PAGCOR vs BIR

FACTS: PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A. Simultaneous to its
creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A) was issued exempting PAGCOR from the
payment of any type of tax, except a franchise tax of five percent (5%) of the gross revenue. Thereafter,
on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's exemption.

In June 1984, PAGCOR's tax exemption was removed through P.D. No. 1931, but it was later restored by
Letter of Instruction No. 1430.

On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue Code of 1997,
took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled
corporations (GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government
Service and Insurance Corporation, the Social Security System, the Philippine Health Insurance
Corporation, and the Philippine Charity Sweepstakes Office.

With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is Section 1
of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by
excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income
tax.

Thus, Philippine Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of
Section 1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal
Revenue Code of 1997, by excluding petitioner from exemption from corporate income tax for being
repugnant to Sections 1 and 10 of Article III of the Constitution. Petitioner further seeks to prohibit the
implementation of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being
contrary to law.

ISSUE:WoN Republic Act 9337 is unconstitutional insofar as it excluded PAGCOR from the
enumeration of GOCCs exempt from the payment of corporate income tax?

HELD: The Supreme Court (SC) held that the omission of PAGCOR from the list of tax-exempt
GOCCs by RA 9337 does not violate the right to equal protection of the laws under Section 1,
Article III of the Constitution, because PAGCOR’s exemption from  payment of corporate income
tax was not based on classification showing substantial distinctions; rather, it was granted upon
the corporation’s own  request to be exempted from corporate income tax. Legislative records
likewise reveal that the legislative intention is to require PAGCOR to pay corporate income tax.

SISON vs ANCHETA

FACTS: Petitioners challenged the constitutionality of Section 1 of Batas Pambansa Blg. 135. It amended
Section 21 of the National Internal Revenue Code of 1977.

Petitioner as taxpayer alleged that "he would be unduly discriminated against by the imposition of
higher rates of tax upon his income arising from the exercise of his profession vis-a-vis those which are
imposed upon fixed income or salaried individual taxpayers." He characterizes the above section as
arbitrary amounting to class legislation, oppressive and capricious in character.

For petitioner, therefore, there is a transgression of both the equal protection and due process clauses
of the Constitution as well as of the rule requiring uniformity in taxation.

The OSG prayed for dismissal of the petition due to lack of merit.

ISSUE: WON the assailed provision violates the equal protection and due process clause of the
Constitution while also violating the rule that taxes must be uniform and equitable.

HELD: Negative. The petition is without merit.

The SC ruled against Sison.

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 paraphrase a recent decision, taxes being the
lifeblood of the government, their prompt and certain availability is of the essence.

On due process: it is undoubted that it may be invoked where a taxing statute is so arbitrary that it finds
no support in the Constitution. An obvious example is where it can be shown to amount to the
confiscation of property from abuse of power.

Petitioner alleges arbitrariness but his mere allegation does not suffice and there must be a factual
foundation of such unconstitutional taint.

On equal protection: it is suffices that the laws operate equally and uniformly on all persons under
similar circumstances, both in the privileges conferred and the liabilities imposed.

On the matter that the rule of taxation shall be uniform and equitable- this requirement is met when the
tax operates with the same force and effect in every place where the subject may be found.

“Also, the rule of uniformity does not call for perfect uniformity or perfect equality, because this is
hardly attainable.”

"Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class
shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation.”

 The taxing power has the authority to make reasonable and natural classifications for purposes of
taxation. Where “the differentiation” complained of “conforms to the practical dictates of justice and
equity” it “is not discriminatory within the meaning of this clause and is therefore uniform.” There is
quite a similarity then to the standard of equal protection for all that is required is that the tax “applies
equally to all persons, firms and corporations placed in similar situation.

WHEREFORE, the petition is dismissed. Costs against petitioner.

VILLEGAS vs. HIU CHIONG

Facts: Municipal Board of Manila passed Ordinance No 6537 prohibiting aliens to engage in business /
trade or from being employed whether permanent / casual / temporary w/o securing employment
permit with a standard fee of PHP 50 from the Mayor’s Office of Manila. Hiu Chiong Tsai Pao Ho assailed
the validity of the ordinance. He contend that the ordinance is arbitrary, oppressive and unreasonable,
being applied only to aliens who are thus, deprived of their rights to life, liberty and property and
therefore, violates the due process and equal protection clauses of the Constitution. CFI decided in
favour of respondent. Petitioner Mayor Antonio Villegas filed petition for certiorari.

Issue: Whether or not Ordinance 6537 violates due process and equal protection clause of the
Constitution?

Decision: Decision appealed from is affirmed. The P50.00 fee is unreasonable not only because it is
excessive but because it fails to consider valid substantial differences in situation among individual aliens
who are required to pay it. The classification should be based on real and substantial differences having
a reasonable relation to the subject of the particular legislation. 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. Once an alien is 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 and citizens.

PROVINCE OF ABRA vs HERNANDO

FACTS: Petitioner Province of Abra sought to tax the properties of the private respondent Roman
Catholic Bishop, Inc. of Bangued. Judge Hernando dismissed the petition of Abra without hearing.
Respondent Hernando ruled that there is no question that the real properties sought to be taxed by the
Province of Abra are properties of the respondent Roman Catholic Bishop of Bangued, Inc. and that
there is no dispute that the properties including their produce are actually, directly and exclusively used
by the Roman Catholic Bishop of Bangued, Inc. for religious or charitable purposes.

He also added that the proper remedy of the petitioner is appeal and not this special civil action.
Petitioner appealed on the grant of tax exemption on the ground of violation of due process of law.

Issue:

Whether or not the properties of respondent is not exempt from realty taxes by reason of violation of
due process of law.

Held:Yes.

The Constitution provides that “charitable institutions, mosques, and non-profit cemeteries” and
required that for the exemption of “lands, buildings, and improvements,” they should not only be
“exclusively” but also “actually” and “directly” used for religious or charitable purposes. The exemption
from taxation is not favored and is never presumed, so that if granted it must be strictly construed
against the taxpayer.

In this case, there is no showing that the said properties are actually and directly used for religious or
charitable uses. Petitioner Province of Abra is therefore fully justified in invoking the protection of
procedural due process. If there is any case where proof is necessary to demonstrate that there is
compliance with the constitutional provision that allows an exemption, this is it.

Instead, respondent Judge accepted at its face the allegation of private respondent.

It clearly appears, therefore, that in failing to accord a hearing to petitioner Province of Abra and
deciding the case immediately in favor of private respondent, respondent Judge failed to abide by the
constitutional command of procedural due process.

ORMOC SUGAR CENTRAL vs. CITY TREASURER

FACTS: The Municipal Board of Ormoc City passedOrdinance 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 1% per export sale to the United States of America and other foreign countries.”

Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March 20, 1964 for
P7,087.50 and on April 20, 1964 for P5,000, or a total of P12,087.50.

Ormoc Sugar Company, Inc. filed a complain tagainst the City of Ormoc as well as its Treasurer,
Municipal Board and Mayor, alleging that the ordinance is unconstitutional for being violative of the
equal protection clause.

On the other hand, the defendants asserted that the tax ordinance was within defendant city’s power to
enact under the Local Autonomy Act and that the same did not violate the afore-cited constitutional
limitations.

Issue: WON the ordinance is unconstitutional for being violative of equal protection clause.

Held: Yes, the ordinance is unconstitutional for being violative of equal protection clause.

The equal protection clause applies only to persons or things identically situated and does not bar a
reasonable classification of the subject of legislation, and a classification is reasonable where (1) it is
based on substantial distinctions which make real differences; (2) these are germane to the purpose of
the law; (3) the classification applies not only to present conditions but also to future conditions which
are substantially identical to those of the present; (4) the classification applies only to those who belong
to the same class.

The questioned ordinance does not meet the requisites for a reasonable classification.

The ordinace taxes only centrifugal sugar 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.
To be reasonable, it should be applicable to future conditions as well. The taxing ordinance should not
be singular and exclusive as to exclude 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.

TIU vs CA

Facts: On 13 March 1992, RA 7227 (An Act Accelerating the Conversion of Military Bases into Other
Productive Uses, etc) was passed into Law. Section 12 created the Subic Special Economic Zone and
granted special privileges such as tax exemptions and duty-free importation of raw materials, capital and
equipment to business enterprises and residents located and residing in said zones.

On 10 June 1993, President Ramos issued EO 97-A, specifying the area within which the tax- and duty-
free privilege was operative.

On 26 Oct 1994, Conrado Tiu et al challenged before the Supreme Court the constitutionality of EO 97-A
for allegedly being violative of their right to equal protection of the laws, inasmuch as the order granted
tax and duty incentives only to businesses and residents within the “secured area” of the Subic Special
Economic Zone and denying them to those who live within the Zone but outside the “fenced-in”
territory.

The SC referred the matter to the CA. The CA denied the petition

There is no substantial difference between the provisions of EO 97-A and RA 7227, holding that EO 97-A
cannot be claimed to be unconstitutional while maintaining the validity of RA 7227

Intention of Congress to confine the coverage of the SSEZ to the secured area and not to include the
entire Olongapo City and other areas rely on the deliberations in the Senate

Limited application of the tax incentives is within the the prerogative of the legislature pursuant to its
avowed purpose (of serving) some public benefit or interest.

Tiu et al’s motion for reconsideration was denied. They filed a petition for review in the SC.
Issue: Whether there is a violation of the equal protection of the laws when EO 97-A granted tax and
duty incentives only to business and residents within the “secured area” of the SSEZ and denied such to
those who live within the Zone but outside such “fenced-in” area

Decision: The EO 97-A is not violative of the equal protection clause; neither is it discriminatory.

The right of equal protection of the laws is not absolute, but is subject to reasonable classification. The
classification occasioned by EO 97-A was not unreasonable, capricious or unfounded. Rather, it was
based, rather, on fair, and substantive considerations that we germane to the legislative purpose.

There are substantial differences between the big investors who are being lured to establish and
operate their industries in so-called “secured area” and the present business operators outside the area.

On one hand, we are talking of billion-esoinvestments and thousands of new jobs, and on the other
hand, definitely none of such magnitude.

In the first, the economic impact is national; in the second, only local.

Business activities outside the the “secured area” are not likely to have any impact in achieving the
purpose of the law, which is to turn the former military base to productive use for the benefit of the
Philippine economy

It will be easier to manage and monitor activities within the “secured area” which is already fenced-off,
to prevent “fraudulent importation of merchandise” or smuggling.

The classification equally applies to all residents within the secured area. The residents, being in like
circumstances or contributing directly to the achievement of the end purpose of the law, are not
categorized further. Instead, they are all similarly treated.

The equal protection gurantee does not reuire territorial uniformity of laws. As long as there are actual
and material differences between territories, there is no violationof the constitutional clause. Herein,
anyone possessing the requisite investment investment capital can always avail of the same benefits by
channeling his or her resources or business operations into the fenced-off free port zone.
American Bible Society vs. City Of Manila

FACTS: American Bible Society is a foreign, non-stock, non-profit, religious, missionary corporation duly
registered and doing business in the Philippines, with its principal office in Manila. They distribute and
sell bibles throughout the country. The City Treasurer of Manila informed American Bible Society that it
violated Ordinance No. 3000 and 2529 as it was conducting business of general merchandise since
November 1945, without the necessary Mayor’s permit and municipal license and required them to
secure the permit and license within three days together with compromise in the sum of P5,821.45. To
avoid the closure of their business, they paid under protest.

American Bible filed a complaint, questioning the constitutionality and legality of the Ordinances 2529
and 3000, and prayed for a refund of the payment made to the City of Manila. They contended:

They had been in the Philippines since 1899 and were not required to pay any license fee or sales tax;

It never made any profit from the sale of its bibles.

City of Manila prayed that the complaint be dismissed, reiterating the constitutionality of the
Ordinances in question. Trial Court dismissed the complaint. American Bible Society appealed to the
Court of Appeals

ISSUE:

Whether or not there will be an impairment of the free exercise and enjoyment of its religious
profession and worship if the City of Manila will require American Bible Society to pay license fee?

RULING:

Yes. The constitutional guaranty of the free exercise and enjoyment of religious profession and worship
carries with it the right to disseminate religious information. Any restraint of such right can only be
justified like other restraints of freedom of expression on the grounds that there is a clear and present
danger of any substantive evil which the State has the right to prevent.” (Tañada and Fernando on the
Constitution of the Philippines, Vol. I, 4th ed., p. 297).

It is true the price asked for the religious articles was in some instances a little bit higher than the actual
cost of the same, but this cannot mean that plaintiff was engaged in the business or occupation of
selling said “merchandise” for profit. For this reasons, the provisions of City Ordinance No. 2529, as
amended, which requires the payment of license fee for conducting the business of general
merchandise, cannot be applied to plaintiff society, for in doing so, it would impair its free exercise and
enjoyment of its religious profession and worship, as well as its rights of dissemination of religious
beliefs.

Upon the other hand, City Ordinance No. 3000, as amended, which requires the obtention of the
Mayor’s permit before any person can engage in any of the businesses, trades or occupations
enumerated therein, does not impose any charge upon the enjoyment of a right granted by the
Constitution, nor tax the exercise of religious practices. Hence, it cannot be considered unconstitutional,
even if applied to plaintiff Society. But as Ordinance No. 2529 is not applicable to plaintiff and the City of
Manila is powerless to license or tax the business of plaintiff society involved herein, for the reasons
above stated, Ordinance No. 3000 is also inapplicable to said business, trade or occupation of the
plaintiff.

MCIAA vs MARCOS

FACTS: Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of
Republic Act No. 6958, mandated to "principally undertake the economical, efficient and effective
control, management and supervision of the Mactan International Airport in the Province of Cebu and
the Lahug Airport in Cebu City, . . . and such other Airports as may be established in the Province of Cebu
. . . (Sec. 3, RA 6958).

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of
realty taxes in accordance with Section 14 of its Charter.

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of the
City of Cebu, demanded payment for realty taxes on several parcels of land belonging to the petitioner ,
in the total amount of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor the
aforecited Section 14 of RA 6958 which exempt it from payment of realty taxes. It was also asserted that
it is an instrumentality of the government performing governmental functions, citing section 133 of the
Local Government Code of 1991 which puts limitations on the taxing powers of local government units.

Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that the MCIAA
is a government-controlled corporation whose tax exemption privilege has been withdrawn by virtue of
Sections 193 and 234 of the Local Governmental Code that took effect on January 1, 1992.

Petitioner was compelled to pay its tax account "under protest" and thereafter filed a Petition for
Declaratory Relief with the Regional Trial Court of Cebu, Branch .

MCIAA basically contended that the taxing powers of local government units do not extend to the levy
of taxes or fees of any kind on an instrumentality of the national government.

Petitioner insisted that while it is indeed a government-owned corporation, it nonetheless stands on the
same footing as an agency or instrumentality of the national government by the very nature of its
powers and functions.
Respondent City, however, asserted that MACIAA is not an instrumentality of the government but
merely a government-owned corporation performing proprietary functions As such, all exemptions
previously granted to it were deemed withdrawn by operation of law, as provided under Sections 193
and 234 of the Local Government Code when it took effect on January 1, 1992. 3

The trial court dismissed the petition and ruled that the New Local Government Code of 1991 or RA
7160 provides the express cancellation and withdrawal of exemption of taxes by government owned
and controlled corporation per Sections.

With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided for in
RA 6958 creating petitioner had been expressly repealed by the provisions of the New Local
Government Code of 1991.

Petitioner’s motion for reconsideration was deniew by the trial court, the petitioner then filed the
instant petition.

ISSUE: W/N Petitioner is liable to is exempted from the payment of realty taxes.

HELD: MCIAA is not exempt from payment of realty taxes.

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the
payment of realty taxes imposed by the National Government or any of its political subdivisions,
agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom the
exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The only
exception to this rule is where the exemption was granted to private parties based on material
consideration of a mutual nature, which then becomes contractual and is thus covered by the non-
impairment clause of the Constitution.

The LGC, enacted pursuant to Section 3, Article X of the constitution provides for

the exercise by local government units of their power to tax, the scope thereof or its limitations, and the
exemption from taxation.

Reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule, as laid down
in Section 133 the taxing powers of local government units cannot extend to the levy of inter alia,
"taxes, fees, and charges of any kind of the National Government, its agencies and instrumentalties, and
local government units"; however, pursuant to Section 232, provinces, cities, municipalities in the
Metropolitan Manila Area may impose the real property tax except on, inter alia, "real property owned
by the Republic of the Philippines or any of its political subdivisions except when the beneficial used
thereof has been granted, for consideration or otherwise, to a taxable person", as provided in item (a) of
the first paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons,

including government-owned and controlled corporations, Section 193 of the LGC prescribes the general
rule, viz., they are withdrawn upon the effectivity of the LGC.Note that as a reproduced in Section
234(a), the phrase "and any government-owned or controlled corporation so exempt by its charter" was
excluded. The justification for this restricted exemption in Section 234(a) seems obvious: to limit further
tax exemption privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last paragraph of Section
234.

These policy considerations are consistent with the State policy to ensure autonomy to local
governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy to
enable them to attain their fullest development as self-reliant communities and make them effective
partners in the attainment of national goals. The power to tax is the most effective instrument to raise
needed revenues to finance and support myriad activities of local government units for the delivery of
basic services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and controlled corporations and
all other units of government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and there was a need for this entities to
share in the requirements of the development, fiscal or otherwise, by paying the taxes and other
charges due from them.

The petitioner cannot claim that it was never a "taxable person" under its Charter. It was only exempted
from the payment of real property taxes. The grant of the privilege only in respect of this tax is
conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real
property tax.

Besides, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the
government performing governmental functions may be subject to tax. Where it is done precisely to
fulfill a constitutional mandate and national policy, no one can doubt its wisdom.

CAGAYAN ELECTRIC POWER vs. CIR

FACTS: Cagayan Electric is a holder of a legislative franchise under RA 3247 where payment of 3% tax on
gross earning is in lieu of all taxes and assessments upon privileges. In 1968, RA 5431 amended the
franchise by making all corporate taxpayers liable for income tax. In 1969, through RA 6020, its franchise
was extended to two other towns and the tax exemption was reenacted. The commissioner required the
company to pay deficiency income taxes for the intervening period (1968-1969).

ISSUE:

Is CEPALCO liable for the tax?

RULING:

Yes. Congress could impair the company’s legislative franchise by making it liable for income tax. The
Constitution

provides that a franchise is subject to amendment, alteration or repeal by the Congress when the public
interest so requires. However, it cannot be denied that the said 1969 assessment appears to be highly
controversial. It had reason not to pay income tax because of the tax exemption its franchise. For this
reason, it should be liable only for tax proper and should not be held liable for surcharge and interest.
MANILA ELECTRIC COMPANY vs PROVINCE OF LAGUNA

FACTS: Certain municipalities of the Province of Laguna by virtue of existing laws then in effect, issued
resolutions through their respective municipal councils granting franchise in favor of petitioner for the
supply of electric light, heat and power within their concerned areas. In 1991, RA 7160, otherwise
known as the “Local Government Code of 1991,” was enacted to take effect on 01 January 1992
enjoining local government units to create their own sources of revenue and to levy taxes, fees and
charges, subject to the limitations expressed therein, consistent with the basic policy of local autonomy.
Pursuant to the provisions of the Code, respondent enacted an Ordinance imposing a tax on businesses
enjoying a franchise. Petitioner paid the tax under protest. A formal claim for refund was thereafter sent
by the petitioner to the Provincial Treasurer claiming that the franchise tax it had paid and continued to
pay to the National Government. Petitioner contended that the imposition of a franchise tax under the
said Ordinance contravened the provisions of P.D. 551. In 1995, the claim for refund of petitioner was
denied. In 1996, petitioner filed with the RTC a complaint for refund, with a prayer for the issuance of a
writ of preliminary injunction and/or TRO, against the Respondent. The trial court dismissed the
complaint. Hence this petition.

Issue: Whether the imposition of a franchise tax under Provincial Ordinance authorized by RA 7160,
otherwise known Local Government Code of 1991, insofar as petitioner is concerned, is violative of the
non-impairment clause of the Constitution.

Held: No, the local governments do not have the inherent power to tax except to the extent that such
power might be delegated to them either by the basic law or by statute. Presently, under Article X of the
1987 Constitution, a general delegation of that power has been given in favor of local government units.
Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the
tax power must be deemed to exist although Congress may provide statutory limitations and guidelines.
The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local
government units by directly granting them general and broad tax powers. Nevertheless, the
fundamental law did not intend the delegation to be absolute and unconditional; the constitutional
objective obviously is to ensure that, while the local government units are being strengthened and made
more autonomous, the legislature must still see to it that (a) the taxpayer will not be over-burdened or
saddled with multiple and unreasonable impositions; (b) each local government unit will have its fair
share of available resources; (c) the resources of the national government will not be unduly disturbed;
and (d) local taxation will be fair, uniform, and just. The Local Government Code of 1991 has
incorporated and adopted, by and large, the provisions of the now repealed Local Tax Code. The Local
Government Code explicitly authorizes provincial governments, notwithstanding “any exemption
granted by any law or other special law, . . . (to) impose a tax on businesses enjoying a franchise.”
Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax powers to
local government units, the Local Government Code has effectively withdrawn under Section 193
thereof, tax exemptions or incentives theretofore enjoyed by certain entities. The Code, in addition,
contains a general repealing which all general and special laws, acts, city charters, decrees, executive
orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent
with any of the provisions of this Code are hereby repealed or modified accordingly. These policy
considerations are consistent with the State policy to ensure autonomy to local governments and the
objective of the LGC that they enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them effective partners in the
attainment of national goals. The power to tax is the most effective instrument to raise needed revenues
to finance and support myriad activities if local government units for the delivery of basic services
essential to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. It may also be relevant to recall that the original reasons for the withdrawal of
tax exemption privileges granted to government-owned and controlled corporations and all other units
of government were that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarity situated enterprises, and there was a need for these entities to share in the
requirements of development, fiscal or otherwise, by paying the taxes and other charges due from
them.

While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as
being in the nature of contracts and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions,
in the real sense of the term and where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such as those contained in government
bonds or debentures, lawfully entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly,
tax exemptions of this kind may not be revoked without impairing the obligations of contracts. 14 These
contractual tax exemptions, however, are not to be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution.15 Indeed, Article XII, Section 11, of the 1987 Constitution, like its
precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except under the condition that such privilege shall be
subject to amendment, alteration or repeal by Congress as and when the common good so requires.

SMART COMMUNICATIONS vs. CITY OF DAVAO

FACTS: On February 18, 2002, Smart filed a special civil action for declaratory relief for the
ascertainment of its rights and obligations under the Tax Code of the City of Davao, which imposes a
franchise tax on businesses enjoying a franchise within the territorial jurisdiction of Davao. Smart avers
that its telecenter in Davao City is exempt from payment of franchise tax to the City on the following
grounds: (a) the issuance of its franchise under Republic Act (R.A.) No. 7294 subsequent to R.A. No. 7160
shows the clear legislative intent to exempt it from the provisions of R.A. 7160; (b) Section 137 of R.A.
No. 7160 can only apply to exemptions already existing at the time of its effectivity and not to future
exemptions; (c) the power of the City of Davao to impose a franchise tax is subject to statutory
limitations such as the in lieu of all taxes clause found in Section 9 of R.A. No. 7294; and (d) the
imposition of franchise tax by the City of Davao would amount to a violation of the constitutional
provision against impairment of contracts.

Respondents contested the tax exemption claimed by Smart. They invoked the power granted by the
Constitution to local government units to create their own sources of revenue.

ISSUE: Is the Contract Clause, a limitation on the State’s power to tax?

RULING:NO.

Jurisprudence suggests that aside from the national franchise tax, the franchisee is still liable to pay the
local franchise tax, unless it is expressly and unequivocally exempted from the payment thereof under
its legislative franchise. The “in lieu of all taxes” clause in a legislative franchise should categorically state
that the exemption applies to both local and national taxes; otherwise, the exemption claimed should
be strictly construed against the taxpayer and liberally in favor of the taxing authority.

Republic Act No. 7716, otherwise known as the “Expanded VAT Law,” did not remove or abolish the
payment of local franchise tax. It merely replaced the national franchise tax that was previously paid by
telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT in accordance
with Section 108 of the Tax Code. VAT replaced the national franchise tax, but it did not prohibit nor
abolish the imposition of local franchise tax by cities or municipalities.