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VAT
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The Court also finds no merit in the petitioners' claim that EO 273
was issued by the President in grave abuse of discretion amounting to
lack or excess of jurisdiction. "Grave abuse of discretion" has been
defined, as follows:
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(2) EN BANC
[G.R. No. 115455. August 25, 1994.]
ARTURO M. TOLENTINO, Petitioner, v. THE
SECRETARY OF FINANCE and THE
COMMISSIONER OF INTERNAL
REVENUE, Respondent
MENDOZA, J.:
The valued-added tax (VAT) is levied on the sale, barter or exchange
of goods and properties as well as on the sale or exchange of services.
It is equivalent to 10% of the gross selling price or gross value in
money of goods or properties sold, bartered or exchanged or of the
gross receipts from the sale or exchange of services. Republic Act
No. 7716 seeks to widen the tax base of the existing VAT system and
enhance its administration by amending the NIRC.
These are various suits for certiorari and prohibition, challenging the
constitutionality of Republic Act No. 7716 on various grounds
summarized in the resolution of July 6, 1994 of this Court, as
follows:chanrob1es
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I. Procedural Issues:
A. Does Republic Act No. 7716 violate Art. VI, 24 of the
Constitution?
B. Does it violate Art. VI, 26(2) of the Constitution?
C. What is the extent of the power of the Bicameral Conference
Committee?
II. Substantive Issues:
A. Does the law violate the following provisions in the Bill of Rights
(Art. III)?
B. Does the law violate the following other provisions of the
Constitution?
1. Art. VI, 28(1)
2. Art. VI, 28(3)
I. PROCEDURAL ISSUES
The contention of petitioners is that in enacting Republic Act No.
7716, or the Expanded Valued-Added Tax Law, Congress violated
the Constitution because, although H. No. 11197 had originated in
the House of Representatives, it was not passed by the Senate but was
simply consolidated with the Senate version (S. No. 1630) in the
Conference Committee to produce the bill which the President signed
into law. The following provisions of the Constitution are cited in
support of the proposition that because Republic Act No. 7716 was
passed in this manner, it did not originate in the House of
Representatives and it has not thereby become a law:brary
Art. VI, 24: All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application,
and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with
amendments.
Id., 26(2): No bill passed by either House shall become a law
unless it has passed three readings on separate days, and printed
copies thereof in its final form have been distributed to its
Members three days before its passage, except when the
President certifies to the necessity of its immediate enactment to
meet a public calamity or emergency. Upon the last reading of a
bill, no amendment thereto shall be allowed, and the vote thereon
shall be taken immediately thereafter, and the yeas and nays
entered
in
the
Journal.
It appears that on various dates between July 22, 1992 and August 31,
1993, several bills 1 were introduced in the House of Representatives
seeking to amend certain provisions of the National Internal Revenue
Code relative to the value-added tax or VAT.
The bill (H. No. 11197) was considered on second reading starting
November 6, 1993 and, on November 17, 1993, it was approved by
the House of Representatives after third and final reading.
It was sent to the Senate on November 23, 1993 and later referred by
that body to its Committee on Ways and Means. On February 7,
1994, the Senate Committee submitted its report recommending
approval of S. No. 1630, entitled
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT)
SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS
ADMINISTRATION, AMENDING FOR THESE PURPOSES
SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110 OF
TITLE IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE
IX, AND REPEALING SECTIONS 113, 114 and 116 OF TITLE V,
ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED,
AND
FOR
OTHER
PURPOSES.
It was stated that the bill was being submitted "in substitution of
Senate Bill No. 1129, taking into consideration P. S. Res. No. 734
and H. B. No. 11197."c
On February 8, 1994, the Senate began consideration of the bill (S.
No. 1630). It finished debates on the bill and approved it on second
reading on March 24, 1994. On the same day, it approved the bill on
third reading by the affirmative votes of 13 of its members, with one
abstention.
H. No. 1197 and its Senate version (S. No. 1630) were then referred
to a conference committee which, after meeting four times (April 13,
19, 21 and 25, 1994), recommended that "House Bill No. 11197, in
consolidation with Senate Bill No. 1630, be approved in accordance
with the attached copy of the bill as reconciled and approved by the
conferees."virtua1aw
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The Conference Committee
bill, entitled "AN
ACT
RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,
WIDENING ITS TAX BASE AND ENHANCING ITS
ADMINISTRATION AND FOR THESE PURPOSES AMENDING
AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND
FOR OTHER PURPOSES," was thereafter approved by the House of
Representatives on April 27, 1994 and by the Senate on May 2, 1994.
The enrolled bill was then presented to the President of the
Philippines who, on May 5, 1994, signed it. It became Republic Act
No. 7716. On May 12, 1994, Republic Act No. 7716 was published
in two newspapers of general circulation and, on May 28, 1994, it
took effect, although its implementation was suspended until June 30,
1994 to allow time for the registration of business entities. It would
have been enforced on July 1, 1994 but its enforcement was stopped
because the Court, by the vote of 11 to 4 of its members, granted a
temporary
restraining
order
on
June
30,
1994.
First. Petitioners contention is that Republic Act No. 7716 did not
"originate exclusively" in the House of Representatives as required
by Art. VI, 24 of the Constitution, because it is in fact the result of
the consolidation of two distinct bills, H. No. 11197 and S. No. 1630.
In this connection, petitioners point out that although Art. VI, 24
was adopted from the American Federal Constitution, 2 it is notable
in two respects: the verb "shall originate" is qualified in the
Philippine Constitution by the word "exclusively" and the phrase "as
on other bills" in the American version is omitted. This means,
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made of its tax exemption. The title of P.D. No. 1590 is:chanrob1es
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AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE
AIRLINES, INC. TO ESTABLISH, OPERATE, AND MAINTAIN
AIR-TRANSPORT SERVICES IN THE PHILIPPINES AND
BETWEEN THE PHILIPPINES AND OTHER COUNTRIES.
The trend in our cases is to construe the constitutional requirement in
such a manner that courts do not unduly interfere with the enactment
of necessary legislation and to consider it sufficient if the title
expresses the general subject of the statute and all its provisions are
germane to the general subject thus expressed. In contrast, in the case
at bar, Republic Act No. 7716 expressly amends PALs franchise
(P.D. No. 1590) by specifically excepting from the grant of
exemptions from the VAT PALs exemption under P.D. No. 1590.
This is within the power of Congress to do under Art. XII, 11 of the
Constitution, which provides that the grant of a franchise for the
operation of a public utility is subject to amendment, alteration or
repeal by Congress when the common good so requires.
II. SUBSTANTIVE ISSUE
A. Claims of Press Freedom, Freedom of Thought and Religious
Freedom
The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is
a nonprofit organization of newspaper publishers established for the
improvement of journalism in the Philippines. On the other hand,
petitioner in G.R. No. 115781, the Philippine Bible Society (PBS), is
a nonprofit organization engaged in the printing and distribution of
bibles and other religious articles. Both petitioners claim violations of
their rights under 4 and 5 of the Bill of Rights as a result of the
enactment of the VAT Law.
The PPI question the law insofar as it has withdrawn the exemption
previously granted to the press under 103 (f) of the NIRC.
Although the exemption was subsequently restored by administrative
regulation with respect to the circulation income of newspapers, the
PPI presses its claim because of the possibility that the exemption
may still be removed by mere revocation of the regulation of the
Secretary of Finance. On the other hand, the PBS goes so far as to
question the Secretarys power to grant exemption for two reasons:
(1) The Secretary of Finance has no power to grant tax exemption
because this is vested in Congress and requires for its exercise the
vote of a majority of all its members 26 and (2) the Secretarys duty
is to execute the law.
103 of the NIRC contains a list of transactions exempted from VAT.
Among
the
transactions
previously
granted
exemption
were:chanrob1es
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(f) Printing, publication, importation or sale of books and any
newspaper, magazine, review, or bulletin which appears at regular
intervals with fixed prices for subscription and sale and which is
devoted principally to the publication of advertisements.
Republic Act No. 7716 amended 103 by deleting par. (f) with the
result that print media became subject to the VAT with respect to all
aspects of their operations. Later, however, based on a memorandum
of the Secretary of Justice, respondent Secretary of Finance issued
Revenue Regulations No. 11-94, dated June 27, 1994, exempting the
"circulation income of print media pursuant to 4 Article III of the
1987 Philippine Constitution guaranteeing against abridgment of
freedom of the press, among others." The exemption of "circulation
income" has left income from advertisements still subject to the
VAT.
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Petitioners argument is premised on the constitutional right of nondeprivation of life, liberty or property without due process of law
under Article III, Section 1 of the Constitution. According to
petitioners, the contested sections impose limitations on the amount
of input tax that may be claimed. Petitioners also argue that the input
tax partakes the nature of a property that may not be confiscated,
appropriated, or limited without due process of law. Petitioners
further contend that like any other property or property right, the
input tax credit may be transferred or disposed of, and that by
limiting the same, the government gets to tax a profit or value-added
even if there is no profit or value-added.
Petitioners also believe that these provisions violate the constitutional
guarantee of equal protection of the law under Article III, Section 1
of the Constitution, as the limitation on the creditable input tax if: (1)
the entity has a high ratio of input tax; or (2) invests in capital
equipment; or (3) has several transactions with the government, is not
based on real and substantial differences to meet a valid
classification.
PROCEDURAL ISSUE:
1. Whether R.A. No. 9337 violates the following provisions
of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2).
GR NO. 168463
SUBSTANTIVE ISSUES:
2. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108 of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2).
3. Whether Section 8 of R.A. No. 9337, amending Sections
110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A.
No. 9337, amending Section 114(C) of the NIRC, violate
the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1.
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E.O. No. 273 was followed by R.A. No. 7716 or the Expanded
VAT Law, R.A. No. 8241 or the Improved VAT Law, R.A. No.
8424 or the Tax Reform Act of 1997, and finally, the presently
beleaguered R.A. No. 9337, also referred to by respondents as the
VAT Reform Act.
(1) The power of internal regulation and discipline are intrinsic in any
legislative body for, as unerringly elucidated by Justice Story, [i]f
the power did not exist, it would be utterly impracticable to
transact the business of the nation, either at all, or at least with
decency, deliberation, and order. Thus, Article VI, Section 16 (3)
of the Constitution provides that each House may determine the
rules of its proceedings. Pursuant to this inherent constitutional
power to promulgate and implement its own rules of procedure, the
respective rules of each house of Congress provided for the creation
of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of
Representatives provides as follows:
Sec. 88. Conference Committee. In the event that the House does
not agree with the Senate on the amendment to any bill or joint
resolution, the differences may be settled by the conference
committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as
much as possible, adhere to and support the House Bill. If the
differences with the Senate are so substantial that they materially
impair the House Bill, the panel shall report such fact to the House
for the latters appropriate action.
Sec. 89. Conference Committee Reports. . . . Each report shall
contain a detailed, sufficiently explicit statement of the changes in or
amendments to the subject measure.
The Chairman of the House panel may be interpellated on the
Conference Committee Report prior to the voting thereon. The
House shall vote on the Conference Committee Report in the same
manner and procedure as it votes on a bill on third and final reading.
discipline its members, may the Court then delve into the details of
how Congress complies with its internal rules or how it conducts its
business of passing legislation? Note that in the present petitions, the
issue is not whether provisions of the rules of both houses creating
the bicameral conference committee are unconstitutional, but
whether the bicameral conference committee has strictly complied
with the rules of both houses, thereby remaining within the
jurisdiction conferred upon it by Congress.
Under the enrolled bill doctrine, the signing of a bill by the
Speaker of the House and the Senate President and the certification of
the Secretaries of both Houses of Congress that it was passed are
conclusive of its due enactment. The Court finds no reason to deviate
from the salutary rule in this case where the irregularities alleged by
the petitioners mostly involved the internal rules of Congress, e.g.,
creation of the 2nd or 3rd Bicameral Conference Committee by the
House. This Court is not the proper forum for the enforcement of
these internal rules of Congress, whether House or Senate.
Parliamentary rules are merely procedural and with their observance
the courts have no concern. Whatever doubts there may be as to the
formal validity of Rep. Act No. 9006 must be resolved in its favor.
Cases, both here and abroad, in varying forms of expression, all deny
to the courts the power to inquire into allegations that, in enacting a
law, a House of Congress failed to comply with its own rules, in the
absence of showing that there was a violation of a constitutional
provision or the rights of private individuals. At any rate, courts have
declared that the rules adopted by deliberative bodies are subject to
revocation, modification or waiver at the pleasure of the body
adopting them. Parliamentary rules are merely procedural, and with
their observance, the courts have no concern. They may be waived or
disregarded by the legislative body. Consequently, mere failure to
conform to parliamentary usage will not invalidate the action (taken
by a deliberative body) when the requisite number of members have
agreed to a particular measure.
Sec. 35. In the event that the Senate does not agree with the House of
Representatives on the provision of any bill or joint resolution, the
differences shall be settled by a conference committee of both Houses
which shall meet within ten (10) days after their composition. The
President shall designate the members of the Senate Panel in the
conference committee with the approval of the Senate.
The present petitions also raise an issue regarding the actions taken
by the conference committee on matters regarding Congress
compliance with its own internal rules. As stated earlier, one of the
most basic and inherent power of the legislature is the power to
formulate rules for its proceedings and the discipline of its members.
Congress is the best judge of how it should conduct its own business
expeditiously and in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its
conference committee if it believes that said members violated any of
its rules of proceedings. Even the expanded jurisdiction of this Court
cannot apply to questions regarding only the internal operation of
Congress, thus, the Court is wont to deny a review of the internal
proceedings of a co-equal branch of government.
House Bill
No.3705
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Provides
for
12% VAT on
every sale of
goods
or
properties
(amending Sec.
106 of NIRC);
12% VAT on
importation of
goods
(amending Sec.
107 of NIRC);
and 12% VAT
on
sale
of
services and use
or
lease
of
properties
(amending Sec.
108 of NIRC)
Provides
for
a
single rate of 10%
VAT on sale of
goods or properties
(amending Sec. 106
of NIRC), 10%
VAT on sale of
services including
sale of electricity by
generation
companies,
transmission
and
distribution
companies, and use
or
lease
of
properties
(amending Sec. 108
of NIRC)
Provides
that
the input tax
credit for capital
goods on which
a VAT has been
paid shall be
equally
distributed over
5 years or the
depreciable life
of such capital
goods; the input
tax credit for
goods
and
services other
than
capital
goods shall not
exceed 5% of
the total amount
of such goods
and
services;
and for persons
engaged in retail
trading
of
goods,
the
allowable input
tax credit shall
not exceed 11%
of the total
amount
of
goods
purchased.
No
provision
similar
No
similar
provision
No similar
provision
No
provision
similar
Provided
for
amendments
to
several
NIRC
provisions
regarding corporate
income, percentage,
franchise and excise
taxes
The disagreements between the provisions in the House bills and the
Senate bill were with regard to (1) what rate of VAT is to be
imposed; (2) whether only the VAT imposed on electricity
generation, transmission and distribution companies should not be
passed on to consumers, as proposed in the Senate bill, or both the
VAT imposed on electricity generation, transmission and distribution
companies and the VAT imposed on sale of petroleum products
should not be passed on to consumers, as proposed in the House bill;
(3) in what manner input tax credits should be limited; (4) and
whether the NIRC provisions on corporate income taxes, percentage,
franchise and excise taxes should be amended.
There being differences and/or disagreements on the foregoing
provisions of the House and Senate bills, the Bicameral Conference
Committee was mandated by the rules of both houses of Congress to
act on the same by settling said differences and/or disagreements.
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power of the two houses of Congress and in fact make the House
superior to the Senate.
Given, then, the power of the Senate to propose amendments, the
Senate can propose its own version even with respect to bills
which are required by the Constitution to originate in the House.
Indeed, what the Constitution simply means is that the initiative for
filing revenue, tariff or tax bills, bills authorizing an increase of the
public debt, private bills and bills of local application must come
from the House of Representatives on the theory that, elected as they
are from the districts, the members of the House can be expected to
be more sensitive to the local needs and problems. On the other
hand, the senators, who are elected at large, are expected to
approach the same problems from the national perspective. Both
views are thereby made to bear on the enactment of such laws.
Since there is no question that the revenue bill exclusively originated
in the House of Representatives, the Senate was acting
within its constitutional power to introduce amendments to the
House bill when it included provisions in Senate Bill No. 1950
amending corporate income taxes, percentage, excise and franchise
taxes. Verily, Article VI, Section 24 of the Constitution does not
contain any prohibition or limitation on the extent of the amendments
that may be introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC
provisions that had not been touched in the House bills are still in
furtherance of the intent of the House in initiating the subject revenue
bills:
One of the challenges faced by the present administration is the
urgent and daunting task of solving the countrys serious financial
problems. To do this, government expenditures must be strictly
monitored and controlled and revenues must be significantly
increased. This may be easier said than done, but our fiscal
authorities are still optimistic the government will be operating on a
balanced budget by the year 2009. In fact, several measures that will
result to significant expenditure savings have been identified by the
administration. It is supported with a credible package of revenue
measures that include measures to improve tax administration
and control the leakages in revenues from income taxes and the
value-added tax (VAT).
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The condition set for increasing VAT rate to 12% have economic or
fiscal meaning. If VAT/GDP is less than 2.8%, it means that
government has weak or no capability of implementing the VAT or
that VAT is not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12% because such
action will also be ineffectual.
2.
The input tax is the tax paid by a person, passed on to him by the
seller, when he buys goods. Output tax meanwhile is the tax due to
the person when he sells goods. In computing the VAT payable,
three possible scenarios may arise:
1. if at the end of a taxable quarter the output taxes charged by the
seller are equal to the input taxes that he paid and passed on by
the suppliers, then no payment is required;
2. when the output taxes exceed the input taxes, the person shall be
liable for the excess, which has to be paid to the Bureau of
Internal Revenue (BIR); and
3. if the input taxes exceed the output taxes, the excess shall be
carried over to the succeeding quarter or quarters. Should the
input taxes result from zero-rated or effectively zero-rated
transactions, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal
revenue taxes, at the taxpayers option.
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on
the input tax. Thus, a person can credit his input tax only up to the
extent of 70% of the output tax. In laymans term, the value-added
taxes that a person/taxpayer paid and passed on to him by a seller can
only be credited up to 70% of the value-added taxes that is due to him
on a taxable transaction. There is no retention of any tax collection
because the person/taxpayer has already previously paid the input tax
to a seller, and the seller will subsequently remit such input tax to the
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BIR. The party directly liable for the payment of the tax is the seller.
What only needs to be done is for the person/taxpayer to apply or
credit these input taxes, as evidenced by receipts, against his output
taxes.
The input tax is not a property or a property right within the
constitutional purview of the due process clause. A VAT-registered
persons entitlement to the creditable input tax is a mere statutory
privilege.
The distinction between statutory privileges and vested rights must be
borne in mind for persons have no vested rights in statutory
privileges. The state may change or take away rights, which were
created by the law of the state, although it may not take away
property, which was vested by virtue of such rights
Under the previous system of single-stage taxation, taxes paid at
every level of distribution are not recoverable from the taxes payable,
although it becomes part of the cost, which is deductible from the
gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a
10% multi-stage tax on all sales, it was then that the crediting of the
input tax paid on purchase or importation of goods and services by
VAT-registered persons against the output tax was introduced. This
was adopted by the Expanded VAT Law (R.A. No. 7716), and The
Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input
tax as against the output tax is clearly a privilege created by law, a
privilege that also the law can remove, or in this case, limit.
Sec. 8 of RA 9337 amending Sec. 110(A) of the NIRC imposes a 60month period within which to amortize the creditable input tax on
purchase or importation of capital goods with acquisition cost of P1
Million pesos, exclusive of the VAT component. Such spread out
only poses a delay in the crediting of the input tax. The taxpayer is
not permanently deprived of his privilege to credit the input tax.
Congress admitted that the spread-out of the creditable input tax in
this case amounts to a 4-year interest-free loan to the government. In
the same breath, Congress also justified its move by saying that the
provision was designed to raise an annual revenue of 22.6 billion.
The legislature also dispelled the fear that the provision will fend off
foreign investments, saying that foreign investors have other tax
incentives provided by law, and citing the case of China, where
despite a 17.5% non-creditable VAT, foreign investments were not
deterred. Again, for whatever is the purpose of the 60-month
amortization, this involves executive economic policy and legislative
wisdom in which the Court cannot intervene.
Section 114(C) merely provides a method of collection, or as stated
by respondents, a more simplified VAT withholding system. The
government in this case is constituted as a withholding agent with
respect to their payments for goods and services.
In Revenue Regulations No. 02-98, implementing R.A. No. 8424
(The Tax Reform Act of 1997), the concept of final withholding tax
on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system
the amount of income tax withheld by the withholding agent is
constituted as full and final payment of the income tax due from the
payee on the said income. The liability for payment of the tax rests
primarily on the payor as a withholding agent. Thus, in case of his
failure to withhold the tax or in case of underwithholding, the
deficiency tax shall be collected from the payor/withholding agent.
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Since the VAT would result in increased toll fees, they have an
interest as regular users of tollways in stopping the BIR action.
Diaz sponsored the approval of the EVAT Law and the NIRC at
the HoR while Timbol served as Asst. Sec. to the DTI and
consultant to the Toll Regulatory Board (TRB) in the past
administration.
Petitioners allege that the BIR attempted during the administration of
President Gloria Macapagal-Arroyo to impose VAT on toll fees. The
imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon
President Benigno C. Aquino IIIs assumption of office in 2010, the
BIR revived the idea and would impose the challenged tax on toll
fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the
NIRC, intend to include toll fees within the meaning of sale of
services that are subject to VAT; that a toll fee is a users tax, not
a sale of services; that to impose VAT on toll fees would amount to a
tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the nonimpairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order
(TRO), enjoining the implementation of the VAT. The Court required
the government, represented by respondents Cesar V. Purisima,
Secretary of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition
within 10 days from notice. Later, the Court issued another resolution
treating the petition as one for prohibition.
On August 23, 2010, the government, through the OSGs comment,
avers that:
rounding off the toll rate and putting any excess collection in an
escrow account. But this would be illegal since only the Congress
can modify VAT rates and authorize its disbursement. Finally, BIR
Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010),
which directs toll companies to record an accumulated input VAT of
zero balance in their books as of August 16, 2010, contravenes
Section 111 of the NIRC which grants entities that first become liable
to VAT a transitional input tax credit of 2% on beginning
inventory. For this reason, the VAT on toll fees cannot be
implemented.
ISSUE: May toll fees collected by tollway operators be subjected to
VAT?
PROCEDURAL ISSUES:
1. WON the court may treat the petition for declaratory relief as
one for prohibition;
2. WON petitioners have legal standing to file the action.
SUBSTANTIVE ISSUES:
3. WON the government is unlawfully expanding VAT coverage
by including tollway operators and tollway operations in the
terms franchise grantees and sale of services under Sec. 108
of the Code; and
4. WON the imposition of VAT on tollway operators
a. Amounts to a tax on tax and not a tax on services;
b. Will impair the tollway operators right to a
reasonable return of investment under their TOAs; and
c. Is not administratively feasible and cannot be
implemented.
HELD: (1) YES. There are precedents for treating a petition for
declaratory relief as one for prohibition if the case has far-reaching
implications and raises questions that need to be resolved for the
public good. The Court has also held that a petition for prohibition is
a proper remedy to prohibit or nullify acts of executive officials that
amount to usurpation of legislative authority.
Here, the imposition of VAT on toll fees has far-reaching
implications. Its imposition would impact, not only on the more than
half a million motorists who use the tollways everyday, but more so
on the governments effort to raise revenue for funding various
projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the
challenged VAT has been imposed, could cause more mischief both
to the tax-paying public and the government. A belated declaration
of nullity of the BIR action would make any attempt to refund to the
motorists what they paid an administrative nightmare with no
solution. Consequently, it is not only the right, but the duty of the
Court to take cognizance of and resolve the issues that the petition
raises.
(2) Although the petition does not strictly comply with the
requirements of Rule 65, the Court has ample power to waive such
technical requirements when the legal questions to be resolved are of
great importance to the public. The same may be said of the
requirement of locus standi which is a mere procedural requisite.
(3) The law imposes VAT on all kinds of services rendered in the
Philippines for a fee, including those specified in the list. The
enumeration of affected services is not exclusive. By qualifying
services with the words all kinds, Congress has given the term
services an all-encompassing meaning. The listing of specific
services are intended to illustrate how pervasive and broad is the
VATs reach rather than establish concrete limits to its
application. Thus, every activity that can be imagined as a form of
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liable for VAT. The latter merely shifts the burden of VAT to the
tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax
even if toll fees were deemed as a users tax. VAT is assessed
against the tollway operators gross receipts and not necessarily on
the toll fees. Although the tollway operator may shift the VAT
burden to the tollway user, it will not make the latter directly liable
for the VAT. The shifted VAT burden simply becomes part of the toll
fees that one has to pay in order to use the tollways.
(4)(b) Petitioner Timbol has no personality to invoke the nonimpairment of contract clause on behalf of private investors in the
tollway projects. She will neither be prejudiced by nor be affected by
the alleged diminution in return of investments that may result from
the VAT imposition. She has no interest at all in the profits to be
earned under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will
be adversely affected by imposing VAT on tollway operations is
purely speculative. Equally presumptuous is her assertion that a
stipulation in the TOAs known as the Material Adverse Grantor
Action will be activated if VAT is thus imposed. The Court cannot
rule on matters that are manifestly conjectural. Neither can it prohibit
the State from exercising its sovereign taxing power based on
uncertain, prophetic grounds.
(4)(c) Administrative feasibility is one of the canons of a sound tax
system. It simply means that the tax system should be capable of
being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon,
however, will not render a tax imposition invalid except to the
extent that specific constitutional or statutory limitations are
impaired. Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not necessarily
invalid unless some aspect of it is shown to violate any law or the
Constitution.
Here, it remains to be seen how the taxing authority will actually
implement the VAT on tollway operations. Any declaration by the
Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the
August 12, 2010 Senate hearing provides some clue as to how the
BIR intends to go about it, the facts pertaining to the matter are not
sufficiently established for the Court to pass judgment on. Besides,
any concern about how the VAT on tollway operations will be
enforced must first be addressed to the BIR on whom the task of
implementing tax laws primarily and exclusively rests. The Court
cannot preempt the BIRs discretion on the matter, absent any clear
violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal,
BIR RMC 63-2010 which directs toll companies to record an
accumulated input VAT of zero balance in their books as of August
16, 2010, the date when the VAT imposition was supposed to take
effect. The issuance allegedly violates Section 111(A) of the Code
which grants first time VAT payers a transitional input VAT of 2%
on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is
actually the product of negotiations with tollway operators who have
been assessed VAT as early as 2005, but failed to charge VATinclusive toll fees which by now can no longer be collected. The
tollway operators agreed to waive the 2% transitional input VAT, in
exchange for cancellation of their past due VAT liabilities. Notably,
the right to claim the 2% transitional input VAT belongs to the
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claim, leading FBDC to file a petition for review with the CTA,
docketed as CTA Case No. 5926. Utilizing the same valuation of 8%
of the total book value of its beginning inventory of real properties
(or P71,227,503,200.00) FBDC argued that its input tax credit was
more than enough to offset the VAT paid by it for the third quarter of
1997.
On 17 October 2000, the CTA promulgated its decision denying the
claim for refund. FBDC then filed a petition for review with the CA
which rendered a decision affirming the judgment of the CTA. As a
result, FBDC filed its second petition.
ISSUES: Whether Section 105 of the Old NIRC may be interpreted
in such a way as to restrict its application in the case of real estate
dealers only to the improvements on the real property belonging to
their beginning inventory, and not the entire real property itself.
There would be no controversy before us if the Old NIRC had itself
supplied that limitation, yet the law is tellingly silent in that regard.
RR 7-95, which imposes such restrictions on real estate dealers, is
discordant with the Old NIRC, so it is alleged.
HELD: On its face, there is nothing in Section 105 of the Old NIRC
that prohibits the inclusion of real properties, together with the
improvements thereon, in the beginning inventory of goods, materials
and supplies, based on which inventory the transitional input tax
credit is computed. It can be conceded that when it was drafted
Section 105 could not have possibly contemplated concerns specific
to real properties, as real estate transactions were not originally
subject to VAT. At the same time, when transactions on real
properties were finally made subject to VAT beginning with Rep. Act
No. 7716, no corresponding amendment was adopted as regards
Section 105 to provide for a differentiated treatment in the
application of the transitional input tax credit with respect to real
properties or real estate dealers.
It was Section 100 of the Old NIRC, as amended by Rep. Act No.
7716, which made real estate transactions subject to VAT for the first
time. Prior to the amendment, Section 100 had imposed the VAT on
every sale, barter or exchange of goods, without however specifying
the kind of properties that fall within or under the generic class
goods subject to the tax.
Rep. Act No. 7716, which significantly is also known as the
Expanded Value-Added Tax (EVAT) law, expanded the coverage of
the VAT by amending Section 100 of the Old NIRC in several
respects:
1. It made every sale, barter or exchange of goods or properties
subject to VAT.
2. It generally defined goods or properties as all tangible and
intangible objects which are capable of pecuniary estimation.
3. It included a non-exclusive enumeration of various objects that
fall under the class goods or properties subject to VAT,
including real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or business.
From these amendments to Section 100, is there any differentiated
VAT treatment on real properties or real estate dealers that would
justify the suggested limitations on the application of the transitional
input tax on them? There is none.
Rep. Act No. 7716 clarifies that it is the real properties held
primarily for sale to customers or held for lease in the ordinary course
of trade or business that are subject to the VAT, and not when the
real estate transactions are engaged in by persons who do not sell or
lease properties in the ordinary course of trade or business. It is clear
that those regularly engaged in the real estate business are accorded
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new trades or businesses to avail of the tax credit once they become
VAT-registered. The transitional input tax credit, whether under the
Old NIRC or the New NIRC, may be claimed by a newly-VAT
registered person such as when a business as it commences
operations. If we view the matter from the perspective of a starting
entrepreneur, greater clarity emerges on the continued utility of the
transitional input tax credit.
Following the theory of the CTA, the new enterprise should be able
to claim the transitional input tax credit because it has presumably
paid taxes, VAT in particular, in the purchase of the goods, materials
and supplies in its beginning inventory. Consequently, as the CTA
held, if the new enterprise has not paid VAT in its purchases of such
goods, materials and supplies, then it should not be able to claim the
tax credit. However, it is not always true that the acquisition of such
goods, materials and supplies entail the payment of taxes on the part
of the new business. In fact, this could occur as a matter of course by
virtue of the operation of various provisions of the NIRC, and not
only on account of a specially legislated exemption.
The interpretation proffered by the CTA would exclude goods and
properties which are acquired through sale not in the ordinary course
of trade or business, donation or through succession, from the
beginning inventory on which the transitional input tax credit is
based. This prospect all but highlights the ultimate absurdity of the
respondents' position. Again, nothing in the Old NIRC (or even the
New NIRC) speaks of such a possibility or qualifies the previous
payment of VAT or any other taxes on the goods, materials and
supplies as a pre-requisite for inclusion in the beginning inventory.
It is apparent that the transitional input tax credit operates to benefit
newly VAT-registered persons, whether or not they previously paid
taxes in the acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition from nonVAT to VAT status, the transitional input tax credit serves to
alleviate the impact of the VAT on the taxpayer. At the very
beginning, the VAT-registered taxpayer is obliged to remit a
significant portion of the income it derived from its sales as output
VAT. The transitional input tax credit mitigates this initial diminution
of the taxpayers income by affording the opportunity to offset the
losses incurred through the remittance of the output VAT at a stage
when the person is yet unable to credit input VAT payments.
Under Section 105 of the Old NIRC, the rate of the transitional input
tax credit is 8% of the value of such inventory or the actual valueadded tax paid on such goods, materials and supplies, whichever is
higher. If indeed the transitional input tax credit is premised on the
previous payment of VAT, then it does not make sense to afford the
taxpayer the benefit of such credit based on 8% of the value of such
inventory should the same prove higher than the actual VAT paid.
This intent that the CTA alluded to could have been implemented
with ease had the legislature shared such intent by providing the
actual VAT paid as the sole basis for the rate of the transitional input
tax credit.
The CTA harped on the circumstance that FBDC was excused from
paying any tax on the purchase of its properties from the national
government, even claiming that to allow the transitional input tax
credit is "tantamount to giving an undeserved bonus to real estate
dealers similarly situated as FBDC which the Government cannot
afford to provide." Yet the tax laws in question, and all tax laws in
general, are designed to enforce uniform tax treatment to persons or
classes of persons who share minimum legislated standards. The
common standard for the application of the transitional input tax
credit, as enacted by E.O. No. 273 and all subsequent tax laws which
reinforced or reintegrated the tax credit, is simply that the taxpayer in
question has become liable to VAT or has elected to be a VAT-
registered person. E.O. No. 273 and the subsequent tax laws are all
decidedly neutral and accommodating in ascertaining who should be
entitled to the tax credit, and it behooves the CIR and the CTA to
adopt a similarly judicious perspective.
There is no logic that coheres with either E.O. No. 273 or Rep.
Act No. 7716 which supports the restriction imposed on real
estate brokers and their ability to claim the transitional input tax
credit based on the value of their real properties. In addition, the
very idea of excluding the real properties itself from the
beginning inventory simply runs counter to what the transitional
input tax credit seeks to accomplish for persons engaged in the
sale of goods, whether or not such goods take the form of real
properties or more mundane commodities.
Under Section 105, the beginning inventory of goods forms
part of the valuation of the transitional input tax credit. Goods,
as commonly understood in the business sense, refers to the
product which the VAT-registered person offers for sale to the
public. With respect to real estate dealers, it is the real properties
themselves which constitute their goods. Such real properties
are the operating assets of the real estate dealer.
Section 4.100-1 of RR No. 7-95 itself includes in its enumeration
of goods or properties such real properties held primarily for
sale to customers or held for lease in the ordinary course of trade
or business. Said definition was taken from the very statutory
language of Section 100 of the Old NIRC. By limiting the
definition of goods to improvements in Section 4.105-1, the BIR
not only contravened the definition of goods as provided in the
Old NIRC, but also the definition which the same revenue
regulation itself has provided.
The Court of Tax Appeals claimed that under Section 105 of the
Old NIRC the basis for the inventory of goods, materials and
supplies upon which the transitional input VAT would be based
shall be left to regulation by the appropriate administrative
authority. This is based on the phrase filing of an inventory as
prescribed by regulations found in Section 105. Nonetheless,
Section 105 does include the particular properties to be included
in the inventory, namely goods, materials and supplies. It is
questionable whether the CIR has the power to actually redefine
the concept of goods, as she did when she excluded real
properties from the class of goods which real estate companies in
the business of selling real properties may include in their
inventory. The authority to prescribe regulations can pertain to
more technical matters, such as how to appraise the value of the
inventory or what papers need to be filed to properly itemize the
contents of such inventory. But such authority cannot go as far as
to amend Section 105 itself, which the Commissioner had
unfortunately accomplished in this case.
It is of course axiomatic that a rule or regulation must bear upon,
and be consistent with, the provisions of the enabling statute if
such rule or regulation is to be valid. In case of conflict between a
statute and an administrative order, the former must prevail.
Indeed, the CIR has no power to limit the meaning and coverage
of the term goods in Section 105 of the Old NIRC absent
statutory authority or basis to make and justify such limitation.
A contrary conclusion would mean the CIR could very well moot
the law or arrogate legislative authority unto himself by retaining
sole discretion to provide the definition and scope of the term
goods.
Justice Antonio T. Carpios dissent adopts the CTAs thesis that the
transitional input tax credit applies only when taxes were previously
paid on the properties in the beginning inventory. Had the dissenting
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