Commissioner of Internal Revenue vs.

Central Luzon Drug Corporation

G.R. No. 159647 April 15, 2005

FACTS:
Respondent is a domestic corporation primarily engaged in retailing of medicines and
other pharmaceutical products. In 1996, it operated six (6) drugstores under the
business name and style Mercury Drug.
From January to December 1996, respondent granted 20% sales discount to qualified
senior citizens on their purchases of medicines pursuant to RA 7432. For the said
period, the amount allegedly representing the 20% sales discount totaled
P904,769.00.
Respondent filed its Annual Income Tax Return for taxable year 1996 declaring
therein that it incurred net losses from its operations.
Respondent filed with petitioner a claim for tax refund/credit in the amount of
P904,769.00 allegedly arising from the 20% sales discount granted by respondent to
qualified senior citizens in compliance with RA 7432. Unable to obtain affirmative
response from petitioner, respondent elevated its claim to the CTA via a Petition for
Review.
The CTA then dismissed respondents Petition for lack of merit. In a subsequent MR,
the CTA ordered petitioner to issue a Tax Credit Certificate in favor of respondent.
On appeal, the CA affirmed the CTA ordering petitioner to issue a tax credit
certificate in favor of respondent in the reduced amount of P903,038.39. Hence, this
petition.

ISSUE:
Whether or not the CA erred in holding that respondent may claim the 20% sales discount as a
tax credit instead of as a deduction from gross income or gross sales

HELD:

No. RA 7432 specifically allows private establishments to claim as tax credit the amount
of discounts they grant. In turn, the Implementing Rules and Regulations, issued pursuant
thereto, provide the procedures for its availment. To deny such credit, despite the plain mandate
of the law and the regulations carrying out that mandate, is indefensible. Furthermore, Congress
has allowed all private establishments a simple tax credit, not a deduction. In fact, no cash outlay
is required from the government for the availment or use of such credit. The deliberations of the
Bicameral Conference Committee Meeting on Social Justice, which finalized RA 7432, disclose
the true intent of our legislators to treat the sales discounts as a tax credit, rather than as a
deduction from gross income.

Moreover, RA 7432 is an earlier law not expressly repealed by, and therefore remains an
exception to, the Tax Code. When the former states that a tax credit may be claimed, then the
requirement of prior tax payments under certain provisions of the latter, cannot be made to apply.
Neither can the instances of or references to a tax deduction under the Tax Code be made to
restrict RA 7432.
 Tax Credit vs. Tax Deduction

Although the term is not specifically defined in our Tax Code, tax credit generally refers to an
amount that is subtracted directly from ones total tax liability. It is an allowance against the tax
itself or a deduction from what is owed by a taxpayer to the government. Examples of tax credits
are withheld taxes, payments of estimated tax, and investment tax credits.

On the other hand, tax deduction is defined as a subtraction from income for tax purposes, or an
amount that is allowed by law to reduce income prior to [the] application of the tax rate to
compute the amount of tax which is due. An example of a tax deduction is any of the allowable
deductions enumerated in Section 34 of the Tax Code.

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due,
including -- whenever applicable -- the income tax that is determined after applying the
corresponding tax rates to taxable income. A tax deduction, on the other, reduces the income that
is subject to tax in order to arrive at taxable income. To think of the former as the latter is to
avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been computed;
a tax deduction, before.
 COMMISSIONER OF INTERNAL REVENUE vs. CENTRAL LUZON DRUG
CORPORATION

G.R. No. 148512 June 26, 2006

FACTS:
Central Luzon Drug Corporation has been a retailer of medicines and other pharmaceutical
products. It opened 3 drugstores as a franchisee under the business name and style of
"Mercury Drug."
For the period January 1995 to December 1995, in conformity to Sec. 4(a) of R.A. No. 7432,
petitioner granted a 20% discount on the sale of medicines to qualified senior citizens
amounting to P219,778
Pursuant to Revenue Regulations No. 2-94 implementing R.A. No. 7432, which states that
the discount given to senior citizens shall be deducted by the establishment from its gross
sales for value-added tax and other percentage tax purposes, respondent deducted the total
amount of P219,778 from its gross income for the taxable year 1995. For said taxable period,
respondent reported a net loss of P20,963 in its corporate income tax return. As a
consequence, respondent did not pay income tax for 1995.
Subsequently, on December 27, 1996, claiming that according to Sec. 4(a) of R.A. No. 7432,
the amount of P219,778 should be applied as a tax credit, respondent filed a claim for refund
in the amount of P150,193
Since the Commissioner of Internal Revenue "was not able to decide the claim for refund on
time," respondent filed a Petition for Review with the CTA which dismissed the petition.
On a Petition for Review, the CA granted petitioners claim for tax credit. Hence, this petition

ISSUE: Whether or not the 20% sales discount granted by respondent to qualified senior citizens
is a tax credit or a deduction from gross sales

HELD:
It is a tax credit. The above provision explicitly employed the word "tax credit." Nothing
in the provision suggests for it to mean a "deduction" from gross sales. To construe it otherwise
would be a departure from the clear mandate of the law.

Thus, the 20% discount required by the Act to be given to senior citizens is a tax credit,
not a deduction from the gross sales of the establishment concerned. As a corollary to this, the
definition of tax credit found in Section 2(1) of Revenue Regulations No. 2-94 is erroneous as it
refers to tax credit as the amount representing the 20% discount that "shall be deducted by the
said establishment from their gross sales for value added tax and other percentage tax purposes."
This definition is contrary to what our lawmakers had envisioned with regard to the treatment of
the discount granted to senior citizens.

Accordingly, when the law says that the cost of the discount may be claimed as a tax
credit, it means that the amount -- when claimed shall be treated as a reduction from any tax
liability. The law cannot be amended by a mere regulation. The administrative agencies issuing
these regulations may not enlarge, alter or restrict the provisions of the law they administer. In
fact, a regulation that "operates to create a rule out of harmony with the statute is a mere nullity."