30, 1988
KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO
C. DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent.

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G.R. No. 81820 June 30, 1988

KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations
and alliances,petitioners,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER OF
INTERNAL REVENUE, and SECRETARY OF BUDGET, respondents.
G.R. No. 81921 June 30, 1988
INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B.
BANAL, petitioners,
vs.
The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent.
G.R. No. 82152 June 30, 1988
RICARDO C. VALMONTE, petitioner,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF INTERNAL
REVENUE and SECRETARY OF BUDGET, respondent.
Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311.
Jaime C. Opinion for individual petitioners in G.R. No. 81311.
Banzuela, Flores, Miralles, Raeses, Sy, Taquio and Associates for petitioners in G.R. No 81820.
Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No
81820.
Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921.

PADILLA, J.:
These four (4) petitions, which have been consolidated because of the similarity of the main issues
involved therein, seek to nullify Executive Order No. 273 (EO 273, for short), issued by the President
of the Philippines on 25 July 1987, to take effect on 1 January 1988, and which amended certain
sections of the National Internal Revenue Code and adopted the value-added tax (VAT, for short), for
being unconstitutional in that its enactment is not alledgedly within the powers of the President; that
the VAT is oppressive, discriminatory, regressive, and violates the due process and equal protection
clauses and other provisions of the 1987 Constitution.
The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have
failed to show justification for the exercise of its judicial powers, viz. (1) the existence of an
appropriate case; (2) an interest, personal and substantial, of the party raising the constitutional
questions; (3) the constitutional question should be raised at the earliest opportunity; and (4) the
question of constitutionality is directly and necessarily involved in a justiciable controversy and its
resolution is essential to the protection of the rights of the parties. According to the Solicitor General,
only the third requisite that the constitutional question should be raised at the earliest opportunity
has been complied with. He also questions the legal standing of the petitioners who, he contends,
are merely asking for an advisory opinion from the Court, there being no justiciable controversy for
resolution.

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Objections to taxpayers' suit for lack of sufficient personality standing, or interest are, however, in the
main procedural matters. Considering the importance to the public of the cases at bar, and in
keeping with the Court's duty, under the 1987 Constitution, to determine wether or not the other
branches of government have kept themselves within the limits of the Constitution and the laws and
that they have not abused the discretion given to them, the Court has brushed aside technicalities of
procedure and has taken cognizance of these petitions.
But, before resolving the issues raised, a brief look into the tax law in question is in order.
The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by
every seller, with aggregate gross annual sales of articles and/or services, exceeding P200,00.00, to
his purchase of goods and services, unless exempt. VAT is computed at the rate of 0% or 10% of the
gross selling price of goods or gross receipts realized from the sale of services.
The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and
producers, advance sales tax, and compensating tax on importations. The framers of EO 273 that it
is principally aimed to rationalize the system of taxing goods and services; simplify tax
administration; and make the tax system more equitable, to enable the country to attain economic
recovery.
The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued.
As pointed out by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO
273, was essentially a single stage value added tax system computed under the "cost subtraction
method" or "cost deduction method" and was imposed only on original sale, barter or exchange of
articles by manufacturers, producers, or importers. Subsequent sales of such articles were not
subject to sales tax. However, with the issuance of PD 1991 on 31 October 1985, a 3% tax was
imposed on a second sale, which was reduced to 1.5% upon the issuance of PD 2006 on 31
December 1985, to take effect 1 January 1986. Reduced sales taxes were imposed not only on the
second sale, but on every subsequent sale, as well. EO 273 merely increased the VAT on every
sale to 10%, unless zero-rated or exempt.
Petitioners first contend that EO 273 is unconstitutional on the Ground that the President had no
authority to issue EO 273 on 25 July 1987.
The contention is without merit.
It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole
legislative authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution
states:
Sec. 1. Until a legislature is elected and convened under a new Constitution, the
President shall continue to exercise legislative powers.
On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the
Republic of the Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article
XVIII, sec. 6 of said Constitution, hereafter referred to as the 1987 Constitution, provides:
Sec. 6. The incumbent President shall continue to exercise legislative powers until
the first Congress is convened.
It should be noted that, under both the Provisional and the 1987 Constitutions, the President is
vested with legislative powers until a legislature under a new Constitution is convened. The first
Congress, created and elected under the 1987 Constitution, was convened on 27 July 1987. Hence,
the enactment of EO 273 on 25 July 1987, two (2) days before Congress convened on 27 July 1987,
was within the President's constitutional power and authority to legislate.

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Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27
July 1987). He contends that the word "convene" is synonymous with "the date when the elected
members of Congress assumed office."
The contention is without merit. The word "convene" which has been interpreted to mean "to call
together, cause to assemble, or convoke," 1 is clearly different from assumption of office by
the individual members of Congress or their taking the oath of office. As an example, we call to mind the
interim National Assembly created under the 1973 Constitution, which had not been "convened" but some
members of the body, more particularly the delegates to the 1971 Constitutional Convention who had
opted to serve therein by voting affirmatively for the approval of said Constitution, had taken their oath of
office.
To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a
bit too far. It would also defeat the purpose of the framers of the 1987 Constitutional and render
meaningless some other provisions of said Constitution. For example, the provisions of Art. VI, sec.
15, requiring Congress to conveneonce every year on the fourth Monday of July for its regular
session would be a contrariety, since Congress would already be deemed to be in session after the
individual members have taken their oath of office. A portion of the provisions of Art. VII, sec. 10,
requiring Congress to convene for the purpose of enacting a law calling for a special election to elect
a President and Vice-President in case a vacancy occurs in said offices, would also be a surplusage.
The portion of Art. VII, sec. 11, third paragraph, requiring Congress to convene, if not in session, to
decide a conflict between the President and the Cabinet as to whether or not the President and the
Cabinet as to whether or not the President can re-assume the powers and duties of his office, would
also be redundant. The same is true with the portion of Art. VII, sec. 18, which requires Congress to
convene within twenty-four (24) hours following the declaration of martial law or the suspension of
the privilage of the writ of habeas corpus.
The 1987 Constitution mentions a specific date when the President loses her power to legislate. If
the framers of said Constitution had intended to terminate the exercise of legislative powers by the
President at the beginning of the term of office of the members of Congress, they should have so
stated (but did not) in clear and unequivocal terms. The Court has not power to re-write the
Constitution and give it a meaning different from that intended.
The Court also finds no merit in the petitioners' claim that EO 273 was issued by the President in
grave abuse of discretion amounting to lack or excess of jurisdiction. "Grave abuse of discretion" has
been defined, as follows:
Grave abuse of discretion" implies such capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction (Abad Santos vs. Province of Tarlac,
38 Off. Gaz. 834), or, in other words, where the power is exercised in an arbitrary or
despotic manner by reason of passion or personal hostility, and it must be so patent
and gross as to amount to an evasion of positive duty or to a virtual refusal to
perform the duty enjoined or to act at all in contemplation of law. (Tavera-Luna, Inc.
vs. Nable, 38 Off. Gaz. 62). 2
Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an
arbitrary or despotic manner by reason of passion or personal hostility. It appears that a
comprehensive study of the VAT had been extensively discussed by this framers and other
government agencies involved in its implementation, even under the past administration. As the
Solicitor General correctly sated. "The signing of E.O. 273 was merely the last stage in the exercise
of her legislative powers. The legislative process started long before the signing when the data were
gathered, proposals were weighed and the final wordings of the measure were drafted, revised and
finalized. Certainly, it cannot be said that the President made a jump, so to speak, on the Congress,
two days before it convened." 3
Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive, in
violation of the provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states:

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Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
The petitioners" assertions in this regard are not supported by facts and circumstances to warrant
their conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory or
unjust. Petitioners merely rely upon newspaper articles which are actually hearsay and have
evidentiary value. To justify the nullification of a law. there must be a clear and unequivocal breach of
the Constitution, not a doubtful and argumentative implication. 4
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. The court,
in City of Baguio vs. De Leon, 5 said:
... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for
the Court, stated: "A tax is considered uniform when it operates with the same force
and effect in every place where the subject may be found."
There was no occasion in that case to consider the possible effect on such a
constitutional requirement where there is a classification. The opportunity came in
Eastern Theatrical Co. v. Alfonso (83 Phil. 852, 862). Thus: "Equality and uniformity
in taxation means that all taxable articles or kinds of property of the same class shall
be taxed at the same rate. The taxing power has the authority to make reasonable
and natural classifications for purposes of taxation; . . ." About two years later, Justice
Tuason, speaking for this Court in Manila Race Horses Trainers Assn. v. de la Fuente
(88 Phil. 60, 65) incorporated the above excerpt in his opinion and continued; "Taking
everything into account, the differentiation against which the plaintiffs complain
conforms to the practical dictates of justice and equity and is not discriminatory within
the meaning of the Constitution."
To satisfy this requirement then, all that is needed as held in another case decided
two years later, (Uy Matias v. City of Cebu, 93 Phil. 300) is that the statute or
ordinance in question "applies equally to all persons, firms and corporations placed
in similar situation." This Court is on record as accepting the view in a leading
American case (Carmichael v. Southern Coal and Coke Co., 301 US 495) that
"inequalities which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation." (Lutz v. Araneta, 98 Phil. 148, 153).
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public,
which are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons
engage 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, spared as they are from the incidence of the VAT, are
expected to be relatively lower and within the reach of the general public. 6
The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers
Association of the Philippines that EO 273, more particularly the new Sec. 103 (r) of the National
Internal Revenue Code, unduly discriminates against customs brokers. The contested provision
states:
Sec. 103. Exempt transactions. The following shall be exempt from the valueadded tax:
xxx xxx xxx

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(r) Service performed in the exercise of profession or calling (except customs

brokers) subject to the occupation tax under the Local Tax Code, and professional
services performed by registered general professional partnerships;
The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was
inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes the
services of customs brokers subject to the payment of the VAT and to distinguish customs brokers
from other professionals who are subject to the payment of an occupation tax under the Local Tax
Code. Pertinent provisions of Sec. 102 read:
Sec. 102. Value-added tax on sale of services. There shall be levied, assessed
and collected, a value-added tax equivalent to 10% percent of gross receipts derived
by any person engaged in the sale of services. The phrase sale of services" means
the performance of all kinds of services for others for a fee, remuneration or
consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers;
lessors of personal property; lessors or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or repacking goods for others; and
similar services regardless of whether or not the performance thereof call for the
exercise or use of the physical or mental faculties: ...
With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential
conflict between the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned,
is averted.
At any rate, the distinction of the customs brokers from the other professionals who are subject to
occupation tax under the Local Tax Code is based upon material differences, in that the activities of
customs brokers (like those of stock, real estate and immigration brokers) partake more of a
business, rather than a profession and were thus subjected to the percentage tax under Sec. 174 of
the National Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the
percentage tax and replaced it with the VAT. If the petitioner Association did not protest the
classification of customs brokers then, the Court sees no reason why it should protest now.
The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the
fears expressed by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of
basic commodities and services, as well as mass actions and demonstrations against the VAT
should by now be evident. The fact that nothing of the sort has happened shows that the fears and
apprehensions of the petitioners appear to be more imagined than real. It would seem that the VAT
is not as bad as we are made to believe.
In any event, if petitioners seriously believe that the adoption and continued application of the VAT
are prejudicial to the general welfare or the interests of the majority of the people, they should seek
recourse and relief from the political branches of the government. The Court, following the timehonored doctrine of separation of powers, cannot substitute its judgment for that of the President as
to the wisdom, justice and advisability of the adoption of the VAT. The Court can only look into and
determine whether or not EO 273 was enacted and made effective as law, in the manner required
by, and consistent with, the Constitution, and to make sure that it was not issued in grave abuse of
discretion amounting to lack or excess of jurisdiction; and, in this regard, the Court finds no reason to
impede its application or continued implementation.
WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs.
SO ORDERED.

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