Law on Taxation

I. General Principles
A. Definition, Concept and Purpose of Taxation
1. Definition. Taxation is the process or means by which the sovereign, through its
lawmaking body, raises income to defray the necessary expenses of the
government.
2. Purposes. (Primary purpose) To provide funds or property with which to
promote the general welfare and protection of its citizens and to enable it to
finance its multifarious activities. (Secondary purposes) a. To strengthen anemic
enterprises by giving tax exemptions; b. to protect local industries against
foreign competition through imposition of high customs duties on imported
goods; c. To reduce inequalities in wealth and income by imposing progressively
higher tax rates; and; d. To prevent inflation by increasing taxes or ward off
depression by decreasing them.
3. Concept.
B. Nature and Characteristics of Taxation
1. It is inherent in sovereignty. The power of taxation may be exercised by the
State although not expressly granted by the constitution
2. Legislative in character. It is only the legislature that can enact tax laws
3. Subject to Constitutional and Inherent limitations. Taxation is not an absolute
power that can be exercised by the legislature anyway it pleases.
C. Power of Taxation as distinguished from Police Power and Power of Eminent Domain
D. Theory and Basis of Taxation
1. Theory. The existence of the government is a necessity, that it cannot continue
without means to pay its expenses; and that it has the right to compel all its
citizens and property within its limits to contribute.
2. Basis. Reciprocal duties of protection and support between the State and its
inhabitants. The State receives taxes that it may be enabled to carry out its
mandates into effect, and perform functions of government and the citizens pay
the portion of the taxes demanded in order that he may, by means thereof, be
secured in the enjoyment of the benefits of an organized society. This is
otherwise known as “benefit-received principle”. (Symbiotic relationship)
(presumption that taxpayers receive such benefit even in unequal proportions
for uniformity in this respect is impossible of attainment)
E. (Basic) Principles of a Sound Tax System
1. Fiscal Adequacy. The sources of revenue should be sufficient to meet the
demands of public expenditures. This can be obtained by creating new taxes or
new tax machinery, or by merely changing the rates applicable to existing taxes
so that the revenue would substantially respond to the expanding needs of
public expenditures.
 2. Equality or Theoretical Justice. The tax burden should be proportionate to the
taxpayer’s ability to pay (Ability-to-Pay Principle)
3. Administrative Feasibility. The tax laws should be capable of convenient, just,
and effective administration
a) Each tax should be clear and plain to the taxpayer, capable of uniform
enforcement by government officials, convenient as to time, place, and
manner of payment, and not unduly burdensome upon, or discouraging
to business activity.
F. Scope and Limitations of Taxation
1. Scope of taxation. The power of taxation is unlimited, comprehensive, plenary
and supreme (CUPS), the principal check upon its abuse resting in the
responsibility of the members of the legislature to their constituents. The
legislature is free to select the subjects and objects to be taxed
2. Limitation of Taxation.
a) Constitutional Limitations. Those found in the constitution or implied
from its provisions
i. Due Process. No person shall be deprived of life, liberty or
property without due process of law, now shall any person be
denied the equal protect6ion of the law (Sec 1, Art. III)
ii. Equal Protection of the laws. (Sec 1, Art. III). “No person or class
of persons shall be deprived of the same protection of laws
enjoyed by other persons or other classes in the same place and
in like circumstances”
iii. Rule in uniformity and equity in taxation. The rule in taxation
shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation (Sec. 28(1), Art. VI). By
Uniformity of taxation, it means that all the taxable persons or
property of the same class shall be taxed at the uniform or same
rate. There is uniformity of taxation when the tax operates with
the same force and effect on this subject wherever found
iv. Non-imprisonment for non-payment of poll tax. No person shall
be imprisoned for non-payment of poll tax (Sec. 20 Art. III)
v. Non-impairment of the obligations of contracts. No law
impairing the obligations of contracts shall be passed (Sec 10,
Art. III). There is “impairment” when a law substantially
invalidates, releases, or extinguishes the obligations of a
contract, or that derogates substantial contractual rights. Also,
the obligation of contract is impaired when its terms or
conditions are changed by law or by treaty without the consent
of the other, thereby weakening the position of the latter. A
gratuitous grant of tax exemption by the government will not
result in such impairment upon the subsequent revocation of
 the exemption. There must be a material consideration received
by the government as a result of the tax exemption to be
covered within the purview of a contract protected by the non-
impairment clause.
vi. Non-infringement of religious freedom. No law shall be made
respecting the establishment of religion, or prohibiting the free
exercise thereof. The free exercise of religious profession and
worship, without discrimination or preference, shall forever be
allowed. No religious test shall be required for the exercise of
civil or political rights (Sec 5, Art III) (rights: free exercise and
enjoyment of religious freedom and worship; rights and
dissemination of religious beliefs)
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