CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M.

JUNGCO, petitioners,
vs.

COURT OF APPEALS, HON. TEOFISTO T. GUINGONA JR., BASES CONVERSION

AND DEVELOPMENT AUTHORITY, SUBIC BAY METROPOLITAN AUTHORITY,
BUREAU OF INTERNAL REVENUE, CITY TREASURER OF OLONGAPO and
MUNICIPAL TREASURER OF SUBIC, ZAMBALES, respondents.

PANGANIBAN, J.:

Facts:
On 13 March 1992, Republic Act 7227 (“An Act Accelerating the Conversion of Military
Reservations Into Other Productive Uses, Creating the Bases Conversion and Development
Authority for this Purpose, Providing Funds Therefor and for Other Purposes.”) was passed into
law. Under Section 12 thereof, created the Subic Special Economic Zone and granted thereto
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 the said zones.

On 10 June 1993, President Ramos issued Executive Order (EO) 97 clarifying the application of
the tax and duty incentives. On 19 June 1993, the President issued EO 97-A, specifying the area
within which the tax-and-duty-free privilege was operative (i.e. the secured area consisting of the
presently fenced-in former Subic Naval Base).

On 26 October 1994, Conrado L. 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 such “fenced-in” territory.

In a Resolution dated 27 June 1995, the Supreme Court referred the matter to the Court of
Appeals, pursuant to Revised Administrative Circular 1-95. Incidentally, on 1 February 1995,
Proclamation 532 was issued by President Ramos, delineating the exact metes and bounds of the
Subic Special Economic and Free Port Zone, pursuant to Section 12 of RA 7227. The Court of
Appeals denied the petition as there is no substantial difference between the provisions of EO
97-A and Section 12 of RA 7227, holding that EO 97-A cannot be claimed to be unconstitutional
while maintaining the validity of RA 7227;
that the 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; and that
the limited application of the tax incentives is within 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, and hence, they filed a petition for review
with the Supreme Court.

1
Issue:
Whether there was a violation of the equal protection of the laws when EO 97-A granted tax and
duty incentives only to businesses and residents within the “secured area” of the Subic Special
Economic Zone and denied such to those who live within the Zone but outside such “fenced-in”
territory.

Held:
No. The EO 97-A is not violative of the equal protection clause; neither is it discriminatory. The
fundamental 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. It was based, rather, on fair and substantive considerations that were germane to the
legislative purpose.

There are substantial differences between the big investors who are being lured to establish and
operate their industries in the so-called “secured area” and the present business operators outside
the area. On the one hand, we are talking of billion-peso investments and thousands of new jobs,
and on the other hand, definitely none of such magnitude. In the first, the economic impact will
be national; in the second, only local. Even more important, at this time the business activities
outside 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. There is, then, hardly any reasonable basis to extend to them the benefits and
incentives accorded in RA 7227.

Additionally, it will be easier to manage and monitor the activities within the “secured area,”
which is already fenced off, to prevent “fraudulent importation of merchandise” or smuggling.
The classification applies equally to all the resident individuals and businesses 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, both in privileges granted and in obligations required. The equal-protection
guarantee does not require territorial uniformity of laws. As long as there are actual and material
differences between territories, there is no violation of the constitutional clause.

Herein, anyone possessing the requisite 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.

The constitutional rights to equal protection of the law is not violated by an executive order, issued
pursuant to law, granting tax and duty incentives only to the business and residents within the “secured
area” of the Subic Special Economic Zone and denying them to those who live within the Zone but
outside such “fenced-in” territory. The Constitution does not require absolute equality among residents. It
is enough that all persons under like circumstances or conditions are given the same privileges and
required to follow the same obligations. In short, a classification based on valid and reasonable standards
does not violate the equal protection clause.

2
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
LINGAYEN GULF ELECTRIC POWER CO., INC. and THE COURT OF TAX
APPEALS, respondents.

Angel Sanchez for Lingayen Electric Power Co., Inc.

Ponente: SARMIENTO

FACTS:

The respondent taxpayer operates an electric power plant serving the adjoining
municipalities of Lingayen and Binmaley, both in the province of Pangasinan,
pursuant to the municipal franchise granted it by their respective municipal councils,
under Resolution Nos. 14 and 25 of June 29 and July 2, 1946, respectively. Bureau of
Internal Revenue (BIR) assessed against and demanded from the private respondent
deficiency franchise taxes and surcharges for the years 1946 to 1954 applying the
franchise tax rate of 5% on gross receipts from March 1, 1948 to December 31, 1954
as prescribed in Section 259 of the National Internal Revenue Code, instead of the
lower rates as provided in the municipal franchises.  Respondent submits that R.A.
No. 3843 is unconstitutional insofar as it provides for the payment by the private
respondent of a franchise tax of 2% of its gross receipts, while other taxpayers
similarly situated were subject to the 5% franchise tax imposed in Section 259 of the
Tax Code, thereby discriminatory and violative of the rule on uniformity and equality
of taxation. Court of tax Appeals ruled in favor of respondent.

ISSUE:

Whether or not Section 4 of R.A. No. 3843, assuming it is valid, could be given
retroactive effect so as to render uncollected taxes in question which were assessed
before its enactment.

HELD:

YES. Appealed decision was affirmed.

RATIO:

A tax is uniform when it operates with the same force and effect in every place
where the subject of it is found. Uniformity means that all property belonging
to the same class shall be taxed alike The Legislature has the inherent power
not only to select the subjects of taxation but to grant exemptions. Tax

3
exemptions have never been deemed violative of the equal protection
clause. It is true that the private respondents municipal franchises were
obtained under Act No. 667 of the Philippine Commission, but these original
franchises have been replaced by a new legislative franchise, i.e. R.A. No.
3843.

Given the validity of said law, it should be applied retroactively so as to render

uncollectible the taxes in question which were assessed before its enactment. The
question of whether a statute operates retrospectively or only prospectively depends
on the legislative intent. In the instant case, Act No. 3843 provides that “effective …
upon the date the original franchise was granted, no other tax and/or licenses other
than the franchise tax of two per centum on the gross receipts … shall be collected,
any provision to the contrary notwithstanding.” Republic Act No. 3843 therefore
specifically provided for the retroactive effect of the law.

4
Shell Corporation v. Vano (As Municipal Treasurer) GR L-6093, 94 Phil 387, February 24,
1954

Facts:

The Municipal Council of Cordova, Cebu adopted Ordinance 10 which imposes an annual tax
on occupation or the exercise of the privilege of installation manager and Ordinance 11
imposing an annual tax on tin can factories having a maximum output capacity of 30,000 tin
cans. Shell, a foreign corporation, disputed the ordinances and contended that: first, “installation
manager” is a designation made by the company and such designation cannot be deemed to be
a “calling” as defined in Sec 178 of NIRC and that the installation manager employed by Shell is
a salaried employee which may not be taxed by the municipal council under the provisions of
NIRC; second, the ordinance is discriminatory and hostile because there is no other person in
the locality who exercises such designation or calling; and third, the imposition of tax on tin can
factories having a 30,000 maximum output capacity is unlawful because it is a percentage tax
and falls under the exceptions provided in the Tax Code.

Issue: W/N an installation manager, although a salaried employee, is liable for occupation tax

Ruling:

Yes. Even if the installation manager is a salaried employee of the corporation, still it is an
occupation. Further, one occupation or line of business does not become exempt by being
conducted with some other occupation or business for which such tax has been paid. The
occupation tax must be paid by each individual engaged in a calling subject to it.

Issue 2: W/N the ordinance is unconstitutional because it is hostile and discriminatory

Ruling:

No. The fact that there is no other person in the locality who exercises such a “designation” or
calling does not make the ordinance discriminatory and hostile, inasmuch as it is and will be
applicable to any person or firm who exercises such calling or occupation named or designated
as “installation manager.

Issue 3: W/N the annual tax imposition on tin can factories having an annual output capacity of
30,000 is valid

Ruling:

Yes. It is not a percentage tax because the maximum annual output capacity is not a
percentage. It is not a share or a tax based on the amount of the proceeds realized out of the
sale of the tin cans manufactured therein but on the business of manufacturing tin cans having a
maximum annual output capacity of 30,000 tin cans.

5
Issue 4: W/N the Municipal Treasurer should have been impleaded in this case

Ruling:

No. In an action for refund of municipal taxes claimed to have been paid and collected under an
illegal ordinance, it is not the municipal treasuer who is the real party-in-interest but the
municipality concerned that is empowered to sue and be sued.

6
 American Bible Society vs City of Manila

G.R. No. L-9637, April 30, 1957

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:

1. They had been in the Philippines since 1899 and were not required to
pay any license fee or sales tax;
2. 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

7
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. 

8
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.

REPUBLIC OF THE PHILIPPINES et al. v. HONORABLE RAMON S.

CAGUIOA et al.

536 SCRA 193 (2007), EN BANC

Congress enacted Republic Act (R.A) No. 7227 or the Bases Conversion and
Development Act of 1992 which created the Subic Special Economic and Freeport Zone
(SBF) and the Subic Bay Metropolitan Authority (SBMA). Section 12 of R.A No. 7227 of
the law provides that no taxes, local and national, shall be imposed within the Subic
Special Economic Zone. Pursuant to the law, Indigo Distribution Corporation, et al.,
which are all domestic corporations doing business at the SBF, applied for and were
granted Certificates of Registration and Tax Exemption by the SBMA.

Congress subsequently passed R.A. No. 9334, which provides that all applicable taxes,
duties, charges, including excise taxes due thereon shall be applied to cigars and
cigarettes, distilled spirits, fermented liquors and wines brought directly into the duly
chartered or legislated freeports of the Subic Economic Freeport Zone. On the basis of
Section 6 of R.A. No. 9334, SBMA issued a Memorandum declaring that, all
importations of cigars, cigarettes, distilled spirits, fermented liquors and wines into the
SBF, shall be treated as ordinary importations subject to all applicable taxes, duties and
charges, including excise taxes.

Upon its implementation, Indigo et al., sought for a reconsideration of the directives on
the imposition of duties and taxes, particularly excise taxes by the Collector of Customs
and the SBMA Administrator. Their request was subsequently denied prompting them

9
to file with the RTC of Olongapo City a special civil action for declaratory relief to have
certain provisions of R.A. No. 9334 declared as unconstitutional. They prayed for the
issuance of a writ of preliminary injunction and/or Temporary Restraining Order (TRO)
and preliminary mandatory injunction. The same was subsequently granted by Judge
Ramon Caguioa. The injunction bond was approved at One Million pesos (P1,000,000).

ISSUES:

Whether or not public respondent judge committed grave abuse of discretion amounting
to lack or excess in jurisdiction in peremptorily and unjustly issuing the injunctive writ
in favor of private respondents despite the absence of the legal requisites for its issuance

HELD:

One such case of grave abuse obtained in this case when Judge Caguioa issued his Order
of May 4, 2005 and the Writ of Preliminary Injunction on May 11, 2005 despite the
absence of a clear and unquestioned legal right of private respondents. In holding that
the presumption of constitutionality and validity of R.A. No. 9334 was overcome by
private respondents for the reasons public respondent cited in his May 4, 2005 Order,
he disregarded the fact that as a condition sine qua non to the issuance of a writ of
preliminary injunction, private respondents needed also to show a clear legal right that
ought to be protected. That requirement is not satisfied in this case. To stress, the
possibility of irreparable damage without proof of an actual existing right would not
justify an injunctive relief.

Indeed, Sections 204 and 229 of the NIRC provide for the recovery of erroneously or
illegally collected taxes which would be the nature of the excise taxes paid by private
respondents should Section 6 of R.A. No. 9334 be declared unconstitutional or invalid.

The Court finds that public respondent had also ventured into the delicate area which
courts are cautioned from taking when deciding applications for the issuance of the writ
of preliminary injunction. Having ruled preliminarily against the prima facie validity of
R.A. No. 9334, he assumed in effect the proposition that private respondents in their
petition for declaratory relief were duty bound to prove, thereby shifting to petitioners
the burden of proving that R.A. No. 9334 is not unconstitutional or invalid.

In the same vein, the Court finds Judge Caguioa to have overstepped his discretion
when he arbitrarily fixed the injunction bond of the SBF enterprises at only P1million.
Rule 58, Section 4(b) provides that a bond is executed in favor of the party enjoined to
answer for all damages which it may sustain by reason of the injunction. The purpose of
the injunction bond is to protect the defendant against loss or damage by reason of the
injunction in case the court finally decides that the plaintiff was not entitled to it, and
the bond is usually conditioned accordingly.

Whether this Court must issue the writ of prohibition, suffice it to stress that being
possessed of the power to act on the petition for declaratory relief, public respondent
can proceed to determine the merits of the main case. Moreover, lacking the requisite

10
proof of public respondent‘s alleged partiality, this Court has no ground to prohibit him
from proceeding with the case for declaratory relief. For these reasons, prohibition does
not lie.

Cagayan Electric Power & Light Co. vs.

Commissioner of Internal Revenue
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-60126 September 25, 1985

CAGAYAN ELECTRIC POWER & LIGHT CO., INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF
APPEALS, respondents.

Quasha, De Guzman Makalintal & Barot for petitioner.

AQUINO, J.:

This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. for
income tax amounting to P75,149.73 for the more than seven-month period of the year
1969 in addition to franchise tax.

The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under
which its payment of 3% tax on its gross earnings from the sale of electric current is "in
lieu of all taxes and assessments of whatever authority upon privileges, earnings,
income, franchise, and poles, wires, transformers, and insulators of the grantee, from
which taxes and assessments the grantee is hereby expressly exempted" (Sec. 3).

On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by
making liable for income tax all corporate taxpayers not specifically exempt under
paragraph (c) (1) of said section and section 27 of the Tax Code notwithstanding the
"provisions of existing special or general laws to the contrary". Thus, franchise
companies were subjected to income tax in addition to franchise tax.

However, in petitioner's case, its franchise was amended by Republic Act No. 6020,
effective August 4, 1969, by authorizing the petitioner to furnish electricity to the

11
municipalities of Villanueva and Jasaan, Misamis Oriental in addition to Cagayan de
Oro City and the municipalities of Tagoloan and Opol. The amendment reenacted the
tax exemption in its original charter or neutralized the modification made by Republic
Act No. 5431 more than a year before.

By reason of the amendment to section 24 of the Tax Code, the Commissioner of

Internal Revenue in a demand letter dated February 15, 1973 required the petitioner to
pay deficiency income taxes for 1968-to 1971. The petitioner contested the assessments.
The Commissioner cancelled the assessments for 1970 and 1971 but insisted on those for
1968 and 1969.

The petitioner filed a petition for review with the Tax Court, which on February 26, 1982
held the petitioner liable only for the income tax for the period from January 1 to
August 3, 1969 or before the passage of Republic Act No. 6020 which reiterated its tax
exemption. The petitioner appealed to this Court.

It contends that the Tax Court erred (1) in not holding that the franchise tax paid by the
petitioner is a commutative tax which already includes the income tax; (2) in holding
that Republic Act No. 5431 as amended, altered or repealed petitioner's franchise; (3) in
holding that petitioner's franchise is a contract which can be impaired by an implied
repeal and (4) in not holding that section 24(d) of the Tax Code should be construed
strictly against the Government.

We hold that Congress could impair petitioner's legislative franchise by making it liable
for income tax from which heretofore it was exempted by virtue of the exemption
provided for in section 3 of its franchise.

The Constitution provides that a franchise is subject to amendment, alteration or repeal

by the Congress when the public interest so requires (Sec. 8, Art. XIV, 1935
Constitution; Sec. 5, Art. XIV, 1973 Constitution),

Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to
the provisions of the Constitution and to the terms and conditions established in Act No.
3636 whose section 12 provides that the franchise is subject to amendment, alteration or
repeal by Congress.

Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income
tax all corporate taxpayers not expressly exempted therein and in section 27 of the Code,
had the effect of withdrawing petitioner's exemption from income tax.

The Tax Court acted correctly in holding that the exemption was restored by the
subsequent enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the
said tax exemption. Hence, the petitioner is liable only for the income tax for the period
from January 1 to August 3, 1969 when its tax exemption was modified by Republic Act
No. 5431.

It is relevant to note that franchise companies, like the Philippine Long Distance
Telephone Company, have been paying income tax in addition to the franchise tax.

12
However, it cannot be denied that the said 1969 assessment appears to be highly
controversial. The Commissioner at the outset was not certain as to petitioner's income
tax liability. It had reason not to pay income tax because of the tax exemption in its
franchise.

For this reason, it should be liable only for tax proper and should not be held liable for
the surcharge and interest. (Advertising Associates, Inc. vs. Commissioner of Internal
Revenue and Court of Tax Appeals, G. R. No. 59758, December 26, 1984,133 SCRA 765;
Imus Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1024; C.M.
Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22, 1976, 71
SCRA 511.)

WHEREFORE, the judgment of the Tax Court is affirmed with the modification that the
petitioner is liable only for the tax proper and that it should not pay the delinquency
penalties. No costs.

SO ORDERED.

Concepcion, Jr., Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.

Manila Electric Company v. Province of Laguna

(G.R. No. 131359. May 5, 1999)
18AUG
FACTS:
MERALCO was granted a franchise by several municipal councils and the National Electrification
Administration to operate an electric light and power service in the Laguna. Upon enactment of Local
Government Code, the provincial government issued ordinance imposing franchise tax. MERALCO paid
under protest and later claims for refund because of the duplicity with Section 1 of P.D. No. 551. This was
denied by the governor (Joey Lina) relying on a more recent law (LGC). MERALCO filed with the RTC a
complaint for refund, but was dismissed. Hence, this petition.

ISSUE: 
Whether or not the imposition of franchise tax under the provincial ordinance is violative of the non-
impairment clause of the Constitution and of P.D. 551.

HELD:

13
No. There is no violation of the non-impairment clause for the same must yield to the inherent power of
the state (taxation). The provincial ordinance is valid and constitutional.

RATIO:
The Local Government Code of 1991 has incorporated and adopted, by and large, the provisions of the
now repealed Local Tax Code. The 1991 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.” A franchise partakes the nature of a grant which is beyond the purview
of the non-impairment clause of the Constitution.    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.

Casanovas v. Hord, G.R. No. 3473, March 22, 1907

Facts: The Spanish Govt. by virtue of a royal decree granted the plaintiff

certain mines. The plaintiff is now the owner of those mines. The Collector of
Internal Revenue imposed tax on the properties, contending that they were
valid perfected mine concessions and it falls within the provisions of sec.134 of
Act No. 1189 known as Internal Revenue Act. The plaintiff paid under protest.
He brought an action against the defendant Collector of Internal Revenue to
recover the sum of Php. 9, 600 paid by him as taxes. Judgment was rendered in
favor of the defendant, so the plaintiff appealed.

Issue: Whether or Not Sec. 164 is void or valid.

Held: The deed constituted a contract between the Spanish Government and

the plaintiff. The obligation of which contract was impaired by the enactment of
sec. 134 of the Internal Revenue Law infringing sec. 5 of the Act of Congress
which provides that “no law impairing the obligation of contracts shall be
enacted”. Sec. 134 of the Internal Revenue Law of 1904 is void because it
impairs the obligation of contracts contained in the concessions of mine made
by the Spanish Government. Judgment reversed.

14
City of Baguio v De Leon (1968)

City of Baguio v De Leon

GR No. L-24756, October 31, 1968

FACTS:
The City of Baguio passed a license fee on any person, entity or corporation doing business in the City. The
ordinance
sourced its authority from RA 329, thereby amending the city charter empowering it to fix the license fee and regulate
businesses, trades and occupation as may be established in the City. De Leon was assessed for P50 annual fee it
being shown that he was engaged in property rental and deriving income therefrom. The latter assailed the validity of
the ordinance arguing that it is ultra vires for there is no statutory authority which expressly grants the City of Baguio
to levy such tax and that there it imposed double taxation and violates the requirement of uniformity.

ISSUE:
Is the ordinance valid?

RULING:
Yes. First, RA 329 was enacted amending Section 2553 of the Revised Administrative Code empowering the City
Council not only to impose a license fee but to levy a tax for purposes of revenue, thus the ordinance cannot be
considered ultra vires for there is more than ample statutory for the enactment thereof.
Second, an argument against double taxation may not be invoked where one tax is imposed by the state and the
other imposed by the City.
Third, violation of uniformity is out of place it being widely recognized that there is nothing inherently obnoxious in the
requirement that license fees of taxes be enacted with respect to the same occupation, calling or activity by both the
state and the political subdivision thereof. 

FACTS:

This is a petition assailing the validity of Batas Pambansa 135 Section

1 which further amends Section 21 of the National Internal Revenue
Code of 1977. Petitioner as taxpayer alleges that by virtue thereof, “he
would be unduly discriminated against by the imposition of higher
15
rates of tax upon his income arising from the exercise of his
profession vis-à-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.
ISSUE:

Whether or not the provision violates the equal protection and due
process of the Constitution as well as of the rule requiring uniformity in
taxation?

RULING:

The petition must be dismissed.

It is manifest that the field of state activity has assumed a much wider
scope, 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.

The petitioner alleges arbitrariness. A mere allegation, as here. does

not suffice. There must be a factual foundation of such
unconstitutional taint. Absent such a showing, the presumption of
validity must prevail. 

Now for equal protection. It suffices that the laws operate equally and
uniformly on all persons under similar circumstances or that all
persons must be treated in the same manner, the conditions not being
different, both in the privileges conferred and the liabilities imposed.
That same formulation applies as well to taxation measures.

16
 

Petitioner likewise invoked the kindred concept of uniformity. “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. 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.”

What misled petitioner is his failure to take into consideration the

distinction between a tax rate and a tax base. It is enough that the
classification must rest upon substantial distinctions that make real
differences. In the case of professionals in the practice of their calling
and businessmen, there is no uniformity in the costs or expenses
necessary to produce their income.

There is ample justification then for the Batasang Pambansa to adopt

the gross system of income taxation to compensation income, while
continuing the system of net income taxation as regards professional
and business income

The petition is without merit, considering the (1) lack of factual

foundation to show the arbitrary character of the assailed
provision; (2) the force of controlling doctrines on due process, equal
protection, and uniformity in taxation and (3) the reasonableness of
the distinction between compensation and taxable net income of
professionals and businessman certainly not a suspect classification.

SUMMARY OF PRINCIPLES:   

17
1.   The Constitution provides restrictions to the
power to tax.

Adversely affecting as it does property rights, both

the due process and equal protection clauses may
properly be invoked, as petitioner does, to
invalidate in appropriate cases a revenue measure.
If it were otherwise, there would be truth to the
1803 dictum of Chief Justice Marshall that “the
power to tax involves the power to destroy.”

In a separate opinion in Graves v. New York,

Justice Frankfurter, after referring to it as
an “unfortunate remark,” characterized it as “a
flourish of rhetoric [attributable to] the intellectual
fashion of the times [allowing] a free use of
absolutes.”

This is merely to emphasize that it is not and there

cannot be such a constitutional mandate. Justice
Frankfurter could rightfully conclude: “The web of
unreality spun from Marshall’s famous dictum was
brushed away by one stroke of Mr. Justice
Holmes’s pen: ‘The power to tax is not the power
to destroy while this Court sits.’

So it is in the Philippines.
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2.   The SC ruled that, a bare allegation that Batas

135, which sets different income tax schedules
for fixed income earners and business or
professional income earners, is arbitrary does
not suffice to invalidate said tax statute.

In the present case, the difficulty confronting

petitioner is thus apparent. He alleges
arbitrariness. A mere allegation, as here, does not
suffice. There must be a factual foundation of such
unconstitutional taint.

Considering that petitioner here would condemn

such a provision as void on its face, he has not
made out a case. This is merely to adhere to the
authoritative doctrine that where the due process
and equal protection clauses are invoked,
considering that they are not fixed rules but rather
broad standards, there is a need for proof of such
persuasive character as would lead to such a
conclusion.

Absent such a showing, the presumption of validity

must prevail.

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3.   It is undoubted that the due process clause

may be invoked where a taxing statute is so
arbitrary that it finds no support in the
Constitution.

An obvious example is where it can be shown to

amount to the confiscation of property. That would
be a clear abuse of power. It then becomes the
duty of this Court to say that such an arbitrary act
amounted to the exercise of an authority not
conferred. That properly calls for the application of
the Holmes dictum.

It has also been held that where the assailed tax

measure is beyond the jurisdiction of the state, or is
not for a public purpose, or, in case of a retroactive
statute is so harsh and unreasonable, it is subject
to attack on due process grounds.

4.   The Constitution does not require things which

are different in fact or opinion to be treated in
law as though they were the same.”

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 Hence the constant reiteration of the view that
classification if rational in character is allowable. As
a matter of fact, in a leading case of Lutz V.
Araneta, this Court, through Justice J.B.L. Reyes,
went so far as to hold “at any rate, it is inherent in
the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly
held that ‘inequalities which result from a singling
out of one particular class for taxation, or
exemption infringe no constitutional limitation.’ ”

5.   Uniformity in taxation quite similar to the

standard of equal protection.

Petitioner likewise invoked the kindred concept of

uniformity. According to the Constitution: “The rule
of taxation shall be uniform and equitable.”

This requirement is met according to Justice Laurel

in Philippine Trust Company v. Yatco, decided in
1940, when the tax “operates with the same force
and effect in every place where the subject may be
found.” He likewise added: “The rule of uniformity
does not call for perfect uniformity or perfect
equality, because this is hardly attainable.”

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 The problem of classification did not present itself
in that case. It did not arise until nine years later,
when the Supreme Court held: “Equality and
uniformity in taxation means that all taxable articles
or kinds of property of the same class shall be
taxed at the same rate. The taxing power has the
authority to make reasonable and natural
classifications for purposes of taxation.”

As clarified by Justice Tuason, where “the

differentiation” complained of “conforms to the
practical dictates of justice and equity” it “is not
discriminatory within the meaning of this clause
and is therefore uniform.” 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.”

6.   Taxpayers may be classified into different

categories where it rests on real differences.

In this case, what misled petitioner is his failure to

take into consideration the distinction between a
tax rate and a tax base. There is no legal objection
to a broader tax base or taxable income by
eliminating all deductible items and at the same

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time reducing the applicable tax rate. Taxpayers
may be classified into different categories. To
repeat, it is enough that the classification must rest
upon substantial distinctions that make real
differences.

In the case of the gross income taxation embodied

in Batas Pambansa Blg. 135, the discernible basis
of classification is the susceptibility of the income to
the application of generalized rules removing all
deductible items for all taxpayers within the class
and fixing a set of reduced tax rates to be applied
to all of them.

Taxpayers who are recipients of compensation

income are set apart as a class. As there is
practically no overhead expense, these taxpayers
are not entitled to make deductions for income tax
purposes because they are in the same situation
more or less.

On the other hand, in the case of professionals in

the practice of their calling and businessmen, there
is no uniformity in the costs or expenses necessary
to produce their income. It would not be just then to
disregard the disparities by giving all of them zero
deduction and indiscriminately impose on all alike
the same tax rates on the basis of gross income.

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There is ample justification then for the Batasang

Pambansa to adopt the gross system of income
taxation to compensation income, while continuing
the system of net income taxation as regards
professional and business income.

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