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G.R. No.


July 21, 2009


THE CITY OF DAVAO, represented herein by its Mayor Hon. RODRIGO DUTERTE, and
1. On February 18, 2002, Smart filed a special civil action for declaratory relief3 for the
ascertainment of its rights and obligations under the Tax Code of the City of Davao (DAVAO).
2. The tax being imposed is a tax on businesses enjoying a franchise, at the rate of seventy-five
percent of one percent of the gross annual receipts for the preceding calendar year based on the
income or receipts realized within the territorial jurisdiction of Davao City.
3. Among the objections raised by Smart were:
a. The issuance of its franchise under RA No. 7294, which is subsequent to RA 7160
(Local Government Code) shows the clear legislative intent to exempt it from the provisions of
RA 7160
b. Sec. 137 of the LGC is meant to apply to exemptions already existing at the time of its
effectivity and not to future exemption
c. The power of the City of Davao to impose a franchise tax is subject to statutory
limitation such as the in lieu of all taxes clause found in RA 7294
d. The imposition of franchise tax by the City of Davao would amount to a violation of
the constitutional provision against impairment of contract.
4. Davao, however, invoked the power granted by the Constitution to local government units
(LGU) to create their own sources of revenue.
5. The RTC held a decision in favor of Davao stating that the ambiguity in RA 7294 regarding
in lieu of all taxes must be resolved against the taxpayer. Tax exemptions are construed in
strictly against the taxpayer and liberally in favor of the taxing authority.
6. The RTC also held that there was no violation of the non-impairment clause of the
Constitution since the power to tax is based not merely on a valid delegation of legislative power
but on the direct authority granted to it by the fundamental law. It added that while such power
may be subject to restrictions or conditions imposed by Congress, any such legislative limitation
must be consistent with the basic policy of local autonomy.
ISSUES: Whether Smart is liable to pay the franchise tax imposed by the City of Davao- YES

1. Smart alleges that the in lieu of all taxes clause of its franchise exempts it from all taxes,
both local and national, except the national franchise tax (now VAT), income tax and real
property tax. The uncertainty in the in lieu of all taxes clause in RA No. 7294 on whether
Smart is exempted from both local and national franchise tax must be construed strictly against
Smart which claims exemption. Smart has the burden of providing that, aside from the imposed
3% franchise tax, Congress intended it to be exempt from all kinds of franchise taxes-whether
local or national. Smart, failed in this regard.
2. Tax exemptions can only be given force if they are clear and categorical. If Congress intended
Smart to be exempted from municipal and provincial taxes, it could have used the same language
as the Clavecilla franchise which stated: in lieu of any and all taxes of any kind, nature or
description levied, established ot collected by any authority whatsoever, municipal, provincial or
national, from which the grantee is hereby expressly exempted. The interpretation of the
franchise granted to Smart is that it refers only to national and not to local taxes.
3. Smart also claims that the clause in lieu of all taxes is in the nature of a tax exclusion and
not a tax exemption. The distinction between the two:
Tax Exemption- This means that the taxpayer does not pay any tax at all. An exemption is an
immunity or privilege, it is the freedom from a charge or burden to which others are subjected.
Tax Exclusion- The removal of otherwise taxable items from the reach of taxation e.g exclusions
from gross income and allowable deductions. An exclusion is also an immunity or privilege
which frees a taxpayer from a charge to which others are subjected. The rule that a tax
exemption should be applied strictly against the taxpayer and liberally in favor of the
government applies equally to tax exclusion.
Smart pays VAT, income tax and real property tax. Thus, what it enjoys it more accurately a tax
4. Smart posits that the franchise of GLOBE contains a provision exempting it from municipal
or local franchise tax, and that Smart should like benefit by these. In granting the franchise of
GLOBE under RA No. 7925, Congress did not intend it to operate as a blanket tax exemption to
all telecommunications entities. GLOBE pays only 1.5% of its gross receipts in lieu of any and
all taxes of any kind, nature or description levies, established or collected by any authority
whatsoever, municipal, provincial or national. This grant to GLOBE is clear and categorical. No
such provision is found in the franchise of Smart, the kind of tax from which it is exempted is not
clearly specified.
5. If the contention of Smart is to be followed. The Government will be burdened of having to
keep track of all granted telecommunications franchises, lest some companies be treated

unequally. It is different if Congress enacts a law specifically granting uniform advantages,

favor, privilege, exemption or immunity to all telecommunication entities.
6. Smart likewise claims a violation of the non-impairment clause since the franchise is in the
nature of the contract between the government and Smart. Smarts franchise was granted with
the express condition that it is subject to amendment, alteration or repeal. As held in Tolentino
vs. Secretary of Finance:
Existing laws are read into contracts in order to fix obligations as between parties, the
reservation of essential attributes of sovereign power is also read into contracts as a basic
postulate of the legal order. The policy of protecting contracts against impairment presupposes
the maintenance of a government which retains adequate authority to secure the peace and good
order of society.
In truth, the Contract Clause was never been though as a limitation on the exercise of the
States power of taxation save only where a tax exemption has been granted for a valid
consideration xxx.
Dispositive: Wherefore, the instant petition is denied for lack of merit. Costs against petitioner.