Commissioner of Internal Revenue vs.

Central Luzon Drug Corporation

G.R. No. 159647 April 15, 2005

Facts:
Respondents operated six drugstores under the business name Mercury Drug. From January
to December 1996 respondent granted 20% sales discount to qualified senior citizens on
their purchases of medicines pursuant to RA 7432 for a total of 904,769.

On April 15, 1997, respondent filed its annual Income Tax Return for taxable year 1996
declaring therein net losses. On Jan. 16, 1998 respondent filed with petitioner a claim for tax
refund/credit of 904,769.00 allegedly arising from the 20% sales discount. Unable to
obtain affirmative response from petitioner, respondent elevated its claim to the Court of
Tax Appeals. The court dismissed the same but upon reconsideration, the latter reversed its
earlier ruling and ordered petitioner to issue a Tax Credit Certificate in favor of respondent
citing CA GR SP No. 60057 (May 31, 2001, Central Luzon Drug Corp. vs. CIR) citing that Sec.
229 of RA 7432 deals exclusively with illegally collected or erroneously paid taxes but that
there are other situations which may warrant a tax credit/refund.

CA affirmed Court of Tax Appeal's decision reasoning that RA 7432 required neither a tax
liability nor a payment of taxes by private establishments prior to the availment of a tax
credit. Moreover, such credit is not tantamount to an unintended benefit from the law, but
rather a just compensation for the taking of private property for public use.

Issue:
Whether or not respondent, despite incurring a net loss, may still claim the 20% sales
discount as a tax credit.

Ruling:
Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of obtaining a
20% discount on their purchase of medicine from any private establishment in the country.
The latter may then claim the cost of the discount as a tax credit. Such credit can be claimed
even if the establishment operates at a loss.

A tax credit generally refers to an amount that is subtracted directly from ones total tax
liability. It is an allowance against the tax itself or a deduction from what is owed by a
taxpayer to the government.
A tax credit should be understood in relation to other tax concepts. One of these is tax
deduction which is subtraction from income for tax purposes, or an amount that is
allowed by law to reduce income prior to the application of the tax rate to compute the
amount of tax which is due. In other words, whereas a tax credit reduces the tax due, tax
deduction reduces the income subject to tax in order to arrive at the taxable income.

A tax credit is used to reduce directly the tax that is due, there ought to be a tax liability
before the tax credit can be applied. Without that liability, any tax credit application will be
useless. There will be no reason for deducting the latter when there is, to begin with, no
existing obligation to the government. However, as will be presented shortly, the existence
of a tax credit or its grant by law is not the same as the availment or use of such
credit. While the grant is mandatory, the availment or use is not. If a net loss is reported by,
and no other taxes are currently due from, a business establishment, there will obviously be
no tax liability against which any tax credit can be applied. For the establishment to choose
the immediate availment of a tax credit will be premature and impracticable.

LUTZ v. ARANETA
GR No. L-7859, December 22, 1955
98 PHIL 148

FACTS: Plaintiff Walter Lutz, in his capacity as judicial administrator of the intestate
estate of Antionio Ledesma, sought to recover from the CIR the sum of P14,666.40 paid by
the estate as taxes, under section 3 of the CA 567 or the Sugar Adjustment Act thereby
assailing its constitutionality, for it provided for an increase of the existing tax on the
manufacture of sugar, alleging that such enactment is not being levied for a public purpose
but solely and exclusively for the aid and support of the sugar industry thus making it void
and unconstitutional. The sugar industry situation at the time of the enactment was in an
imminent threat of loss and needed to be stabilized by imposition of emergency measures.

ISSUE: Is CA 567 constitutional, despite its being allegedly violative of the equal
protection clause, the purpose of which is not for the benefit of the general public but for
the rehabilitation only of the sugar industry?

HELD: Yes. The protection and promotion of the sugar industry is a matter of public
concern, it follows that the Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here, the legislative discretion
must be allowed to fully play, subject only to the test of reasonableness; and it is not
contended that the means provided in the law bear no relation to the objective pursued or
are oppressive in character. If objective and methods are alike constitutionally valid, no
reason is seen why the state may not levy taxes to raise funds for their prosecution and
attainment. Taxation may be made the implement of the state's police power.

G.R. No. 166006

PLANTERS PRODUCTS, INC
Petitioner,
FERTIPHIL CORPORATION,
Respondent.

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under
Philippine laws. They are both engaged in the importation and distribution of fertilizers, pesticides
and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI
No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC)
on the domestic sale of all grades of fertilizers in the Philippines. The LOI provides:

The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a
capital contribution component of not less than P10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the Philippines.

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the
Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East
Bank and Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July
8, 1985 to January 24, 1986.
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the
return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No.
1465, but PPI refused to accede to the demand.

Unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due
process of law. Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation,
which used the proceeds to maintain its monopoly of the fertilizer industry.

In its Answer, FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was
a valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in
the country. It also averred that Fertiphil did not sustain any damage from the LOI because the
burden imposed by the levy fell on the ultimate consumer, not the seller.

Issues:

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE

DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTIONAND DAMAGES
WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH
HAS NO STANDING TO DO SO.

In this jurisdiction,SC adopted the direct injury test to determine locus standi in public suits. In
People v. Vera, it was held that a person who impugns the validity of a statute must have a
personal and substantial interest in the case such that he has sustained, or will sustain direct injury
as a result. The direct injury test in public suits is similar to the real party in interest rule for
private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.

Recognizing that a strict application of the direct injury test may hamper public interest, this Court
relaxed the requirement in cases of transcendental importance or with far reaching
implications. Being a mere procedural technicality, it has also been held that locus standi may be
waived in the public interest.

Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has
locus standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It
was required, and it did pay, the P10 levy imposed for every bag of fertilizer sold on the domestic
market. It may be true that Fertiphil has passed some or all of the levy to the ultimate consumer,
but that does not disqualify it from attacking the constitutionality of the LOI or from seeking a
refund. As seller, it bore the ultimate burden of paying the levy. It faced the possibility of severe
sanctions for failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.

Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to
factor in its product the levy. The levy certainly rendered the fertilizer products of Fertiphil and
other domestic sellers much more expensive. The harm to their business consists not only in
fewer clients because of the increased price, but also in adopting alternative corporate strategies to
meet the demands of LOI No. 1465. Fertiphil and other fertilizer sellers may have shouldered all or
part of the levy just to be competitive in the market. The harm occasioned on the business of
Fertiphil is sufficient injury for purposes of locus standi.

II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE
FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A
FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR
STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE
EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.

The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI
is enacted under the police power, it is still unconstitutional because it did not promote the general
welfare of the people or public interest.

Police power and the power of taxation are inherent powers of the State. These powers are
distinct and have different tests for validity. Police power is the power of the State to enact
legislation that may interfere with personal liberty or property in order to promote the general
welfare, while the power of taxation is the power to levy taxes to be used for public purpose. The
main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue
generation. The lawful subjects and lawful means tests are used to determine the validity of a
law enacted under the police power. The power of taxation, on the other hand, is circumscribed by
inherent and constitutional limitations.

While it is true that the power of taxation can be used as an implement of police power, the primary
purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at
least, one of the real and substantial purposes, then the exaction is properly called a tax.

III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS
REMITTED TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO
AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED
RIGHTS BY VIRTUE OF THE PRINCIPLE OF OPERATIVEFACT PRIOR TO ANY
DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.

The general rule is that an unconstitutional law is void. It produces no rights, imposes no duties
and affords no protection. It has no legal effect. It is, in legal contemplation, inoperative as if it has
not been passed. Being void, Fertiphil is not required to pay the levy. All levies paid should be
refunded in accordance with the general civil code principle against unjust enrichment. The
general rule is supported by Article 7 of the Civil Code, which provides:

ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall
not be excused by disuse or custom or practice to the contrary.

When the courts declare a law to be inconsistent with the Constitution, the former shall be void and
the latter shall govern.

Notes:

An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a
public purpose. They cannot be used for purely private purposes or for the exclusive benefit of
private persons. The reason for this is simple. The power to tax exists for the general welfare;
hence, implicit in its power is the limitation that it should be used only for a public purpose. It would
be a robbery for the State to tax its citizens and use the funds generated for a private purpose. As
an old United States case bluntly put it: To lay with one hand, the power of the government on the
property of the citizen, and with the other to bestow it upon favored individuals to aid private
enterprises and build up private fortunes, is nonetheless a robbery because it is done under the
forms of law and is called taxation.

The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity
and fair play. It nullifies the effects of an unconstitutional law by recognizing that the existence of a
statute prior to a determination of unconstitutionality is an operative fact and may have
consequences which cannot always be ignored. The past cannot always be erased by a new
judicial declaration.

The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on
those who have relied on the invalid law. Thus, it was applied to a criminal case when a
declaration of unconstitutionality would put the accused in double jeopardy or would put in limbo the
acts done by a municipality in reliance upon a law creating it.

Chavez v Ongpin
GR No 76778, June 6, 1990

FACTS:
Section 21 of Presidential Decree 464 provides that every 5 years starting calendar year 1978,
there shall be a provincial or city general revision of real property assessments. The general
revision was completed in 1984.
On November 25, 1986, President Corazon Aquino issued EO 73 stating that beginning
January 1, 1987, the 1984 assessments shall be the basis of real property taxes. Francisco
Chavez, a taxpayer and landowner, questioned the constitutionality of EO 74. He alleges that
it will bring unreasonable increase in real property taxes.

ISSUE:
Is EO 73 constitutional?

RULING:
Yes. Without EO 73, the basis for collection of real property taxes will still be the 1978
revision of property values. Certainly, to continue collecting real property taxes based on
valuations arrived at several years ago, in disregard of the increases in the value of real
properties that have occurred since then is not in consonance with a sound tax system.
Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that
sources of revenue must be adequate to meet government expenditures and their
variations.

Arturo Tolentino v. Secretary of Finance and Commissioner of Internal Revenue

G.R. No. 115455; October 30, 1995
Mendoza, J.:

FACTS:
The present case involves motions seeking reconsideration of the Courts decision dismissing
the petitions for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as
the Expanded Value-Added Tax Law. The motions, of which there are 10 in all, have been
filed by the several petitioners.

The Philippine Press Institute, Inc. (PPI) contends that by removing the exemption of the
press from the VAT while maintaining those granted to others, the law discriminates against
the press. At any rate, it is averred, "even nondiscriminatory taxation of constitutionally
guaranteed freedom is unconstitutional, citing in support the case of Murdock v.
Pennsylvania.

Chamber of Real Estate and Builders Associations, Invc., (CREBA), on the other hand, asserts
that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as
covered or exempt without reasonable basis and (3) violates the rule that taxes should be
uniform and equitable and that Congress shall "evolve a progressive system of taxation.

Further, the Cooperative Union of the Philippines (CUP), argues that legislature was to adopt
a definite policy of granting tax exemption to cooperatives that the present Constitution
embodies provisions on cooperatives. To subject cooperatives to the VAT would therefore
be to infringe a constitutional policy.

ISSUE:
Whether or not, based on the aforementioned grounds of the petitioners, the Expanded
Value-Added Tax Law should be declared unconstitutional.

RULING:
No. With respect to the first contention, it would suffice to say that since the law granted
the press a privilege, the law could take back the privilege anytime without offense to the
Constitution. The reason is simple: by granting exemptions, the State does not forever waive
the exercise of its sovereign prerogative. Indeed, in withdrawing the exemption, the law
merely subjects the press to the same tax burden to which other businesses have long ago
been subject. The PPI asserts that it does not really matter that the law does not
discriminate against the press because "even nondiscriminatory taxation on constitutionally
guaranteed freedom is unconstitutional." The Court was speaking in that case (Murdock v.
Pennsylvania) of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays a prior restraint on the exercise of
its right. The VAT is, however, different. It is not a license tax. It is not a tax on the exercise
of a privilege, much less a constitutional right. It is imposed on the sale, barter, lease or
exchange of goods or properties or the sale or exchange of services and the lease of
properties purely for revenue purposes. To subject the press to its payment is not to burden
the exercise of its right any more than to make the press pay income tax or subject it to
general regulation is not to violate its freedom under the Constitution.

Anent the first contention of CREBA, it has been held in an early case that even though such
taxation may affect particular contracts, as it may increase the debt of one person and
lessen the security of another, or may impose additional burdens upon one class and release
the burdens of another, still the tax must be paid unless prohibited by the Constitution, nor
can it be said that it impairs the obligation of any existing contract in its true legal sense. It is
next pointed out that while Section 4 of R.A. No. 7716 exempts such transactions as the sale
of agricultural products, food items, petroleum, and medical and veterinary services, it
grants no exemption on the sale of real property which is equally essential. The sale of food
items, petroleum, medical and veterinary services, etc., which are essential goods and
services was already exempt under Section 103, pars. (b) (d) (1) of the NIRC before the
enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted
exemption to these transactions, while subjecting those of petitioner to the payment of the
VAT. Finally, it is contended that R.A. No. 7716 also violates Art. VI, Section 28(1) which
provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve
a progressive system of taxation. Nevertheless, equality and uniformity of taxation means
that all taxable articles or kinds of property of the same class be taxed at the same rate. The
taxing power has the authority to make reasonable and natural classifications for purposes
of taxation. To satisfy this requirement it is enough that the statute or ordinance applies
equally to all persons, forms and corporations placed in similar situation. Furthermore, 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."
The mandate to Congress is not to prescribe, but to evolve, a progressive tax system.

As regards the contention of CUP, it is worth noting that its theory amounts to saying that
under the Constitution cooperatives are exempt from taxation. Such theory is contrary to
the Constitution under which only the following are exempt from taxation: charitable
institutions, churches and parsonages, by reason of Art. VI, 28 (3), and non-stock,
non-profit educational institutions by reason of Art. XIV, 4 (3).
With all the foregoing ratiocinations, it is clear that the subject law bears no constitutional
infirmities and is thus upheld.