Taxation-tax Notes for Cnsl -Part1 Cases Inserted

7/30/2019 Taxation-tax Notes for Cnsl -Part1 Cases Inserted

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NOTES IN TAXATION FOR CNSL LAW STUDENTS2010 NOTES

CHAPTER ONEGENERAL PRINCIPLES

IN TAXATION

DEFINITION

What is taxation?

Taxation is the power of the Sovereign to assess and collect sums of money from the public tosupport the government.

The Sovereign is the State. For the continued existence of the State and in order to support itsgovernmental function, it needs to collect money from the people. We call this as tax . Thegovernment infrastructures like the roads, bridges, city halls, public hospitals, terminals, and allothers which are owned by the government comes from the taxes people pay. The expenses for the salaries of the government employees and all other disbursement of the government comefrom taxes.

The power to tax is inherent in the State as an attribute of its sovereignty . The State, beingsovereign in itself, does not need the mandate of the people in order to have its taxing power.Thus, the people cannot remove its power to tax by enacting a law.

Tax is an enforced contribution . All those who are covered and not exempted must pay tax. Infact, non-payment of tax will subject an individual to civil and criminal penalties.

VERA VS. FERNANDEZ

Facts:

The Bureau of Internal Revenue was claiming against the estate of Luis D. Tongoy for deficiency income taxes for theyears 1963 and 1964 of the decedent in the total amount of P3,254.80, inclusive of 5% surcharge, 1% monthly interest andcompromise penalties. The administrator opposed the motion solely on the ground that the claim was barred under Section 5,Rule 86 of the Rules of Court.

Held:

A perusal of Section 5, Rule 86 of the Rules of Court shows that it makes no mention of claims for monetary obligationof the decedent created by law, such as taxes which is entirely of different character from the claims expressly enumeratedtherein, such as: all claims for money against the decedent arising from contract, express or implied, whether the same be due,not due or contingent, all claim for funeral expenses and expenses for the last sickness of the decedent and judgment for moneyagainst the decedent.

MULTIPLE CHOICE

1. Where does the power to tax come from?a. The government

b. The Constitution by Atty. Francis D. Nieves, CPA1 | P a g e


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c. The Stated. The Legislature

Ans: C

NATURE

What are the nature of taxation?

1. The power of taxation is inherent in the State being essential to its existence; thus, there isno need to provide for this power in the Constitution. This power exists even without themandate of the Constitution.

2. It is essentially a legislative function . While the power to tax is already inherent and doesnot need any Constitutional mandate, its exercise needs a law to be enacted. An enacted lawis needed to determine the subjects to be covered. The legislature or the Congress determineswhat to tax, whom to tax, and how much to tax.

3. While the power to tax does not need an express grant , it is however subject toconstitutional and inherent limitation.

MULTIPLE CHOICE

1. Which of the following is not one of the nature of taxation?a. It is inherent in the State

b. It is subject to constitutional and inherent limitationc. It is naturally within the legislative functiond. It is subject to Constitutional grant

Ans: D

2. Which of the following is not one of the nature of taxation?a. It is inherent in the State

b. It is subject to constitutional and inherent limitationc. It is inherent in the BIR d. It does not need to be conferred by the Constitution

Ans: C

LIMITATIONS

What are the inherent limitations on the power to tax?

1. The power to tax is subject to the territoriality principle. The power of taxation is limitedonly to the territorial jurisdiction of the State. Tax laws do not operate beyond the countrysterritorial limit. Thus, as a rule, our tax laws can be enforced only in the Philippines.

Query:

If tax laws do not operate beyond the territorial principle of the State, then why are ResidentCitizens of the Philippines deriving income from abroad taxable?

by Atty. Francis D. Nieves, CPA2 | P a g e


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It is because Resident Citizens are receiving benefits and protection from the Philippines. Thus,their income, although derived from abroad, is taxed. By the theory of privity, a state can tax itscitizens, although their income were purely derived abroad.

2. Tax must be for public purpose . Although the State is sovereign, it cannot be denied that the power to tax is allowed by the people for the common good. Tax being a deprivation of the peoples property must be collected and disbursed only for public purpose.

In Lutz vs. Araneta, the Supreme Court, quoting Johnson vs. State ex rel. Marey, said:

As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent by

public interests as to be within the police power of the sovereign. (128 Sp. 857).Once it is conceded, as it must, that 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 andexpedient for its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of reasonableness; and it is not contended that the means provided in section 6 of the law (above quoted) bear norelation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionallyvalid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxationmay be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L.Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint; indeed,it appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure of thefunds derived from it. 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" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495,81 L. Ed. 1245, citing numerous authorities, at p. 1251).From the point of view we have taken it appears of no moment that the funds raised under the Sugar Stabilization

Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that very enterprise that isbeing protected. It may be that other industries are also in need of similar protection; that the legislature is notrequired by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. ProbateCourt, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrownbecause there are other instances to which it might have been applied;" and that "the legislative authority, exertedwithin its proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp.301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax money toexperimental stations to seek increase of efficiency in sugar production, utilization of by-products and solution of allied problems, as well as to the improvements of living and working conditions in sugar mills or plantations, withoutany part of such money being channeled directly to private persons, constitutes expenditure of tax money for privatepurposes,

3. Government entities are exempt from tax by virtue of the notion that one cannot taxitself . Thus, the government cannot collect its money from its left pocket and then place it on itsright for this would just be an exercise in futility

4. The power to tax, being purely legislative, cannot be delegated . The legislature cannotdelegate the power to tax to the executive nor to the judiciary. The power to tax is essentiallylodged in Congress being essentially a lawmaking function. Congress, in which the people havedelegated their lawmaking power, cannot renege on its duty by simply delegating the power toanother branch. This is based on the principle that what has been delegated cannot be re-delegated.



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4. The power to tax is subject to International Comity By virtue of informal agreement between states, the property of a state may not be taxed by another. A state cannot exercisesovereignty over another state. Both are regarded as sovereign equals.

MULTIPLE CHOICE1. It is a principle in which states regard themselves as sovereign equals?

a. Territoriality b. Reciprocityc. International Justiced. International Comity

Ans: D

What are the constitutional limitations on the power to tax?

1. The power to tax is subject to the due process of law . Section 1 of Article III of theConstitution states that, No person shall be deprived of life, liberty, or property without due

process of law. People must be collected taxes based on a clear substantive law. They mustalso be given opportunity to defend their position on how much is their obligation to pay thetax even at the risk of being wrong and being subjected to penalties.

In Villegas vs Hiu Ching Tsai Pao, the Court held as invalid

AN ORDINANCE MAKING IT UNLAWFUL FOR ANY PERSON NOT A CITIZEN OF THE PHILIPPINES TO BEEMPLOYED IN ANY PLACE OF EMPLOYMENT OR TO BE ENGAGED IN ANY KIND OF TRADE, BUSINESS OROCCUPATION WITHIN THE CITY OF MANILA WITHOUT FIRST SECURING AN EMPLOYMENT PERMIT FROMTHE MAYOR OF MANILA; AND FOR OTHER PURPOSES. 3

Thus, the Court said:

The ordinance in question violates the due process of law and equal protection rule of the Constitution.

Requiring a person before he can be employed to get a permit from the City Mayor of Manila who may withhold or refuse it at will is tantamount to denying him the basic right of the people in the Philippines to engage in a means of livelihood. While it is true that the Philippines as a State is not obliged to admit aliens within its territory, once an alienis admitted, he cannot be deprived of life without due process of law. This guarantee includes the means of livelihood.The shelter of protection under the due process and equal protection clause is given to all persons, both aliens andcitizens. 13

2. The power to tax is subject to the equal protection of laws . Section 1 of Article III of theConstitution states that, No person shall be deprived of life, liberty, or property without due

process of law, nor shall any person be denied the equal protection of laws.This means thatthose similarly situated must be treated alike. A person similarly situated with another must

be subject to the same tax. If a provision of law exempts a person from paying taxes, thoseothers similarly situated must also be exempted.

In upholding the constitutionality and non violation of equal protection clause by the enactementRepublic Act 1635, 1 as amended by Republic Act 2631, 2 which requires mail matters to be

posted with Anti TB Stamps, the Court, in Gomez vs. Palomar held:We now consider the constitutional objections raised against the statute and the implementing orders.

1. It is said that the statute is violative of the equal protection clause of the Constitution. More specifically the claim is made thatit constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the population and that even



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among postal patrons the statute discriminatorily grants exemption to newspapers while Administrative Order 9 of the respondentPostmaster General grants a similar exemption to offices performing governmental functions. .

The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise tax, laid upon the exercise of a privilege, namely, the privilege of using the mails. As such the objections levelled against it must be viewed in the light of applicable principles of taxation.

To begin with, it is settled that the legislature has the inherent power to select the subjects of taxation and to grant exemptions.4

This power has aptly been described as "of wide range and flexibility." 5 Indeed, it is said that in the field of taxation, more than inother areas, the legislature possesses the greatest freedom in classification. 6

xxx

We are not wont to invalidate legislation on equal protection grounds except by the clearest demonstration that it sanctionsinvidious discrimination, which is all that the Constitution forbids. The remedy for unwise legislation must be sought in thelegislature. Now, the classification of mail users is not without any reason. It is based on ability to pay, let alone the enjoyment of a privilege, and on administrative convinience. In the allocation of the tax burden, Congress must have concluded that thecontribution to the anti-TB fund can be assured by those whose who can afford the use of the mails.

The classification is likewise based on considerations of administrative convenience. For it is now a settled principle of law that"consideration of practical administrative convenience and cost in the administration of tax laws afford adequate ground for imposing a tax on a well recognized and defined class." 9 In the case of the anti-TB stamps, undoubtedly, the single mostimportant and influential consideration that led the legislature to select mail users as subjects of the tax is the relative ease and

convenienceof collecting the tax through the post offices. The small amount of five centavos does not justify the great expenseand inconvenience of collecting through the regular means of collection. On the other hand, by placing the duty of collection on postal authorities the tax was made almost self-enforcing, with as little cost and as little inconvenience as possible.

And then of course it is not accurate to say that the statute constituted mail users into a class. Mail users were already a class bythemselves even before the enactment of the statue and all that the legislature did was merely to select their class. Legislation isessentially empiric and Republic Act 1635, as amended, no more than reflects a distinction that exists in fact. As Mr. JusticeFrankfurter said, "to recognize differences that exist in fact is living law; to disregard [them] and concentrate on some abstractidentities is lifeless logic." 10

Granted the power to select the subject of taxation, the State's power to grant exemption must likewise be conceded as anecessary corollary. Tax exemptions are too common in the law; they have never been thought of as raising issues under theequal protection clause.

It is thus erroneous for the trial court to hold that because certain mail users are exempted from the levy the law andadministrative officials have sanctioned an invidious discrimination offensive to the Constitution. The application of the lower courts theory would require all mail users to be taxed, a conclusion that is hardly tenable in the light of differences in status of mail users. The Constitution does not require this kind of equality.

As the United States Supreme Court has said, the legislature may withhold the burden of the tax in order to foster what itconceives to be a beneficent enterprise. 11 This is the case of newspapers which, under the amendment introduced by Republic Act2631, are exempt from the payment of the additional stamp.

As for the Government and its instrumentalities, their exemption rests on the State's sovereign immunity from taxation. The Statecannot be taxed without its consent and such consent, being in derogation of its sovereignty, is to be strictly construed. 12

Administrative Order 9 of the respondent Postmaster General, which lists the various offices and instrumentalities of theGovernment exempt from the payment of the anti-TB stamp, is but a restatement of this well-known principle of constitutionallaw.

The trial court likewise held the law invalid on the ground that it singles out tuberculosis to the exclusion of other diseases which,it is said, are equally a menace to public health. But it is never a requirement of equal protection that all evils of the same genus

be eradicated or none at all. 13 As this Court has had occasion to say, "if the law presumably hits the evil where it is most felt, it isnot to be overthrown because there are other instances to which it might have been applied." 14

2. The petitioner further argues that the tax in question is invalid, first, because it is not levied for a public purpose as no special benefits accrue to mail users as taxpayers, and second, because it violates the rule of uniformity in taxation.

The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit to a taxpayer as areturn for what he pays, then it is sufficient answer to say that the only benefit to which the taxpayer is constitutionally entitled isthat derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotionof taxes to public purposes . Any other view would preclude the levying of taxes except as they are used to compensate for the

burden on those who pay them and would involve the abandonment of the most fundamental principle of government that itexists primarily to provide for the common good. 15

Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate rather than a graduatedtax. A tax need not be measured by the weight of the mail or the extent of the service rendered. We have said thatconsiderations of administrative convenience and cost afford an adequate ground for classification. The sameconsiderations may induce the legislature to impose a flat tax which in effect is a charge for the transaction, operatingequally on all persons within the class regardless of the amount involved.

xxx

According to the trial court, the money raised from the sales of the anti-TB stamps is spent for the benefit of the PhilippineTuberculosis Society, a private organization, without appropriation by law. But as the Solicitor General points out, the Society is



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not really the beneficiary but only the agency through which the State acts in carrying out what is essentially a public function.The money is treated as a special fund and as such need not be appropriated by law. 18

xxx

The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of the additional charge but also that of theregular postage. In the case of business reply cards, for instance, it is obvious that to require mailers to affix the anti-TB stamp ontheir cards would be to make them pay much more because the cards likewise bear the amount of the regular postage.

It is likewise true that the statute does not provide for the disposition of mails which do not bear the anti-TB stamp, but adeclaration therein that "no mail matter shall be accepted in the mails unless it bears such semi-postal stamp" is a declaration thatsuch mail matter is nonmailable within the meaning of section 1952 of the Administrative Code. Administrative Order 7 of thePostmaster General is but a restatement of the law for the guidance of postal officials and employees. As for AdministrativeOrder 9, we have already said that in listing the offices and entities of the Government exempt from the payment of the stamp,the respondent Postmaster General merely observed an established principle, namely, that the Government is exempt fromtaxation.

ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without pronouncement as to costs.

In Ormoc Sugar vs Treasurer of Ormoc City, the Municipal Board of Ormoc City, on January 29, 1964 passed 1 Ordinance No. 4, Series of 1964, imposing "on any and all

productions of centrifugal sugar milled at the Ormoc Sugar Company, Inc ., in Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to the United States of America and other foreign countries."

On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of Leyte, with service of a copy upon theSolicitor General, a complaint 3 against the City of Ormoc as well as its Treasurer, Municipal Board and Mayor, alleging that theafore-stated ordinance is unconstitutional for being violative of the equal protection clause (Sec. 1[1], Art. III, Constitution) andthe rule of uniformity of taxation (Sec. 22[1]), Art. VI, Constitution),

The Court held:

The point remains to be determined, however, whether constitutional limits on the power of taxation, specifically the equal

protection clause and rule of uniformity of taxation, were infringed.The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal protection of the laws." (Sec. 1

[1], Art. III) In Felwa vs. Salas , 5 We ruled that the equal protection clause applies only to persons or things identically situatedand does not bar a reasonable classification of the subject of legislation, and a classification is reasonable where (1) it is based onsubstantial distinctions which make real differences; (2) these are germane to the purpose of the law; (3) the classification appliesnot only to present conditions but also to future conditions which are substantially identical to those of the present; (4) theclassification applies only to those who belong to the same class.

A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only centrifugalsugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing ordinance's enactment,Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable,should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as toexclude any subsequently established sugar central, of the same class as plaintiff, for the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon.

Appellant, however, is not entitled to interest; on the refund because the taxes were not arbitrarily collected (Collector of Internal Revenue v. Binalbagan). 6 At the time of collection, the ordinance provided a sufficient basis to preclude arbitrariness, thesame being then presumed constitutional until declared otherwise.

CIR vs. SantosOf grave concern to this Court is the judicial pronouncement of the court a quo that certain provisions of the Tariff &Customs Code and the National Internal Revenue Code are unconstitutional. This provokes the issue: Can theRegional Trial Courts declare a law inoperative and without force and effect or otherwise unconstitutional? If it can,under what circumstances?

In this petition, the Commissioner of Internal Revenue and the Commissioner of Customs jointly seek the reversal of the Decision, 1 dated February 16, 1995, of herein public respondent, Hon. Apolinario B. Santos, Presiding Judge of Branch 67 of the Regional Trial Court of Pasig City.

The following facts, concisely related in the petition 2 of the Office of the Solicitor General, appear to be undisputed:

1. Private respondent Guild of Philippine Jewelers, Inc., is an association of Filipino jewelersengaged in the manufacture of jewelries ( sic ) and allied undertakings. Among its members areHans Brumann, Inc., Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International Traders, Inc.,Diagem Trading Corporation, and private respondent Jewelry by Marco & Co., Inc. Privaterespondent Antonio M. Marco is the President of the Guild.



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2. On August 5, 1988, Felicidad L. Viray, then Regional Director, Region No. 4-A of the Bureau of Internal Revenue, acting for and in behalf of the Commissioner of Internal Revenue, issuedRegional Mission Order No. 109-88 to BIR officers, led by Eliseo Corcega, to conduct surveillance,monitoring, and inventory of all imported articles of Hans Brumann, Inc., and place the same under preventive embargo. The duration of the mission was from August 8 to August 20, 1988 (Exhibit"1"; Exhibit "A").

3. On August 17, 1988, pursuant to the aforementioned Mission Order, the BIR officers proceededto the establishment of Hans Brumann, Inc., served the Mission Order, and informed theestablishment that they were going to make an inventory of the articles involved to see if the proper taxes thereon have been paid. They then made an inventory of the articles displayed in thecabinets with the assistance of an employee of the establishment. They listed down the articles,which list was signed by the assistant employee. They also requested the presentation of proof of necessary payments for excise tax and value-added tax on said articles (pp. 10-15, TSN, April 12,1993, Exhibits "2", "2-A", "3", "3-A").

4. The BIR officers requested the establishment not to sell the articles until it can be proven that thenecessary taxes thereon have been paid. Accordingly, Mr. Hans Brumann, the owner of theestablishment, signed a receipt for Goods, Articles, and Things Seized under Authority of theNational Internal Revenue Code (dated August 17, 1988), acknowledging that the articlesinventoried have been seized and left in his possession, and promising not to dispose of the samewithout authority of the Commissioner of Internal Revenue pending investigation. 3

5. Subsequently, BIR officer Eliseo Corcega submitted to his superiors a report of the inventoryconducted and a computation of the value-added tax and ad valorem tax on the articles for evaluation and disposition. 4

6. Mr. Hans Brumann, the owner of the establishment, never filed a protest with the BIR on thepreventive embargo of the articles. 5

7. On October 17, 1988, Letter of Authority No. 0020596 was issued by Deputy Commissioner Eufracio D. Santos to BIR officers to examine the books of accounts and other accounting recordsof Hans Brumann, Inc., for "stocktaking investigation for excise tax purposes for the period January1, 1988 to present" (Exhibit "C"). In a letter dated October 27, 1988, in connection with the physicalcount of the inventory (stocks on hand) pursuant to said Letter of Authority, Hans Brumann, Inc.was requested to prepare and make available to the BIR the documents indicated therein (Exhibit"D").

8. Hans Brumann, Inc., did not produce the documents requested by the BIR. 6

9. Similar Letter of Authority were issued to BIR officers to examine the books of accounts andother accounting records of Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International Traders,Inc., (Exhibits "E", "G" and "N") and Diagem Trading Corporation 7 for "stocktaking/investigation far excise tax purpose for the period January 1, 1988 to present."

10. In the case of Miladay Jewels, Inc. and Mercelles, Inc., there is no account of what actuallytranspired in the implementation of the Letters of Authority.

11. In the case of Solid Gold International Traders Corporation, the BIR officers made an inventoryof the articles in the establishment. 8 The same is true with respect to Diagem Traders Corporation.9

12. On November 29, 1988, private respondents Antonio M. Marco and Jewelry By Marco & Co.,Inc. filed with the Regional Trial Court, National Capital Judicial Region, Pasig City, Metro Manila, apetition for declaratory relief with writ of preliminary injunction and/or temporary restraining order against herein petitioners and Revenue Regional Director Felicidad L. Viray (docketed as CivilCase No. 56736) praying that Sections 126, 127(a) and (b) and 150(a) of the National InternalRevenue Code and Hdg. No. 71.01, 71.02, 71.03, and 71.04, Chapter 71 of the Tariff and CustomsCode of the Philippines be declared unconstitutional and void, and that the Commissioner of Internal Revenue and Customs be prevented or enjoined from issuing mission orders and other orders of similar nature. . . .

13. On February 9, 1989, herein petitioners filed their answer to the petition. . . .

14 On October 16, 1989, private respondents filed a Motion with Leave to Amend Petition byincluding as petitioner the Guild of Philippine Jewelers, Inc., which motion was granted. . . .

15. The case, which was originally assigned to Branch 154, was later reassigned to Branch 67.

16. On February 16, 1995, public respondents rendered a decision, the dispositive portion of whichreads:

In view of the foregoing reflections, judgment is hereby rendered, as follows:

1. Declaring Section 104 of the Tariff and the Customs Code of the Philippines, Hdg. 71.01, 71.02, 71.03, and 71.04, Chapter 71 as amended by Executive Order No. 470, imposing three toten (3% to 10%) percent tariff and customs duty on natural andcultured pearls and precious or semi-precious stones, andSection 150 par. (a) the National Internal Revenue Code of



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1977, as amended, renumbered and rearranged by ExecutiveOrder 273, imposing twenty (20%) percent excise tax on

jewelry, pearls and other precious stones, as INOPERATIVEand WITHOUT FORCE and EFFECT insofar as petitioners areconcerned.

2. Enforcement of the same is hereby enjoined.

No cost.

SO ORDERED.

Section 150 (a) of Executive Order No. 273 reads:

Sec. 150. Non-essential goods. There shall be levied, assessed and collected a tax equivalentto 20% based on the wholesale price or the value of importation used by the Bureau of Customs indetermining tariff and customs duties; net of the excise tax and value-added tax, of the followinggoods:

(a) All goods commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semi-precious stones and imitations thereof;goods made of, or ornamented, mounted and fitted with, precious metals or imitations thereof or ivory (not including surgical and dental instruments, silver-plated wares, frames or mountings for spectacles or eyeglasses, and dental goldor gold alloys and other precious metals used in filling, mounting or fitting of theteeth); opera glasses and lorgnettes. The term "precious metals" shall includeplatinum, gold, silver, and other metals of similar or greater value. The term"imitations thereof" shall include platings and alloys of such metals.

Section 150 (a) of Executive Order No. 273, which took effect on January 1, 1988, amended the then Section 163 (a)of the Tax Code of 1986 which provided that:

Sec. 163. Percentage tax on sales of non-essential articles. There shall be levied, assessed andcollected, once only on every original sale, barter, exchange or similar transaction for nominal or valuable consideration intended to transfer ownership of, or title to, the articles herein belowenumerated a tax equivalent to 50% of the gross value in money of the articles so sold, bartered,exchanged or transferred, such tax to be paid by the manufacturer or producer:

(a) All articles commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semi-precious stones, and imitations thereof,

articles made of, or ornamented, mounted or fitted with, precious metals or imitations thereof or ivory (not including surgical and dental instruments, silver-plated wares, frames or mounting for spectacles or eyeglasses, and dental goldor gold alloys and other precious metal used in filling, mounting or fitting of theteeth); opera glasses, and lorgnettes. The term "precious metals" shall includeplatinum, gold, silver, and other metals of similar or greater value. The term"imitations thereof" shall include platings and alloys of such metals;

Section 163 (a) of the 1986 Tax Code was formerly Section 194(a) of the 1977 Tax Code and Section 184(a) of theTax code, as amended by Presidential Decree No. 69, which took effect on January 1, 1974.

It will be noted that, while under the present law, jewelry is subject to a 20% excise tax in addition to a 10% value-added tax under the old law, it was subjected to 50% percentage tax. It was even subjected to a 70% percentage taxunder then Section 184(a) of the Tax Code, as amended by P.D. 69.

Section 104, Hdg. Nos. 17.01, 17.02, 17.03 and 17.04, Chapter 71 of the Tariff and Customs Code, as amended byExecutive Order No. 470, dated July 20, 1991, imposes import duty on natural or cultured pearls and precious or semi-precious stones at the rate of 3% to 10% to be applied in stages from 1991 to 1994 and 30% in 1995.

Prior to the issuance of E.O. 470, the rate of import duty in 1988 was 10% to 50% when the petition was filed in thecourt a quo .

In support of their petition before the lower court, the private respondents submitted a position paper purporting to bean exhaustive study of the tax rates on jewelry prevailing in other Asian countries, in comparison to tax rates leviedon the same in the Philippines. 10

The following issues were thus raised therein:

1. Whether or not the Honorable Court has jurisdiction over the subject matter of the petition.

2. Whether the petition states a cause of action or whether the petition alleges a justiciablecontroversy between the parties.

3. Whether Section 150, par. (a) of the NIRC and Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04

of the Tariff and Customs Code are unconstitutional.4. Whether the issuance of the Mission Order and Letters of Authority is valid and legal.

In the assailed decision, the public respondent held indeed that the Regional Trial Court has jurisdiction to takecognizance of the petition since "jurisdiction over the nature of the suit is conferred by law and it is determine[d]through the allegations in the petition," and that the "Court of Tax Appeals has no jurisdiction to declare a statute



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unconstitutional much less issue writs of certiorari and prohibition in order to correct acts of respondents allegedlycommitted with grave abuse of discretion amounting to lack of jurisdiction."

As to the second issue, the public respondent, made the holding that there exists a justiciable controversy betweenthe parties, agreeing with the statements made in the position paper presented by the private respondents, andconsidering these statements to be factual evidence, to wit:

Evidence for the petitioners indeed reveals that government taxation policy treats jewelry, pearls,and other precious stones and metals as non-essential luxury items and therefore, taxed heavily;that the atmospheric cost of taxation is killing the local manufacturing jewelry industry because theycannot compete with neighboring and other countries where importation and manufacturing of

jewelry is not taxed heavily, if not at all; that while government incentives and subsidies exit, localmanufacturers cannot avail of the same because officially many of them are unregistered and areunable to produce the required official documents because they operate underground, outside thetariff and tax structure; that local jewelry manufacturing is under threat of extinction, otherwisediscouraged, while domestic trading has become more attractive; and as a consequence,neighboring countries, such as: Hongkong, Singapore, Malaysia, Thailand, and other foreigncompetitors supplying the Philippine market either through local channels or through the blackmarket for smuggled goods are the ones who are getting business and making money, whilemembers of the petitioner Guild of Philippine Jewelers, Inc. are constantly subjected tobureaucratic harassment instead of being given by the government the necessary support in order to survive and generate revenue for the government, and most of all fight competitively not only inthe domestic market but in the arena of world market where the real contest is.Considering the allegations of fact in the petition which were duly proven during the trial, the Courtholds that the petition states a cause of action and there exists a justiciable controversy betweenthe parties which would require determination of constitutionality of the laws imposing excise taxand customs duty on jewelry. 11 (emphasis ours)

The public respondent, in addressing the third issue, ruled that the laws in question are confiscatory and oppressive. Again, virtually adopting verbatim the reasons presented by the private respondents in their position paper, the lower court stated:

The Court finds that indeed government taxation policy trats( sic ) hewelry( sic ) as non-essentialluxury item and therefore, taxed heavily. Aside from the ten (10%) percent value added tax (VAT),local jewelry manufacturers contend with the (manufacturing) excise tax of twenty (20%) percent (tobe applied in stages) customs duties on imported raw materials, the highest in the Asia-Pacificregion. In contrast, imported gemstones and other precious metals are duty free in Hongkong,

Thailand, Malaysia and Singapore.The Court elaborates further on the experiences of other countries in their treatment of the jewelrysector.

MALAYSIA

Duties and taxes on imported gemstones and gold and the sales tax on jewelry were abolished inMalaysia in 1984. They were removed to encourage the development of Malaysia's jewelrymanufacturing industry and to increase exports of jewelry.

THAILAND

Gems and jewelry are Thailand's ninth most important export earner. In the past, the industry wasoverlooked by successive administrations much to the dismay of those involved in developingtrade. Prohibitive import duties and sales tax on precious gemstones restricted the growht ( sic ) of the industry, resulting in most of the business being unofficial. It was indeed difficult for agovernment or businessman to promote an industry which did not officially exist.

Despite these circumstances, Thailand's Gem business kept growing up in ( sic ) businessmenbegan to realize it's potential. In 1978, the government quietly removed the severe duties onprecious stones, but imposed a sales tax of 3.5%. Little was said or done at that time as thegovernment wanted to see if a free trade in gemstones and jewelry would increase localmanufacturing and exports or if it would mean more foreign made jewelry pouring into Thailand.However, as time progressed, there were indications that local manufacturing was indeed beingencouraged and the economy was earning mom from exports. The government soon removed the3% sales tax too, putting Thailand at par with Hongkong and Singapore. In these countries, thereare no more import duties and sales tax on gems. (Cited in pages 6 and 7 of Exhibit "M". TheCenter for Research and Communication in cooperation with the Guild of Philippine Jewelers, Inc.,June 1986).

To illustrate, shown hereunder is the Philippine tariff and tax structure on jewelry and other precious and semi-precious stones compared to other neighboring countries, to wit:

Tariff on importedJewelry and (Manufacturing) Sales Tax 10% (VAT)precious stones Excise tax

Philippines 3% to 10% to be 20% 10% VATapplied in stages

Malaysia None None None



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Thailand None None None

Singapore None None None

Hongkong None None None

In this connection, the present tariff and tax structure increases manufacturing costs and rendersthe local jewelry manufacturers uncompetitive against other countries even before they startmanufacturing and trading. Because of the prohibitive cast ( sic ) of taxation, most manufacturerssource from black market for smuggled goods, and that while manufacturers can avail of taxexemption and/or tax credits from the (manufacturing) excise tax, they have no documents topresent when filing this exemption because, or pointed out earlier, most of them source their rawmaterials from the block market, and since many of them do not legally exist or operate onofficially(sic ), or underground, again they have no records (receipts) to indicate where and when they willutilize such tax credits. (Cited in Exhibit "M" Buencamino Report).

Given these constraints, the local manufacturer has no recourse but to the back door for smuggledgoods if only to be able to compete even ineffectively, or cease manufacturing activities andinstead engage in the tradinf ( sic ) of smuggled finished jewelry.

Worthy of note is the fact that indeed no evidence was adduced by respondents to disprove theforegoing allegations of fact. Under the foregoing factual circumstances, the Court finds thequestioned statutory provisions confiscatory and destructive of the proprietary right of the

petitioners to engage in business in violation of Section 1, Article III of the Constitution whichstates, as follows:

No person shall be deprived of the life, liberty, or property without due process of law . . . . 12

Anent the fourth and last issue, the herein public respondent did not f ind it necessary to rule thereon, since, in hisopinion, "the same has been rendered moot and academic by the aforementioned pronouncement." 13

The petitioners now assail the decision rendered by the public respondent, contending that the latter has no authorityto pass judgment upon the taxation policy of the government. In addition, the petitioners impugn the decision inquestion by asserting that there was no showing that the tax laws on jewelry are confiscatory and destructive of private respondent's proprietary rights.

We rule in favor of the petitioners.

It is interesting to note that public respondent, in the dispositive portion of his decision, perhaps keeping in mind hislimitations under the law as a trial judge, did not go so far as to declare the laws in question to be unconstitutional.However, therein he declared the laws to be inoperative and without force and effect insofar as the privaterespondents are concerned. But, respondent judge, in the body of his decision, unequivocally but wrongly declaredthe said provisions of law to be violative of Section 1, Article III of the Constitution. In fact, in their SupplementalComment on the Petition for Review, 14 the private respondents insist that Judge Santos, in his capacity as judge of the Regional Trial Court, acted within his authority in passing upon the issues, to wit:

A perusal of the appealed decision would undoubtedly disclose that public respondent did not pass judgment on the soundness or wisdom of the government's tax policy on jewelry. True, publicrespondent, in his questioned decision, observed, inter alia , that indeed government tax policytreats jewelry as non-essential item, and therefore, taxed heavily; that the present tariff and taxstructure increase manufacturing cost and renders the local jewelry manufacturers uncompetitiveagainst other countries even before they start manufacturing and trading; that many of the localmanufacturers do not legally exist or operate unofficially or underground; and that themanufacturers have no recourse but to the back door for smuggled goods if only to be able tocompete even if ineffectively or cease manufacturing activities.

BUT, public respondent did not, in any manner, interfere with or encroach upon the prerogative of the legislature to determine what should be the tax policy on jewelry. On the other hand, the issueraised before, and passed upon by, the public respondent was whether or not Section 150,paragraph (a) of the National Internal Revenue Code (NIRC) and Section 104, Hdg. 71.01, 71.02,71.03 and 71.04 of the Tariff and Customs Code are unconstitutional, or differently stated, whether or not the questioned statutory provisions affect the constitutional right of private respondents toengage in business.

It is submitted that public respondent confined himself on this issue which is clearly a judicialquestion.

We find it incongruous, in the face of the sweeping pronouncements made by Judge Santos in his decision, thatprivate respondents can still persist in their argument that the former did not overreach the restrictions dictated uponhim by law. There is no doubt in the Court's mind, despite protestations to the contrary, that respondent judgeencroached upon matters properly falling within the province of legislative functions. In citing as basis for his decisionunproven comparative data pertaining to differences between tax rates of various Asian countries, and concluding

that the jewelry industry in the Philippines suffers as a result, the respondent judge took it upon himself to supplantlegislative policy regarding jewelry taxation. In advocating the abolition of local tax and duty on jewelry simplybecause other countries have adopted such policies, the respondent judge overlooked the fact that such matters arenot for him to decide. There are reasons why jewelry, a non-essential item, is taxed as it is in this country, and thesereasons, deliberated upon by our legislature, are beyond the reach of judicial questioning. As held in Macasiano vs .National Housing Authority : 15



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The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the political departments are valid in the absence of a clear and unmistakable showing to thecontrary. To doubt is to sustain. This presumption is based on the doctrine of separation of powerswhich enjoins upon each department a becoming respect for the acts of the other departments.The theory is that as the joint act of Congress and the President of the Philippines, a law has beencarefully studied and determined to be in accordance with the fundamental low before it was finally

enacted . (emphasis ours)What we see here is a debate on the WISDOM of the laws in question. This is a matter on which the RTC is notcompetent to rule. 16 As Cooley observed: "Debatable questions are for the legislature to decide. The courts do not sitto resolve the merits of conflicting issues." 17 In Angara vs . Electoral Commission , 18 Justice Laurel made it clear that"the judiciary does not pass upon questions of wisdom, justice or expediency of legislation." And fittingly so, for in theexercise of judicial power, we are allowed only "to settle actual controversies involving rights which are legallydemandable and enforceable", and may not annul an act of the political departments simply because we feel it isunwise or impractical. 19 This is not to say that Regional Trial Courts have no power whatsoever to declare a lawunconstitutional. In J .M . Tuason and Co . v . Court of Appeals , 20 we said that "[p]lainly the Constitution contemplatesthat the inferior courts should have jurisdiction in cases involving constitutionality of any treaty or law, for it speaks of appellate review of final judgments of inferior courts in cases where such constitutionality happens to be in issue."This authority of lower courts to decide questions of constitutionality in the first instance reaffirmed in Ynos v .Intermediate Court of Appeals . 21 But this authority does not extend to deciding questions which pertain to legislativepolicy.

The trial court is not the proper forum for the ventilation of the issues raised by the private respondents. Thearguments they presented focus on the wisdom of the provisions of law which they seek to nullify. Regional TrialCourts can only look into the validity of a provision, that is, whether or not it has been passed according to theprocedures laid down by law, and thus cannot inquire as to the reasons for its existence. Granting arguendo that theprivate respondents may have provided convincing arguments why the jewelry industry in the Philippines should notbe taxed as it is, it is to the legislature that they must resort to for relief, since with the legislature primarily lies thediscretion 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. 22

As succinctly put in Lim vs . Pacquing : 23 "Where a controversy may be settled on a platform other than one involvingconstitutional adjudication, the court should exercise becoming modesty and avoid the constitutional question." As

judges, we can only interpret and apply the law and, despite our doubts about its wisdom, cannot repeal or amend it.24

The respondents presented an exhaustive study on the tax rates on jewelry levied by different Asian countries. This ismeant to convince us that compared to other countries, the tax rates imposed on said industry in the Philippines isoppressive and confiscatory. This Court, however, cannot subscribe to the theory that the tax rates of other countriesshould be used as a yardstick in determining what may be the proper subjects of taxation in our own country. Itshould be pointed out that in imposing the aforementioned taxes and duties, the State, acting through the legislativeand executive branches, is exercising its sovereign prerogative. It is inherent in the power to tax that the State be freeto select the subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out or one particular class for taxation, or exemption, infringe no constitutional limitation." 25

WHEREFORE, premises considered, the petition is hereby GRANTED, and the Decision in Civil Case No. 56736 ishereby REVERSED and SET ASIDE. No costs.

Sison vs. Ancheta

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 provisionfurther amends Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizensor 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 andsimilar arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership, (f)adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly discriminatedagainst by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-visthose which are imposed upon fixed income or salaried individual taxpayers. 4 He characterizes the above sction asarbitrary amounting to class legislation, oppressive and capricious in character 5 For petitioner, therefore, there is atransgression of both the equal protection and due process clauses 6 of the Constitution as well as of the rulerequiring 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 AffirmativeDefenses." 9 The answer then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. Theauthorities and cases cited while correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer isfor the dismissal of the petition for lack of merit.

This Court finds such a plea more than justified. The petition must be dismissed.



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1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forthby retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and whichthe government was called upon to enter optionally, and only 'because it was better equipped to administer for thepublic welfare than is any private individual or group of individuals,' continue to lose their well-defined boundaries andto be absorbed within activities that the government must undertake in its sovereign capacity if it is to meet theincreasing 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 certainavailability 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 allthe powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is notunconfined. There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properlyrights, both the due process and equal protection clauses inay properly be invoked, all petitioner does, to invalidate inappropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief JusticeMarshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves v. New York , 15Justice 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 emphasizethat it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "Theweb 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 challengedstatutory provision as petitioner here alleges fails to abide by its command, then this Court must so declare andadjudge it null. The injury thus is centered on the question of whether the imposition of a higher tax rate on taxablenet 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 notsuffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here wouldcondemn such a provision as void or its face, he has not made out a case. This is merely to adhere to theauthoritative doctrine that were the due process and equal protection clauses are invoked, considering that they arcnot fixed rules but rather broad standards, there is a need for of such persuasive character as would lead to such aconclusion. 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 nosupport 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 actamounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. Ithas also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a publicpurpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due processgrounds. 19

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutionalmandate whether the assailed act is in the exercise of the lice power or the power of eminent domain is todemonstrated that the governmental act assailed, far from being inspired by the attainment of the common weal wasprompted by the spirit of hostility, or at the very least, discrimination that finds no support in reason. It suffices thenthat the laws operate equally and uniformly on all persons under similar circumstances or that all persons must betreated in the same manner, the conditions not being different, both in the privileges conferred and the liabilitiesimposed. Favoritism and undue preference cannot be allowed. For the principle is that equal protection and securityshall be given to every person under circumtances which if not Identical are analogous. If law be looked upon interms of burden or charges, those that fall within a class should be treated in the same fashion, whatever restrictionscast 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 lawsbenefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which isof the very essence of the Idea of law. There is, however, wisdom, as well as realism in these words of JusticeFrankfurter: "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 toabstract 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 thatclassification if rational in character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 thisCourt, 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 statebe free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singlingout 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 taxationshag 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 subjectmay 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 ariseuntil nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxablearticles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority tomake reasonable and natural classifications for purposes of taxation, ... . 28 As clarified by Justice Tuason, where "thedifferentiation" complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within



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the meaning of this clause and is therefore uniform." 29 There is quite a similarity then to the standard of equalprotection 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 distinctionbetween a tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminatingall deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into differentcategories. To repeat, it. is enough that the classification must rest upon substantial distinctions that make realdifferences. 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 itemsfor all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who arerecipients of compensation income are set apart as a class. As there is practically no overhead expense, thesetaxpayers are e not entitled to make deductions for income tax purposes because they are in the same situation moreor less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is nouniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard thedisparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on thebasis 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 professionaland business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factualfoundation to show the arbitrary character of the assailed provision; 31 (2) the force of controlling doctrines on dueprocess, equal protection, and uniformity in taxation and (3) the reasonableness of the distinction betweencompensation and taxable net income of professionals and businessman certainly not a suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner

3. The power to tax is subject to the rule of uniformity and equity in taxation . This is basedon Article VI, Section 28(1). The rule of taxation shall be uniform and equitable. TheCongress shall evolve a progressive system of taxation. Tax laws shall be imposed on thesame class at the same rate. If the basis of a tax law is income, those having the same incomeshould be subject to the same tax rate.

In Chruchill and Tait vs. Conception

Francis A. Churchill and Stewart Tait, copartners doing business under the firm name and style of the Mercantile Advertising Agency, owners of a sign or billboard containing an area of 52 square meters questioned the nonuniformity of Section 100 of Act No. 2339 for the tax not being based or graded according to value.

The law was, passed February 27, 1914, effective July 1, 1914, imposed an annual tax of P4 per square meter upon"electric signs, billboards, and spaces used for posting or displaying temporary signs, and all signs displayed onpremises not occupied by buildings." This section was subsequently amended by Act No. 2432, effective January 1,1915, by reducing the tax on such signs, billboards, etc., to P2 per square meter or fraction thereof.

In answering whether the tax is void for lack of uniformity or because it is not graded according to value or constitutesdouble taxation, or because the classification upon which it is based is mere arbitrary selection and not based on anyreasonable grounds, the Court held:

The only limitation, in so far as these questions are concerned, placed upon the Philippine Legislature in the exerciseof its taxing power is that found in section 5 of the Philippine Bill, wherein it is declared "that the rule of taxation insaid Islands shall be uniform."

Uniformity in taxation says Black on Constitutional Law, page 292 means that all taxable articles or kinds of property, of the same class, shall be taxed at the same rate. It does not mean that lands, chattels,securities, incomes, occupations, franchises, privileges, necessities, and luxuries, shall all be assessed atthe same rate. Different articles may be taxed at different amounts, provided the rate is uniform on the sameclass everywhere, with all people, and at all times.

A tax is uniform when it operates with the same force and effect in every place where the subject of it is found (StateRailroad Tax Cases, 92 U.S., 575.) The words "uniform throughout the United States," as required of a tax by theConstitution, do not signify an intrinsic, but simply a geographical, uniformity, and such uniformity is therefore the onlyuniformity which is prescribed by the Constitution. (Patton vs. Brady, 184 U.S., 608; 46 L. Ed., 713.) A tax is uniform,within the constitutional requirement, when it operates with the same force and effect in every place where thesubject of it is found. (Edye vs. Robertson, 112 U.S., 580; 28 L. Ed., 798.) "Uniformity," as applied to theconstitutional provision that all taxes shall be uniform, means that all property belonging to the same class shall betaxed alike. (Adams vs. Mississippi State Bank, 23 South, 395, citing Mississippi Mills vs Cook, 56 Miss., 40.) Thestatute under consideration imposes a tax of P2 per square meter or fraction thereof upon every electric sign, bill-board, etc., wherever found in the Philippine Islands. Or in other words, "the rule of taxation" upon such signs isuniform throughout the Islands. The rule, which we have just quoted from the Philippine Bill, does not require taxes tobe graded according to the value of the subject or subjects upon which they are imposed, especially those levied as



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privilege or occupation taxes. We can hardly see wherein the tax in question constitutes double taxation. The fact thatthe land upon which the billboards are located is taxed at so much per unit and the billboards at so much per squaremeter does not constitute "double taxation." Double taxation, within the true meaning of that expression, does notnecessarily affect its validity. (1 Cooley on Taxation, 3d ed., 389.) And again, it is not for the judiciary to say that theclassification upon which the tax is based "is mere arbitrary selection and not based upon any reasonable grounds."The Legislature selected signs and billboards as a subject for taxation and it must be presumed that it, in so doing,

acted with a full knowledge of the situation.

4. The power to tax is subject to non-infringement of religious freedom . Tax laws are not to be imposed in order to thwart religious beliefs. Thus, the power to tax cannot be exercised ina manner that is directed to hinder a person, or a group in the exercise of their freedom of religion. The power to tax being a burden can be used as an oppressive force against certainreligious minority. This is abhorred by the Constitution. Art. III, Section 5 of the Constitutionstates that No law shall be made respecting an establishment of religion or prohibiting thefree exercise thereof. No religious test shall be required for the exercise of civil or political

rights.A case in point is American Bible Socitey vs. City of Manila

Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly registered and doing business in thePhilippines through its Philippine agency established in Manila in November, 1898, with its principal office at 636 Isaac Peral insaid City. The defendant appellee is a municipal corporation with powers that are to be exercised in conformity with the

provisions of Republic Act No. 409, known as the Revised Charter of the City of Manila.

In the course of its ministry, plaintiff's Philippine agency has been distributing and selling bibles and/or gospel portions thereof (except during the Japanese occupation) throughout the Philippines and translating the same into several Philippine dialects. OnMay 29 1953, the acting City Treasurer of the City of Manila informed plaintiff that it was conducting the business of generalmerchandise since November, 1945, without providing itself with the necessary Mayor's permit and municipal license, inviolation of Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364, and required plaintiff to secure, withinthree days, the corresponding permit and license fees, together with compromise covering the period from the 4th quarter of 1945to the 2nd quarter of 1953, in the total sum of P5,821.45 (Annex A).

Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff deposit and pay under protest the sumof P5,891.45, if suit was to be taken in court regarding the same (Annex B). To avoid the closing of its business as well as further fines and penalties in the premises on October 24, 1953, plaintiff paid to the defendant under protest the said permit and licensefees in the aforementioned amount, giving at the same time notice to the City Treasurer that suit would be taken in court toquestion the legality of the ordinances under which, the said fees were being collected

xxx

Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines, provides that:

(7) No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof, and the freeexercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever beallowed. No religious test shall be required for the exercise of civil or political rights.

Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances Nos. 2529 and 3000, as respectivelyamended, are unconstitutional and illegal in so far as its society is concerned, because they provide for religious censorship andrestrain the free exercise and enjoyment of its religious profession, to wit: the distribution and sale of bibles and other religiousliterature to the people of the Philippines.

The question that now remains to be determined is whether said ordinances are inapplicable, invalid or unconstitutional if appliedto the alleged business of distribution and sale of bibles to the people of the Philippines by a religious corporation like theAmerican Bible Society, plaintiff herein.

xxxx

Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees the freedom of religious professionand worship. "Religion has been spoken of as a profession of faith to an active power that binds and elevates man to its Creator"

(Aglipay vs. Ruiz, 64 Phil., 201).It has reference to one's views of his relations to His Creator and to the obligations they imposeof reverence to His being and character, and obedience to His Will (Davis vs. Beason, 133 U.S., 342). The constitutional guarantyof the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religiousinformation. Any restraints of such right can only be justified like other restraints of freedom of expression on the grounds thatthere is a clear and present danger of any substantive evil which the State has the right to prevent". (Taada and Fernando on theConstitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the license fee herein involved is imposed uponappellant for its distribution and sale of bibles and other religious literature:



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In the case of Murdock vs. Pennsylvania , it was held that an ordinance requiring that a license be obtained before a person could canvass or solicit orders for goods, paintings, pictures, wares or merchandise cannot be made to apply tomembers of Jehovah's Witnesses who went about from door to door distributing literature and soliciting people to"purchase" certain religious books and pamphlets, all published by the Watch Tower Bible & Tract Society. The"price" of the books was twenty-five cents each, the "price" of the pamphlets five cents each. It was shown that inmaking the solicitations there was a request for additional "contribution" of twenty-five cents each for the books and

five cents each for the pamphlets. Lesser sum were accepted, however, and books were even donated in case interested persons were without funds.

On the above facts the Supreme Court held that it could not be said that petitioners were engaged in commercial rather than a religious venture. Their activities could not be described as embraced in the occupation of selling books and

pamphlets. Then the Court continued:

"We do not mean to say that religious groups and the press are free from all financial burdens of government. SeeGrosjean vs. American Press Co ., 297 U.S., 233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444. We have here something quitedifferent, for example, from a tax on the income of one who engages in religious activities or a tax on property used or employed in connection with activities. It is one thing to impose a tax on the income or property of a preacher. It isquite another to exact a tax from him for the privilege of delivering a sermon. The tax imposed by the City of Jeannetteis a flat license tax, payment of which is a condition of the exercise of these constitutional privileges. The power to taxthe exercise of a privilege is the power to control or suppress its enjoyment. . . . Those who can tax the exercise of thisreligious practice can make its exercise so costly as to deprive it of the resources necessary for its maintenance. Thosewho can tax the privilege of engaging in this form of missionary evangelism can close all its doors to all those who donot have a full purse. Spreading religious beliefs in this ancient and honorable manner would thus be denied theneedy. . . .

It is contended however that the fact that the license tax can suppress or control this activity is unimportant if it doesnot do so. But that is to disregard the nature of this tax. It is a license tax a flat tax imposed on the exercise of a

privilege granted by the Bill of Rights . . . The power to impose a license tax on the exercise of these freedom is indeedas potent as the power of censorship which this Court has repeatedly struck down. . . . It is not a nominal fee imposedas a regulatory measure to defray the expenses of policing the activities in question. It is in no way apportioned. It isflat license tax levied and collected as a condition to the pursuit of activities whose enjoyment is guaranteed by theconstitutional liberties of press and religion and inevitably tends to suppress their exercise. That is almost uniformlyrecognized as the inherent vice and evil of this flat license tax."

Nor could dissemination of religious information be conditioned upon the approval of an official or manager even if thetown were owned by a corporation as held in the case of Marsh vs. State of Alabama (326 U.S. 501), or by the UnitedStates itself as held in the case of Tucker vs. Texas (326 U.S. 517). In the former case the Supreme Court expressed theopinion that the right to enjoy freedom of the press and religion occupies a preferred position as against theconstitutional right of property owners.

"When we balance the constitutional rights of owners of property against those of the people to enjoy freedom of pressand religion, as we must here, we remain mindful of the fact that the latter occupy a preferred position. . . . In our viewthe circumstance that the property rights to the premises where the deprivation of property here involved, took place,were held by others than the public, is not sufficient to justify the State's permitting a corporation to govern acommunity of citizens so as to restrict their fundamental liberties and the enforcement of such restraint by theapplication of a State statute." (Taada and Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306).

It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some instances a little bithigher than the actual cost of the same but this cannot mean that appellant was engaged in the business or occupation of sellingsaid "merchandise" for profit. For this reason We believe that the provisions of City of Manila Ordinance No. 2529, as amended,cannot be applied to appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession andworship as well as its rights of dissemination of religious beliefs.

With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's permit before any person can engagein any of the businesses, trades or occupations enumerated therein, We do not find that it imposes any charge upon the enjoymentof a right granted by the Constitution, nor tax the exercise of religious practices. In the case of Coleman vs. City of Griffin , 189S.E. 427, this point was elucidated as follows:

An ordinance by the City of Griffin, declaring that the practice of distributing either by hand or otherwise, circulars,handbooks, advertising, or literature of any kind, whether said articles are being delivered free, or whether same are

being sold within the city limits of the City of Griffin, without first obtaining written permission from the city manager of the City of Griffin, shall be deemed a nuisance and punishable as an offense against the City of Griffin, does not deprive defendant of his constitutional right of the free exercise and enjoyment of religious profession and worship,even though it prohibits him from introducing and carrying out a scheme or purpose which he sees fit to claim as a

part of his religious system .

It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if applied to plaintiff Society. Butas Ordinance No. 2529 of the City of Manila, as amended, is not applicable to plaintiff-appellant and defendant-appellee is

powerless to license or tax the business of plaintiff Society involved herein for, as stated before, it would impair plaintiff's rightto the free exercise and enjoyment of its religious profession and worship, as well as its rights of dissemination of religious

beliefs, We find that Ordinance No. 3000, as amended is also inapplicable to said business, trade or occupation of the plaintiff.



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5. The power to tax is subject to non appropriation for religious purpose. This is based onArticle VI Section 29 (2). No public money or property shall be appropriated, applied, paid,or employed, directly or indirectly, for the use, benefit, or support of any sect, church,denomination, sectarian institution, or system of religion, or any priest, preacher, minister, or

other religious teacher, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the Armed Forces, or to any penal institution, or governmentorphanage, or leprosarium. The tax being of public fund should be disposed only for public

purposes. The only way it can indirectly benefit religion is when a religious event is also for civic purposes and not intended to benefit a particular religion even if its members comprisethe majority of the population of the inhabitants. Appropriation for celebration of events thatclearly has historical and political significance is allowed even if it tends to favor a particular group of religion, if the primary purpose is to promote tourism.

6. The power to tax is subject to the exemption of religious, charitable and educationalentities, non-profit cemeteries, and churches from property taxation. The basis is Art. VI

Sec. 28(3).Charitable institutions, churches, and parsonages or convents appurtenant thereto,mosques, non profit cemeteries, and all lands, buildings, and improvements actually, directly,and exclusively used for religious, charitable or educational purposes shall be exempt fromtaxation.. But the constitutional exemption covers only property taxes and no other.

Abra Valley College vs. Aquino

Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities andExchange Commission in 1948, filed a complaint (Annex "1" of Answer by the respondents Heirs of Paterno Millare;Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void the "Notice of Seizure' and the "Noticeof Sale" of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and penaltiesamounting to P5,140.31. Said "Notice of Seizure" of the college lot and building covered by Original Certificate of TitleNo. Q-83 duly registered in the name of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal

Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon. The"Notice of Sale" was caused to be served upon the petitioner by the respondent treasurers on July 8, 1972 for thesale at public auction of said college lot and building, which sale was held on the same date. Dr. Paterno Millare, thenMunicipal Mayor of Bangued, Abra, offered the highest bid of P6,000.00 which was duly accepted. The certificate of sale was correspondingly issued to him.

Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the school is recognizedby the government and is offering Primary, High School and College Courses, and has a school population of morethan one thousand students all in all; (b) that it is located right in the heart of the town of Bangued, a few meters fromthe plaza and about 120 meters from the Court of First Instance building; (c) that the elementary pupils are housed ina two-storey building across the street; (d) that the high school and college students are housed in the main building;(e) that the Director with his family is in the second floor of the main building; and (f) that the annual gross income of the school reaches more than one hundred thousand pesos.

From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is whether or notthe lot and building in question are used exclusively for educational purposes . (Rollo, p. 20)

The main issue in this case is the proper interpretation of the phrase "used exclusively for educational purposes."

Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental usethereof, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935 Constitution.Hence, the seizure and sale of subject college lot and building, which are contrary thereto as well as to the provisionof Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building in question which were subjected toseizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the college; (2) as thepermanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws and grandchildren; and (3) for commercial purposes because the ground floor of the college building is beingused and rented by a commercial establishment, the Northern Marketing Corporation (See photograph attached as

Annex "8" (Comment; Rollo, p. 90]).

Due to its time frame, the constitutional provision which finds application in the case at bar is Section 22, paragraph3, Article VI, of the then 1935 Philippine Constitution, which expressly grants exemption from realty taxes for "Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvementsused exclusively for religious, charitable or educational purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409,otherwise known as the Assessment Law, provides:

The following are exempted from real property tax under the Assessment Law:



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xxx xxx xxx

(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, andimprovements used exclusively for religious, charitable, scientific or educational purposes.

xxx xxx xxx

In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling guide,norm and standard to determine tax exemption, and not the mere incidental use thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue , 33 Phil. 217 [1916], this Court ruled that whileit may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its members, stillthese do not constitute business in the ordinary acceptance of the word, but an institution used exclusively for religious, charitable and educational purposes, and as such, it is entitled to be exempted from taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte , 51 Phil. 352 [1972], this Court included inthe exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It was clarified thatthe term "used exclusively" considers incidental use also. Thus, the exemption from payment of land tax in favor of the convent includes, not only the land actually occupied by the building but also the adjacent garden devoted to theincidental use of the parish priest. The lot which is not used for commercial purposes but serves solely as a sort of lodging place, also qualifies for exemption because this constitutes incidental use in religious functio

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