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G.R. No.

149110 April 9, 2003

NATIONAL POWER CORPORATION, petitioner,


vs.
CITY OF CABANATUAN, respondent.

PUNO, J.:

This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated March 12, 2001 and
July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable to pay franchise tax to
respondent City of Cabanatuan.

Petitioner is a government-owned and controlled corporation created under Commonwealth Act No. 120, as
amended.4 It is tasked to undertake the "development of hydroelectric generations of power and the production of
electricity from nuclear, geothermal and other sources, as well as, the transmission of electric power on a nationwide
basis."5 Concomitant to its mandated duty, petitioner has, among others, the power to construct, operate and
maintain power plants, auxiliary plants, power stations and substations for the purpose of developing hydraulic
power and supplying such power to the inhabitants.6

For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a gross income of
P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the respondent assessed the petitioner a
franchise tax amounting to P808,606.41, representing 75% of 1% of the latter's gross receipts for the preceding
year.9

Petitioner, whose capital stock was subscribed and paid wholly by the Philippine Government, 10 refused to pay the
tax assessment. It argued that the respondent has no authority to impose tax on government entities. Petitioner also
contended that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or
fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:

"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and
Other Charges by Government and Governmental Instrumentalities.- The Corporation shall be non-profit
and shall devote all its return from its capital investment, as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby
exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies and instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines,
its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum
products used by the Corporation in the generation, transmission, utilization, and sale of electric power." 12

The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that petitioner pay
the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and 2% monthly
interest.13Respondent alleged that petitioner's exemption from local taxes has been repealed by section 193 of Rep.
Act No. 7160,14 which reads as follows:

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government owned or controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code."

On January 25, 1996, the trial court issued an Order 15 dismissing the case. It ruled that the tax exemption privileges
granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the following reasons: (1) Rep. Act No.
6395 is a particular law and it may not be repealed by Rep. Act No. 7160 which is a general law; (2) section 193 of
Rep. Act No. 7160 is in the nature of an implied repeal which is not favored; and (3) local governments have no
power to tax instrumentalities of the national government. Pertinent portion of the Order reads:

"The question of whether a particular law has been repealed or not by a subsequent law is a matter of
legislative intent. The lawmakers may expressly repeal a law by incorporating therein repealing provisions
which expressly and specifically cite(s) the particular law or laws, and portions thereof, that are intended to
be repealed. A declaration in a statute, usually in its repealing clause, that a particular and specific law,
identified by its number or title is repealed is an express repeal; all others are implied repeal. Sec. 193 of
R.A. No. 7160 is an implied repealing clause because it fails to identify the act or acts that are intended to
be repealed. It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored. The presumption is against inconsistency and repugnancy for the legislative is presumed to know
the existing laws on the subject and not to have enacted inconsistent or conflicting statutes. It is also a well-
settled rule that, generally, general law does not repeal a special law unless it clearly appears that the
legislative has intended by the latter general act to modify or repeal the earlier special law. Thus, despite
the passage of R.A. No. 7160 from which the questioned Ordinance No. 165-92 was based, the tax
exemption privileges of defendant NPC remain.

Another point going against plaintiff in this case is the ruling of the Supreme Court in the case of Basco vs.
Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held that:

'Local governments have no power to tax instrumentalities of the National Government. PAGCOR
is a government owned or controlled corporation with an original charter, PD 1869. All of its
shares of stocks are owned by the National Government. xxx Being an instrumentality of the
government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation
might be burdened, impeded or subjected to control by mere local government.'

Like PAGCOR, NPC, being a government owned and controlled corporation with an original charter and
its shares of stocks owned by the National Government, is beyond the taxing power of the Local
Government. Corollary to this, it should be noted here that in the NPC Charter's declaration of Policy,
Congress declared that: 'xxx (2) the total electrification of the Philippines through the development of
power from all services to meet the needs of industrial development and dispersal and needs of rural
electrification are primary objectives of the nations which shall be pursued coordinately and supported by
all instrumentalities and agencies of the government, including its financial institutions.' (underscoring
supplied). To allow plaintiff to subject defendant to its tax-ordinance would be to impede the avowed goal
of this government instrumentality.

Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is limited to that
which is provided for in its charter or other statute. Any grant of taxing power is to be construed strictly,
with doubts resolved against its existence.

From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff could not
impose the subject tax on the defendant." 16
On appeal, the Court of Appeals reversed the trial court's Order 17 on the ground that section 193, in relation to
sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the petitioner. 18 It ordered the
petitioner to pay the respondent city government the following: (a) the sum of P808,606.41 representing the
franchise tax due based on gross receipts for the year 1992, (b) the tax due every year thereafter based in the gross
receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax due and unpaid, and (d) the sum of P
10,000.00 as litigation expense.19

On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision. This was
denied by the appellate court, viz:

"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated therein that the
taxing power of the province under Art. 137 (sic) of the Local Government Code refers merely to private
persons or corporations in which category it (NPC) does not belong, and that the LGC (RA 7160) which is
a general law may not impliedly repeal the NPC Charter which is a special law—finds the answer in
Section 193 of the LGC to the effect that 'tax exemptions or incentives granted to, or presently enjoyed by
all persons, whether natural or juridical, including government-owned or controlled corporations except
local water districts xxx are hereby withdrawn.' The repeal is direct and unequivocal, not implied.

IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.

SO ORDERED."20

In this petition for review, petitioner raises the following issues:

"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-
PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER
THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131
APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE.

B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION FROM
ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL
GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A
GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.

C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE


OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL
GOVERNMENT CODE."21

It is beyond dispute that the respondent city government has the authority to issue Ordinance No. 165-92 and impose
an annual tax on "businesses enjoying a franchise," pursuant to section 151 in relation to section 137 of the
LGC, viz:

"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%)
of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction.

In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of
the capital investment. In the succeeding calendar year, regardless of when the business started to operate,
the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as
provided herein." (emphasis supplied)

x x x
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may levy the taxes,
fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees
and charges levied and collected by highly urbanized and independent component cities shall accrue to
them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes."

Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city government. It
contends that sections 137 and 151 of the LGC in relation to section 131, limit the taxing power of the respondent
city government to private entities that are engaged in trade or occupation for profit. 22

Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest which is
conferred upon private persons or corporations, under such terms and conditions as the government and its political
subdivisions may impose in the interest of the public welfare, security and safety." From the phraseology of this
provision, the petitioner claims that the word "private" modifies the terms "persons" and "corporations." Hence,
when the LGC uses the term "franchise," petitioner submits that it should refer specifically to franchises granted to
private natural persons and to private corporations.23 Ergo, its charter should not be considered a "franchise" for the
purpose of imposing the franchise tax in question.

On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity regularly engaged
in as means of livelihood or with a view to profit." Petitioner claims that it is not engaged in an activity for profit, in
as much as its charter specifically provides that it is a "non-profit organization." In any case, petitioner argues that
the accumulation of profit is merely incidental to its operation; all these profits are required by law to be channeled
for expansion and improvement of its facilities and services. 24

Petitioner also alleges that it is an instrumentality of the National Government,25 and as such, may not be taxed by
the respondent city government. It cites the doctrine in Basco vs. Philippine Amusement and Gaming
Corporation26where this Court held that local governments have no power to tax instrumentalities of the National
Government, viz:

"Local governments have no power to tax instrumentalities of the National Government.

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is governmental, which
places it in the category of an agency or instrumentality of the Government. Being an instrumentality of the
Government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might
be burdened, impeded or subjected to control by a mere local government.

'The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)'

This doctrine emanates from the 'supremacy' of the National Government over local governments.

'Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power
on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision
can regulate a federal instrumentality in such a way as to prevent it from consummating its
federal responsibilities, or even seriously burden it from accomplishment of them.'
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activities or enterprise using the power to tax as ' a tool
regulation' (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which has
the inherent power to wield it." 27

Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of government-owned or
controlled corporations, is in the nature of an implied repeal. A special law, its charter cannot be amended or
modified impliedly by the local government code which is a general law. Consequently, petitioner claims that its
exemption from all taxes, fees or charges under its charter subsists despite the passage of the LGC, viz:

"It is a well-settled rule of statutory construction that repeals of statutes by implication are not favored and
as much as possible, effect must be given to all enactments of the legislature. Moreover, it has to be
conceded that the charter of the NPC constitutes a special law. Republic Act No. 7160, is a general law. It
is a basic rule in statutory construction that the enactment of a later legislation which is a general law
cannot be construed to have repealed a special law. Where there is a conflict between a general law and a
special statute, the special statute should prevail since it evinces the legislative intent more clearly than the
general statute."28

Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should prevail over
the LGC. It alleges that the power of the local government to impose franchise tax is subordinate to petitioner's
exemption from taxation; "police power being the most pervasive, the least limitable and most demanding of all
powers, including the power of taxation." 29

The petition is without merit.

Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist nor endure. A
principal attribute of sovereignty,31 the exercise of taxing power derives its source from the very existence of the
state whose social contract with its citizens obliges it to promote public interest and common good. The theory
behind the exercise of the power to tax emanates from necessity;32 without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people.

In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has
become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection
of local industries as well as public welfare and similar objectives. 33 Taxation assumes even greater significance
with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on
Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges 34 pursuant to
Article X, section 5 of the 1987 Constitution, viz:

"Section 5.- Each Local Government unit shall have the power to create its own sources of revenue, to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent
with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the Local
Governments."

This paradigm shift results from the realization that genuine development can be achieved only by strengthening
local autonomy and promoting decentralization of governance. For a long time, the country's highly centralized
government structure has bred a culture of dependence among local government leaders upon the national
leadership. It has also "dampened the spirit of initiative, innovation and imaginative resilience in matters of local
development on the part of local government leaders." 35 The only way to shatter this culture of dependence is to give
the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own
sources for the purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to
enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and
limitations to this grant of taxing powers, viz:

"Section 3. The Congress shall enact a local government code which shall provide for a more responsive
and accountable local government structure instituted through a system of decentralization with effective
mechanisms of recall, initiative, and referendum, allocate among the different local government units their
powers, responsibilities, and resources, and provide for the qualifications, election, appointment and
removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to
the organization and operation of the local units."

To recall, prior to the enactment of the Rep. Act No. 7160, 36 also known as the Local Government Code of 1991
(LGC), various measures have been enacted to promote local autonomy. These include the Barrio Charter of
1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of 196739 and the Local Government Code of
1983.40 Despite these initiatives, however, the shackles of dependence on the national government remained. Local
government units were faced with the same problems that hamper their capabilities to participate effectively in the
national development efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external
sources of income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence on
external sources of income, and (e) limited supervisory control over personnel of national line agencies. 41

Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively deals with the
fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by previous
laws such as the imposition of taxes on forest products, forest concessionaires, mineral products, mining operations,
and the like. The LGC likewise provides enough flexibility to impose tax rates in accordance with their needs and
capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates
and leaves the determination of the actual rates to the respective sanggunian.43

One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and
agencies of the national government from the coverage of local taxation. Although as a general rule, LGUs cannot
impose taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, this rule
now admits an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or
charges on the aforementioned entities, viz:

"Section 133. Common Limitations on the Taxing Powers of the Local Government Units.- Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:

x x x

(o) Taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, and
local government units." (emphasis supplied)

In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement and Gaming
Corporation44 relied upon by the petitioner to support its claim no longer applies. To emphasize, the Basco case was
decided prior to the effectivity of the LGC, when no law empowering the local government units to tax
instrumentalities of the National Government was in effect. However, as this Court ruled in the case of Mactan Cebu
International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents Congress from decreeing that even
instrumentalities or agencies of the government performing governmental functions may be subject to tax. 46 In
enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees
fit. Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an
instrumentality of the national government, was subject to real property tax, viz:

"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as laid
down in section 133, the taxing power of local governments cannot extend to the levy of inter alia, 'taxes,
fees and charges of any kind on the national government, its agencies and instrumentalities, and local
government units'; however, pursuant to section 232, provinces, cities and municipalities in the
Metropolitan Manila Area may impose the real property tax except on, inter alia, 'real property owned by
the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof
has been granted for consideration or otherwise, to a taxable person as provided in the item (a) of the first
paragraph of section 12.'"47

In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the respondent city
government to impose on the petitioner the franchise tax in question.

In its general signification, a franchise is a privilege conferred by government authority, which does not belong to
citizens of the country generally as a matter of common right.48 In its specific sense, a franchise may refer to a
general or primary franchise, or to a special or secondary franchise. The former relates to the right to exist as a
corporation, by virtue of duly approved articles of incorporation, or a charter pursuant to a special law creating the
corporation.49 The right under a primary or general franchise is vested in the individuals who compose the
corporation and not in the corporation itself.50 On the other hand, the latter refers to the right or privileges conferred
upon an existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect poles or
string wires.51 The rights under a secondary or special franchise are vested in the corporation and may ordinarily be
conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such
special or secondary franchises as are charged with a public use. 52

In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or special
franchise. This is to avoid any confusion when the word franchise is used in the context of taxation. As commonly
used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising corporate franchises
granted by the state."53 It is not levied on the corporation simply for existing as a corporation, upon its property 54 or
its income,55 but on its exercise of the rights or privileges granted to it by the government. Hence, a corporation need
not pay franchise tax from the time it ceased to do business and exercise its franchise. 56 It is within this context that
the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be interpreted and understood.
Verily, to determine whether the petitioner is covered by the franchise tax in question, the following requisites
should concur: (1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and (2) that it is
exercising its rights or privileges under this franchise within the territory of the respondent city government.

Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395, constitutes
petitioner's primary and secondary franchises. It serves as the petitioner's charter, defining its composition,
capitalization, the appointment and the specific duties of its corporate officers, and its corporate life span. 57 As its
secondary franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following powers which are
not available to ordinary corporations, viz:

"x x x

(e) To conduct investigations and surveys for the development of water power in any part of the
Philippines;

(f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines, for the
purposes specified in this Act; to intercept and divert the flow of waters from lands of riparian owners and
from persons owning or interested in waters which are or may be necessary for said purposes, upon
payment of just compensation therefor; to alter, straighten, obstruct or increase the flow of water in streams
or water channels intersecting or connecting therewith or contiguous to its works or any part thereof:
Provided, That just compensation shall be paid to any person or persons whose property is, directly or
indirectly, adversely affected or damaged thereby;

(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes, mains,
transmission lines, power stations and substations, and other works for the purpose of developing hydraulic
power from any river, creek, lake, spring and waterfall in the Philippines and supplying such power to the
inhabitants thereof; to acquire, construct, install, maintain, operate, and improve gas, oil, or steam engines,
and/or other prime movers, generators and machinery in plants and/or auxiliary plants for the production of
electric power; to establish, develop, operate, maintain and administer power and lighting systems for the
transmission and utilization of its power generation; to sell electric power in bulk to (1) industrial
enterprises, (2) city, municipal or provincial systems and other government institutions, (3) electric
cooperatives, (4) franchise holders, and (5) real estate subdivisions x x x;

(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise dispose of
property incident to, or necessary, convenient or proper to carry out the purposes for which the Corporation
was created: Provided, That in case a right of way is necessary for its transmission lines, easement of right
of way shall only be sought: Provided, however, That in case the property itself shall be acquired by
purchase, the cost thereof shall be the fair market value at the time of the taking of such property;

(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume, street, avenue,
highway or railway of private and public ownership, as the location of said works may require xxx;

(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided by law for
instituting condemnation proceedings by the national, provincial and municipal governments;

x x x

(m) To cooperate with, and to coordinate its operations with those of the National Electrification
Administration and public service entities;

(n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs of plants
and/or projects constructed or proposed to be constructed by the Corporation. Upon determination by the
Corporation of the areas required for watersheds for a specific project, the Bureau of Forestry, the
Reforestation Administration and the Bureau of Lands shall, upon written advice by the Corporation,
forthwith surrender jurisdiction to the Corporation of all areas embraced within the watersheds, subject to
existing private rights, the needs of waterworks systems, and the requirements of domestic water supply;

(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures to prevent
environmental pollution and promote the conservation, development and maximum utilization of natural
resources xxx "58

With these powers, petitioner eventually had the monopoly in the generation and distribution of electricity. This
monopoly was strengthened with the issuance of Pres. Decree No. 40, 59 nationalizing the electric power industry.
Although Exec. Order No. 21560 thereafter allowed private sector participation in the generation of electricity, the
transmission of electricity remains the monopoly of the petitioner.

Petitioner also fulfills the second requisite. It is operating within the respondent city government's territorial
jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as amended. From its operations in
the City of Cabanatuan, petitioner realized a gross income of P107,814,187.96 in 1992. Fulfilling both requisites,
petitioner is, and ought to be, subject of the franchise tax in question.

Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because its stocks are
wholly owned by the National Government, and its charter characterized it as a "non-profit" organization.

These contentions must necessarily fail.

To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege
to do business. The taxable entity is the corporation which exercises the franchise, and not the individual
stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National
Government. It can sue and be sued under its own name,61 and can exercise all the powers of a corporation under the
Corporation Code.62

To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that
petitioner is not engaged in business. Section 2 of Pres. Decree No. 2029 63 classifies government-owned or
controlled corporations (GOCCs) into those performing governmental functions and those performing proprietary
functions, viz:

"A government-owned or controlled corporation is a stock or a non-stock corporation, whether performing


governmental or proprietary functions, which is directly chartered by special law or if organized under the
general corporation law is owned or controlled by the government directly, or indirectly through a parent
corporation or subsidiary corporation, to the extent of at least a majority of its outstanding voting capital
stock x x x." (emphases supplied)

Governmental functions are those pertaining to the administration of government, and as such, are treated as
absolute obligation on the part of the state to perform while proprietary functions are those that are undertaken only
by way of advancing the general interest of society, and are merely optional on the government. 64 Included in the
class of GOCCs performing proprietary functions are "business-like" entities such as the National Steel Corporation
(NSC), the National Development Corporation (NDC), the Social Security System (SSS), the Government Service
Insurance System (GSIS), and the National Water Sewerage Authority (NAWASA), 65 among others.

Petitioner was created to "undertake the development of hydroelectric generation of power and the production of
electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide
basis."66 Pursuant to this mandate, petitioner generates power and sells electricity in bulk. Certainly, these activities
do not partake of the sovereign functions of the government. They are purely private and commercial undertakings,
albeit imbued with public interest. The public interest involved in its activities, however, does not distract from the
true nature of the petitioner as a commercial enterprise, in the same league with similar public utilities like telephone
and telegraph companies, railroad companies, water supply and irrigation companies, gas, coal or light companies,
power plants, ice plant among others; all of which are declared by this Court as ministrant or proprietary functions
of government aimed at advancing the general interest of society. 67

A closer reading of its charter reveals that even the legislature treats the character of the petitioner's enterprise as a
"business," although it limits petitioner's profits to twelve percent (12%), viz:68

"(n) When essential to the proper administration of its corporate affairs or necessary for the proper
transaction of its business or to carry out the purposes for which it was organized, to contract indebtedness
and issue bonds subject to approval of the President upon recommendation of the Secretary of Finance;

(o) To exercise such powers and do such things as may be reasonably necessary to carry out the business
and purposes for which it was organized, or which, from time to time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to accomplish the said purpose xxx."(emphases supplied)

It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its electricity
requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on profits. 69 The main
difference is that the petitioner is mandated to devote "all its returns from its capital investment, as well as excess
revenues from its operation, for expansion" 70 while other franchise holders have the option to distribute their profits
to its stockholders by declaring dividends. We do not see why this fact can be a source of difference in tax treatment.
In both instances, the taxable entity is the corporation, which exercises the franchise, and not the individual
stockholders.

We also do not find merit in the petitioner's contention that its tax exemptions under its charter subsist despite the
passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist clearly
and categorically, and supported by clear legal provisions. 71 In the case at bar, the petitioner's sole refuge is section
13 of Rep. Act No. 6395 exempting from, among others, "all income taxes, franchise taxes and realty taxes to be
paid to the National Government, its provinces, cities, municipalities and other government agencies and
instrumentalities." However, section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax
privileges previously enjoyed by private and public corporations. Contrary to the contention of petitioner, section
193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions from local taxes.72 It
reads:

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code." (emphases supplied)

It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence
excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius.73 Not being a local water
district, a cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital or educational
institution, petitioner clearly does not belong to the exception. It is therefore incumbent upon the petitioner to point
to some provisions of the LGC that expressly grant it exemption from local taxes.

But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can impose franchise
tax "notwithstanding any exemption granted by any law or other special law." This particular provision of the LGC
does not admit any exception. In City Government of San Pablo, Laguna v. Reyes,74 MERALCO's exemption from
the payment of franchise taxes was brought as an issue before this Court. The same issue was involved in the
subsequent case of Manila Electric Company v. Province of Laguna.75 Ruling in favor of the local government in
both instances, we ruled that the franchise tax in question is imposable despite any exemption enjoyed by
MERALCO under special laws, viz:

"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to support
their position that MERALCO's tax exemption has been withdrawn. The explicit language of section 137
which authorizes the province to impose franchise tax 'notwithstanding any exemption granted by any law
or other special law' is all-encompassing and clear. The franchise tax is imposable despite any exemption
enjoyed under special laws.

Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless otherwise
provided in this Code, tax exemptions or incentives granted to or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled corporations except (1) local water districts,
(2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit hospitals and educational
institutions, are withdrawn upon the effectivity of this code, the obvious import is to limit the exemptions to
the three enumerated entities. It is a basic precept of statutory construction that the express mention of one
person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius
est exclusio alterius. In the absence of any provision of the Code to the contrary, and we find no other
provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing law was
clearly intended to be withdrawn.

Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local government
unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the
preceding calendar based on the incoming receipts realized within its territorial jurisdiction. The
legislative purpose to withdraw tax privileges enjoyed under existing law or charter is clearly manifested
by the language used on (sic) Sections 137 and 193 categorically withdrawing such exemption subject only
to the exceptions enumerated. Since it would be not only tedious and impractical to attempt to enumerate
all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an
express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could
have been used."76(emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly approved, to grant
tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which imposes an annual
franchise tax "notwithstanding any exemption granted by law or other special law," the respondent city government
clearly did not intend to exempt the petitioner from the coverage thereof.

Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support myriad
activities of the local government units for the delivery of basic services essential to the promotion of the general
welfare and the enhancement of peace, progress, and prosperity of the people. As this Court observed in
the Mactan case, "the original reasons for the withdrawal of tax exemption privileges granted to government-owned
or controlled corporations and all other units of government were that such privilege resulted in serious tax base
erosion and distortions in the tax treatment of similarly situated enterprises." 78 With the added burden of devolution,
it is even more imperative for government entities to share in the requirements of development, fiscal or otherwise,
by paying taxes or other charges due from them.

IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the Court of
Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED.

SO ORDERED.
COMMISSIONER OF INTERNAL G.R. No. 159647
REVENUE,
Petitioner, Present:
Panganiban, J.,
Chairman,
Sandoval-Gutierrez,
- versus - Corona,
Carpio Morales, and
Garcia, JJ
CENTRAL LUZON DRUG Promulgated:
CORPORATION,
Respondent. April 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

he 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax

deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private

T
establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432

unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that withdraw

or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke the law.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the August 29,

2002 Decision[2] and the August 11, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 67439. The

assailed Decision reads as follows:

WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in


toto. No costs.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.


The Facts

The CA narrated the antecedent facts as follows:

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 twenty (20%) percent sales discount to
qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432
and its Implementing Rules and Regulations. For the said period, the amount allegedly representing
the 20% sales discount granted by respondent to qualified senior citizens totaled P904,769.00.

On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring
therein that it incurred net losses from its operations.

On January 16, 1998, 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 [R.A.] 7432. Unable to obtain affirmative response from
petitioner, respondent elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a
Petition for Review.

On February 12, 2001, the Tax Court rendered a Decision[5] dismissing respondents Petition for lack
of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:

x x x, if no tax has been paid to the government, erroneously or illegally, or if no


amount is due and collectible from the taxpayer, tax refund or tax credit is
unavailing. Moreover, whether the recovery of the tax is made by means of a
claim for refund or tax credit, before recovery is allowed[,] it must be first
established that there was an actual collection and receipt by the government of
the tax sought to be recovered. x x x.
xxxxxxxxx

Prescinding from the above, it could logically be deduced that tax credit is
premised on the existence of tax liability on the part of taxpayer. In other words,
if there is no tax liability, tax credit is not available.

Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution, [6] granted
respondents motion for reconsideration and ordered herein petitioner to issue a Tax Credit
Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the CA]
in CA G.R. SP No. 60057 entitled Central [Luzon] Drug Corporation vs. Commissioner of Internal
Revenue promulgated on May 31, 2001, to wit:

However, Sec. 229 clearly does not apply in the instant case because the tax
sought to be refunded or credited by petitioner was not erroneously paid or
illegally collected. We take exception to the CTAs sweeping but unfounded
statement that both tax refund and tax credit are modes of recovering taxes which
are either erroneously or illegally paid to the government. Tax refunds or credits
do not exclusively pertain to illegally collected or erroneously paid taxes as they
may be other circumstances where a refund is warranted. The tax refund provided
under Section 229 deals exclusively with illegally collected or erroneously paid
taxes but there are other possible situations, such as the refund of excess estimated
corporate quarterly income tax paid, or that of excess input tax paid by a VAT-
registered person, or that of excise tax paid on goods locally produced or
manufactured but actually exported. The standards and mechanics for the grant of
a refund or credit under these situations are different from that under Sec. 229.
Sec. 4[.a)] of R.A. 7432, is yet another instance of a tax credit and it does not in
any way refer to illegally collected or erroneously paid taxes, x x x. [7]

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax credit

certificate in favor of respondent in the reduced amount of P903,038.39. It reasoned that Republic Act No. (RA) 7432

required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a tax credit.

Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just compensation for the

taking of private property for public use.

Hence this Petition.[8]

The Issues

Petitioner raises the following issues for our consideration:

Whether the Court of Appeals 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.

Whether the Court of Appeals erred in holding that respondent is entitled to a refund. [9]
These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may still claim the

20 percent sales discount as a tax credit.

The Courts Ruling

The Petition is not meritorious.

Sole Issue:
Claim of 20 Percent Sales Discount
as Tax Credit Despite Net Loss

Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20 percent discount on their purchase

of medicine from any private establishment in the country. [11] The latter may then claim the cost of the discount as

a tax credit.[12] But can such credit be claimed, even though an establishment operates at a loss?

We answer in the affirmative.

Tax Credit versus


Tax Deduction

Although the term is not specifically defined in our Tax Code, [13] tax credit generally refers to an amount that is

subtracted directly from ones total tax liability.[14] It is an allowance against the tax itself[15] or a deduction from what

is owed[16] by a taxpayer to the government. Examples of tax credits are withheld taxes, payments of estimated tax,

and investment tax credits.[17]

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a

subtraction from income for tax purposes,[18] 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. [19] An example of a tax deduction is any of the

allowable deductions enumerated in Section 34[20] 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.[21] A tax

deduction, on the other, reduces the income that is subject to tax[22] in order to arrive at taxable income.[23] 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.

Tax Liability Required


for Tax Credit

Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax creditcan

be applied. Without that liability, any tax credit application will be useless. There will be no reason for deducting the

latter when there is, to begin with, no existing obligation to the government. However, as will be presented shortly,

the existence of a tax credit or its grant by law is not the same as the availment or use of such credit. While the grant

is mandatory, the availment or use is not.

If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will obviously

be no tax liability against which any tax credit can be applied.[24] For the establishment to choose the immediate

availment of a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains that, under

RA 7432, Congress has granted without conditions a tax credit benefit to all covered establishments.

Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability that

calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen, simply
because no reduction of taxes can instantly be effected. By its nature, the tax credit may still be deducted from a future,

not a present, tax liability, without which it does not have any use. In the meantime, it need not move. But it breathes.

Prior Tax Payments Not


Required for Tax Credit

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary,

for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code

is in fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain limitations -- for

estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donors taxes -- again

when paid to a foreign country -- in computing for the donors tax due. The tax credits in both instances allude to the

prior payment of taxes, even if not made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or not subject

to the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax not directly attributable to

either activity. This input tax may either be the VAT on the purchase or importation of goods or services that is merely

due from -- not necessarily paid by -- such VAT-registered person in the course of trade or business; or the transitional

input tax determined in accordance with Section 111(A). The latter type may in fact be an amount equivalent to only

eight percent of the value of a VAT-registered persons beginning inventory of goods, materials and supplies, when

such amount -- as computed -- is higher than the actual VAT paid on the said items.[25] Clearly from this provision,

the tax credit refers to an input tax that is either due only or given a value by mere comparison with the VAT actually

paid -- then later prorated. No tax is actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For the purchase of

primary agricultural products used as inputs -- either in the processing of sardines, mackerel and milk, or in the

manufacture of refined sugar and cooking oil -- and for the contract price of public work contracts entered into with

the government, again, no prior tax payments are needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under Section

112(A), apply for the issuance of a tax credit certificate for the amount of creditable input taxes merely due -- again

not necessarily paid to -- the government and attributable to such sales, to the extent that the input taxes have not been

applied against output taxes.[26] Where a taxpayer

is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the amount of creditable

input taxes due that are not directly and entirely attributable to any one of these transactions shall be proportionately

allocated on the basis of the volume of sales. Indeed, in availing of such tax credit for VAT purposes, this provision -

- as well as the one earlier mentioned -- shows that the prior payment of taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit allowed, even though

no prior tax payments are not required. Specifically, in this provision, the imposition of a final withholding tax rate

on cash and/or property dividends received by a nonresident foreign corporation from a domestic corporation is

subjected to the condition that a foreign tax credit will be given by the domiciliary country in an amount equivalent

to taxes that are merely deemed paid.[27] Although true, this provision actually refers to the tax credit as

a condition only for the imposition of a lower tax rate, not as a deduction from the corresponding tax liability. Besides,

it is not our government but the domiciliary country that credits against the income tax payable to the latter by the

foreign corporation, the tax to be foregone or spared. [28]


In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against the income tax

imposable under Title II, the amount of income taxes merely incurred -- not necessarily paid -- by a domestic

corporation during a taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for such taxes

incurred but not paid, a tax credit may be allowed, subject to the condition precedent that the taxpayer shall simply

give a bond with sureties satisfactory to and approved by petitioner, in such sum as may be required; and further

conditioned upon payment by the taxpayer of any tax found due, upon petitioners redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that grant or

allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income that is taxed in

the state of source is also taxable in the state of residence, but the tax paid in the former is merely allowed as a credit

against the tax levied in the latter.[29] Apparently, payment is made to the state of source, not the state of residence.

No tax, therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To illustrate, the

incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP)

391, include tax credits equivalent to either five percent of the net value earned, or five or ten percent of the net local

content of exports.[30] In order to avail of such credits under the said law and still achieve its objectives, no prior tax

payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the availment of a tax

credit. Thus, the CA correctly held that the availment under RA 7432 did not require prior tax payments by private

establishments concerned.[31] However, we do not agree with its finding[32] that the carry-over of tax credits under the
said special law to succeeding taxable periods, and even their application against internal revenue taxes, did not

necessitate the existence of a tax liability.

The examples above show that a tax liability is certainly important in the availment or use, not the existence or grant,

of a tax credit. Regarding this matter, a private establishment reporting a net loss in its financial statements is no

different from another that presents a net income. Both are entitled to the tax credit provided for under RA 7432, since

the law itself accords that unconditional benefit. However, for the losing establishment to immediately apply such

credit, where no tax is due, will be an improvident usance.

Sections 2.i and 4 of Revenue


Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant.[33] In

turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment.[34] To

deny such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent

discount that shall be deducted by the said establishments from their gross income for income tax purposes and from

their gross sales for value-added tax or other percentage tax purposes.[35] In ordinary business language, the tax

credit represents the amount of such discount. However, the manner by which the discount shall be credited against

taxes has not been clarified by the revenue regulations.

By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or value of

anything.[36] To be more precise, it is in business parlance a deduction or lowering of an amount of money; [37] or a

reduction from the full amount or value of something, especially a price. [38] In business there are many kinds of
discount, the most common of which is that affecting the income statement[39] or financial report upon which

the income tax is based.

Business Discounts
Deducted from Gross Sales

A cash discount, for example, is one granted by business establishments to credit customers for their prompt

payment.[40] It is a reduction in price offered to the purchaser if payment is made within a shorter period of time than

the maximum time specified.[41] Also referred to as a sales discount on the part of the seller and a purchase discount on

the part of the buyer, it may be expressed in such

terms as 5/10, n/30.[42]

A quantity discount, however, is a reduction in price allowed for purchases made in large quantities, justified by

savings in packaging, shipping, and handling.[43] It is also called a volume or bulk discount.[44]

A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by wholesalers to

retailers[45] is known as a trade discount. No entry for it need be made in the manual or computerized books of

accounts, since the purchase or sale is already valued at the net price actually charged the buyer.[46] The purpose for

the discount is to encourage trading or increase sales, and the prices at which the purchased goods may be resold are

also suggested.[47] Even a chain discount -- a series of discounts from one list price -- is recorded at net.[48]

Finally, akin to a trade discount is a functional discount. It is a suppliers price discount given to a purchaser based on

the [latters] role in the [formers] distribution system.[49] This role usually involves warehousing or advertising.

Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally accepted

accounting principles (GAAP) in the country, this type of discount is reflected in the income statement[50] as a line
item deducted -- along with returns, allowances, rebates and other similar expenses -- from gross sales to arrive at net

sales.[51] This type of presentation is resorted to, because the accounts receivable and sales figures that arise

from sales discounts, -- as well as from quantity, volume or bulk discounts -- are recorded in the manual and

computerized books of accounts and reflected in the financial statements at the gross amounts of the invoices.[52] This

manner of recording credit sales -- known as the gross method -- is most widely used, because it is simple, more

convenient to apply than the net method, and produces no material errors over time.[53]

However, under the net method used in recording trade, chain or functional discounts, only the net amounts of the

invoices -- after the discounts have been deducted -- are recorded in the books of accounts[54] and reflected in the

financial statements. A separate line item cannot be shown,[55] because the transactions themselves involving

both accounts receivable and sales have already been entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts whose sum -

- along with sales returns, allowances and cost of goods sold[56] -- is deducted from gross sales to come up with

the gross income, profit or margin[57] derived from business.[58] In another provision therein, sales discounts that are

granted and indicated in the invoices at the time of sale -- and that do not depend upon the happening of any future

event -- may be excluded from the gross sales within the same quarter they were given.[59] While determinative only

of the VAT, the latter provision also appears as a suitable reference point for income tax purposes already embraced

in the former. After all, these two provisions affirm that sales discounts are amounts that are always deductible

from gross sales.

Reason for the Senior Citizen Discount:


The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the private establishments outright deduction of the

discount from the invoice price of the medicine sold to the senior citizen.[60] It is, therefore, expected that for each
retail sale made under this law, the discount period lasts no more than a day, because such discount is given -- and the

net amount thereof collected -- immediately upon perfection of the sale.[61] Although prompt payment is made for an

arms-length transaction by the senior citizen, the real and compelling reason for the private establishment giving the

discount is that the law itself makes it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the above discounts

in particular. Prompt payment is not the reason for (although a necessary consequence of) such grant. To be sure, the

privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit enjoyed by the private establishment

granting the discount. Yet, under the revenue regulations promulgated by our tax authorities, this benefit has been

erroneously likened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a sales discount.

However, to a private establishment, the effect is different from a simple reduction in price that results from such

discount. In other words, the tax credit benefit is not the same as a sales discount. To repeat from our earlier discourse,

this benefit cannot and should not be treated as a tax deduction.

To stress, the effect of a sales discount on the income statement and income tax return of an establishment covered by

RA 7432 is different from that resulting from the availment or use of its tax credit benefit. While the former is a

deduction before, the latter is a deduction after, the income tax is computed. As mentioned earlier, a discount is not

necessarily a sales discount, and a tax credit for a simple discount privilege should not be automatically treated like

a sales discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought

not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible

from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect,

the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering

that the latter has to be deducted from gross sales in order to compute the gross income in the income statement and

cannot be deducted again, even for purposes of computing the income tax.

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, plain and simple. The option to avail of the tax

creditbenefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount -- which is not

even identical to the discount privilege that is granted by law -- does not define it at all and serves no useful purpose.

The definition must, therefore, be stricken down.

Laws Not Amended


by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that operates to create a rule out of

harmony with

the statute is a mere nullity;[62] it cannot prevail.

It is a cardinal rule that courts will and should respect the contemporaneous construction placed upon a statute by the

executive officers whose duty it is to enforce it x x x. [63] In the scheme of judicial tax administration, the need for

certainty and predictability in the implementation of tax laws is crucial. [64] Our tax authorities fill in the details that

Congress may not have the opportunity or competence to provide. [65] The regulations these authorities issue are relied

upon by taxpayers, who are certain that these will be followed by the courts.[66] Courts, however, will not uphold these

authorities interpretations when clearly absurd, erroneous or improper.


In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly

in contrast to what RA 7432 provides. Their interpretation has muddled up the intent of Congress in granting a mere

discount privilege, not a sales discount. The administrative agency issuing these regulations may not enlarge, alter or

restrict the provisions of the law it administers; it cannot engraft additional requirements not contemplated by the

legislature.[67]

In case of conflict, the law must prevail.[68] A regulation adopted pursuant to law is law.[69] Conversely, a regulation

or any portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law. [70]

Availment of Tax
Credit Voluntary

Third, the word may in the text of the statute[71] implies that the

availability of the tax credit benefit is neither unrestricted nor mandatory.[72] There is no absolute right conferred upon

respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever it chooses; neither does it impose

a duty on the part of the government to sit back and allow an important facet of tax collection to be at the sole control

and discretion of the taxpayer. [73] For the tax authorities to compel respondent to deduct the 20 percent discount from

either its gross income or its gross sales[74] is, therefore, not only to make an imposition without basis in law, but also

to blatantly contravene the law itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not imperative. Respondent is

given two options -- either to claim or not to claim the cost of the discounts as a tax credit. In fact, it may even ignore

the credit and simply consider the gesture as an act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax credit can easily be

applied. If there is none, the credit cannot be used and will just have to be carried over and revalidated [75]accordingly.
If, however, the business continues to operate at a loss and no other taxes are due, thus compelling it to close shop,

the credit can never be applied and will be lost altogether.

In other words, it is the existence or the lack of a tax liability that determines whether the cost of the discounts can be

used as a tax credit. RA 7432 does not give respondent the unfettered right to avail itself of the credit whenever it

pleases. Neither does it allow our tax administrators to expand or contract the legislative mandate. The plain meaning

rule or verba legis in statutory construction is thus applicable x x x. Where the words of a statute are clear, plain and

free from ambiguity, it must be given its literal meaning and applied without attempted interpretation.[76]

Tax Credit Benefit


Deemed Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be it stressed

that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private

establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as

their just compensation for private property taken by the State for public use. [77]

The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous

with public interest, public benefit, public welfare, and public convenience.[78] The discount privilege to which our

senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The

discounts given would have entered the coffers and formed part of the gross sales of the private establishments

concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding

to the taking of private property for public use or benefit.


As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This

term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but

also to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance -- when

not done within a reasonable time from the grant of the discounts -- cannot be considered as just compensation. In

effect, respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting

actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction in its revenues. [79]

Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain. [80] Tax

measures are but enforced contributions exacted on pain of penal sanctions[81] and clearly imposed for a public

purpose.[82] In recent years, the power to tax has indeed become a most effective tool to realize social justice, public

welfare, and the equitable distribution of wealth.[83]

While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to trample on the

rights of property owners who under our Constitution and laws are also entitled to protection. The social justice

consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to another who is

not entitled thereto.[84] For this reason, a just compensation for income that is taken away from respondent becomes

necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body

can alter that fact.

To put it differently, a private establishment that merely breaks even[85] -- without the discounts yet -- will surely start

to incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent, and if all

its sales come from retail purchases by senior citizens. Aside from the observation we have already raised earlier, it

will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from either its gross

income or its gross sales. Operating at a loss through no fault of its own, it will realize that the tax creditlimitation
under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better position if they

avail themselves of tax credits denied those that are losing, because no taxes are due from the latter.

Grant of Tax Credit


Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a whole and

to establish a program beneficial to them.[86] These objectives are consonant with the constitutional policy of making

health x x x services available to all the people at affordable cost [87] and of giving priority for the needs of the x x x

elderly.[88] Sections 2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory objectives.

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 on February 5, 1992

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. We quote

from those deliberations as follows:

"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable
income. I think we incorporated there a provision na - on the
responsibility of the private hospitals and drugstores, hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the
deductions from taxable income of that private hospitals, di ba ganon
'yan?

MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public
institutions, so, puwede na po nating hindi isama yung mga less
deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit
natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).

SEN. ANGARA. Hindi pa, hindi pa.


THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that,
the private hospitals can claim the expense as a tax credit.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go
back to Section 4 ha?

REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all
establishments et cetera, et cetera, provided that said establishments -
provided that private establishments may claim the cost as a tax credit.
Ganon ba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A". [89]

Special Law
Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. x x x [T]he rule is that

on a specific matter the special law shall prevail over the general law, which shall
be resorted to only to supply deficiencies in the former.[90] In addition, [w]here there are two statutes, the earlier special

and the later general -- the terms of the general broad enough to include the matter provided for in the special -- the

fact that one is special and the other is general creates a presumption that the special is to be considered as remaining

an exception to the general,[91] one as a general law of the land, the other as the law of a particular case.[92] It is a canon

of statutory construction that a later statute, general in its terms and not expressly repealing a prior special statute,

will ordinarily not affect the special provisions of such earlier statute. [93]

RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the Tax Code -- a later

law. When the former states that a tax credit may be claimed, then the requirement of prior tax payments under certain

provisions of the latter, as discussed above, cannot be made to apply. Neither can the instances of or references to

a tax deduction under the Tax Code[94] be made to restrict RA 7432. No provision of any revenue regulation can

supplant or modify the acts of Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of

Appeals AFFIRMED. No pronouncement as to costs.

SO ORDERED.
ABAKADA GURO PARTY LIST (Formerly G.R. No. 168056
AASJAS) OFFICERS SAMSON S.
ALCANTARA and ED VINCENT S. ALBANO,
Petitioners, Present:

DAVIDE, JR., C.J.,


PUNO,
PANGANIBAN,
QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
- versus - CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO-MORALES,
CALLEJO, SR.,
AZCUNA,
TINGA,
CHICO-NAZARIO, and
GARCIA, JJ.
THE HONORABLE EXECUTIVE SECRETARY
EDUARDO ERMITA; HONORABLE SECRETARY
OF THE DEPARTMENT OF FINANCE CESAR
PURISIMA; and HONORABLE COMMISSIONER
OF INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents.

x-------------------------x

AQUILINO Q. PIMENTEL, JR., LUISA P. G.R. No. 168207


EJERCITO-ESTRADA, JINGGOY E. ESTRADA,
PANFILO M. LACSON, ALFREDO S. LIM, JAMBY
A.S. MADRIGAL, AND SERGIO R. OSMEA III,
Petitioners,

- versus -

EXECUTIVE SECRETARY EDUARDO R.


ERMITA, CESAR V. PURISIMA, SECRETARY OF
FINANCE, GUILLERMO L. PARAYNO, JR.,
COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE,
Respondents.

x-------------------------x

ASSOCIATION OF PILIPINAS SHELL DEALERS, G.R. No. 168461


INC. represented by its President, ROSARIO
ANTONIO; PETRON DEALERS ASSOCIATION
represented by its President, RUTH E. BARBIBI;
ASSOCIATION OF CALTEX DEALERS OF THE
PHILIPPINES represented by its President,
MERCEDITAS A. GARCIA; ROSARIO ANTONIO
doing business under the name and style of ANB
NORTH SHELL SERVICE STATION; LOURDES
MARTINEZ doing business under the name and style
of SHELL GATE N. DOMINGO; BETHZAIDA TAN
doing business under the name and style of
ADVANCE SHELL STATION; REYNALDO P.
MONTOYA doing business under the name and style
of NEW LAMUAN SHELL SERVICE STATION;
EFREN SOTTO doing business under the name and
style of RED FIELD SHELL SERVICE STATION;
DONICA CORPORATION represented by its
President, DESI TOMACRUZ; RUTH E. MARBIBI
doing business under the name and style of R&R
PETRON STATION; PETER M. UNGSON doing
business under the name and style of CLASSIC STAR
GASOLINE SERVICE STATION; MARIAN
SHEILA A. LEE doing business under the name and
style of NTE GASOLINE & SERVICE STATION;
JULIAN CESAR P. POSADAS doing business under
the name and style of STARCARGA ENTERPRISES;
ADORACION MAEBO doing business under the
name and style of CMA MOTORISTS CENTER;
SUSAN M. ENTRATA doing business under the name
and style of LEONAS GASOLINE STATION and
SERVICE CENTER; CARMELITA BALDONADO
doing business under the name and style of FIRST
CHOICE SERVICE CENTER; MERCEDITAS A.
GARCIA doing business under the name and style of
LORPED SERVICE CENTER; RHEAMAR A.
RAMOS doing business under the name and style of
RJRAM PTT GAS STATION; MA. ISABEL
VIOLAGO doing business under the name and style
of VIOLAGO-PTT SERVICE CENTER;
MOTORISTS HEART CORPORATION represented
by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HARVARD
CORPORATION represented by its Vice-President
for Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HERITAGE CORPORATION
represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; PHILIPPINE
STANDARD OIL CORPORATION represented by
its Vice-President for Operations, JOSELITO F.
FLORDELIZA; ROMEO MANUEL doing business
under the name and style of ROMMAN GASOLINE
STATION; ANTHONY ALBERT CRUZ III doing
business under the name and style of TRUE
SERVICE STATION,
Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as Secretary of


the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of
Internal Revenue,
Respondents.
x-------------------------x

FRANCIS JOSEPH G. ESCUDERO, VINCENT G.R. No. 168463


CRISOLOGO, EMMANUEL JOEL J.
VILLANUEVA, RODOLFO G. PLAZA, DARLENE
ANTONINO-CUSTODIO, OSCAR G.
MALAPITAN, BENJAMIN C. AGARAO, JR. JUAN
EDGARDO M. ANGARA, JUSTIN MARC SB.
CHIPECO, FLORENCIO G. NOEL, MUJIV S.
HATAMAN, RENATO B. MAGTUBO, JOSEPH A.
SANTIAGO, TEOFISTO DL. GUINGONA III, RUY
ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and
TEODORO A. CASIO,
Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as Secretary of


Finance, GUILLERMO L. PARAYNO, JR., in his
capacity as Commissioner of Internal Revenue, and
EDUARDO R. ERMITA, in his capacity as Executive
Secretary,
Respondents.

x-------------------------x

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. G.R. No. 168730


Petitioner,

- versus -

HON. EDUARDO R. ERMITA, in his capacity as the


Executive Secretary; HON. MARGARITO TEVES,
in his capacity as Secretary of Finance; HON. JOSE
MARIO BUNAG, in his capacity as the OIC
Commissioner of the Bureau of Internal Revenue; and
HON. ALEXANDER AREVALO, in his capacity as
the OIC Commissioner of the Bureau of Customs,

Promulgated:
Respondents. September 1, 2005

x-----------------------------------------------------------x

DECISION

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest of all, should be borne by
everyone, and the more man enjoys the advantages of society, the more he ought to hold himself
honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased

emoluments for health workers, and wider coverage for full value-added tax benefits these are the reasons why

Republic Act No. 9337 (R.A. No. 9337)[1] was enacted. Reasons, the wisdom of which, the Court even with its
extensive constitutional power of review, cannot probe. The petitioners in these cases, however, question not only the

wisdom of the law, but also perceived constitutional infirmities in its passage.

Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding,

petitioners failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate

Bill No. 1950.

House Bill No. 3555[2] was introduced on first reading on January 7, 2005. The House Committee on Ways

and Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson

introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate enactment.

On January 27, 2005, the House of Representatives approved the bill on second and third reading.

House Bill No. 3705[3] on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F.

Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its mother bill is House Bill No. 3555. The

House Committee on Ways and Means approved the bill on February 2, 2005. The President also certified it as urgent

on February 8, 2005. The House of Representatives approved the bill on second and third reading on February 28,
2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 1950[4] on March 7, 2005,

in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and 3705.
Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both sponsored

by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill on March 11,

2005, and was approved by the Senate on second and third reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a

committee conference on the disagreeing provisions of the proposed bills.


Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill
No. 3705, and Senate Bill No. 1950, after having met and discussed in full free and conference, recommended the

approval of its report, which the Senate did on May 10, 2005, and with the House of Representatives agreeing thereto

the next day, May 11, 2005.

On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the

President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.

July 1, 2005 is the effectivity date of R.A. No. 9337.[5] When said date came, the Court issued a temporary

restraining order, effective immediately and continuing until further orders, enjoining respondents from enforcing and

implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through

Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining order on July 1,

2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a
little background. You know when the law took effect on July 1, 2005,
the Court issued a TRO at about 5 oclock in the afternoon. But before
that, there was a lot of complaints aired on television and on radio. Some
people in a gas station were complaining that the gas prices went up by
10%. Some people were complaining that their electric bill will go up by
10%. Other times people riding in domestic air carrier were complaining
that the prices that theyll have to pay would have to go up by 10%. While
all that was being aired, per your presentation and per our own
understanding of the law, thats not true. Its not true that the e-vat law
necessarily increased prices by 10% uniformly isnt it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the
Petroleum companies some subsidy . . . interrupted

J. PANGANIBAN : Thats correct . . .

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.


J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination
of the Excise Tax and the import duties. That is why, it is not correct to
say that the VAT as to petroleum dealers increased prices by 10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to
cover the E-Vat tax. If you consider the excise tax and the import duties,
the Net Tax would probably be in the neighborhood of 7%? We are not
going into exact figures I am just trying to deliver a point that different
industries, different products, different services are hit differently. So its
not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present
imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales
Tax was also removed as a mitigating measure. So, therefore, there is no
justification to increase the fares by 10% at best 7%, correct?

ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that the people were complaining on that first day,
were being increased arbitrarily by 10%. And thats one reason among
many others this Court had to issue TRO because of the confusion in the
implementation. Thats why we added as an issue in this case, even if its
tangentially taken up by the pleadings of the parties, the confusion in the
implementation of the E-vat. Our people were subjected to the mercy of
that confusion of an across the board increase of 10%, which you
yourself now admit and I think even the Government will admit is
incorrect. In some cases, it should be 3% only, in some cases it should
be 6% depending on these mitigating measures and the location and
situation of each product, of each service, of each company, isnt it?

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the
clarification of all these and we wish the government will take time to
clarify all these by means of a more detailed implementing rules, in case
the law is upheld by this Court. . . .[6]

The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for

prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending

Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10%
VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes
a 10% VAT on sale of services and use or lease of properties. These questioned provisions contain a

uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate
to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 %).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive

authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the

constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on

the ground that it amounts to an undue delegation of legislative power, petitioners also contend that the increase in the

VAT rate to 12% contingent on any of the two conditions being satisfied violates the due process clause embodied in

Article III, Section 1 of the Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1)

the 12% increase is ambiguous because it does not state if the rate would be returned to the original 10% if the

conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of the applicable

VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to be an incentive to the President

to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should only be based on fiscal adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral

Conference Committee is a violation of the no-amendment rule upon last reading of a bill laid down in Article VI,
Section 26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell

Dealers, Inc.,et al., assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable
goods shall be amortized over a 60-month period, if the acquisition, excluding the VAT
components, exceeds One Million Pesos (P1, 000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input
tax to be credited against the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its
political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5%
final withholding tax on gross payments of goods and services, which are subject to 10%
VAT under Sections 106 (sale of goods and properties) and 108 (sale of services and use
or lease of properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and
confiscatory.

Petitioners argument is premised on the constitutional right of non-deprivation 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.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section
28(1) of the Constitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer

the consequences thereof for it wipes out whatever meager margins the petitioners make.

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition

for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in
violation of Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass
on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121,
125,[7] 148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates
Article VI, Section 24(1) of the Constitution, which provides that all appropriation, revenue
or tariff bills shall originate exclusively in the House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20,

2005, alleging unconstitutionality of the law on the ground that the limitation on the creditable input tax in effect

allows VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle that tax

collection and revenue should be solely allocated for public purposes and expenditures. Petitioner Garcia further

claims that allowing these establishments to pass on the tax to the consumers is inequitable, in violation of Article VI,

Section 28(1) of the Constitution.

RESPONDENTS COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily,

respondents contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt

on its validity.

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral

proceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto, have already

been settled. With regard to the issue of undue delegation of legislative power to the President, respondents contend

that the law is complete and leaves no discretion to the President but to increase the rate to 12% once any of the two

conditions provided therein arise.

Respondents also refute petitioners argument that the increase to 12%, as well as the 70% limitation on the

creditable input tax, the 60-month amortization on the purchase or importation of capital goods
exceeding P1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and

confiscatory, and that it violates the constitutional principle on progressive taxation, among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform agenda. A

reform in the value-added system of taxation is the core revenue measure that will tilt the balance towards a sustainable

macroeconomic environment necessary for economic growth.


ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and


b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. 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)

2. 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

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT),

as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or

properties and services.[8] Being an indirect tax on expenditure, the seller of goods or services may pass on the amount

of tax paid to the buyer,[9] with the seller acting merely as a tax collector.[10] The burden of VAT is intended to fall on
the immediate buyers and ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages

in, without transferring the burden to someone else. [11] Examples are individual and corporate income taxes, transfer
taxes, and residence taxes.[12]

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different
mode. Prior to 1978, the system was a single-stage tax computed under the cost deduction method and was payable

only by the original sellers. The single-stage system was subsequently modified, and a mixture of the cost deduction
method and tax credit method was used to determine the value-added tax payable.[13] Under the tax credit method, an

entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs
and imports.[14]

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT
system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the tax credit method. [15]

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, [16] R.A. No. 8241 or the Improved
VAT Law,[17] R.A. No. 8424 or the Tax Reform Act of 1997,[18] and finally, the presently beleaguered R.A. No. 9337,

also referred to by respondents as the VAT Reform Act.

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and


b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded

its authority by:

1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;

2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the
output tax; and

4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes
in addition to the value-added tax.

Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.

It should be borne in mind that 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. [19] 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.

Rule XII, Section 35 of the Rules of the Senate states:

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.

Each Conference Committee Report shall contain a detailed and sufficiently explicit
statement of the changes in, or amendments to the subject measure, and shall be signed by a majority
of the members of each House panel, voting separately.

A comparative presentation of the conflicting House and Senate provisions and a


reconciled version thereof with the explanatory statement of the conference committee shall be
attached to the report.

...

The creation of such conference committee was apparently in response to a problem, not addressed by any

constitutional provision, where the two houses of Congress find themselves in disagreement over changes or

amendments introduced by the other house in a legislative bill. Given that one of the most basic powers of the
legislative branch is to formulate and implement its own rules of proceedings and to 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.

In the recent case of Farias vs. The Executive Secretary,[20] the Court En Banc, unanimously reiterated and
emphasized its adherence to the enrolled bill doctrine, thus, declining therein petitioners plea for the Court to go behind

the enrolled copy of the bill. Assailed in said case was Congresss creation of two sets of bicameral conference

committees, the lack of records of said committees proceedings, the alleged violation of said committees of the rules

of both houses, and the disappearance or deletion of one of the provisions in the compromise bill submitted by the

bicameral conference committee. It was argued that such irregularities in the passage of the law nullified R.A. No.

9006, or the Fair Election Act.

Striking down such argument, the Court held thus:

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. A review of cases reveals the Courts consistent
adherence to the rule. 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. The Court reiterates its ruling in Arroyo vs. De
Venecia, viz.:

But the 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. In Osmea v. Pendatun, it was held: 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. And
it has been said that 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.[21] (Emphasis supplied)
The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities

committed by the conference committee in introducing changes or deleting provisions in the House and Senate bills.
Akin to the Farias case,[22] 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.

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of

Finance,[23] the Court already made the pronouncement that [i]f a change is desired in the practice [of the Bicameral

Conference Committee] it must be sought in Congress since this question is not covered by any constitutional
provision but is only an internal rule of each house. [24] To date, Congress has not seen it fit to make such changes

adverted to by the Court. It seems, therefore, that Congress finds the practices of the bicameral conference committee

to be very useful for purposes of prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral

conference committees, the Court deems it necessary to dwell on the issue. The Court observes that there was a

necessity for a conference committee because a comparison of the provisions of House Bill Nos. 3555 and 3705 on

one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed disagreements. As pointed out in the

petitions, said disagreements were as follows:

House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950

With regard to Stand-By Authority in favor of President

Provides for 12% VAT on Provides for 12% VAT in general Provides for a single rate of 10%
every sale of goods or on sales of goods or properties and VAT on sale of goods or properties
properties (amending Sec. 106 reduced rates for sale of certain (amending Sec. 106 of NIRC), 10%
of NIRC); 12% VAT on locally manufactured goods and VAT on sale of services including
importation of goods petroleum products and raw sale of electricity by generation
(amending Sec. 107 of NIRC); materials to be used in the companies, transmission and
and 12% VAT on sale of manufacture thereof (amending distribution companies, and use or
services and use or lease of Sec. 106 of NIRC); 12% VAT on
properties (amending Sec. 108 importation of goods and reduced lease of properties (amending Sec.
of NIRC) rates for certain imported products 108 of NIRC)
including petroleum products
(amending Sec. 107 of NIRC); and
12% VAT on sale of services and
use or lease of properties and a
reduced rate for certain services
including power generation
(amending Sec. 108 of NIRC)

With regard to the no pass-on provision

No similar provision Provides that the VAT imposed on Provides that the VAT imposed on
power generation and on the sale of sales of electricity by generation
petroleum products shall be companies and services of
absorbed by generation companies transmission companies and
or sellers, respectively, and shall distribution companies, as well as
not be passed on to consumers those of franchise grantees of
electric utilities shall not apply to
residential
end-users. VAT shall be absorbed by
generation, transmission, and
distribution companies.
With regard to 70% limit on input tax credit

Provides that the input tax No similar provision Provides that the input tax credit for
credit for capital goods on capital goods on which a VAT has
which a VAT has been paid been paid shall be equally
shall be equally distributed distributed over 5 years or the
over 5 years or the depreciable depreciable life of such capital
life of such capital goods; the goods; the input tax credit for goods
input tax credit for goods and and services other than capital goods
services other than capital shall not exceed 90% of the output
goods shall not exceed 5% of VAT.
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.

With regard to amendments to be made to NIRC provisions regarding income and excise taxes

No similar provision No similar provision 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. The Bicameral Conference Committee acted on the disagreeing provisions by

making the following changes:

1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference

Committee Report that the Bicameral Conference Committee tried to bridge the gap in the difference between the

10% VAT rate proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed by the

House, by striking a compromise whereby the present 10% VAT rate would be retained until certain conditions

arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of the previous year

exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year exceeds 1%, when

the President, upon recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective

January 1, 2006.

2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission

and distribution companies should not be passed on to consumers or whether both the VAT imposed on electricity

generation, transmission and distribution companies and the VAT imposed on sale of petroleum products may be
passed on to consumers, the Bicameral Conference Committee chose to settle such disagreement by altogether deleting

from its Report any no pass-on provision.


3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral

Conference Committee decided to adopt the position of the House by putting a limitation on the amount of input

tax that may be credited against the output tax, although it crafted its own language as to the amount of the

limitation on input tax credits and the manner of computing the same by providing thus:

(A) Creditable Input Tax. . . .

...

Provided, The input tax on goods purchased or imported in a calendar month for
use in trade or business for which deduction for depreciation is allowed under this
Code, shall be spread evenly over the month of acquisition and the fifty-nine (59)
succeeding months if the aggregate acquisition cost for such goods, excluding the
VAT component thereof, exceeds one million Pesos (P1,000,000.00):
PROVIDED, however, that if the estimated useful life of the capital good is less
than five (5) years, as used for depreciation purposes, then the input VAT shall be
spread over such shorter period: . . .

(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax
exceeds the input tax, the excess shall be paid by the VAT-registered person. If
the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters: PROVIDED that the input tax inclusive of input
VAT carried over from the previous quarter that may be credited in every quarter
shall not exceed seventy percent (70%) of the output VAT: PROVIDED,
HOWEVER, THAT any input tax attributable to zero-rated sales by a VAT-
registered person may at his option be refunded or credited against other internal
revenue taxes, . . .

4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise,

percentage and excise taxes, the conference committee decided to include such amendments and basically adopted the
provisions found in Senate Bill No. 1950, with some changes as to the rate of the tax to be imposed.

Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral

Conference Committee is mandated to settle the differences between the disagreeing provisions in the House bill and

the Senate bill. The term settle is synonymous to reconcile and harmonize. [25] To reconcile or harmonize disagreeing

provisions, the Bicameral Conference Committee may then (a) adopt the specific provisions of either the House bill
or Senate bill, (b) decide that neither provisions in the House bill or the provisions in the Senate bill would

be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing

provisions were meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea or
intent that is wholly foreign to the subject embraced by the original provisions.

The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the
Senate is retained until such time that certain conditions arise when the 12% VAT wanted by the House shall be

imposed, appears to be a compromise to try to bridge the difference in the rate of VAT proposed by the two houses of

Congress. Nevertheless, such compromise is still totally within the subject of what rate of VAT should be imposed on
taxpayers.

The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral

Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained the reason

for deleting the no pass-on provision in this wise:

. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking
that no sector should be a beneficiary of legislative grace, neither should any sector be discriminated
on. The VAT is an indirect tax. It is a pass on-tax. And lets keep it plain and simple. Lets not
confuse the bill and put a no pass-on provision. Two-thirds of the world have a VAT system and in
this two-thirds of the globe, I have yet to see a VAT with a no pass-though provision. So, the thinking
of the Senate is basically simple, lets keep the VAT simple.[26] (Emphasis supplied)

Rep. Teodoro Locsin further made the manifestation that the no pass-on provision never really enjoyed the

support of either House.[27]

With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee

came to a compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the change

introduced by the Bicameral Conference Committee was totally within the intent of both houses to put a cap on input

tax that may be

credited against the output tax. From the inception of the subject revenue bill in the House of Representatives, one of
the major objectives was to plug a glaring loophole in the tax policy and administration by creating vital restrictions

on the claiming of input VAT tax credits . . . and [b]y introducing limitations on the claiming of tax credit, we are

capping a major leakage that has placed our collection efforts at an apparent disadvantage. [28]

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill

No. 1950, since said provisions were among those referred to it, the conference committee had to act on the same and
it basically adopted the version of the Senate.
Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to

subjects of the provisions referred


to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack or

excess of jurisdiction committed by the Bicameral Conference Committee. In the earlier cases of Philippine Judges

Association vs. Prado[29] and Tolentino vs. Secretary of Finance,[30] the Court recognized the long-standing legislative
practice of giving said conference committee ample latitude for compromising differences between the Senate and the

House. Thus, in the Tolentino case, it was held that:

. . . it is within the power of a conference committee to include in its report an entirely new
provision that is not found either in the House bill or in the Senate bill. If the committee can propose
an amendment consisting of one or two provisions, there is no reason why it cannot propose several
provisions, collectively considered as an amendment in the nature of a substitute, so long as such
amendment is germane to the subject of the bills before the committee. After all, its report was not
final but needed the approval of both houses of Congress to become valid as an act of the legislative
department. The charge that in this case the Conference Committee acted as a third legislative
chamber is thus without any basis.[31] (Emphasis supplied)

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution
on the No-Amendment Rule

Article VI, Sec. 26 (2) of the Constitution, states:

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.

Petitioners argument that the practice where a bicameral conference committee is allowed to add or delete

provisions in the House bill and the Senate bill after these had passed three readings is in effect a circumvention of
the no amendment rule (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate from its

ruling in the Tolentino case that:

Nor is there any reason for requiring that the Committees Report in these cases must have
undergone three readings in each of the two houses. If that be the case, there would be no end to
negotiation since each house may seek modification of the compromise bill. . . .

Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced for
the first time in either house of Congress, not to the conference committee report. [32] (Emphasis
supplied)
The Court reiterates here that the no-amendment rule refers only to the procedure to be followed by each

house of Congress with regard to bills initiated in each of said respective houses, before said bill is transmitted
to the other house for its concurrence or amendment. Verily, to construe said provision in a way as to proscribe

any further changes to a bill after one house has voted on it would lead to absurdity as this would mean that the other

house of Congress would be deprived of its constitutional power to amend or introduce changes to said bill. Thus, Art.
VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral Conference

Committee of amendments and modifications to disagreeing provisions in bills that have been acted upon by both

houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on
Exclusive Origination of Revenue Bills

Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate

income taxes and percentage, excise taxes. Petitioners refer to the following provisions, to wit:

Section 27
Rates of Income Tax on Domestic Corporation
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of
Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House.
They aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114 of the

NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the

NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments were not found in the
House bills are not intended to be amended by the House of Representatives. Hence, they argue that since the proposed

amendments did not originate from the House, such amendments are a violation of Article VI, Section 24 of the
Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 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.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the

move for amending provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House

bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to NIRC provisions

on the value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is the introduction by the

Senate of provisions not dealing directly with the value- added tax, which is the only kind of tax being amended in

the House bills, still within the purview of the constitutional provision authorizing the Senate to propose or concur

with amendments to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:

. . . To begin with, it is not the law but the revenue bill which is required by the Constitution
to originate exclusively in the House of Representatives. It is important to emphasize this, because
a bill originating in the House may undergo such extensive changes in the Senate that the result may
be a rewriting of the whole. . . . At this point, what is important to note is that, as a result of the
Senate action, a distinct bill may be produced. To insist that a revenue statute and not only the
bill which initiated the legislative process culminating in the enactment of the law must
substantially be the same as the House bill would be to deny the Senates power not only
to concur with amendments but also to propose amendments. It would be to violate the coequality
of legislative 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.[33] (Emphasis supplied)
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. The Explanatory

Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later substituted by House

Bill No. 3555, stated:

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). (Emphasis supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:

In the budget message of our President in the year 2005, she reiterated that we all
acknowledged that on top of our agenda must be the restoration of the health of our fiscal system.

In order to considerably lower the consolidated public sector deficit and eventually achieve
a balanced budget by the year 2009, we need to seize windows of opportunities which might seem
poignant in the beginning, but in the long run prove effective and beneficial to the overall
status of our economy. One such opportunity is a review of existing tax rates, evaluating the
relevance given our present conditions.[34] (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in

sizeable revenues for the government


to supplement our countrys serious financial problems, and improve tax administration and control of the leakages in

revenues from income taxes and value-added taxes. As these house bills were transmitted to the Senate, the latter,

approaching the measures from the point of national perspective, can introduce amendments within the purposes of
those bills. It can provide for ways that would soften the impact of the VAT measure on the consumer, i.e., by

distributing the burden across all sectors instead of putting it entirely on the shoulders of the consumers. The
sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation were included is worth

quoting:

All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion
in additional revenues annually even while by mitigating prices of power, services and petroleum
products.

However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is
from the VAT on twelve goods and services. The rest of the tab P10.5 billion- will be picked by
corporations.

What we therefore prescribe is a burden sharing between corporate Philippines and the
consumer. Why should the latter bear all the pain? Why should the fiscal salvation be only on the
burden of the consumer?

The corporate worlds equity is in form of the increase in the corporate income tax from 32
to 35 percent, but up to 2008 only. This will raise P10.5 billion a year. After that, the rate will slide
back, not to its old rate of 32 percent, but two notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations, to bear with this
emergency provision that will be in effect for 1,200 days, while we put our fiscal house in order.
This fiscal medicine will have an expiry date.

For their assistance, a reward of tax reduction awaits them. We intend to keep the length
of their sacrifice brief. We would like to assure them that not because there is a light at the end of
the tunnel, this government will keep on making the tunnel long.

The responsibility will not rest solely on the weary shoulders of the small man. Big
business will be there to share the burden.[35]

As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions

in the tax on income of corporations are germane to the purpose of the house bills which is to raise revenues for the

government.

Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms

to the VAT system, as these sections would cushion the effects of VAT on consumers. Considering that certain goods

and services which were subject to percentage tax and excise tax would no longer be VAT-exempt, the consumer

would be burdened more as they would be paying the VAT in addition to these taxes. Thus, there is a need to amend

these sections to soften the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:

However, for power plants that run on oil, we will reduce to zero the present excise tax on
bunker fuel, to lessen the effect of a VAT on this product.

For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a
VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to
destroy the VAT chain, we will however bring down the excise tax on socially sensitive products
such as diesel, bunker, fuel and kerosene.

...

What do all these exercises point to? These are not contortions of giving to the left hand
what was taken from the right. Rather, these sprang from our concern of softening the impact of
VAT, so that the people can cushion the blow of higher prices they will have to pay as a result of
VAT.[36]

The other sections amended by the Senate pertained to matters of tax administration which are necessary for

the implementation of the changes in the VAT system.

To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the

house bills, which is to supplement our countrys fiscal deficit, among others. Thus, the Senate acted within its power

to propose those amendments.

SUBSTANTIVE ISSUES

I.
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)
A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common

that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving the

President the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is met, constitutes

undue delegation of the legislative power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as
follows:

SEC. 106. Value-Added Tax on Sale of Goods or Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected on every
sale, barter or exchange of goods or properties, a value-added tax equivalent to
ten percent (10%) of the gross selling price or gross value in money of the goods
or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor: provided, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%), after any of the following conditions has
been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic


Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year


exceeds one and one-half percent (1 %).

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as
follows:

SEC. 107. Value-Added Tax on Importation of Goods.


(A) In General. There shall be levied, assessed and collected on every importation
of goods a value-added tax equivalent to ten percent (10%) based on the total
value used by the Bureau of Customs in determining tariff and customs duties,
plus customs duties, excise taxes, if any, and other charges, such tax to be paid by
the importer prior to the release of such goods from customs custody: Provided,
That where the customs duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on the landed cost plus
excise taxes, if any: provided, further, that the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%) after any of the
following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product


(GDP) of the previous year exceeds two and four-fifth percent (2
4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as
follows:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-
added tax equivalent to ten percent (10%) of gross receipts derived from the sale
or exchange of services: provided, that the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product


(GDP) of the previous year exceeds two and four-fifth percent (2
4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual

abdication by Congress of its exclusive power to tax because such delegation is not within the purview of Section 28
(2), Article VI of the Constitution, which provides:

The Congress may, by law, authorize the President to fix within specified limits, and may
impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development program of the government.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on

the sale or exchange of services, which cannot be included within the purview of tariffs under the exempted delegation

as the latter refers to customs duties, tolls or tribute payable upon merchandise to the government and usually imposed

on goods or merchandise imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative

power to tax is contrary to republicanism. They insist that accountability, responsibility and transparency should

dictate the actions of Congress and they should not pass to the President the decision to impose taxes. They also argue

that the law also effectively nullified the Presidents power of control, which includes the authority to set aside and

nullify the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by the

President upon the recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the

conditions provided by the law to bring about either or both the conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of

the 12% rate would be subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the

principle of no taxation without representation. They submit that the Secretary of Finance is not mandated to give a
favorable recommendation and he may not even give his recommendation. Moreover, they allege that no guiding

standards are provided in the law on what basis and as to how he will make his recommendation. They claim,

nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by the President since
the former is a mere alter ego of the latter, such that, ultimately, it is the President who decides whether to impose the

increased tax rate or not.

A brief discourse on the principle of non-delegation of powers is instructive.

The principle of separation of powers ordains that each of the three great branches of government has

exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. [37] A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin

maxim: potestas delegata non delegari potest which means what has been delegated, cannot be delegated.[38] This
doctrine is based on the ethical principle that such as delegated power constitutes not only a right but a duty to be

performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of

another.[39]

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that the Legislative power

shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of Representatives. The
powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively,

legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a

complete law complete as to the time when it shall take effect and as to whom it shall be applicable and to
determine the expediency of its enactment.[40] Thus, the rule is that in order that a court may be justified in holding

a statute unconstitutional as a delegation of legislative power, it must appear that the power involved is purely

legislative in nature that is, one appertaining exclusively to the legislative department. It is the nature of the power,

and not the liability of its use or the manner of its exercise, which determines the validity of its delegation.

Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized

limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the
Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid

only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by

the delegate;[41] and (b) fixes a standard the limits of which are sufficiently determinate and determinable to which the

delegate must conform in the performance of his functions. [42] A sufficient standard is one which defines legislative
policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the

circumstances under which the legislative command is to be effected.[43] Both tests are intended to prevent a total

transference of legislative authority to the delegate, who is not allowed to step into the shoes of the legislature and
exercise a power essentially legislative.[44]
In People vs. Vera,[45] the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent

of delegation of power in this wise:

In testing whether a statute constitutes an undue delegation of legislative power or not, it


is usual to inquire whether the statute was complete in all its terms and provisions when it left the
hands of the legislature so that nothing was left to the judgment of any other appointee or delegate
of the legislature.

...

The true distinction, says Judge Ranney, is between the delegation of power to make
the law, which necessarily involves a discretion as to what it shall be, and conferring an
authority or discretion as to its execution, to be exercised under and in pursuance of the law.
The first cannot be done; to the latter no valid objection can be made.

...

It is contended, however, that a legislative act may be made to the effect as law after it
leaves the hands of the legislature. It is true that laws may be made effective on certain
contingencies, as by proclamation of the executive or the adoption by the people of a particular
community. In Wayman vs. Southard, the Supreme Court of the United States ruled that the
legislature may delegate a power not legislative which it may itself rightfully exercise. The power
to ascertain facts is such a power which may be delegated. There is nothing essentially
legislative in ascertaining the existence of facts or conditions as the basis of the taking into
effect of a law. That is a mental process common to all branches of the
government. Notwithstanding the apparent tendency, however, to relax the rule prohibiting
delegation of legislative authority on account of the complexity arising from social and economic
forces at work in this modern industrial age, the orthodox pronouncement of Judge Cooley in his
work on Constitutional Limitations finds restatement in Prof. Willoughby's treatise on the
Constitution of the United States in the following language speaking of declaration of legislative
power to administrative agencies: The principle which permits the legislature to provide that
the administrative agent may determine when the circumstances are such as require the
application of a law is defended upon the ground that at the time this authority is granted, the
rule of public policy, which is the essence of the legislative act, is determined by the legislature.
In other words, the legislature, as it is its duty to do, determines that, under given
circumstances, certain executive or administrative action is to be taken, and that, under other
circumstances, different or no action at all is to be taken. What is thus left to the administrative
official is not the legislative determination of what public policy demands, but simply the
ascertainment of what the facts of the case require to be done according to the terms of the
law by which he is governed. The efficiency of an Act as a declaration of legislative will must,
of course, come from Congress, but the ascertainment of the contingency upon which the Act
shall take effect may be left to such agencies as it may designate. The legislature, then, may
provide that a law shall take effect upon the happening of future specified contingencies
leaving to some other person or body the power to determine when the specified contingency
has arisen. (Emphasis supplied).[46]

In Edu vs. Ericta,[47] the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to alter
and repeal them; the test is the completeness of the statute in all its terms and provisions when it
leaves the hands of the legislature. To determine whether or not there is an undue delegation of
legislative power, the inquiry must be directed to the scope and definiteness of the measure
enacted. The legislative does not abdicate its functions when it describes what job must be
done, who is to do it, and what is the scope of his authority. For a complex economy, that may
be the only way in which the legislative process can go forward. A distinction has rightfully been
made between delegation of power to make the laws which necessarily involves a discretion as
to what it shall be, which constitutionally may not be done, and delegation of authority or
discretion as to its execution to be exercised under and in pursuance of the law, to which no
valid objection can be made. The Constitution is thus not to be regarded as denying the legislature
the necessary resources of flexibility and practicability. (Emphasis supplied). [48]

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or

conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to depend, but

the legislature must prescribe sufficient standards, policies or limitations on their authority. [49] While the power to tax

cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such

power may be left to them, including the power to determine the existence of facts on which its operation depends. [50]

The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is

not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information and

making recommendations is the kind of subsidiary activity which the legislature may perform through its members,

or which it may delegate to others to perform. Intelligent legislation on the complicated problems of modern society

is impossible in the absence of accurate information on the part of the legislators, and any reasonable method of

securing such information is proper.[51] The Constitution as a continuously operative charter of government does not

require that Congress find for itself

every fact upon which it desires to base legislative action or that it make for itself detailed determinations which it has

declared to be prerequisite to application of legislative policy to particular facts and circumstances impossible for

Congress itself properly to investigate.[52]

In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6

which reads as follows:

That the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic


Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%);
or

(ii) National government deficit as a percentage of GDP of the previous


year exceeds one and one-half percent (1 %).
The case before the Court is not a delegation of legislative power. It is simply a delegation of

ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent.

The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact

or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the

control of the executive.

No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the

word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a statute

denotes an imperative obligation and is inconsistent with the idea of discretion. [53] Where the law is clear and

unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate

is obeyed.[54]

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any

of the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law

specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a clear

directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the

12% VAT rate is based on the happening of a certain specified contingency, or upon the ascertainment of certain facts

or conditions by a person or body other than the legislature itself.

The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law

effectively nullified the Presidents power of control over the Secretary of Finance by mandating the fixing of the tax

rate by the President upon the recommendation of the Secretary of Finance. The Court cannot also subscribe to the
position of petitioners

Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase upon the recommendation

of the Secretary of Finance. Neither does the Court find persuasive the submission of petitioners Escudero, et al. that
any recommendation by the Secretary of Finance can easily be brushed aside by the President since the former is a

mere alter ego of the latter.

When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head

of the Department of Finance he is the assistant and agent of the Chief Executive. The multifarious executive and

administrative functions of the Chief Executive are performed by and through the executive departments, and the acts

of the secretaries of such departments, such as the Department of Finance, performed and promulgated in the regular
course of business, are, unless disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief

Executive. The Secretary of Finance, as such, occupies a political position and holds office in an advisory capacity,
and, in the language of Thomas Jefferson, "should be of the President's bosom confidence" and, in the language of

Attorney-General Cushing, is subject to the direction of the President." [55]

In the present case, in making his recommendation to the President on the existence of either of the two

conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such

instance, he is not subject to the power of control and direction of the President. He is acting as the agent of the

legislative department, to determine and declare the event upon which its expressed will is to take effect. [56] The

Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented,

considering that he possesses all the facilities to gather data and information and has a much broader perspective to

properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify

if any of the two conditions laid out by Congress is present. His personality in such instance is in reality but a projection

of that of Congress. Thus, being the agent of Congress and not of the President, the President cannot alter or modify

or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the former for that of

the latter.

Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely,

whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of

the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a percentage of

GDP of the previous year exceeds one and one-half percent (1%). If either of these two instances has occurred, the

Secretary of Finance, by legislative mandate, must submit such information to the President. Then the 12% VAT rate

must be imposed by the President effective January 1, 2006. There is no undue delegation of legislative power but
only of the discretion as to the execution of a law. This is constitutionally permissible.[57] Congress does not

abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is

the scope of his authority; in our complex economy that is frequently the only way in which the legislative process
can go forward.[58]

As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the

legislative power to tax is contrary to the principle of republicanism, the same deserves scant consideration. Congress

did not delegate the power to tax but the mere implementation of the law. The intent and will to increase the VAT rate

to 12% came from Congress and the task of the President is to simply execute the legislative policy. That Congress
chose to do so in such a manner is not within the province of the Court to inquire into, its task being to interpret the

law.[59]

The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the

conditions to bring about either or both the conditions precedent does not deserve any merit as this argument is highly
speculative. The Court does not rule on allegations which are manifestly conjectural, as these may not exist at all. The

Court deals with facts, not fancies; on realities, not appearances. When the Court acts on appearances instead of

realities, justice and law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary
Additional Tax Burden

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional

tax burden on the people. Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set

forth in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned to the

original 10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair and unreasonable, as

the people are unsure of the applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth

therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It does not

provide for a return to the 10% rate nor does it empower the President to so revert if, after the rate is increased to 12%,

the VAT collection goes below the 24/5 of the GDP of the previous year or that the national government deficit as a

percentage of GDP of the previous year does not exceed 1%.

Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be

introduced where none is provided for. Rewriting the law is a forbidden ground that only Congress may tread upon. [60]

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court

finds none, petitioners argument is, at best, purely speculative. There is no basis for petitioners fear of a fluctuating

VAT rate because the law itself does not provide that the rate should go back to 10% if the conditions provided in
Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the law is clear and unambiguous, so

that there is no occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid of judicial

addition or subtraction.[61]
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President
to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another

condition, i.e., the national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %).

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

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. Natl Govt Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal
condition of government has reached a relatively sound position or is towards the direction of a
balanced budget position. Therefore, there is no need to increase the VAT rate since the fiscal house
is in a relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a
need to increase the VAT rate.[62]

That the first condition amounts to an incentive to the President to increase the VAT collection does not

render it unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is

mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam

Smith in his Canons of Taxation (1776), as:


IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the
people as little as possible over and above what it brings into the public treasury of the
state.[63]

It simply means that sources of revenues must be adequate to meet government expenditures and their
variations.[64]

The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the

Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the countrys gloomy
state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a
position where 90 percent of our revenue is used for debt service. So, for every peso of revenue that
we currently raise, 90 goes to debt service. Thats interest plus amortization of our debt. So clearly,
this is not a sustainable situation. Thats the first fact.

The second fact is that our debt to GDP level is way out of line compared to other peer
countries that borrow money from that international financial markets. Our debt to GDP is
approximately equal to our GDP. Again, that shows you that this is not a sustainable situation.

The third thing that Id like to point out is the environment that we are presently operating
in is not as benign as what it used to be the past five years.

What do I mean by that?

In the past five years, weve been lucky because we were operating in a period of basically
global growth and low interest rates. The past few months, we have seen an inching up, in fact, a
rapid increase in the interest rates in the leading economies of the world. And, therefore, our ability
to borrow at reasonable prices is going to be challenged. In fact, ultimately, the question is our
ability to access the financial markets.

When the President made her speech in July last year, the environment was not as bad as
it is now, at least based on the forecast of most financial institutions. So, we were assuming that
raising 80 billion would put us in a position where we can then convince them to improve our ability
to borrow at lower rates. But conditions have changed on us because the interest rates have gone up.
In fact, just within this room, we tried to access the market for a billion dollars because for this year
alone, the Philippines will have to borrow 4 billion dollars. Of that amount, we have borrowed 1.5
billion. We issued last January a 25-year bond at 9.7 percent cost. We were trying to access last
week and the market was not as favorable and up to now we have not accessed and we might pull
back because the conditions are not very good.

So given this situation, we at the Department of Finance believe that we really need to
front-end our deficit reduction. Because it is deficit that is causing the increase of the debt and we
are in what we call a debt spiral. The more debt you have, the more deficit you have because interest
and debt service eats and eats more of your revenue. We need to get out of this debt spiral. And the
only way, I think, we can get out of this debt spiral is really have a front-end adjustment in our
revenue base.[65]

The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe.

Whether the law is indeed sufficient to answer the states economic dilemma is not for the Court to judge. In

the Farias case, the Court refused to consider the various arguments raised therein that dwelt on the wisdom of Section

14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:

. . . policy matters are not the concern of the Court. Government policy is within the
exclusive dominion of the political branches of the government. It is not for this Court to look into
the wisdom or propriety of legislative determination. Indeed, whether an enactment is wise or
unwise, whether it is based on sound economic theory, whether it is the best means to achieve the
desired results, whether, in short, the legislative discretion within its prescribed limits should be
exercised in a particular manner are matters for the judgment of the legislature, and the serious
conflict of opinions does not suffice to bring them within the range of judicial cognizance. [66]
In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy,

given that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of legislation. [67]

II.
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

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337,

amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are

arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the constitutional right against

deprivation of life, liberty of property without due process of law, as embodied in Article III, Section 1 of the

Constitution.

Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the

law.

The doctrine is 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. [68]

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of
input tax that may be credited against the output tax. It states, in part: [P]rovided, that the input tax inclusive of the

input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy

percent (70%) of the output VAT:

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax

due from or paid by a VAT-registered person on the importation of goods or local purchase of good and services,

including lease or use of property, in the course of trade or business, from a VAT-registered person, and Output Tax is
the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or

required to register under the law.


Petitioners claim that the contested sections impose limitations on the amount of input tax that may be

claimed. In effect, a portion of the input tax that has already been paid cannot now be credited against the output tax.

Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and

therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the input tax is less than 70%
of the output tax, then 100% of such input tax is still creditable.

More importantly, the excess input tax, if any, is retained in a businesss books of accounts and remains

creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that if the input

tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. In addition, Section

112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or refund for any unused

input taxes, to the extent that such input taxes have not been applied against the output taxes. Such unused input tax

may be used in payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners

exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided. It ends at the

net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the fact

that such unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over

provision of Section 110(B) or that it may later on be refunded through a tax credit certificate under Section 112(B).

Therefore, petitioners argument must be rejected.

On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation

on the input tax. According to petitioner, the limitation on the creditable input tax in effect allows VAT-registered

establishments to retain a portion of the taxes they collect, which violates the principle that tax collection and revenue
should be for public purposes and expenditures

As earlier stated, 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:

First, 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;
Second, 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);[69] and

Third, 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.[70]

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 BIR. The party

directly liable for the payment of the tax is the seller.[71] 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.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. 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.

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. [72]

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.[73] This was adopted by the Expanded VAT Law (R.A. No. 7716), [74] and The Tax Reform Act of

1997 (R.A. No. 8424).[75] 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.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337,

amending Section 110(A) of the NIRC, which provides:

SEC. 110. Tax Credits.

(A) Creditable Input Tax.

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or
business for which deduction for depreciation is allowed under this Code, shall be spread evenly
over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition
cost for such goods, excluding the VAT component thereof, exceeds One million pesos
(P1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less
than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such
a shorter period: Provided, finally, That in the case of purchase of services, lease or use of properties,
the input tax shall be creditable to the purchaser, lessee or license upon payment of the
compensation, rental, royalty or fee.

The foregoing section imposes a 60-month 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. Petitioners argument is without basis because the

taxpayer is not permanently deprived of his privilege to credit the input tax.

It is worth mentioning that 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.[76] 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. [77] 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.[78] 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.

With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable
transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax.

(C) Withholding of Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods and services which are subject
to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final
value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the
payment for lease or use of properties or property rights to nonresident owners shall be subject to
ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor
or person in control of the payment shall be considered as the withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made.

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.

Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld --

3% on gross payments for purchases of goods; 6% on gross payments for services supplied by contractors other than

by public works contractors; 8.5% on gross payments for services supplied by public work contractors; or 10% on

payment for the lease or use of properties or property rights to nonresident owners. Under the present Section 114(C),

these different rates, except for the 10% on lease or property rights payment to nonresidents, were deleted, and a

uniform rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to

creditable, means full. Thus, it is provided in Section 114(C): final value-added tax at the rate of five percent (5%).

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.

(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal or at least approximate the tax due of
the payee on said income. Taxes withheld on income payments covered by the expanded
withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation income (referred
to in Sec. 2.78 also of these regulations) are creditable in nature.

As applied to value-added tax, this means that taxable transactions with the government are subject to a 5%
rate, which constitutes as full payment of the tax payable on the transaction. This represents the net VAT payable of

the seller. The other 5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of the actual

input VAT directly or attributable to the taxable transaction. [79]


The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat

differently taxable transactions with the government.[80] This is supported by the fact that under the old provision, the
5% tax withheld by the government remains creditable against the tax liability of the seller or contractor, to wit:

SEC. 114. Return and Payment of Value-added Tax.

(C) Withholding of Creditable Value-added Tax. The Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or controlled corporations
(GOCCs) shall, before making payment on account of each purchase of goods from sellers and
services rendered by contractors which are subject to the value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent (3%)
of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services
rendered by contractors on every sale or installment payment which shall be creditable against the
value-added tax liability of the seller or contractor: Provided, however, That in the case of
government public works contractors, the withholding rate shall be eight and one-half percent
(8.5%): Provided, further, That the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment.
For this purpose, the payor or person in control of the payment shall be considered as the withholding
agent.

The valued-added tax withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made. (Emphasis supplied)

As amended, the use of the word final and the deletion of the word creditable exhibits Congresss intention

to treat transactions with the government differently. Since it has not been shown that the class subject to the 5% final

withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as

petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to all those who deal with

the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations

No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the

actual input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should the actual input
tax be less than 5%, the difference is treated as income.[81]

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a

profit or value-added even if there is no profit or value-added.

Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in

a legal joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the Court
on this point will only be, as Shakespeare describes life in Macbeth,[82] full of sound and fury, signifying nothing.
Whats more, petitioners contention assumes the proposition that there is no profit or value-added. It need not

take an astute businessman to know that it is a matter of exception that a business will sell goods or services without
profit or value-added. It cannot be overstressed that a business is created precisely for profit.

The equal protection clause under the Constitution means that no person or class of persons shall be deprived
of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like

circumstances.[83]

The power of the State to make reasonable and natural classifications for the purposes of taxation has long

been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts

to be raised, the methods of assessment, valuation and collection, the States power is entitled to presumption of

validity. As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness,

discrimination, or arbitrariness.[84]

Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax,

or invests in capital equipment, or has several transactions with the government, is not based on real and substantial

differences to meet a valid classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of

taxation, the kind of property, the rates to be levied or the amounts to be raised, the methods of assessment, valuation

and collection. Petitioners alleged distinctions are based on variables that bear different consequences. While the

implementation of the law may yield varying end results depending on ones profit margin and value-added, the Court

cannot go beyond what the legislature has laid down and interfere with the affairs of business.

The equal protection clause does not require the universal application of the laws on all persons or things

without distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality
among equals as determined according to a valid classification. By classification is meant the grouping of persons or

things similar to each other in certain particulars and different from all others in these same particulars. [85]

Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmea

III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The

proposed legislation seeks to amend the 70% limitation by increasing the same to 90%. This, according to

petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to
say that these are still proposed legislations. Until Congress amends the law, and absent any unequivocal basis for

its unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at

the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class

everywhere with all people at all times.[86]

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and

services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC,

provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and use

or lease of properties. These same sections also provide for a 0% rate on certain sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation

on the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final

withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive Congress of

the power to classify subjects of taxation, and only demands uniformity within the particular class.[87]

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10%
(or 12%) does not apply to sales of goods or services with gross annual sales or receipts not

exceeding P1,500,000.00.[88] Also, basic marine and agricultural food products in their original state are still not

subject to the tax,[89] thus ensuring that prices at the grassroots level will remain accessible. As was stated in Kapatiran
ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by
persons engaged in business with an aggregate gross annual sales exceeding P200,000.00. Small
corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax
are sales of farm and marine products, so that the costs of basic food and other necessities, spared
as they are from the incidence of the VAT, are expected to be relatively lower and within the reach
of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors

those with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law
entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e.,

transactions with gross annual sales and/or receipts not exceeding P1.5 Million. This acts as a equalizer because in

effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those

previously exempt. Excise taxes on petroleum products[91] and natural gas[92] were reduced. Percentage tax on
domestic carriers was removed.[93] Power producers are now exempt from paying franchise tax.[94]

Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the

burden of taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax rate, from

a previous 32%.[95] Intercorporate dividends of non-resident foreign corporations are still subject to 15% final

withholding tax but the tax credit allowed on the corporations domicile was increased to 20%. [96] The Philippine

Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore. [97] Even the sale by an

artist of his works or services performed for the production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest

largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the

smaller business with higher input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayers ability to pay. This principle was also lifted
from Adam Smiths Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the government, as nearly
as possible, in proportion to their respective abilities; that is, in proportion to the revenue
which they respectively enjoy under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected.[98]

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for

every goods bought or services enjoyed is the same regardless of income. In


other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income

earned by a person or profit margin marked by a business, such that the higher the income or profit margin, the smaller
the portion of the income or profit that is eaten by VAT. A converso, the lower the income or profit margin, the bigger

the part that the VAT eats away. At the end of the day, it is really the lower income group or businesses with low-

profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What

it simply provides is that Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino
case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall evolve a progressive system of
taxation. The constitutional provision has been interpreted to mean simply that direct taxes are . . .
to be preferred [and] as much as possible, indirect taxes should be minimized. (E. FERNANDO,
THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to
Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which
perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of
Art. VIII, 17 (1) of the 1973 Constitution from which the present Art. VI, 28 (1) was taken. Sales
taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult,
if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay.
In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for
zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC), while granting
exemptions to other transactions. (R.A. No. 7716, 4 amending 103 of the NIRC) [99]

CONCLUSION

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight of

the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other cases, the Court

cannot strike down a law as unconstitutional simply because of its yokes.

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that
the judiciary should stand ready to afford relief. There are undoubtedly many wrongs the judicature
may not correct, for instance, those involving political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary is the repository of
remedies for all political or social ills; We should not forget that the Constitution has judiciously
allocated the powers of government to three distinct and separate compartments; and that judicial
interpretation has tended to the preservation of the independence of the three, and a zealous regard
of the prerogatives of each, knowing full well that one is not the guardian of the others and that, for
official wrong-doing, each may be brought to account, either by impeachment, trial or by the ballot
box.[100]
The words of the Court in Vera vs. Avelino[101] holds true then, as it still holds true now. All things considered,
there is no raison d'tre for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056,

168207, 168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the

temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.

SO ORDERED.
EN BANC

PROF. RANDOLF S. DAVID, LORENZO TA�ADA III, G.R. No. 171396


RONALD LLAMAS, H. HARRY L. ROQUE, JR., JOEL
RUIZ BUTUYAN, ROGER R. RAYEL, GARY S. Present:
MALLARI, ROMEL REGALADO BAGARES,
CHRISTOPHER F.C. BOLASTIG, PANGANIBAN, C.J.,
*
Petitioners, PUNO,
QUISUMBING,
- versus - YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
CARPIO,
GLORIA MACAPAGAL-ARROYO, AS AUSTRIA-MARTINEZ,
PRESIDENT AND COMMANDER-IN-CHIEF, CORONA,
EXECUTIVE SECRETARY EDUARDO ERMITA, HON. CARPIO MORALES,
AVELINO CRUZ II, SECRETARY OF NATIONAL CALLEJO, SR.,
DEFENSE, GENERAL GENEROSO SENGA, CHIEF OF AZCUNA,
STAFF, ARMED FORCES OF THE PHILIPPINES, TINGA,
DIRECTOR GENERAL ARTURO LOMIBAO, CHIEF, CHICO-NAZARIO,
PHILIPPINE NATIONAL POLICE, GARCIA, and
Respondents. VELASCO, JJ.
x-------------------------------------------------x
NI�EZ CACHO-OLIVARES AND TRIBUNE Promulgated:
PUBLISHING CO., INC.,
Petitioners, May 3, 2006

- versus - G.R. No. 171409

HONORABLE SECRETARY EDUARDO ERMITA AND


HONORABLE DIRECTOR GENERAL ARTURO C.
LOMIBAO,
Respondents.
x-------------------------------------------------x
FRANCIS JOSEPH G. ESCUDERO, JOSEPH A.
SANTIAGO, TEODORO A. CASINO, AGAPITO A.
AQUINO, MARIO J. AGUJA, SATUR C. OCAMPO,
MUJIV S. HATAMAN, JUAN EDGARDO ANGARA,
TEOFISTO DL. GUINGONA III, EMMANUEL JOSEL J.
VILLANUEVA, LIZA L. MAZA, IMEE R. MARCOS, G.R. No. 171485
RENATO B. MAGTUBO, JUSTIN MARC SB. CHIPECO,
ROILO GOLEZ, DARLENE ANTONINO-CUSTODIO,
LORETTA ANN P. ROSALES, JOSEL G. VIRADOR,
RAFAEL V. MARIANO, GILBERT C. REMULLA,
FLORENCIO G. NOEL, ANA THERESIA HONTIVEROS-
BARAQUEL, IMELDA C. NICOLAS, MARVIC M.V.F.
LEONEN, NERI JAVIER COLMENARES, MOVEMENT
OF CONCERNED CITIZENS FOR CIVIL LIBERTIES
REPRESENTED BY AMADO GAT INCIONG,
Petitioners,

- versus -
EDUARDO R. ERMITA, EXECUTIVE SECRETARY,
AVELINO J. CRUZ, JR., SECRETARY, DND RONALDO
V. PUNO, SECRETARY, DILG, GENEROSO SENGA,
AFP CHIEF OF STAFF, ARTURO LOMIBAO, CHIEF
PNP,
Respondents.
x-------------------------------------------------x
KILUSANG MAYO UNO, REPRESENTED BY ITS
CHAIRPERSON ELMER C. LABOG AND SECRETARY
GENERAL JOEL MAGLUNSOD, NATIONAL
FEDERATION OF LABOR UNIONS � KILUSANG
MAYO UNO (NAFLU-KMU), REPRESENTED BY ITS
NATIONAL PRESIDENT, JOSELITO V. USTAREZ,
ANTONIO C. PASCUAL, SALVADOR T. CARRANZA,
EMILIA P. DAPULANG, MARTIN CUSTODIO, JR., AND
ROQUE M. TAN,
Petitioners,

- versus - G.R. No. 171483

HER EXCELLENCY, PRESIDENT GLORIA


MACAPAGAL-ARROYO, THE HONORABLE
EXECUTIVE SECRETARY, EDUARDO ERMITA, THE
CHIEF OF STAFF, ARMED FORCES OF THE
PHILIPPINES, GENEROSO SENGA, AND THE PNP
DIRECTOR GENERAL, ARTURO LOMIBAO,
Respondents.
x-------------------------------------------------x
ALTERNATIVE LAW GROUPS, INC. (ALG),
Petitioner,
- versus -

EXECUTIVE SECRETARY EDUARDO R. ERMITA, LT.


GEN. GENEROSO SENGA, AND DIRECTOR GENERAL
ARTURO LOMIBAO,
Respondents.
x-------------------------------------------------x
JOSE ANSELMO I. CADIZ, FELICIANO M. BAUTISTA,
ROMULO R. RIVERA, JOSE AMOR M. AMORADO,
ALICIA A. RISOS-VIDAL, FELIMON C. ABELITA III,
MANUEL P. LEGASPI, J.B. JOVY C. BERNABE,
BERNARD L. DAGCUTA, ROGELIO V. GARCIA AND
INTEGRATED BAR OF THE PHILIPPINES (IBP),
Petitioners,

- versus - G.R. No. 171400


HON. EXECUTIVE SECRETARY EDUARDO ERMITA,
GENERAL GENEROSO SENGA, IN HIS CAPACITY AS
AFP CHIEF OF STAFF, AND DIRECTOR GENERAL
ARTURO LOMIBAO, IN HIS CAPACITY AS PNP CHIEF,
Respondents.
x-------------------------------------------------x
LOREN B. LEGARDA,
Petitioner,

- versus -

G.R. No. 171489


GLORIA MACAPAGAL-ARROYO, IN HER CAPACITY
AS PRESIDENT AND COMMANDER-IN-CHIEF;
ARTURO LOMIBAO, IN HIS CAPACITY AS
DIRECTOR-GENERAL OF THE PHILIPPINE
NATIONAL POLICE (PNP); GENEROSO SENGA, IN HIS
CAPACITY AS CHIEF OF STAFF OF THE ARMED
FORCES OF THE PHILIPPINES (AFP); AND EDUARDO
ERMITA, IN HIS CAPACITY AS EXECUTIVE
SECRETARY,
Respondents.

G.R. No. 171424

x---------------------------------------------------------------------------------------------x

DECISION

SANDOVAL-GUTIERREZ, J.:

All powers need some restraint; practical adjustments rather than rigid formula are necessary. [1] Superior
strength � the use of force � cannot make wrongs into rights. In this regard, the courts should be vigilant in
safeguarding the constitutional rights of the citizens, specifically their liberty.
Chief Justice Artemio V. Panganiban�s philosophy of liberty is thus most relevant. He said: �In cases
involving liberty, the scales of justice should weigh heavily against government and in favor of the poor, the
oppressed, the marginalized, the dispossessed and the weak.� Laws and actions that restrict fundamental rights
come to the courts �with a heavy presumption against their constitutional validity.�[2]

These seven (7) consolidated petitions for certiorari and prohibition allege that in issuing Presidential
Proclamation No. 1017 (PP 1017) and General Order No. 5 (G.O. No. 5), President Gloria Macapagal-Arroyo
committed grave abuse of discretion. Petitioners contend that respondent officials of the Government, in their
professed efforts to defend and preserve democratic institutions, are actually trampling upon the very freedom
guaranteed and protected by the Constitution. Hence, such issuances are void for being unconstitutional.

Once again, the Court is faced with an age-old but persistently modern problem. How does the Constitution of
a free people combine the degree of liberty, without which, law becomes tyranny, with the degree of law, without
which, liberty becomes license?[3]

On February 24, 2006, as the nation celebrated the 20th Anniversary of the Edsa People Power I, President
Arroyo issued PP 1017 declaring a state of national emergency, thus:

NOW, THEREFORE, I, Gloria Macapagal-Arroyo, President of the Republic of the


Philippines and Commander-in-Chief of the Armed Forces of the Philippines, by virtue of the
powers vested upon me by Section 18, Article 7 of the Philippine Constitution which states that:
�The President. . . whenever it becomes necessary, . . . may call out (the) armed forces to prevent
or suppress. . .rebellion. . .,� and in my capacity as their Commander-in-Chief, do hereby
command the Armed Forces of the Philippines, to maintain law and order throughout the
Philippines, prevent or suppress all forms of lawless violence as well as any act of insurrection
or rebellion and to enforce obedience to all the laws and to all decrees, orders and regulations
promulgated by me personally or upon my direction; and as provided in Section 17, Article 12
of the Constitution do hereby declare a State of National Emergency.

She cited the following facts as bases:

WHEREAS, over these past months, elements in the political opposition have conspired
with authoritarians of the extreme Left represented by the NDF-CPP-NPA and the extreme
Right, represented by military adventurists � the historical enemies of the democratic
Philippine State � who are now in a tactical alliance and engaged in a concerted and systematic
conspiracy, over a broad front, to bring down the duly constituted Government elected in May 2004;

WHEREAS, these conspirators have repeatedly tried to bring down the President;

WHEREAS, the claims of these elements have been recklessly magnified by certain
segments of the national media;
WHEREAS, this series of actions is hurting the Philippine State � by obstructing
governance including hindering the growth of the economy and sabotaging the people�s
confidence in government and their faith in the future of this country;

WHEREAS, these actions are adversely affecting the economy;

WHEREAS, these activities give totalitarian forces of both the extreme Left and
extreme Right the opening to intensify their avowed aims to bring down the democratic
Philippine State;

WHEREAS, Article 2, Section 4 of the our Constitution makes the defense and
preservation of the democratic institutions and the State the primary duty of Government;

WHEREAS, the activities above-described, their consequences, ramifications and


collateral effects constitute a clear and present danger to the safety and the integrity of the
Philippine State and of the Filipino people;

On the same day, the President issued G. O. No. 5 implementing PP 1017, thus:

WHEREAS, over these past months, elements in the political opposition have conspired with
authoritarians of the extreme Left, represented by the NDF-CPP-NPA and the extreme Right,
represented by military adventurists - the historical enemies of the democratic Philippine State �
and who are now in a tactical alliance and engaged in a concerted and systematic conspiracy, over
a broad front, to bring down the duly-constituted Government elected in May 2004;
WHEREAS, these conspirators have repeatedly tried to bring down our republican
government;

WHEREAS, the claims of these elements have been recklessly magnified by certain
segments of the national media;

WHEREAS, these series of actions is hurting the Philippine State by obstructing


governance, including hindering the growth of the economy and sabotaging the people�s
confidence in the government and their faith in the future of this country;

WHEREAS, these actions are adversely affecting the economy;

WHEREAS, these activities give totalitarian forces; of both the extreme Left and extreme
Right the opening to intensify their avowed aims to bring down the democratic Philippine State;

WHEREAS, Article 2, Section 4 of our Constitution makes the defense and preservation
of the democratic institutions and the State the primary duty of Government;

WHEREAS, the activities above-described, their consequences, ramifications and


collateral effects constitute a clear and present danger to the safety and the integrity of the Philippine
State and of the Filipino people;

WHEREAS, Proclamation 1017 date February 24, 2006 has been issued declaring a State
of National Emergency;

NOW, THEREFORE, I GLORIA MACAPAGAL-ARROYO, by virtue of the powers


vested in me under the Constitution as President of the Republic of the Philippines, and Commander-
in-Chief of the Republic of the Philippines, and pursuant to Proclamation No. 1017 dated February
24, 2006, do hereby call upon the Armed Forces of the Philippines (AFP) and the Philippine
National Police (PNP), to prevent and suppress acts of terrorism and lawless violence in the country;
I hereby direct the Chief of Staff of the AFP and the Chief of the PNP, as well as the officers
and men of the AFP and PNP,to immediately carry out the necessary and appropriate actions
and measures to suppress and prevent acts of terrorism and lawless violence.

On March 3, 2006, exactly one week after the declaration of a state of national emergency and after all these
petitions had been filed, the President lifted PP 1017. She issued Proclamation No. 1021 which reads:

WHEREAS, pursuant to Section 18, Article VII and Section 17, Article XII of the
Constitution, Proclamation No. 1017 dated February 24, 2006, was issued declaring a state of
national emergency;

WHEREAS, by virtue of General Order No.5 and No.6 dated February 24, 2006, which
were issued on the basis of Proclamation No. 1017, the Armed Forces of the Philippines (AFP)
and the Philippine National Police (PNP), were directed to maintain law and order throughout the
Philippines, prevent and suppress all form of lawless violence as well as any act of rebellion and
to undertake such action as may be necessary;

WHEREAS, the AFP and PNP have effectively prevented, suppressed and quelled the
acts lawless violence and rebellion;

NOW, THEREFORE, I, GLORIA MACAPAGAL-ARROYO, President of the


Republic of the Philippines, by virtue of the powers vested in me by law, hereby declare that the
state of national emergency has ceased to exist.

In their presentation of the factual bases of PP 1017 and G.O. No. 5, respondents stated that the proximate
cause behind the executive issuances was the conspiracy among some military officers, leftist insurgents of the New
People�s Army (NPA), and some members of the political opposition in a plot to unseat or assassinate President
Arroyo.[4] They considered the aim to oust or assassinate the President and take-over the reigns of government as a
clear and present danger.

During the oral arguments held on March 7, 2006, the Solicitor General specified the facts leading to the
issuance of PP 1017 and G.O. No. 5. Significantly, there was no refutation from petitioners� counsels.

The Solicitor General argued that the intent of the Constitution is to give full discretionary powers to the
President in determining the necessity of calling out the armed forces. He emphasized that none of the petitioners
has shown that PP 1017 was without factual bases. While he explained that it is not respondents� task to state the
facts behind the questioned Proclamation, however, they are presenting the same, narrated hereunder, for the
elucidation of the issues.

On January 17, 2006, Captain Nathaniel Rabonza and First Lieutenants Sonny Sarmiento,
Lawrence San Juan and Patricio Bumidang, members of the Magdalo Group indicted in the Oakwood mutiny, escaped
their detention cell in Fort Bonifacio, Taguig City. In a public statement, they vowed to remain defiant and to elude
arrest at all costs. They called upon the people to �show and proclaim our displeasure at the sham regime. Let us
demonstrate our disgust, not only by going to the streets in protest, but also by wearing red bands on our left arms.�[5]

On February 17, 2006, the authorities got hold of a document entitled �Oplan Hackle I � which detailed
plans for bombings and attacks during the Philippine Military Academy Alumni Homecoming in Baguio City. The
plot was to assassinate selected targets including some cabinet members and President Arroyo herself. [6] Upon the
advice of her security, President Arroyo decided not to attend the Alumni Homecoming. The next day, at the height
of the celebration, a bomb was found and detonated at the PMA parade ground.

On February 21, 2006, Lt. San Juan was recaptured in a communist safehouse in Batangas province. Found
in his possession were two (2) flash disks containing minutes of the meetings between members of the Magdalo Group
and the National People�s Army (NPA), a tape recorder, audio cassette cartridges, diskettes, and copies of subversive
documents.[7] Prior to his arrest, Lt. San Juan announced through DZRH that the �Magdalo�s D-Day would be on
February 24, 2006, the 20th Anniversary of Edsa I.�

On February 23, 2006, PNP Chief Arturo Lomibao intercepted information that members of the PNP- Special
Action Force were planning to defect. Thus, he immediately ordered SAF Commanding General Marcelino Franco,
Jr. to �disavow� any defection. The latter promptly obeyed and issued a public statement: �All SAF units are under
the effective control of responsible and trustworthy officers with proven integrity and unquestionable loyalty.�

On the same day, at the house of former Congressman Peping Cojuangco, President Cory Aquino�s brother,
businessmen and mid-level government officials plotted moves to bring down the Arroyo administration. Nelly
Sindayen of TIME Magazine reported that Pastor Saycon, longtime Arroyo critic, called a U.S. government official
about his group�s plans if President Arroyo is ousted. Saycon also phoned a man code-named Delta. Saycon
identified him as B/Gen. Danilo Lim, Commander of the Army�s elite Scout Ranger. Lim said �it was all systems
go for the planned movement against Arroyo.�[8]

B/Gen. Danilo Lim and Brigade Commander Col. Ariel Querubin confided to Gen. Generoso Senga, Chief
of Staff of the Armed Forces of the Philippines (AFP), that a huge number of soldiers would join the rallies to provide
a critical mass and armed component to the Anti-Arroyo protests to be held on February 24, 2005. According to these
two (2) officers, there was no way they could possibly stop the soldiers because they too, were breaking the chain of
command to join the forces foist to unseat the President. However, Gen. Senga has remained faithful to his
Commander-in-Chief and to the chain of command. He immediately took custody of B/Gen. Lim and directed Col.
Querubin to return to the Philippine Marines Headquarters in Fort Bonifacio.
Earlier, the CPP-NPA called for intensification of political and revolutionary work within the military and
the police establishments in order to forge alliances with its members and key officials. NPA spokesman Gregorio
�Ka Roger�Rosal declared: �The Communist Party and revolutionary movement and the entire people look forward
to the possibility in the coming year of accomplishing its immediate task of bringing down the Arroyo regime; of
rendering it to weaken and unable to rule that it will not take much longer to end it.�[9]

On the other hand, Cesar Renerio, spokesman for the National Democratic Front (NDF) at North Central
Mindanao, publicly announced: �Anti-Arroyo groups within the military and police are growing rapidly, hastened by
the economic difficulties suffered by the families of AFP officers and enlisted personnel who undertake counter-
insurgency operations in the field.� He claimed that with the forces of the national democratic movement, the anti-
Arroyo conservative political parties, coalitions, plus the groups that have been reinforcing since June 2005, it is
probable that the President�s ouster is nearing its concluding stage in the first half of 2006.

Respondents further claimed that the bombing of telecommunication towers and cell sites in Bulacan and
Bataan was also considered as additional factual basis for the issuance of PP 1017 and G.O. No. 5. So is the raid of
an army outpost in Benguet resulting in the death of three (3) soldiers. And also the directive of the Communist Party
of the Philippines ordering its front organizations to join 5,000 Metro Manila radicals and 25,000 more from the
provinces in mass protests.[10]

By midnight of February 23, 2006, the President convened her security advisers and several cabinet members
to assess the gravity of the fermenting peace and order situation. She directed both the AFP and the PNP to account
for all their men and ensure that the chain of command remains solid and undivided. To protect the young students
from any possible trouble that might break loose on the streets, the President suspended classes in all levels in the
entire National Capital Region.

For their part, petitioners cited the events that followed after the issuance of PP 1017 and G.O. No. 5.

Immediately, the Office of the President announced the cancellation of all programs and activities related to
the 20thanniversary celebration of Edsa People Power I; and revoked the permits to hold rallies issued earlier by the
local governments. Justice Secretary Raul Gonzales stated that political rallies, which to the President�s mind were
organized for purposes of destabilization, are cancelled. Presidential Chief of Staff Michael Defensor announced that
�warrantless arrests and take-over of facilities, including media, can already be implemented.�[11]

Undeterred by the announcements that rallies and public assemblies would not be allowed, groups of
protesters (members of Kilusang Mayo Uno [KMU] and National Federation of Labor Unions-Kilusang Mayo
Uno [NAFLU-KMU]), marched from various parts of Metro Manila with the intention of converging at the EDSA
shrine. Those who were already near the EDSA site were violently dispersed by huge clusters of anti-riot police. The
well-trained policemen used truncheons, big fiber glass shields, water cannons, and tear gas to stop and break up the
marching groups, and scatter the massed participants. The same police action was used against the protesters marching
forward to Cubao, Quezon City and to the corner of Santolan Street and EDSA. That same evening, hundreds of riot
policemen broke up an EDSA celebration rally held along Ayala Avenue and Paseo de Roxas Street in Makati
City.[12]

According to petitioner Kilusang Mayo Uno, the police cited PP 1017 as the ground for the dispersal of their
assemblies.

During the dispersal of the rallyists along EDSA, police arrested (without warrant) petitioner Randolf S.
David, a professor at the University of the Philippines and newspaper columnist. Also arrested was his companion,
Ronald Llamas, president of party-list Akbayan.

At around 12:20 in the early morning of February 25, 2006, operatives of the Criminal Investigation and
Detection Group (CIDG) of the PNP, on the basis of PP 1017 and G.O. No. 5, raided the Daily Tribune offices in
Manila. The raiding team confiscated news stories by reporters, documents, pictures, and mock-ups of the Saturday
issue. Policemen from Camp Crame in Quezon City were stationed inside the editorial and business offices of the
newspaper; while policemen from the Manila Police District were stationed outside the building. [13]

A few minutes after the search and seizure at the Daily Tribune offices, the police surrounded the premises
of another pro-opposition paper, Malaya, and its sister publication, the tabloid Abante.

The raid, according to Presidential Chief of Staff Michael Defensor, is �meant to show a �strong
presence,� to tell media outlets not to connive or do anything that would help the rebels in bringing down this
government.� The PNP warned that it would take over any media organization that would not follow �standards
set by the government during the state of national emergency. � Director General Lomibao stated that �if they do
not follow the standards � and the standards are - if they would contribute to instability in the government, or if they
do not subscribe to what is in General Order No. 5 and Proc. No. 1017 � we will recommend a
�takeover.�� National Telecommunications� Commissioner Ronald Solis urged television and radio networks
to �cooperate� with the government for the duration of the state of national emergency. He asked for �balanced
reporting� from broadcasters when covering the events surrounding the coup attempt foiled by the government. He
warned that his agency will not hesitate to recommend the closure of any broadcast outfit that violates rules set out
for media coverage when the national security is threatened.[14]
Also, on February 25, 2006, the police arrested Congressman Crispin Beltran, representing
the Anakpawis Party and Chairman of Kilusang Mayo Uno (KMU), while leaving his farmhouse in Bulacan. The
police showed a warrant for his arrest dated 1985. Beltran�s lawyer explained that the warrant, which stemmed from
a case of inciting to rebellion filed during the Marcos regime, had long been quashed. Beltran, however, is not a party
in any of these petitions.

When members of petitioner KMU went to Camp Crame to visit Beltran, they were told they could not be
admitted because of PP 1017 and G.O. No. 5. Two members were arrested and detained, while the rest were dispersed
by the police.

Bayan Muna Representative Satur Ocampo eluded arrest when the police went after him during a public
forum at the Sulo Hotel in Quezon City. But his two drivers, identified as Roel and Art, were taken into custody.

Retired Major General Ramon Monta�o, former head of the Philippine Constabulary, was arrested while
with his wife and golfmates at the Orchard Golf and Country Club in Dasmari�as, Cavite.

Attempts were made to arrest Anakpawis Representative Satur Ocampo, Representative Rafael
Mariano, Bayan Muna Representative Teodoro Casi�o and Gabriela Representative Liza Maza. Bayan
Muna Representative Josel Virador was arrested at the PAL Ticket Office in Davao City. Later, he was turned over
to the custody of the House of Representatives where the �Batasan 5� decided to stay indefinitely.

Let it be stressed at this point that the alleged violations of the rights of Representatives Beltran, Satur
Ocampo, et al., are not being raised in these petitions.

On March 3, 2006, President Arroyo issued PP 1021 declaring that the state of national emergency has
ceased to exist.

In the interim, these seven (7) petitions challenging the constitutionality of PP 1017 and G.O. No. 5 were
filed with this Court against the above-named respondents. Three (3) of these petitions impleaded President Arroyo
as respondent.

In G.R. No. 171396, petitioners Randolf S. David, et al. assailed PP 1017 on the grounds that (1) it encroaches
on the emergency powers of Congress; (2) it is a subterfuge to avoid the constitutional requirements for the imposition
of martial law; and (3) it violates the constitutional guarantees of freedom of the press, of speech and of assembly.
In G.R. No. 171409, petitioners Ninez Cacho-Olivares and Tribune Publishing Co., Inc. challenged the
CIDG�s act of raiding the Daily Tribune offices as a clear case of �censorship� or �prior restraint.� They also
claimed that the term �emergency� refers only to tsunami, typhoon, hurricane and similar occurrences, hence, there
is �absolutely no emergency� that warrants the issuance of PP 1017.

In G.R. No. 171485, petitioners herein are Representative Francis Joseph G. Escudero, and twenty one (21)
other members of the House of Representatives, including Representatives Satur Ocampo, Rafael Mariano, Teodoro
Casi�o, Liza Maza, and Josel Virador. They asserted that PP 1017 and G.O. No. 5 constitute �usurpation of
legislative powers�; �violation of freedom of expression� and �a declaration of martial law.� They alleged that
President Arroyo �gravely abused her discretion in calling out the armed forces without clear and verifiable factual
basis of the possibility of lawless violence and a showing that there is necessity to do so.�

In G.R. No. 171483, petitioners KMU, NAFLU-KMU, and their members averred that PP 1017 and G.O. No.
5 are unconstitutional because (1) they arrogate unto President Arroyo the power to enact laws and decrees; (2) their
issuance was without factual basis; and (3) they violate freedom of expression and the right of the people to peaceably
assemble to redress their grievances.

In G.R. No. 171400, petitioner Alternative Law Groups, Inc. (ALGI) alleged that PP 1017 and G.O. No. 5
are unconstitutional because they violate (a) Section 4[15] of Article II, (b) Sections 1,[16] 2,[17] and 4[18] of Article
III,(c) Section 23[19] of Article VI, and (d) Section 17[20] of Article XII of the Constitution.

In G.R. No. 171489, petitioners Jose Anselmo I. Cadiz et al., alleged that PP 1017 is an �arbitrary and
unlawful exercise by the President of her Martial Law powers.� And assuming that PP 1017 is not really a
declaration of Martial Law, petitioners argued that �it amounts to an exercise by the President of emergency powers
without congressional approval.� In addition, petitioners asserted that PP 1017 �goes beyond the nature and
function of a proclamation as defined under the Revised Administrative Code. �

And lastly, in G.R. No. 171424, petitioner Loren B. Legarda maintained that PP 1017 and G.O. No. 5 are
�unconstitutional for being violative of the freedom of expression, including its cognate rights such as freedom of the
press and the right to access to information on matters of public concern, all guaranteed under Article III, Section 4
of the 1987 Constitution.� In this regard, she stated that these issuances prevented her from fully prosecuting her
election protest pending before the Presidential Electoral Tribunal.

In respondents� Consolidated Comment, the Solicitor General countered that: first, the petitions should be
dismissed for being moot; second, petitioners in G.R. Nos. 171400 (ALGI), 171424 (Legarda), 171483
(KMU et al.), 171485 (Escudero et al.) and 171489 (Cadiz et al.) have no legal standing; third, it is not necessary for
petitioners to implead President Arroyo as respondent; fourth, PP 1017 has constitutional and legal basis;
and fifth, PP 1017 does not violate the people�s right to free expression and redress of grievances.

On March 7, 2006, the Court conducted oral arguments and heard the parties on the above interlocking issues
which may be summarized as follows:

A. PROCEDURAL:
1) Whether the issuance of PP 1021 renders the petitions moot and academic.
2) Whether petitioners in 171485 (Escudero et al.), G.R. Nos.
171400 (ALGI), 171483 (KMU et al.),171489 (Cadiz et al.), and 171424 (Legarda) have legal
standing.
B. SUBSTANTIVE:
1) Whether the Supreme Court can review the factual bases of PP 1017.
2) Whether PP 1017 and G.O. No. 5 are unconstitutional.
a. Facial Challenge
b. Constitutional Basis
c. As Applied Challenge

A. PROCEDURAL

First, we must resolve the procedural roadblocks.

I- Moot and Academic Principle

One of the greatest contributions of the American system to this country is the concept of judicial review
enunciated in Marbury v. Madison.[21] This concept rests on the extraordinary simple foundation --

The Constitution is the supreme law. It was ordained by the people, the ultimate source of all
political authority. It confers limited powers on the national government. x x x If the government
consciously or unconsciously oversteps these limitations there must be some authority
competent to hold it in control, to thwart its unconstitutional attempt, and thus to vindicate
and preserve inviolate the will of the people as expressed in the Constitution. This power the
courts exercise. This is the beginning and the end of the theory of judicial review.[22]

But the power of judicial review does not repose upon the courts a �self-starting capacity.�[23] Courts may
exercise such power only when the following requisites are present: first, there must be an actual case or
controversy; second, petitioners have to raise a question of constitutionality; third, the constitutional question must be
raised at the earliest opportunity; and fourth, the decision of the constitutional question must be necessary to the
determination of the case itself.[24]
Respondents maintain that the first and second requisites are absent, hence, we shall limit our discussion
thereon.

An actual case or controversy involves a conflict of legal right, an opposite legal claims susceptible of judicial
resolution. It is �definite and concrete, touching the legal relations of parties having adverse legal interest;� a real
and substantial controversy admitting of specific relief.[25] The Solicitor General refutes the existence of such actual
case or controversy, contending that the present petitions were rendered �moot and academic� by President
Arroyo�s issuance of PP 1021.

Such contention lacks merit.

A moot and academic case is one that ceases to present a justiciable controversy by virtue of supervening
events,[26] so that a declaration thereon would be of no practical use or value.[27] Generally, courts decline jurisdiction
over such case[28] or dismiss it on ground of mootness.[29]

The Court holds that President Arroyo�s issuance of PP 1021 did not render the present petitions moot and
academic. During the eight (8) days that PP 1017 was operative, the police officers, according to petitioners,
committed illegal acts in implementing it. Are PP 1017 and G.O. No. 5 constitutional or valid? Do they justify
these alleged illegal acts? These are the vital issues that must be resolved in the present petitions. It must be stressed
that �an unconstitutional act is not a law, it confers no rights, it imposes no duties, it affords no protection; it
is in legal contemplation, inoperative.�[30]

The �moot and academic� principle is not a magical formula that can automatically dissuade the courts in
resolving a case. Courts will decide cases, otherwise moot and academic, if: first, there is a grave violation of the
Constitution;[31] second, the exceptional character of the situation and the paramount public interest is
involved;[32]third, when constitutional issue raised requires formulation of controlling principles to guide the bench,
the bar, and the public;[33] and fourth, the case is capable of repetition yet evading review.[34]

All the foregoing exceptions are present here and justify this Court�s assumption of jurisdiction over the
instant petitions. Petitioners alleged that the issuance of PP 1017 and G.O. No. 5 violates the Constitution. There is
no question that the issues being raised affect the public�s interest, involving as they do the people�s basic rights to
freedom of expression, of assembly and of the press. Moreover, the Court has the duty to formulate guiding and
controlling constitutional precepts, doctrines or rules. It has the symbolic function of educating the bench and the bar,
and in the present petitions, the military and the police, on the extent of the protection given by constitutional
guarantees.[35] And lastly, respondents� contested actions are capable of repetition. Certainly, the petitions are
subject to judicial review.
In their attempt to prove the alleged mootness of this case, respondents cited Chief Justice Artemio V.
Panganiban�s Separate Opinion in Sanlakas v. Executive Secretary.[36] However, they failed to take into account the
Chief Justice�s very statement that an otherwise �moot� case may still be decided �provided the party raising it in
a proper case has been and/or continues to be prejudiced or damaged as a direct result of its issuance.� The present
case falls right within this exception to the mootness rule pointed out by the Chief Justice.

II- Legal Standing

In view of the number of petitioners suing in various personalities, the Court deems it imperative to have a
more than passing discussion on legal standing or locus standi.

Locus standi is defined as �a right of appearance in a court of justice on a given question.�[37] In private suits,
standing is governed by the �real-parties-in interest�rule as contained in Section 2, Rule 3 of the 1997 Rules of Civil
Procedure, as amended. It provides that �every action must be prosecuted or defended in the name of the real
party in interest.� Accordingly, the �real-party-in interest� is �the party who stands to be benefited or injured
by the judgment in the suit or the party entitled to the avails of the suit.�[38] Succinctly put, the plaintiff�s
standing is based on his own right to the relief sought.

The difficulty of determining locus standi arises in public suits. Here, the plaintiff who asserts a �public
right� in assailing an allegedly illegal official action, does so as a representative of the general public. He may be a
person who is affected no differently from any other person. He could be suing as a �stranger,� or in the category
of a �citizen,� or �taxpayer.� In either case, he has to adequately show that he is entitled to seek judicial
protection. In other words, he has to make out a sufficient interest in the vindication of the public order and the
securing of relief as a �citizen� or �taxpayer.

Case law in most jurisdictions now allows both �citizen� and �taxpayer� standing in public actions. The
distinction was first laid down in Beauchamp v. Silk,[39] where it was held that the plaintiff in a taxpayer�s suit is in
a different category from the plaintiff in a citizen�s suit. In the former, the plaintiff is affected by the expenditure
of public funds, while in the latter, he is but the mere instrument of the public concern. As held by the New
York Supreme Court in People ex rel Case v. Collins:[40] �In matter of mere public right, however�the people
are the real parties�It is at least the right, if not the duty, of every citizen to interfere and see that a public
offence be properly pursued and punished, and that a public grievance be remedied.� With respect to
taxpayer�s suits, Terr v. Jordan[41] held that �the right of a citizen and a taxpayer to maintain an action in courts
to restrain the unlawful use of public funds to his injury cannot be denied.�
However, to prevent just about any person from seeking judicial interference in any official policy or act with
which he disagreed with, and thus hinders the activities of governmental agencies engaged in public service, the United
State Supreme Court laid down the more stringent �direct injury� test in Ex Parte Levitt,[42] later reaffirmed
in Tileston v. Ullman.[43] The same Court ruled that for a private individual to invoke the judicial power to determine
the validity of an executive or legislative action, he must show that he has sustained a direct injury as a result of
that action, and it is not sufficient that he has a general interest common to all members of the public.

This Court adopted the �direct injury� test in our jurisdiction. In People v. Vera,[44] it held that the
person who impugns the validity of a statute must have �a personal and substantial interest in the case such that
he has sustained, or will sustain direct injury as a result.� The Vera doctrine was upheld in a litany of cases, such
as, Custodio v. President of the Senate,[45] Manila Race Horse Trainers� Association v. De la Fuente,[46] Pascual v.
Secretary of Public Works[47] and Anti-Chinese League of the Philippines v. Felix.[48]

However, being a mere procedural technicality, the requirement of locus standi may be waived by the Court
in the exercise of its discretion. This was done in the 1949 Emergency Powers Cases, Araneta v. Dinglasan,[49] where
the �transcendental importance� of the cases prompted the Court to act liberally. Such liberality was neither a
rarity nor accidental. In Aquino v. Comelec,[50] this Court resolved to pass upon the issues raised due to the �far-
reaching implications� of the petition notwithstanding its categorical statement that petitioner therein had no
personality to file the suit. Indeed, there is a chain of cases where this liberal policy has been observed, allowing
ordinary citizens, members of Congress, and civic organizations to prosecute actions involving the constitutionality
or validity of laws, regulations and rulings.[51]

Thus, the Court has adopted a rule that even where the petitioners have failed to show direct injury, they have
been allowed to sue under the principle of �transcendental importance.� Pertinent are the following cases:
(1) Chavez v. Public Estates Authority,[52] where the Court ruled that the enforcement of
the constitutional right to information and the equitable diffusion of natural resources are
matters of transcendental importance which clothe the petitioner with locus standi;

(2) Bagong Alyansang Makabayan v. Zamora,[53] wherein the Court held that �given the
transcendental importance of the issues involved, the Court may relax the standing
requirements and allow the suit to prosper despite the lack of direct injury to the parties
seeking judicial review� of the Visiting Forces Agreement;

(3) Lim v. Executive Secretary,[54] while the Court noted that the petitioners may not file
suit in their capacity as taxpayers absent a showing that �Balikatan 02-01� involves the exercise
of Congress� taxing or spending powers, it reiterated its ruling in Bagong Alyansang
Makabayan v. Zamora,[55] that in cases of transcendental importance, the cases must be settled
promptly and definitely and standing requirements may be relaxed.
By way of summary, the following rules may be culled from the cases decided by this Court. Taxpayers,
voters, concerned citizens, and legislators may be accorded standing to sue, provided that the following requirements
are met:

(1) the cases involve constitutional issues;

(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax
measure is unconstitutional;

(3) for voters, there must be a showing of obvious interest in the validity of the election law in
question;

(4) for concerned citizens, there must be a showing that the issues raised are of transcendental
importance which must be settled early; and

(5) for legislators, there must be a claim that the official action complained of infringes upon
their prerogatives as legislators.

Significantly, recent decisions show a certain toughening in the Court�s attitude toward legal standing.

In Kilosbayan, Inc. v. Morato,[56] the Court ruled that the status of Kilosbayan as a people�s organization does
not give it the requisite personality to question the validity of the on-line lottery contract, more so where it does not
raise any issue of constitutionality. Moreover, it cannot sue as a taxpayer absent any allegation that public funds are
being misused. Nor can it sue as a concerned citizen as it does not allege any specific injury it has suffered.

In Telecommunications and Broadcast Attorneys of the Philippines, Inc. v. Comelec,[57] the Court reiterated the
�direct injury� test with respect to concerned citizens� cases involving constitutional issues. It held that �there
must be a showing that the citizen personally suffered some actual or threatened injury arising from the alleged illegal
official act.�

In Lacson v. Perez,[58] the Court ruled that one of the petitioners, Laban ng Demokratikong Pilipino (LDP),
is not a real party-in-interest as it had not demonstrated any injury to itself or to its leaders, members or supporters.

In Sanlakas v. Executive Secretary,[59] the Court ruled that only the petitioners who are members of Congress
have standing to sue, as they claim that the President�s declaration of a state of rebellion is a usurpation of the
emergency powers of Congress, thus impairing their legislative powers. As to petitioners Sanlakas, Partido
Manggagawa, and Social Justice Society, the Court declared them to be devoid of standing, equating them with the
LDP in Lacson.

Now, the application of the above principles to the present petitions.

The locus standi of petitioners in G.R. No. 171396, particularly David and Llamas, is beyond doubt. The
same holds true with petitioners in G.R. No. 171409, Cacho-Olivares and Tribune Publishing Co. Inc. They alleged
�direct injury� resulting from �illegal arrest� and �unlawful search� committed by police operatives pursuant to
PP 1017. Rightly so, the Solicitor General does not question their legal standing.

In G.R. No. 171485, the opposition Congressmen alleged there was usurpation of legislative powers. They also
raised the issue of whether or not the concurrence of Congress is necessary whenever the alarming powers incident to
Martial Law are used. Moreover, it is in the interest of justice that those affected by PP 1017 can be represented by
their Congressmen in bringing to the attention of the Court the alleged violations of their basic rights.

In G.R. No. 171400, (ALGI), this Court applied the liberality rule in Philconsa v. Enriquez,[60] Kapatiran Ng
Mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan,[61] Association of Small Landowners in the Philippines,
Inc. v. Secretary of Agrarian Reform,[62] Basco v. Philippine Amusement and Gaming Corporation,[63] and Ta�ada v.
Tuvera,[64] that when the issue concerns a public right, it is sufficient that the petitioner is a citizen and has an interest
in the execution of the laws.

In G.R. No. 171483, KMU�s assertion that PP 1017 and G.O. No. 5 violated its right to peaceful assembly
may be deemed sufficient to give it legal standing. Organizations may be granted standing to assert the rights of
their members.[65] We take judicial notice of the announcement by the Office of the President banning all rallies
and canceling all permits for public assemblies following the issuance of PP 1017 and G.O. No. 5.

In G.R. No. 171489, petitioners, Cadiz et al., who are national officers of the Integrated Bar of the
Philippines (IBP) have no legal standing, having failed to allege any direct or potential injury which the IBP as an
institution or its members may suffer as a consequence of the issuance of PP No. 1017 and G.O. No. 5. In Integrated
Bar of the Philippines v. Zamora,[66] the Court held that the mere invocation by the IBP of its duty to preserve the
rule of law and nothing more, while undoubtedly true, is not sufficient to clothe it with standing in this case. This is
too general an interest which is shared by other groups and the whole citizenry. However, in view of the
transcendental importance of the issue, this Court declares that petitioner have locus standi.

In G.R. No. 171424, Loren Legarda has no personality as a taxpayer to file the instant petition as there are
no allegations of illegal disbursement of public funds. The fact that she is a former Senator is of no
consequence. She can no longer sue as a legislator on the allegation that her prerogatives as a lawmaker have been
impaired by PP 1017 and G.O. No. 5. Her claim that she is a media personality will not likewise aid her because
there was no showing that the enforcement of these issuances prevented her from pursuing her occupation. Her
submission that she has pending electoral protest before the Presidential Electoral Tribunal is likewise of no
relevance. She has not sufficiently shown that PP 1017 will affect the proceedings or result of her case. But
considering once more the transcendental importance of the issue involved, this Court may relax the standing rules.

It must always be borne in mind that the question of locus standi is but corollary to the bigger question of
proper exercise of judicial power. This is the underlying legal tenet of the �liberality doctrine� on legal standing. It
cannot be doubted that the validity of PP No. 1017 and G.O. No. 5 is a judicial question which is of paramount
importance to the Filipino people. To paraphrase Justice Laurel, the whole of Philippine society now waits with bated
breath the ruling of this Court on this very critical matter. The petitions thus call for the application of the
�transcendental importance� doctrine, a relaxation of the standing requirements for the petitioners in the �PP
1017 cases.�

This Court holds that all the petitioners herein have locus standi.

Incidentally, it is not proper to implead President Arroyo as respondent. Settled is the doctrine that the
President, during his tenure of office or actual incumbency,[67] may not be sued in any civil or criminal case, and there
is no need to provide for it in the Constitution or law. It will degrade the dignity of the high office of the President,
the Head of State, if he can be dragged into court litigations while serving as such. Furthermore, it is important that
he be freed from any form of harassment, hindrance or distraction to enable him to fully attend to the performance of
his official duties and functions. Unlike the legislative and judicial branch, only one constitutes the executive branch
and anything which impairs his usefulness in the discharge of the many great and important duties imposed upon him
by the Constitution necessarily impairs the operation of the Government. However, this does not mean that the
President is not accountable to anyone. Like any other official, he remains accountable to the people[68] but he may
be removed from office only in the mode provided by law and that is by impeachment. [69]

B. SUBSTANTIVE

I. Review of Factual Bases

Petitioners maintain that PP 1017 has no factual basis. Hence, it was not �necessary� for President Arroyo
to issue such Proclamation.
The issue of whether the Court may review the factual bases of the President�s exercise of his Commander-
in-Chief power has reached its distilled point - from the indulgent days of Barcelon v.
Baker[70] andMontenegro v. Castaneda[71] to the volatile era of Lansang
v. Garcia,[72] Aquino, Jr. v. Enrile,[73] and Garcia-Padilla v. Enrile.[74] The tug-of-war always cuts across the
line defining �political questions,� particularly those questions �in regard to which full discretionary authority has
been delegated to the legislative or executive branch of the government.�[75] Barcelon and Montenegro were in
unison in declaring that the authority to decide whether an exigency has arisen belongs to the President and his
decision is final and conclusive on the courts. Lansang took the opposite view. There, the members of the Court
were unanimous in the conviction that the Court has the authority to inquire into the existence of factual bases in order
to determine their constitutional sufficiency. From the principle of separation of powers, it shifted the focus to
the system of checks and balances, �under which the President is supreme, x x x only if and when he acts within
the sphere allotted to him by the Basic Law, and the authority to determine whether or not he has so
acted is vested in the Judicial Department, which in this respect, is, in turn,
constitutionally supreme.�[76] In 1973, the unanimous Court of Lansang was divided in Aquino v. Enrile.[77] There,
the Court was almost evenly divided on the issue of whether the validity of the imposition
of Martial Law is a political or justiciable question.[78] Then came Garcia-Padilla v. Enrile which greatly
diluted Lansang. It declared that there is a need to re-examine the latter case, ratiocinating that �in times of war or
national emergency, the President must be given absolute control for the very life of the nation and the
government is in great peril. The President, it intoned, is answerable only to his conscience, the People, and
God.�[79]

The Integrated Bar of the Philippines v. Zamora [80] -- a recent case most pertinent to these cases at bar -
- echoed a principle similar to Lansang. While the Court considered the President�s �calling-out� power as a
discretionary power solely vested in his wisdom, it stressed that �this does not prevent an examination of whether
such power was exercised within permissible constitutional limits or whether it was exercised in a manner
constituting grave abuse of discretion.� This ruling is mainly a result of the Court�s reliance on Section 1, Article
VIII of 1987 Constitution which fortifies the authority of the courts to determine in an appropriate action the validity
of the acts of the political departments. Under the new definition of judicial power, the courts are authorized not only
�to settle actual controversies involving rights which are legally demandable and enforceable,� but also �to
determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction
on the part of any branch or instrumentality of the government.� The latter part of the authority represents a
broadening of judicial power to enable the courts of justice to review what was before a forbidden territory, to wit,
the discretion of the political departments of the government. [81] It speaks of judicial prerogative not only in terms
of power but also of duty.[82]
As to how the Court may inquire into the President�s exercise of power, Lansang adopted the test that

�judicial inquiry can go no further than to satisfy the Court not that the President�s decision is correct,� but that

�the President did not act arbitrarily.� Thus, the standard laid down is not correctness, but

arbitrariness.[83] In Integrated Bar of the Philippines, this Court further ruled that �it is incumbent upon the

petitioner to show that the President�s decision is totally bereft of factual basis� and that if he fails, by way of

proof, to support his assertion, then �this Court cannot undertake an independent investigation beyond the

pleadings.�

Petitioners failed to show that President Arroyo�s exercise of the calling-out power, by issuing PP 1017, is
totally bereft of factual basis. A reading of the Solicitor General�s Consolidated Comment and Memorandum shows
a detailed narration of the events leading to the issuance of PP 1017, with supporting reports forming part of the
records. Mentioned are the escape of the Magdalo Group, their audacious threat of the Magdalo D-Day, the defections
in the military, particularly in the Philippine Marines, and the reproving statements from the communist leaders. There
was also the Minutes of the Intelligence Report and Security Group of the Philippine Army showing the growing
alliance between the NPA and the military. Petitioners presented nothing to refute such events. Thus, absent any
contrary allegations, the Court is convinced that the President was justified in issuing PP 1017 calling for military aid.

Indeed, judging the seriousness of the incidents, President Arroyo was not expected to simply fold her arms
and do nothing to prevent or suppress what she believed was lawless violence, invasion or rebellion. However, the
exercise of such power or duty must not stifle liberty.

II. Constitutionality of PP 1017 and G.O. No. 5

Doctrines of Several Political Theorists


on the Power of the President
in Times of Emergency

This case brings to fore a contentious subject -- the power of the President in times of emergency. A glimpse

at the various political theories relating to this subject provides an adequate backdrop for our ensuing discussion.

John Locke, describing the architecture of civil government, called upon the English doctrine of prerogative

to cope with the problem of emergency. In times of danger to the nation, positive law enacted by the legislature might

be inadequate or even a fatal obstacle to the promptness of action necessary to avert catastrophe. In these situations,
the Crown retained a prerogative �power to act according to discretion for the public good, without the

proscription of the law and sometimes even against it.�[84] But Locke recognized that this moral restraint might

not suffice to avoid abuse of prerogative powers. Who shall judge the need for resorting to the prerogative and

how may its abuse be avoided? Here, Locke readily admitted defeat, suggesting that �the people have no other

remedy in this, as in all other cases where they have no judge on earth, but to appeal to Heaven.�[85]

Jean-Jacques Rousseau also assumed the need for temporary suspension of democratic processes of

government in time of emergency. According to him:

The inflexibility of the laws, which prevents them from adopting themselves to
circumstances, may, in certain cases, render them disastrous and make them bring about, at a time
of crisis, the ruin of the State�

It is wrong therefore to wish to make political institutions as strong as to render it


impossible to suspend their operation. Even Sparta allowed its law to lapse...

If the peril is of such a kind that the paraphernalia of the laws are an obstacle to their
preservation, the method is to nominate a supreme lawyer, who shall silence all the laws and suspend
for a moment the sovereign authority. In such a case, there is no doubt about the general will, and it
clear that the people�s first intention is that the State shall not perish.[86]

Rosseau did not fear the abuse of the emergency dictatorship or �supreme magistracy�as he termed it. For
him, it would more likely be cheapened by �indiscreet use.� He was unwilling to rely upon an �appeal to
heaven.� Instead, he relied upon a tenure of office of prescribed duration to avoid perpetuation of the dictatorship.[87]

John Stuart Mill concluded his ardent defense of representative government: �I am far from condemning,
in cases of extreme necessity, the assumption of absolute power in the form of a temporary dictatorship.�[88]

Nicollo Machiavelli�s view of emergency powers, as one element in the whole scheme of limited
government, furnished an ironic contrast to the Lockean theory of prerogative. He recognized and attempted to bridge
this chasm in democratic political theory, thus:

Now, in a well-ordered society, it should never be necessary to resort to extra �constitutional


measures; for although they may for a time be beneficial, yet the precedent is pernicious, for if the
practice is once established for good objects, they will in a little while be disregarded under that
pretext but for evil purposes. Thus, no republic will ever be perfect if she has not by law provided
for everything, having a remedy for every emergency and fixed rules for applying it. [89]
Machiavelli � in contrast to Locke, Rosseau and Mill �sought to incorporate into the constitution a regularized
system of standby emergency powers to be invoked with suitable checks and controls in time of national danger. He
attempted forthrightly to meet the problem of combining a capacious reserve of power and speed and vigor in its
application in time of emergency, with effective constitutional restraints. [90]

Contemporary political theorists, addressing themselves to the problem of response to emergency by


constitutional democracies, have employed the doctrine of constitutional dictatorship. [91] Frederick M. Watkins saw
�no reason why absolutism should not be used as a means for the defense of liberal institutions,� provided it
�serves to protect established institutions from the danger of permanent injury in a period of temporary
emergency and is followed by a prompt return to the previous forms of political life.�[92] He recognized the two
(2) key elements of the problem of emergency governance, as well as all constitutional governance: increasing
administrative powers of the executive, while at the same time �imposing limitation upon that
power.�[93] Watkins placed his real faith in a scheme of constitutional dictatorship. These are the conditions of
success of such a dictatorship: �The period of dictatorship must be relatively short�Dictatorship should always
be strictly legitimate in character�Final authority to determine the need for dictatorship in any given case
must never rest with the dictator himself��[94]and the objective of such an emergency dictatorship should be
�strict political conservatism.�

Carl J. Friedrich cast his analysis in terms similar to those of Watkins.[95] �It is a problem of concentrating
power � in a government where power has consciously been divided � to cope with� situations of unprecedented
magnitude and gravity. There must be a broad grant of powers, subject to equally strong limitations as to who shall
exercise such powers, when, for how long, and to what end.�[96] Friedrich, too, offered criteria for judging the
adequacy of any of scheme of emergency powers, to wit: �The emergency executive must be appointed by
constitutional means � i.e., he must be legitimate; he should not enjoy power to determine the existence of an
emergency; emergency powers should be exercised under a strict time limitation; and last, the objective of
emergency action must be the defense of the constitutional order.�[97]

Clinton L. Rossiter, after surveying the history of the employment of emergency powers in Great Britain,
France, Weimar, Germany and the United States, reverted to a description of a scheme of �constitutional
dictatorship�as solution to the vexing problems presented by emergency.[98] Like Watkins and Friedrich, he stated a
priori the conditions of success of the �constitutional dictatorship,� thus:

1) No general regime or particular institution of constitutional dictatorship should


be initiated unless it is necessary or even indispensable to the preservation of the State and
its constitutional order�
2) �the decision to institute a constitutional dictatorship should never be in the
hands of the man or men who will constitute the dictator�

3) No government should initiate a constitutional dictatorship without making


specific provisions for its termination�

4) �all uses of emergency powers and all readjustments in the organization of


the government should be effected in pursuit of constitutional or legal requirements�

5) � no dictatorial institution should be adopted, no right invaded, no regular


procedure altered any more than is absolutely necessary for the conquest of the particular
crisis . . .

6) The measures adopted in the prosecution of the a constitutional dictatorship


should never be permanent in character or effect�

7) The dictatorship should be carried on by persons representative of every part


of the citizenry interested in the defense of the existing constitutional order. . .

8) Ultimate responsibility should be maintained for every action taken under a


constitutional dictatorship. . .

9) The decision to terminate a constitutional dictatorship, like the decision to


institute one should never be in the hands of the man or men who constitute the dictator. .
.

10) No constitutional dictatorship should extend beyond the termination of the


crisis for which it was instituted�

11) �the termination of the crisis must be followed by a complete return as


possible to the political and governmental conditions existing prior to the initiation of the
constitutional dictatorship�[99]

Rossiter accorded to legislature a far greater role in the oversight exercise of emergency powers than did Watkins. He
would secure to Congress final responsibility for declaring the existence or termination of an emergency, and he places
great faith in the effectiveness of congressional investigating committees. [100]
Scott and Cotter, in analyzing the above contemporary theories in light of recent experience, were one in saying
that, �the suggestion that democracies surrender the control of government to an authoritarian ruler in time
of grave danger to the nation is not based upon sound constitutional theory.� To appraise emergency power in
terms of constitutional dictatorship serves merely to distort the problem and hinder realistic analysis. It matters not
whether the term �dictator� is used in its normal sense (as applied to authoritarian rulers) or is employed to embrace
all chief executives administering emergency powers. However used, �constitutional dictatorship� cannot be
divorced from the implication of suspension of the processes of constitutionalism. Thus, they favored instead the
�concept of constitutionalism� articulated by Charles H. McIlwain:

A concept of constitutionalism which is less misleading in the analysis of problems of


emergency powers, and which is consistent with the findings of this study, is that formulated by
Charles H. McIlwain. While it does not by any means necessarily exclude some indeterminate
limitations upon the substantive powers of government, full emphasis is placed upon procedural
limitations, and political responsibility. McIlwain clearly recognized the need to repose adequate
power in government. And in discussing the meaning of constitutionalism, he insisted that
the historical and proper test of constitutionalism was the existence of adequate processes for
keeping government responsible. He refused to equate constitutionalism with the enfeebling of
government by an exaggerated emphasis upon separation of powers and substantive limitations on
governmental power. He found that the really effective checks on despotism have consisted not in
the weakening of government but, but rather in the limiting of it; between which there is a great and
very significant difference. In associating constitutionalism with �limited� as distinguished
from �weak� government, McIlwain meant government limited to the orderly procedure of
law as opposed to the processes of force. The two fundamental correlative elements of
constitutionalism for which all lovers of liberty must yet fight are the legal limits to arbitrary
power and a complete political responsibility of government to the governed.[101]

In the final analysis, the various approaches to emergency of the above political theorists �- from Lock�s
�theory of prerogative,� to Watkins� doctrine of �constitutional dictatorship� and, eventually, to McIlwain�s
�principle of constitutionalism� --- ultimately aim to solve one real problem in emergency governance, i.e., that of
allotting increasing areas of discretionary power to the Chief Executive, while insuring that such powers will
be exercised with a sense of political responsibility and under effective limitations and checks.

Our Constitution has fairly coped with this problem. Fresh from the fetters of a repressive regime, the 1986
Constitutional Commission, in drafting the 1987 Constitution, endeavored to create a government in the concept of
Justice Jackson�s �balanced power structure.�[102] Executive, legislative, and judicial powers are dispersed to the
President, the Congress, and the Supreme Court, respectively. Each is supreme within its own sphere. But none has
the monopoly of power in times of emergency. Each branch is given a role to serve as limitation or check upon
the other. This system does not weaken the President, it just limits his power, using the language of
McIlwain. In other words, in times of emergency, our Constitution reasonably demands that we repose a certain
amount of faith in the basic integrity and wisdom of the Chief Executive but, at the same time, it obliges him to
operate within carefully prescribed procedural limitations.

a. �Facial Challenge�

Petitioners contend that PP 1017 is void on its face because of its �overbreadth.� They claim that its
enforcement encroached on both unprotected and protected rights under Section 4, Article III of the Constitution and
sent a �chilling effect� to the citizens.

A facial review of PP 1017, using the overbreadth doctrine, is uncalled for.


First and foremost, the overbreadth doctrine is an analytical tool developed for testing �on their faces�
statutes in free speech cases, also known under the American Law as First Amendment cases.[103]

A plain reading of PP 1017 shows that it is not primarily directed to speech or even speech-related conduct. It
is actually a call upon the AFP to prevent or suppress all forms of lawless violence. In United States v.
Salerno,[104] the US Supreme Court held that �we have not recognized an �overbreadth� doctrine outside the
limited context of the First Amendment� (freedom of speech).

Moreover, the overbreadth doctrine is not intended for testing the validity of a law that �reflects legitimate
state interest in maintaining comprehensive control over harmful, constitutionally unprotected conduct.�
Undoubtedly, lawless violence, insurrection and rebellion are considered �harmful� and �constitutionally
unprotected conduct.� In Broadrick v. Oklahoma,[105] it was held:

It remains a �matter of no little difficulty� to determine when a law may properly be held
void on its face and when �such summary action� is inappropriate. But the plain import of our
cases is, at the very least, that facial overbreadth adjudication is an exception to our traditional
rules of practice and that its function, a limited one at the outset, attenuates as the otherwise
unprotected behavior that it forbids the State to sanction moves from �pure speech� toward
conductand that conduct �even if expressive � falls within the scope of otherwise valid
criminal laws that reflect legitimate state interests in maintaining comprehensive controls over
harmful, constitutionally unprotected conduct.

Thus, claims of facial overbreadth are entertained in cases involving statutes which, by their terms, seek to
regulate only �spoken words� and again, that �overbreadth claims, if entertained at all, have been curtailed
when invoked against ordinary criminal laws that are sought to be applied to protected conduct.�[106] Here,
the incontrovertible fact remains that PP 1017 pertains to a spectrum of conduct, not free speech, which is manifestly
subject to state regulation.

Second, facial invalidation of laws is considered as �manifestly strong medicine,�to be used �sparingly and
only as a last resort,� and is �generally disfavored;�[107] The reason for this is obvious. Embedded in the
traditional rules governing constitutional adjudication is the principle that a person to whom a law may be applied will
not be heard to challenge a law on the ground that it may conceivably be applied unconstitutionally to others, i.e., in
other situations not before the Court.[108] A writer and scholar in Constitutional Law explains further:

The most distinctive feature of the overbreadth technique is that it marks an


exception to some of the usual rules of constitutional litigation. Ordinarily, a particular
litigant claims that a statute is unconstitutional as applied to him or her; if the litigant prevails,
the courts carve away the unconstitutional aspects of the law by invalidating its improper
applications on a case to case basis. Moreover, challengers to a law are not permitted to raise
the rights of third parties and can only assert their own interests. In overbreadth analysis,
those rules give way; challenges are permitted to raise the rights of third parties; and the court
invalidates the entire statute �on its face,� not merely �as applied for� so that the overbroad law
becomes unenforceable until a properly authorized court construes it more narrowly. The factor
that motivates courts to depart from the normal adjudicatory rules is the concern with the
�chilling;�deterrent effect of the overbroad statute on third parties not courageous enough to bring
suit. The Court assumes that an overbroad law�s �very existence may cause others not before the
court to refrain from constitutionally protected speech or expression.� An overbreadth ruling is
designed to remove that deterrent effect on the speech of those third parties.

In other words, a facial challenge using the overbreadth doctrine will require the Court to examine PP 1017
and pinpoint its flaws and defects, not on the basis of its actual operation to petitioners, but on the assumption or
prediction that its very existence may cause others not before the Court to refrain from constitutionally protected
speech or expression. In Younger v. Harris,[109] it was held that:

[T]he task of analyzing a proposed statute, pinpointing its deficiencies, and requiring
correction of these deficiencies before the statute is put into effect, is rarely if ever an appropriate
task for the judiciary. The combination of the relative remoteness of the controversy, the impact
on the legislative process of the relief sought, and above all the speculative and amorphous
nature of the required line-by-line analysis of detailed statutes,...ordinarily results in a kind of
case that is wholly unsatisfactory for deciding constitutional questions, whichever way they might
be decided.

And third, a facial challenge on the ground of overbreadth is the most difficult challenge to mount
successfully, since the challenger must establish that there can be no instance when the assailed law may be
valid. Here, petitioners did not even attempt to show whether this situation exists.

Petitioners likewise seek a facial review of PP 1017 on the ground of vagueness. This, too, is unwarranted.

Related to the �overbreadth� doctrine is the �void for vagueness doctrine� which holds that �a law is
facially invalid if men of common intelligence must necessarily guess at its meaning and differ as to its
application.�[110] It is subject to the same principles governing overbreadth doctrine. For one, it is also an analytical
tool for testing �on their faces� statutes in free speech cases. And like overbreadth, it is said that a litigant may
challenge a statute on its face only if it is vague in all its possible applications. Again, petitioners did not even
attempt to show that PP 1017 is vague in all its application. They also failed to establish that men of common
intelligence cannot understand the meaning and application of PP 1017.

b. Constitutional Basis of PP 1017

Now on the constitutional foundation of PP 1017.


The operative portion of PP 1017 may be divided into three important provisions, thus:

First provision:

�by virtue of the power vested upon me by Section 18, Artilce VII �do hereby command
the Armed Forces of the Philippines, to maintain law and order throughout the Philippines, prevent
or suppress all forms of lawless violence as well any act of insurrection or rebellion�

Second provision:

�and to enforce obedience to all the laws and to all decrees, orders and regulations
promulgated by me personally or upon my direction;�

Third provision:

�as provided in Section 17, Article XII of the Constitution do hereby declare a State of
National Emergency.�

First Provision: Calling-out Power

The first provision pertains to the President�s calling-out power. In


[111]
Sanlakas v. Executive Secretary, this Court, through Mr. Justice Dante O. Tinga, held that Section 18, Article VII
of the Constitution reproduced as follows:

Sec. 18. The President shall be the Commander-in-Chief of all armed forces of the
Philippines and whenever it becomes necessary, he may call out such armed forces to prevent
or suppress lawless violence, invasion or rebellion. In case of invasion or rebellion, when the
public safety requires it, he may, for a period not exceeding sixty days, suspend the privilege of the
writ of habeas corpus or place the Philippines or any part thereof under martial law. Within forty-
eight hours from the proclamation of martial law or the suspension of the privilege of the writ
of habeas corpus, the President shall submit a report in person or in writing to the Congress. The
Congress, voting jointly, by a vote of at least a majority of all its Members in regular or special
session, may revoke such proclamation or suspension, which revocation shall not be set aside by the
President. Upon the initiative of the President, the Congress may, in the same manner, extend such
proclamation or suspension for a period to be determined by the Congress, if the invasion or
rebellion shall persist and public safety requires it.

The Congress, if not in session, shall within twenty-four hours following such proclamation or
suspension, convene in accordance with its rules without need of a call.

The Supreme Court may review, in an appropriate proceeding filed by any citizen, the
sufficiency of the factual bases of the proclamation of martial law or the suspension of the privilege
of the writ or the extension thereof, and must promulgate its decision thereon within thirty days from
its filing.

A state of martial law does not suspend the operation of the Constitution, nor supplant the
functioning of the civil courts or legislative assemblies, nor authorize the conferment of jurisdiction
on military courts and agencies over civilians where civil courts are able to function, nor
automatically suspend the privilege of the writ.

The suspension of the privilege of the writ shall apply only to persons judicially charged for
rebellion or offenses inherent in or directly connected with invasion.

During the suspension of the privilege of the writ, any person thus arrested or detained shall be
judicially charged within three days, otherwise he shall be released.

grants the President, as Commander-in-Chief, a �sequence� of graduated powers. From the most to the least benign,
these are: the calling-out power, the power to suspend the privilege of the writ of habeas corpus, and the power to
declare Martial Law. Citing Integrated Bar of the Philippines v. Zamora,[112] the Court ruled that the only criterion
for the exercise of the calling-out power is that �whenever it becomes necessary,� the President may call the armed
forces �to prevent or suppress lawless violence, invasion or rebellion.� Are these conditions present in the instant
cases? As stated earlier, considering the circumstances then prevailing, President Arroyo found it necessary to issue
PP 1017. Owing to her Office�s vast intelligence network, she is in the best position to determine the actual condition
of the country.

Under the calling-out power, the President may summon the armed forces to aid him in suppressing lawless
violence, invasion and rebellion. This involves ordinary police action. But every act that goes beyond the
President�s calling-out power is considered illegal or ultra vires. For this reason, a President must be careful in the
exercise of his powers. He cannot invoke a greater power when he wishes to act under a lesser power. There lies the
wisdom of our Constitution, the greater the power, the greater are the limitations.

It is pertinent to state, however, that there is a distinction between the President�s authority to declare a �state
of rebellion� (in Sanlakas) and the authority to proclaim a state of national emergency. While President Arroyo�s
authority to declare a �state of rebellion� emanates from her powers as Chief Executive, the statutory authority cited
in Sanlakas was Section 4, Chapter 2, Book II of the Revised Administrative Code of 1987, which provides:
SEC. 4. � Proclamations. � Acts of the President fixing a date or declaring a status
or condition of public moment or interest, upon the existence of which the operation of a
specific law or regulation is made to depend, shall be promulgated in proclamations which
shall have the force of an executive order.

President Arroyo�s declaration of a �state of rebellion� was merely an act declaring a status or condition of
public moment or interest, a declaration allowed under Section 4 cited above. Such declaration, in the words
of Sanlakas, is harmless, without legal significance, and deemed not written. In these cases, PP 1017 is more than
that. In declaring a state of national emergency, President Arroyo did not only rely on Section 18, Article VII of the
Constitution, a provision calling on the AFP to prevent or suppress lawless violence, invasion or rebellion. She also
relied on Section 17, Article XII, a provision on the State�s extraordinary power to take over privately-owned public
utility and business affected with public interest. Indeed, PP 1017 calls for the exercise of an awesome
power. Obviously, such Proclamation cannot be deemed harmless, without legal significance, or not written, as in
the case of Sanlakas.

Some of the petitioners vehemently maintain that PP 1017 is actually a declaration of Martial Law. It is no
so. What defines the character of PP 1017 are its wordings. It is plain therein that what the President invoked was
her calling-out power.

The declaration of Martial Law is a �warn[ing] to citizens that the military power has been called upon by the
executive to assist in the maintenance of law and order, and that, while the emergency lasts, they must, upon pain of
arrest and punishment, not commit any acts which will in any way render more difficult the restoration of order and
the enforcement of law.�[113]

In his �Statement before the Senate Committee on Justice� on March 13, 2006, Mr. Justice Vicente V.
Mendoza,[114] an authority in constitutional law, said that of the three powers of the President as Commander-in-Chief,
the power to declare Martial Law poses the most severe threat to civil liberties. It is a strong medicine which should
not be resorted to lightly. It cannot be used to stifle or persecute critics of the government. It is placed in the keeping
of the President for the purpose of enabling him to secure the people from harm and to restore order so that they can
enjoy their individual freedoms. In fact, Section 18, Art. VII, provides:

A state of martial law does not suspend the operation of the Constitution, nor supplant the
functioning of the civil courts or legislative assemblies, nor authorize the conferment of jurisdiction
on military courts and agencies over civilians where civil courts are able to function, nor
automatically suspend the privilege of the writ.

Justice Mendoza also stated that PP 1017 is not a declaration of Martial Law. It is no more than a call by the
President to the armed forces to prevent or suppress lawless violence. As such, it cannot be used to justify acts that
only under a valid declaration of Martial Law can be done. Its use for any other purpose is a perversion of its nature
and scope, and any act done contrary to its command is ultra vires.

Justice Mendoza further stated that specifically, (a) arrests and seizures without judicial warrants; (b) ban on
public assemblies; (c) take-over of news media and agencies and press censorship; and (d) issuance of Presidential
Decrees, are powers which can be exercised by the President as Commander-in-Chief only where there is a valid
declaration of Martial Law or suspension of the writ of habeas corpus.

Based on the above disquisition, it is clear that PP 1017 is not a declaration of Martial Law. It is merely an
exercise of President Arroyo�s calling-out power for the armed forces to assist her in preventing or suppressing
lawless violence.

Second Provision: �Take Care� Power

The second provision pertains to the power of the President to ensure that the laws be faithfully
executed. This is based on Section 17, Article VII which reads:

SEC. 17. The President shall have control of all the executive departments, bureaus, and
offices. He shall ensure that the laws be faithfully executed.

As the Executive in whom the executive power is vested, [115] the primary function of the President is to
enforce the laws as well as to formulate policies to be embodied in existing laws. He sees to it that all laws are
enforced by the officials and employees of his department. Before assuming office, he is required to take an oath or
affirmation to the effect that as President of the Philippines, he will, among others, �execute its laws.�[116] In the
exercise of such function, the President, if needed, may employ the powers attached to his office as the Commander-
in-Chief of all the armed forces of the country,[117] including the Philippine National Police[118] under the Department
of Interior and Local Government.[119]

Petitioners, especially Representatives Francis Joseph G. Escudero, Satur Ocampo, Rafael Mariano, Teodoro
Casi�o, Liza Maza, and Josel Virador argue that PP 1017 is unconstitutional as it arrogated upon President Arroyo
the power to enact laws and decrees in violation of Section 1, Article VI of the Constitution, which vests the power to
enact laws in Congress. They assail the clause �to enforce obedience to all the laws and to all decrees, orders and
regulations promulgated by me personally or upon my direction.�
\

Petitioners� contention is understandable. A reading of PP 1017 operative clause shows that it was
lifted[120]from Former President Marcos� Proclamation No. 1081, which partly reads:

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines by


virtue of the powers vested upon me by Article VII, Section 10, Paragraph (2) of the Constitution,
do hereby place the entire Philippines as defined in Article 1, Section 1 of the Constitution under
martial law and, in my capacity as their Commander-in-Chief, do hereby command the Armed
Forces of the Philippines, to maintain law and order throughout the Philippines, prevent or
suppress all forms of lawless violence as well as any act of insurrection or rebellion and to
enforce obedience to all the laws and decrees, orders and regulations promulgated by me
personally or upon my direction.

We all know that it was PP 1081 which granted President Marcos legislative power. Its enabling clause
states: �to enforce obedience to all the laws and decrees, orders and regulations promulgated by me personally
or upon my direction.� Upon the other hand, the enabling clause of PP 1017 issued by President Arroyo is: to
enforce obedience to all the laws and to all decrees, orders and regulations promulgated by me personally or
upon my direction.�

Is it within the domain of President Arroyo to promulgate �decrees�?

PP 1017 states in part: �to enforce obedience to all the laws and decrees x x x promulgated by me
personally or upon my direction.�

The President is granted an Ordinance Power under Chapter 2, Book III of Executive Order No. 292
(Administrative Code of 1987). She may issue any of the following:

Sec. 2. Executive Orders. � Acts of the President providing for rules of a general or
permanent character in implementation or execution of constitutional or statutory powers shall be
promulgated in executive orders.
Sec. 3. Administrative Orders. � Acts of the President which relate to particular aspect of
governmental operations in pursuance of his duties as administrative head shall be promulgated in
administrative orders.
Sec. 4. Proclamations. � Acts of the President fixing a date or declaring a status or
condition of public moment or interest, upon the existence of which the operation of a specific law
or regulation is made to depend, shall be promulgated in proclamations which shall have the force
of an executive order.
Sec. 5. Memorandum Orders. � Acts of the President on matters of administrative detail
or of subordinate or temporary interest which only concern a particular officer or office of the
Government shall be embodied in memorandum orders.
Sec. 6. Memorandum Circulars. � Acts of the President on matters relating to internal
administration, which the President desires to bring to the attention of all or some of the departments,
agencies, bureaus or offices of the Government, for information or compliance, shall be embodied
in memorandum circulars.
Sec. 7. General or Special Orders. � Acts and commands of the President in his capacity
as Commander-in-Chief of the Armed Forces of the Philippines shall be issued as general or special
orders.

President Arroyo�s ordinance power is limited to the foregoing issuances. She cannot issue decrees similar
to those issued by Former President Marcos under PP 1081. Presidential Decrees are laws which are of the same
category and binding force as statutes because they were issued by the President in the exercise of his legislative power
during the period of Martial Law under the 1973 Constitution. [121]

This Court rules that the assailed PP 1017 is unconstitutional insofar as it grants President Arroyo the
authority to promulgate �decrees.� Legislative power is peculiarly within the province of the Legislature. Section
1, Article VI categorically states that �[t]he legislative power shall be vested in the Congress of the Philippines
which shall consist of a Senate and a House of Representatives.� To be sure, neither Martial Law nor a state of
rebellion nor a state of emergency can justify President Arroyo�s exercise of legislative power by issuing decrees.

Can President Arroyo enforce obedience to all decrees and laws through the military?

As this Court stated earlier, President Arroyo has no authority to enact decrees. It follows that these decrees are
void and, therefore, cannot be enforced. With respect to �laws,� she cannot call the military to enforce or implement
certain laws, such as customs laws, laws governing family and property relations, laws on obligations and contracts
and the like. She can only order the military, under PP 1017, to enforce laws pertinent to its duty to suppress lawless
violence.

Third Provision: Power to Take Over

The pertinent provision of PP 1017 states:


x x x and to enforce obedience to all the laws and to all decrees, orders,
and regulations promulgated by me personally or upon my direction; and as
provided in Section 17, Article XII of the Constitution do hereby declare a
state of national emergency.

The import of this provision is that President Arroyo, during the state of national emergency under PP 1017,
can call the military not only to enforce obedience �to all the laws and to all decrees x x x� but also to act pursuant
to the provision of Section 17, Article XII which reads:

Sec. 17. In times of national emergency, when the public interest so requires, the State may,
during the emergency and under reasonable terms prescribed by it, temporarily take over or direct
the operation of any privately-owned public utility or business affected with public interest.

What could be the reason of President Arroyo in invoking the above provision when she issued PP 1017?

The answer is simple. During the existence of the state of national emergency, PP 1017 purports to grant the
President, without any authority or delegation from Congress, to take over or direct the operation of any privately-
owned public utility or business affected with public interest.

This provision was first introduced in the 1973 Constitution, as a product of the �martial law� thinking of
the 1971 Constitutional Convention.[122] In effect at the time of its approval was President Marcos� Letter of
Instruction No. 2 dated September 22, 1972 instructing the Secretary of National Defense to take over
�the management, control and operation of the Manila Electric Company, the Philippine Long Distance Telephone
Company, the National Waterworks and Sewerage Authority, the Philippine National Railways, the Philippine Air
Lines, Air Manila (and) Filipinas Orient Airways . . . for the successful prosecution by the Government of its effort to
contain, solve and end the present national emergency.�

Petitioners, particularly the members of the House of Representatives, claim that President Arroyo�s inclusion
of Section 17, Article XII in PP 1017 is an encroachment on the legislature�s emergency powers.

This is an area that needs delineation.

A distinction must be drawn between the President�s authority to declare �a state of national emergency�
and to exercise emergency powers. To the first, as elucidated by the Court, Section 18, Article VII grants the
President such power, hence, no legitimate constitutional objection can be raised. But to the second, manifold
constitutional issues arise.
Section 23, Article VI of the Constitution reads:

SEC. 23. (1) The Congress, by a vote of two-thirds of both Houses in joint session
assembled, voting separately, shall have the sole power to declare the existence of a state of war.

(2) In times of war or other national emergency, the Congress may, by law, authorize the
President, for a limited period and subject to such restrictions as it may prescribe, to exercise powers
necessary and proper to carry out a declared national policy. Unless sooner withdrawn by resolution
of the Congress, such powers shall cease upon the next adjournment thereof.

It may be pointed out that the second paragraph of the above provision refers not only to war but also to �other
national emergency.� If the intention of the Framers of our Constitution was to withhold from the President the
authority to declare a �state of national emergency�pursuant to Section 18, Article VII (calling-out power) and grant
it to Congress (like the declaration of the existence of a state of war), then the Framers could have provided
so. Clearly, they did not intend that Congress should first authorize the President before he can declare a �state of
national emergency.� The logical conclusion then is that President Arroyo could validly declare the existence of a
state of national emergency even in the absence of a Congressional enactment.

But the exercise of emergency powers, such as the taking over of privately owned public utility or business
affected with public interest, is a
different matter. This requires a delegation from Congress.

Courts have often said that constitutional provisions in pari materia are to be construed together. Otherwise
stated, different clauses, sections, and provisions of a constitution which relate to the same subject matter will be
construed together and considered in the light of each other.[123] Considering that Section 17 of Article XII and Section
23 of Article VI, previously quoted, relate to national emergencies, they must be read together to determine the
limitation of the exercise of emergency powers.

Generally, Congress is the repository of emergency powers. This is evident in the tenor of Section 23 (2),
Article VI authorizing it to delegate such powers to the President. Certainly, a body cannot delegate a power not
reposed upon it. However, knowing that during grave emergencies, it may not be possible or practicable for Congress
to meet and exercise its powers, the Framers of our Constitution deemed it wise to allow Congress to grant emergency
powers to the President, subject to certain conditions, thus:

(1) There must be a war or other emergency.

(2) The delegation must be for a limited period only.

(3) The delegation must be subject to such restrictions as the Congress may prescribe.
(4) The emergency powers must be exercised to carry out a national policy declared by
Congress.[124]

Section 17, Article XII must be understood as an aspect of the emergency powers clause. The taking over of
private business affected with public interest is just another facet of the emergency powers generally reposed upon
Congress. Thus, when Section 17 states that the �the State may, during the emergency and under reasonable
terms prescribed by it, temporarily take over or direct the operation of any privately owned public utility or
business affected with public interest,� it refers to Congress, not the President. Now, whether or not the President
may exercise such power is dependent on whether Congress may delegate it to him pursuant to a law prescribing the
reasonable terms thereof. Youngstown Sheet & Tube Co. et al. v. Sawyer,[125] held:

It is clear that if the President had authority to issue the order he did, it must be found in
some provision of the Constitution. And it is not claimed that express constitutional language grants
this power to the President. The contention is that presidential power should be implied from the
aggregate of his powers under the Constitution. Particular reliance is placed on provisions in Article
II which say that �The executive Power shall be vested in a President . . . .;� that �he shall take
Care that the Laws be faithfully executed;�and that he �shall be Commander-in-Chief of the Army
and Navy of the United States.

The order cannot properly be sustained as an exercise of the President�s military power as
Commander-in-Chief of the Armed Forces. The Government attempts to do so by citing a number
of cases upholding broad powers in military commanders engaged in day-to-day fighting in a theater
of war. Such cases need not concern us here. Even though �theater of war� be an expanding
concept, we cannot with faithfulness to our constitutional system hold that the Commander-
in-Chief of the Armed Forces has the ultimate power as such to take possession of private
property in order to keep labor disputes from stopping production. This is a job for the
nation�s lawmakers, not for its military authorities.

Nor can the seizure order be sustained because of the several constitutional provisions
that grant executive power to the President. In the framework of our Constitution, the
President�s power to see that the laws are faithfully executed refutes the idea that he is to be
a lawmaker. The Constitution limits his functions in the lawmaking process to the
recommending of laws he thinks wise and the vetoing of laws he thinks bad. And the
Constitution is neither silent nor equivocal about who shall make laws which the President is
to execute. The first section of the first article says that �All legislative Powers herein granted
shall be vested in a Congress of the United States. . .�[126]

Petitioner Cacho-Olivares, et al. contends that the term �emergency� under Section 17, Article XII refers
to �tsunami,� �typhoon,� �hurricane� and �similar occurrences.� This is a limited view of
�emergency.�
Emergency, as a generic term, connotes the existence of conditions suddenly intensifying the degree of
existing danger to life or well-being beyond that which is accepted as normal. Implicit in this definitions are the
elements of intensity, variety, and perception.[127] Emergencies, as perceived by legislature or executive in the United
Sates since 1933, have been occasioned by a wide range of situations, classifiable under three (3) principal
heads: a) economic,[128]b) natural disaster,[129] and c) national security.[130]

�Emergency,� as contemplated in our Constitution, is of the same breadth. It may include rebellion,
economic crisis, pestilence or epidemic, typhoon, flood, or other similar catastrophe of nationwide proportions or
effect.[131] This is evident in the Records of the Constitutional Commission, thus:

MR. GASCON. Yes. What is the Committee�s definition of �national emergency� which
appears in Section 13, page 5? It reads:

When the common good so requires, the State may temporarily take over or direct the operation
of any privately owned public utility or business affected with public interest.

MR. VILLEGAS. What I mean is threat from external aggression, for


example, calamities or natural disasters.

MR. GASCON. There is a question by Commissioner de los Reyes. What about strikes and
riots?

MR. VILLEGAS. Strikes, no; those would not be covered by the term �national emergency.�

MR. BENGZON. Unless they are of such proportions such that they would paralyze
government service.[132]

x x x x x x

MR. TINGSON. May I ask the committee if �national emergency� refers to military
national emergency or could this be economic emergency?�

MR. VILLEGAS. Yes, it could refer to both military or economic dislocations.

MR. TINGSON. Thank you very much.[133]

It may be argued that when there is national emergency, Congress may not be able to convene and, therefore,
unable to delegate to the President the power to take over privately-owned public utility or business affected with
public interest.

In Araneta v. Dinglasan,[134] this Court emphasized that legislative power, through which extraordinary
measures are exercised, remains in Congress even in times of crisis.
�x x x

After all the criticisms that have been made against the efficiency of the system of
the separation of powers, the fact remains that the Constitution has set up this form of
government, with all its defects and shortcomings, in preference to the commingling of
powers in one man or group of men. The Filipino people by adopting parliamentary
government have given notice that they share the faith of other democracy-loving peoples
in this system, with all its faults, as the ideal. The point is, under this framework of
government, legislation is preserved for Congress all the time, not excepting periods of
crisis no matter how serious. Never in the history of the United States, the basic features
of whose Constitution have been copied in ours, have specific functions of the legislative
branch of enacting laws been surrendered to another department � unless we regard as
legislating the carrying out of a legislative policy according to prescribed standards; no,
not even when that Republic was fighting a total war, or when it was engaged in a life-and-
death struggle to preserve the Union. The truth is that under our concept of constitutional
government, in times of extreme perils more than in normal circumstances �the various
branches, executive, legislative, and judicial,�given the ability to act, are called upon �to
perform the duties and discharge the responsibilities committed to them respectively.�

Following our interpretation of Section 17, Article XII, invoked by President Arroyo in issuing PP 1017, this
Court rules that such Proclamation does not authorize her during the emergency to temporarily take over or direct the
operation of any privately owned public utility or business affected with public interest without authority from
Congress.

Let it be emphasized that while the President alone can declare a state of national emergency, however,
without legislation, he has no power to take over privately-owned public utility or business affected with public
interest. The President cannot decide whether exceptional circumstances exist warranting the take over of privately-
owned public utility or business affected with public interest. Nor can he determine when such exceptional
circumstances have ceased. Likewise, without legislation, the President has no power to point out the types of
businesses affected with public interest that should be taken over. In short, the President has no absolute authority to
exercise all the powers of the State under Section 17, Article VII in the absence of an emergency powers act passed
by Congress.

c. �AS APPLIED CHALLENGE�

One of the misfortunes of an emergency, particularly, that which pertains to security, is that military necessity
and the guaranteed rights of the individual are often not compatible. Our history reveals that in the crucible of
conflict, many rights are curtailed and trampled upon. Here, the right against unreasonable search and seizure;
the right against warrantless arrest; and the freedom of speech, of expression, of the press, and of
assembly under the Bill of Rights suffered the greatest blow.

Of the seven (7) petitions, three (3) indicate �direct injury.�

In G.R. No. 171396, petitioners David and Llamas alleged that, on February 24, 2006, they were arrested
without warrants on their way to EDSA to celebrate the 20 th Anniversary of People Power I. The arresting officers
cited PP 1017 as basis of the arrest.

In G.R. No. 171409, petitioners Cacho-Olivares and Tribune Publishing Co., Inc. claimed that on February
25, 2006, the CIDG operatives �raided and ransacked without warrant� their office. Three policemen were assigned
to guard their office as a possible �source of destabilization.� Again, the basis was PP 1017.

And in G.R. No. 171483, petitioners KMU and NAFLU-KMU et al. alleged that their members were
�turned away and dispersed� when they went to EDSA and later, to Ayala Avenue, to celebrate the 20 th Anniversary
of People Power I.

A perusal of the �direct injuries� allegedly suffered by the said petitioners shows that they resulted from
the implementation, pursuant to G.O. No. 5, of PP 1017.

Can this Court adjudge as unconstitutional PP 1017 and G.O. No 5 on the basis of these illegal acts? In
general, does the illegal implementation of a law render it unconstitutional?

Settled is the rule that courts are not at liberty to declare statutes invalid although they may be abused and
misabused[135] and may afford an opportunity for abuse in the manner of application.[136] The validity of a statute
or ordinance is to be determined from its general purpose and its efficiency to accomplish the end desired, not from
its effects in a particular case.[137] PP 1017 is merely an invocation of the President�s calling-out power. Its general
purpose is to command the AFP to suppress all forms of lawless violence, invasion or rebellion. It had accomplished
the end desired which prompted President Arroyo to issue PP 1021. But there is nothing in PP 1017 allowing the
police, expressly or impliedly, to conduct illegal arrest, search or violate the citizens� constitutional rights.

Now, may this Court adjudge a law or ordinance unconstitutional on the ground that its implementor
committed illegal acts? The answer is no. The criterion by which the validity of the statute or ordinance is to be
measured is the essential basis for the exercise of power, and not a mere incidental result arising from its
exertion.[138] This is logical. Just imagine the absurdity of situations when laws maybe declared unconstitutional just
because the officers implementing them have acted arbitrarily. If this were so, judging from the blunders committed
by policemen in the cases passed upon by the Court, majority of the provisions of the Revised Penal Code would have
been declared unconstitutional a long time ago.

President Arroyo issued G.O. No. 5 to carry into effect the provisions of PP 1017. General orders are �acts
and commands of the President in his capacity as Commander-in-Chief of the Armed Forces of the Philippines.�
They are internal rules issued by the executive officer to his subordinates precisely for
the proper and efficient administration of law. Such rules and regulations create no relation except between the
official who issues them and the official who receives them.[139] They are based on and are the product of, a
relationship in which power is their source, and obedience, their object. [140] For these reasons, one requirement for
these rules to be valid is that they must bereasonable, not arbitrary or capricious.

G.O. No. 5 mandates the AFP and the PNP to immediately carry out the �necessary and appropriate
actions and measures to suppress and prevent acts of terrorism and lawless violence.�

Unlike the term �lawless violence� which is unarguably extant in our statutes and the Constitution, and
which is invariably associated with �invasion, insurrection or rebellion,� the phrase �acts of terrorism� is still an
amorphous and vague concept. Congress has yet to enact a law defining and punishing acts of terrorism.

In fact, this �definitional predicament� or the �absence of an agreed definition of terrorism� confronts not
only our country, but the international
community as well. The following observations are quite apropos:

In the actual unipolar context of international relations, the �fight against terrorism� has
become one of the basic slogans when it comes to the justification of the use of force against certain
states and against groups operating internationally. Lists of states �sponsoring terrorism� and of
terrorist organizations are set up and constantly being updated according to criteria that are not
always known to the public, but are clearly determined by strategic interests.

The basic problem underlying all these military actions � or threats of the use of force as
the most recent by the United States against Iraq � consists in the absence of an agreed definition
of terrorism.

Remarkable confusion persists in regard to the legal categorization of acts of violence


either by states, by armed groups such as liberation movements, or by individuals.
The dilemma can by summarized in the saying �One country�s terrorist is another
country�s freedom fighter.� The apparent contradiction or lack of consistency in the use of the
term �terrorism� may further be demonstrated by the historical fact that leaders of national
liberation movements such as Nelson Mandela in South Africa, Habib Bourgouiba in Tunisia, or
Ahmed Ben Bella in Algeria, to mention only a few, were originally labeled as terrorists by those
who controlled the territory at the time, but later became internationally respected statesmen.

What, then, is the defining criterion for terrorist acts � the differentia
specifica distinguishing those acts from eventually legitimate acts of national resistance or self-
defense?

Since the times of the Cold War the United Nations Organization has been trying in vain
to reach a consensus on the basic issue of definition. The organization has intensified its efforts
recently, but has been unable to bridge the gap between those who associate �terrorism� with any
violent act by non-state groups against civilians, state functionaries or infrastructure or military
installations, and those who believe in the concept of the legitimate use of force when resistance
against foreign occupation or against systematic oppression of ethnic and/or religious groups within
a state is concerned.

The dilemma facing the international community can best be illustrated by reference to the
contradicting categorization of organizations and movements such as Palestine Liberation
Organization (PLO) � which is a terrorist group for Israel and a liberation movement for Arabs and
Muslims �the Kashmiri resistance groups � who are terrorists in the perception of India, liberation
fighters in that of Pakistan � the earlier Contras in Nicaragua � freedom fighters for the United
States, terrorists for the Socialist camp � or, most drastically, the Afghani Mujahedeen (later to
become the Taliban movement): during the Cold War period they were a group of freedom fighters
for the West, nurtured by the United States, and a terrorist gang for the Soviet Union. One could go
on and on in enumerating examples of conflicting categorizations that cannot be reconciled in any
way � because of opposing political interests that are at the roots of those perceptions.

How, then, can those contradicting definitions and conflicting perceptions and evaluations
of one and the same group and its actions be explained? In our analysis, the basic reason for these
striking inconsistencies lies in the divergent interest of states. Depending on whether a state is in
the position of an occupying power or in that of a rival, or adversary, of an occupying power in a
given territory, the definition of terrorism will �fluctuate� accordingly. A state may eventually
see itself as protector of the rights of a certain ethnic group outside its territory and will therefore
speak of a �liberation struggle,� not of �terrorism� when acts of violence by this group are
concerned, and vice-versa.

The United Nations Organization has been unable to reach a decision on the definition of
terrorism exactly because of these conflicting interests of sovereign states that determine in each
and every instance how a particular armed movement (i.e. a non-state actor) is labeled in regard to
the terrorists-freedom fighter dichotomy. A �policy of double standards� on this vital issue of
international affairs has been the unavoidable consequence.

This �definitional predicament� of an organization consisting of sovereign states � and


not of peoples, in spite of the emphasis in the Preamble to the United Nations Charter! �has become
even more serious in the present global power constellation: one superpower exercises the decisive
role in the Security Council, former great powers of the Cold War era as well as medium powers
are increasingly being marginalized; and the problem has become even more acute since the terrorist
attacks of 11 September 2001 I the United States.[141]

The absence of a law defining �acts of terrorism� may result in abuse and oppression on the part of the
police or military. An illustration is when a group of persons are merely engaged in a drinking spree. Yet the military
or the police may consider the act as an act of terrorism and immediately arrest them pursuant to G.O. No.
5. Obviously, this is abuse and oppression on their part. It must be remembered that an act can only be considered a
crime if there is a law defining the same as such and imposing the corresponding penalty thereon.

So far, the word �terrorism� appears only once in our criminal laws, i.e., in P.D. No. 1835 dated January
16, 1981 enacted by President Marcos during the Martial Law regime. This decree is entitled �Codifying The Various
Laws on Anti-Subversion and Increasing The Penalties for Membership in Subversive Organizations.� The word
�terrorism�is mentioned in the following provision: �That one who conspires with any other person for the purpose
of overthrowing the Government of the Philippines x x x by force, violence, terrorism, x x x shall be punished
by reclusion temporal x x x.�

P.D. No. 1835 was repealed by E.O. No. 167 (which outlaws the Communist Party of the Philippines) enacted
by President Corazon Aquino on May 5, 1985. These two (2) laws, however, do not define �acts of
terrorism.� Since there is no law defining �acts of terrorism,� it is President Arroyo alone, under G.O. No. 5, who
has the discretion to determine what acts constitute terrorism. Her judgment on this aspect is absolute, without
restrictions. Consequently, there can be indiscriminate arrest without warrants, breaking into offices and residences,
taking over the media enterprises, prohibition and dispersal of all assemblies and gatherings unfriendly to the
administration. All these can be effected in the name of G.O. No. 5. These acts go far beyond the calling-out power
of the President. Certainly, they violate the due process clause of the Constitution. Thus, this Court declares that the
�acts of terrorism� portion of G.O. No. 5 is unconstitutional.

Significantly, there is nothing in G.O. No. 5 authorizing the military or police to commit acts beyond what
are necessary and appropriate to suppress and prevent lawless violence, the limitation of their authority in
pursuing the Order. Otherwise, such acts are considered illegal.

We first examine G.R. No. 171396 (David et al.)


The Constitution provides that �the right of the people to be secured in their persons, houses, papers and
effects against unreasonable search and seizure of whatever nature and for any purpose shall be inviolable, and no
search warrant or warrant of arrest shall issue except upon probable cause to be determined personally by the judge
after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly
describing the place to be searched and the persons or things to be seized.�[142] The plain import of the language of
the Constitution is that searches, seizures and arrests are normally unreasonable unless authorized by a validly issued
search warrant or warrant of arrest. Thus, the fundamental protection given by this provision is that between person
and police must stand the protective authority of a magistrate clothed with power to issue or refuse to issue search
warrants or warrants of arrest.[143]

In the Brief Account[144] submitted by petitioner David, certain facts are established: first, he was arrested
without warrant; second, the PNP operatives arrested him on the basis of PP 1017; third, he was brought at Camp
Karingal, Quezon City where he was fingerprinted, photographed and booked like a criminal suspect; fourth, he was
treated brusquely by policemen who �held his head and tried to push him� inside an unmarked car; fifth, he was
charged with Violation of Batas Pambansa Bilang No. 880[145] and Inciting to Sedition; sixth, he
was detained for seven (7) hours; and seventh, he was eventually released for insufficiency of evidence.

Section 5, Rule 113 of the Revised Rules on Criminal Procedure provides:

Sec. 5. Arrest without warrant; when lawful. - A peace officer or a private person
may, without a warrant, arrest a person:

(a) When, in his presence, the person to be arrested has committed, is actually
committing, or is attempting to commit an offense.

(b) When an offense has just been committed and he has probable cause to believe
based on personal knowledge of facts or circumstances that the person to be arrested has
committed it; and

x x x.

Neither of the two (2) exceptions mentioned above justifies petitioner David�s warrantless arrest. During
the inquest for the charges of inciting to sedition and violation of BP
880, all that the arresting officers could invoke was their observation that some rallyists were wearing t-
shirts with the invective �Oust Gloria Now� and their erroneous assumption that petitioner David was the leader
of the rally.[146] Consequently, the Inquest Prosecutor ordered his immediate release on the ground of insufficiency
of evidence. He noted that petitioner David was not wearing the subject t-shirt and even if he was wearing it, such
fact is insufficient to charge him with inciting to sedition. Further, he also stated that there is insufficient evidence
for the charge of violation of BP 880 as it was not even known whether petitioner David was the leader of the rally.[147]

But what made it doubly worse for petitioners David et al. is that not only was their right against warrantless
arrest violated, but also their right to peaceably assemble.

Section 4 of Article III guarantees:

No law shall be passed abridging the freedom of speech, of expression, or of the press, or
the right of the people peaceably to assemble and petition the government for redress of grievances.

�Assembly� means a right on the part of the citizens to meet peaceably for consultation in respect to public
affairs. It is a necessary consequence of our republican institution and complements the right of speech. As in the
case of freedom of expression, this right is not to be limited, much less denied, except on a showing of a clear and
present danger of a substantive evil that Congress has a right to prevent. In other words, like other rights embraced
in the freedom of expression, the right to assemble is not subject to previous restraint or censorship. It may not be
conditioned upon the prior issuance of a permit or authorization from the government authorities except, of course, if
the assembly is intended to be held in a public place, a permit for the use of such place, and not for the assembly itself,
may be validly required.

The ringing truth here is that petitioner David, et al. were arrested while they were exercising their right to
peaceful assembly. They were not committing any crime, neither was there a showing of a clear and present danger
that warranted the limitation of that right. As can be gleaned from circumstances, the charges of inciting to
sedition and violation of BP 880 were mere afterthought. Even the Solicitor General, during the oral argument, failed
to justify the arresting officers� conduct. In De Jonge v. Oregon,[148] it was held that peaceable assembly cannot be
made a crime, thus:

Peaceable assembly for lawful discussion cannot be made a crime. The holding of meetings
for peaceable political action cannot be proscribed. Those who assist in the conduct of such meetings
cannot be branded as criminals on that score. The question, if the rights of free speech and peaceful
assembly are not to be preserved, is not as to the auspices under which the meeting was held but as
to its purpose; not as to the relations of the speakers, but whether their utterances transcend the
bounds of the freedom of speech which the Constitution protects. If the persons assembling have
committed crimes elsewhere, if they have formed or are engaged in a conspiracy against the public
peace and order, they may be prosecuted for their conspiracy or other violations of valid laws. But
it is a different matter when the State, instead of prosecuting them for such offenses, seizes
upon mere participation in a peaceable assembly and a lawful public discussion as the basis
for a criminal charge.

On the basis of the above principles, the Court likewise considers the dispersal and arrest of the members of
KMU et al. (G.R. No. 171483) unwarranted. Apparently, their dispersal was done merely on the basis of
Malaca�ang�s directive canceling all permits previously issued by local government units. This is arbitrary. The
wholesale cancellation of all permits to rally is a blatant disregard of the principle that �freedom of assembly is not
to be limited, much less denied, except on a showing of a clear and present danger of a substantive evil that the
State has a right to prevent.�[149] Tolerance is the rule and limitation is the exception. Only upon a showing that
an assembly presents a clear and present danger that the State may deny the citizens� right to exercise it. Indeed,
respondents failed to show or convince the Court that the rallyists committed acts amounting to lawless violence,
invasion or rebellion. With the blanket revocation of permits, the distinction between protected and unprotected
assemblies was eliminated.

Moreover, under BP 880, the authority to regulate assemblies and rallies is lodged with the local government
units. They have the power to issue permits and to revoke such permits after due notice and hearing on the
determination of the presence of clear and present danger. Here, petitioners were not even notified and heard on the
revocation of their permits.[150] The first time they learned of it was at the time of the dispersal. Such absence of
notice is a fatal defect. When a person�s right is restricted by government action, it behooves a democratic
government to see to it that the restriction is fair, reasonable, and according to procedure.
G.R. No. 171409, (Cacho-Olivares, et al.) presents another facet of freedom of speech i.e., the freedom of
the press. Petitioners� narration of facts, which the Solicitor General failed to refute, established the
following: first, the Daily Tribune�s offices were searched without warrant; second, the police operatives seized
several materials for publication; third, the search was conducted at about 1:00 o� clock in the morning of February
25, 2006; fourth, the search was conducted in the absence of any official of the Daily Tribune except the security
guard of the building; and fifth, policemen stationed themselves at the vicinity of the Daily Tribune offices.

Thereafter, a wave of warning came from government officials. Presidential Chief of Staff Michael Defensor
was quoted as saying that such raid was �meant to show a �strong presence,�to tell media outlets not to connive
or do anything that would help the rebels in bringing down this government.� Director General Lomibao further
stated that �if they do not follow the standards �and the standards are if they would contribute to instability
in the government, or if they do not subscribe to what is in General Order No. 5 and Proc. No. 1017 � we will
recommend a �takeover.�� National Telecommunications Commissioner Ronald Solis urged television and radio
networks to �cooperate� with the government for the duration of the state of national emergency. He warned that
his agency will not hesitate to recommend the closure of any broadcast outfit that violates rules set out for
media coverage during times when the national security is threatened.[151]

The search is illegal. Rule 126 of The Revised Rules on Criminal Procedure lays down the steps in the
conduct of search and seizure. Section 4 requires that a search warrant be issued upon probable cause in connection
with one specific offence to be determined personally by the judge after examination under oath or affirmation of the
complainant and the witnesses he may produce. Section 8 mandates that the search of a house, room, or any other
premise be made in the presence of the lawful occupant thereof or any member of his family or in the absence of
the latter, in the presence of two (2) witnesses of sufficient age and discretion residing in the same
locality. And Section 9 states that the warrant must direct that it be served in the daytime, unless the property is on
the person or in the place ordered to be searched, in which case a direction may be inserted that it be served at any
time of the day or night. All these rules were violated by the CIDG operatives.

Not only that, the search violated petitioners�freedom of the press. The best gauge of a free and democratic
society rests in the degree of freedom enjoyed by its media. In the Burgos v. Chief of Staff[152] this Court held that -
-

As heretofore stated, the premises searched were the business and printing offices of the
"Metropolitan Mail" and the "We Forum� newspapers. As a consequence of the search and
seizure, these premises were padlocked and sealed, with the further result that the printing
and publication of said newspapers were discontinued.

Such closure is in the nature of previous restraint or censorship abhorrent to the


freedom of the press guaranteed under the fundamental law, and constitutes a virtual denial
of petitioners' freedom to express themselves in print. This state of being is patently
anathematic to a democratic framework where a free, alert and even militant press is essential
for the political enlightenment and growth of the citizenry.

While admittedly, the Daily Tribune was not padlocked and sealed like the �Metropolitan Mail� and �We
Forum� newspapers in the above case, yet it cannot be denied that the CIDG operatives exceeded their enforcement
duties. The search and seizure of materials for publication, the stationing of policemen in the vicinity of the The Daily
Tribune offices, and the arrogant warning of government officials to media, are plain censorship. It is that officious
functionary of the repressive government who tells the citizen that he may speak only if allowed to do so, and no more
and no less than what he is permitted to say on pain of punishment should he be so rash as to
disobey.[153] Undoubtedly, the The Daily Tribune was subjected to these arbitrary intrusions because of its anti-
government sentiments. This Court cannot tolerate the blatant disregard of a constitutional right even if it involves
the most defiant of our citizens. Freedom to comment on public affairs is essential to the vitality of a representative
democracy. It is the duty of the courts to be watchful for the constitutional rights of the citizen, and against any
stealthy encroachments thereon. The motto should always be obsta principiis.[154]

Incidentally, during the oral arguments, the Solicitor General admitted that the search of
the Tribune�s offices and the seizure of its materials for publication and other papers are illegal; and that the same
are inadmissible �for any purpose,� thus:

JUSTICE CALLEJO:

You made quite a mouthful of admission when you said that the
policemen, when inspected the Tribune for the purpose of gathering
evidence and you admitted that the policemen were able to get the
clippings. Is that not in admission of the admissibility of these clippings
that were taken from the Tribune?

SOLICITOR GENERAL BENIPAYO:

Under the law they would seem to be, if they were illegally seized, I think
and I know, Your Honor, and these are inadmissible for any purpose. [155]

xxx xxx xxx

SR. ASSO. JUSTICE PUNO:


These have been published in the past issues of the Daily Tribune; all you
have to do is to get those past issues. So why do you have to go there at
1 o�clock in the morning and without any search warrant? Did they
become suddenly part of the evidence of rebellion or inciting to sedition
or what?

SOLGEN BENIPAYO:

Well, it was the police that did that, Your Honor. Not upon my
instructions.

SR. ASSO. JUSTICE PUNO:

Are you saying that the act of the policeman is illegal, it is not based on
any law, and it is not based on Proclamation 1017.

SOLGEN BENIPAYO:

It is not based on Proclamation 1017, Your Honor, because there is


nothing in 1017 which says that the police could go and inspect and
gather clippings from Daily Tribune or any other newspaper.

SR. ASSO. JUSTICE PUNO:

Is it based on any law?

SOLGEN BENIPAYO:

As far as I know, no, Your Honor, from the facts, no.

SR. ASSO. JUSTICE PUNO:

So, it has no basis, no legal basis whatsoever?

SOLGEN BENIPAYO:

Maybe so, Your Honor. Maybe so, that is why I said, I don�t know if it
is premature to say this, we do not condone this. If the people who
have been injured by this would want to sue them, they can sue and
there are remedies for this.[156]

Likewise, the warrantless arrests and seizures executed by the police were, according to the Solicitor General,
illegal and cannot be condoned, thus:

CHIEF JUSTICE PANGANIBAN:

There seems to be some confusions if not contradiction in your theory.

SOLICITOR GENERAL BENIPAYO:


I don�t know whether this will clarify. The acts, the supposed illegal or
unlawful acts committed on the occasion of 1017, as I said, it cannot be
condoned. You cannot blame the President for, as you said, a misapplication of
the law. These are acts of the police officers, that is their responsibility. [157]

The Dissenting Opinion states that PP 1017 and G.O. No. 5 are constitutional in every aspect and �should
result in no constitutional or statutory breaches if applied according to their letter.�

The Court has passed upon the constitutionality of these issuances. Its ratiocination has been exhaustively
presented. At this point, suffice it to reiterate that PP 1017 is limited to the calling out by the President of the military
to prevent or suppress lawless violence, invasion or rebellion. When in implementing its provisions, pursuant to G.O.
No. 5, the military and the police committed acts which violate the citizens� rights under the Constitution, this Court
has to declare such acts unconstitutional and illegal.

In this connection, Chief Justice Artemio V. Panganiban�s concurring opinion, attached hereto, is considered
an integral part of this ponencia.

SUMMATION

In sum, the lifting of PP 1017 through the issuance of PP 1021 �a supervening event �would have normally
rendered this case moot and academic. However, while PP 1017 was still operative, illegal acts were committed
allegedly in pursuance thereof. Besides, there is no guarantee that PP 1017, or one similar to it, may not again be
issued. Already, there have been media reports on April 30, 2006 that allegedly PP 1017 would be reimposed �if
the May 1 rallies� become �unruly and violent.� Consequently, the transcendental issues raised by the parties
should not be �evaded;� they must now be resolved to prevent future constitutional aberration.

The Court finds and so holds that PP 1017 is constitutional insofar as it constitutes a call by the President for
the AFP to prevent or suppress lawless violence. The proclamation is sustained by Section 18, Article VII of the
Constitution and the relevant jurisprudence discussed earlier. However, PP 1017�s extraneous provisions giving the
President express or implied power (1) to issue decrees; (2) to direct the AFP to enforce obedience to all laws even
those not related to lawless violence as well as decrees promulgated by the President; and (3) to impose standards on
media or any form of prior restraint on the press, are ultra vires and unconstitutional. The Court also rules that under
Section 17, Article XII of the Constitution, the President, in the absence of a legislation, cannot take over privately-
owned public utility and private business affected with public interest.
In the same vein, the Court finds G.O. No. 5 valid. It is an Order issued by the President � acting as
Commander-in-Chief � addressed to subalterns in the AFP to carry out the provisions of PP 1017. Significantly, it
also provides a valid standard � that the military and the police should take only the �necessary and appropriate
actions and measures to suppress and prevent acts of lawless violence.� But the words �acts of terrorism�
found in G.O. No. 5 have not been legally defined and made punishable by Congress and should thus be deemed
deleted from the said G.O. While �terrorism� has been denounced generally in media, no law has been enacted to
guide the military, and eventually the courts, to determine the limits of the AFP�s authority in carrying out this portion
of G.O. No. 5.

On the basis of the relevant and uncontested facts narrated earlier, it is also pristine clear that (1) the
warrantless arrest of petitioners Randolf S. David and Ronald Llamas; (2) the dispersal of the rallies and warrantless
arrest of the KMU and NAFLU-KMU members; (3) the imposition of standards on media or any prior restraint on the
press; and (4) the warrantless search of the Tribune offices and the whimsical seizures of some articles for publication
and other materials, are not authorized by the Constitution, the law and jurisprudence. Not even by the valid
provisions of PP 1017 and G.O. No. 5.

Other than this declaration of invalidity, this Court cannot impose any civil, criminal or administrative
sanctions on the individual police officers concerned. They have not been individually identified and given their day
in court. The civil complaints or causes of action and/or relevant criminal Informations have not been presented before
this Court. Elementary due process bars this Court from making any specific pronouncement of civil, criminal or
administrative liabilities.

It is well to remember that military power is a means to an end and substantive civil rights are ends in
themselves. How to give the military the power it needs to protect the Republic without unnecessarily
trampling individual rights is one of the eternal balancing tasks of a democratic state. During emergency,
governmental action may vary in breadth and intensity from normal times, yet they should not be arbitrary as to unduly
restrain our people�s liberty.
Perhaps, the vital lesson that we must learn from the theorists who studied the various competing political
philosophies is that, it is possible to grant government the authority to cope with crises without surrendering the two
vital principles of constitutionalism: the maintenance of legal limits to arbitrary power, and political
responsibility of the government to the governed.[158]

WHEREFORE, the Petitions are partly granted. The Court rules that PP 1017
is CONSTITUTIONAL insofar as it constitutes a call by President Gloria Macapagal-Arroyo on the AFP to prevent
or suppress lawless violence. However, the provisions of PP 1017 commanding the AFP to enforce laws not related
to lawless violence, as well as decrees promulgated by the President, are declared UNCONSTITUTIONAL. In
addition, the provision in PP 1017 declaring national emergency under Section 17, Article VII of the Constitution
is CONSTITUTIONAL, but such declaration does not authorize the President to take over privately-owned public
utility or business affected with public interest without prior legislation.

G.O. No. 5 is CONSTITUTIONAL since it provides a standard by which the AFP and the PNP should
implement PP 1017, i.e. whatever is �necessary and appropriate actions and measures to suppress and prevent
acts of lawless violence.� Considering that �acts of terrorism� have not yet been defined and made punishable by
the Legislature, such portion of G.O. No. 5 is declared UNCONSTITUTIONAL.

The warrantless arrest of Randolf S. David and Ronald Llamas; the dispersal and warrantless arrest of the
KMU and NAFLU-KMU members during their rallies, in the absence of proof that these petitioners were committing
acts constituting lawless violence, invasion or rebellion and violating BP 880; the imposition of standards on media
or any form of prior restraint on the press, as well as the warrantless search of the Tribune offices and whimsical
seizure of its articles for publication and other materials, are declared UNCONSTITUTIONAL.

No costs.

SO ORDERED.
G.R. No. 81311 June 30, 1988

KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO


C. DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent.

G.R. No. 81820 June 30, 1988

KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations and
alliances, petitioners,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL
REVENUE, and SECRETARY OF BUDGET, respondents.

G.R. No. 81921 June 30, 1988

INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B.


BANAL, petitioners,
vs.
The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent.

G.R. No. 82152 June 30, 1988

RICARDO C. VALMONTE, petitioner,


vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF INTERNAL
REVENUE and SECRETARY OF BUDGET, respondent.

Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311.

Jaime C. Opinion for individual petitioners in G.R. No. 81311.

Banzuela, Flores, Miralles, Rañeses, Sy, Taquio and Associates for petitioners in G.R. No 81820.

Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No 81820.

Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921.

PADILLA, J.:

These four (4) petitions, which have been consolidated because of the similarity of the main issues involved therein,
seek to nullify Executive Order No. 273 (EO 273, for short), issued by the President of the Philippines on 25 July
1987, to take effect on 1 January 1988, and which amended certain sections of the National Internal Revenue Code
and adopted the value-added tax (VAT, for short), for being unconstitutional in that its enactment is not alledgedly
within the powers of the President; that the VAT is oppressive, discriminatory, regressive, and violates the due
process and equal protection clauses and other provisions of the 1987 Constitution.

The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have failed to show
justification for the exercise of its judicial powers, viz. (1) the existence of an appropriate case; (2) an interest,
personal and substantial, of the party raising the constitutional questions; (3) the constitutional question should be
raised at the earliest opportunity; and (4) the question of constitutionality is directly and necessarily involved in a
justiciable controversy and its resolution is essential to the protection of the rights of the parties. According to the
Solicitor General, only the third requisite — that the constitutional question should be raised at the earliest
opportunity — has been complied with. He also questions the legal standing of the petitioners who, he contends, are
merely asking for an advisory opinion from the Court, there being no justiciable controversy for resolution.

Objections to taxpayers' suit for lack of sufficient personality standing, or interest are, however, in the main
procedural matters. Considering the importance to the public of the cases at bar, and in keeping with the Court's
duty, under the 1987 Constitution, to determine wether or not the other branches of government have kept
themselves within the limits of the Constitution and the laws and that they have not abused the discretion given to
them, the Court has brushed aside technicalities of procedure and has taken cognizance of these petitions.

But, before resolving the issues raised, a brief look into the tax law in question is in order.

The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with
aggregate gross annual sales of articles and/or services, exceeding P200,00.00, to his purchase of goods and
services, unless exempt. VAT is computed at the rate of 0% or 10% of the gross selling price of goods or gross
receipts realized from the sale of services.

The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and producers,
advance sales tax, and compensating tax on importations. The framers of EO 273 that it is principally aimed to
rationalize the system of taxing goods and services; simplify tax administration; and make the tax system more
equitable, to enable the country to attain economic recovery.

The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued. As pointed out
by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO 273, was essentially a single
stage value added tax system computed under the "cost subtraction method" or "cost deduction method" and was
imposed only on original sale, barter or exchange of articles by manufacturers, producers, or importers. Subsequent
sales of such articles were not subject to sales tax. However, with the issuance of PD 1991 on 31 October 1985, a
3% tax was imposed on a second sale, which was reduced to 1.5% upon the issuance of PD 2006 on 31 December
1985, to take effect 1 January 1986. Reduced sales taxes were imposed not only on the second sale, but
on every subsequent sale, as well. EO 273 merely increased the VAT on every sale to 10%, unless zero-rated or
exempt.

Petitioners first contend that EO 273 is unconstitutional on the Ground that the President had no authority to issue
EO 273 on 25 July 1987.

The contention is without merit.

It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole legislative
authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution states:

Sec. 1. Until a legislature is elected and convened under a new Constitution, the President shall
continue to exercise legislative powers.

On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the Republic of the
Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article XVIII, sec. 6 of said
Constitution, hereafter referred to as the 1987 Constitution, provides:

Sec. 6. The incumbent President shall continue to exercise legislative powers until the first
Congress is convened.
It should be noted that, under both the Provisional and the 1987 Constitutions, the President is vested with
legislative powers until a legislature under a new Constitution is convened. The first Congress, created and elected
under the 1987 Constitution, was convened on 27 July 1987. Hence, the enactment of EO 273 on 25 July 1987, two
(2) days before Congress convened on 27 July 1987, was within the President's constitutional power and authority to
legislate.

Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27 July 1987). He
contends that the word "convene" is synonymous with "the date when the elected members of Congress assumed
office."

The contention is without merit. The word "convene" which has been interpreted to mean "to call together, cause to
assemble, or convoke," 1 is clearly different from assumption of office by the individual members of Congress or
their taking the oath of office. As an example, we call to mind the interim National Assembly created under the 1973
Constitution, which had not been "convened" but some members of the body, more particularly the delegates to the
1971 Constitutional Convention who had opted to serve therein by voting affirmatively for the approval of said
Constitution, had taken their oath of office.

To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a bit too far. It
would also defeat the purpose of the framers of the 1987 Constitutional and render meaningless some other
provisions of said Constitution. For example, the provisions of Art. VI, sec. 15, requiring Congress to convene once
every year on the fourth Monday of July for its regular session would be a contrariety, since Congress would already
be deemed to be in session after the individual members have taken their oath of office. A portion of the provisions
of Art. VII, sec. 10, requiring Congress to convene for the purpose of enacting a law calling for a special election to
elect a President and Vice-President in case a vacancy occurs in said offices, would also be a surplusage. The
portion of Art. VII, sec. 11, third paragraph, requiring Congress to convene, if not in session, to decide a conflict
between the President and the Cabinet as to whether or not the President and the Cabinet as to whether or not the
President can re-assume the powers and duties of his office, would also be redundant. The same is true with the
portion of Art. VII, sec. 18, which requires Congress to convene within twenty-four (24) hours following the
declaration of martial law or the suspension of the privilage of the writ of habeas corpus.

The 1987 Constitution mentions a specific date when the President loses her power to legislate. If the framers of said
Constitution had intended to terminate the exercise of legislative powers by the President at the beginning of the
term of office of the members of Congress, they should have so stated (but did not) in clear and unequivocal terms.
The Court has not power to re-write the Constitution and give it a meaning different from that intended.

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:

Grave abuse of discretion" implies such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction (Abad Santos vs. Province of Tarlac, 38 Off. Gaz. 834), or, in
other words, where the power is exercised in an arbitrary or despotic manner by reason of passion
or personal hostility, and it must be so patent and gross as to amount to an evasion of positive duty
or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law. (Tavera-
Luna, Inc. vs. Nable, 38 Off. Gaz. 62). 2

Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an arbitrary or despotic
manner by reason of passion or personal hostility. It appears that a comprehensive study of the VAT had been
extensively discussed by this framers and other government agencies involved in its implementation, even under the
past administration. As the Solicitor General correctly sated. "The signing of E.O. 273 was merely the last stage in
the exercise of her legislative powers. The legislative process started long before the signing when the data were
gathered, proposals were weighed and the final wordings of the measure were drafted, revised and finalized.
Certainly, it cannot be said that the President made a jump, so to speak, on the Congress, two days before it
convened." 3
Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive, in violation of the
provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states:

Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.

The petitioners" assertions in this regard are not supported by facts and circumstances to warrant their conclusions.
They have failed to adequately show that the VAT is oppressive, discriminatory or unjust. Petitioners merely rely
upon newspaper articles which are actually hearsay and have evidentiary value. To justify the nullification of a law.
there must be a clear and unequivocal breach of the Constitution, not a doubtful and argumentative implication. 4

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. The court, in City of Baguio
vs. De Leon, 5 said:

... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for the Court,
stated: "A tax is considered uniform when it operates with the same force and effect in every place
where the subject may be found."

There was no occasion in that case to consider the possible effect on such a constitutional
requirement where there is a classification. The opportunity came in Eastern Theatrical Co. v.
Alfonso (83 Phil. 852, 862). Thus: "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; . . ." About
two years later, Justice Tuason, speaking for this Court in Manila Race Horses Trainers Assn. v.
de la Fuente (88 Phil. 60, 65) incorporated the above excerpt in his opinion and continued;
"Taking everything into account, the differentiation against which the plaintiffs complain
conforms to the practical dictates of justice and equity and is not discriminatory within the
meaning of the Constitution."

To satisfy this requirement then, all that is needed as held in another case decided two years later,
(Uy Matias v. City of Cebu, 93 Phil. 300) is that the statute or ordinance in question "applies
equally to all persons, firms and corporations placed in similar situation." This Court is on record
as accepting the view in a leading American case (Carmichael v. Southern Coal and Coke Co., 301
US 495) that "inequalities which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation." (Lutz v. Araneta, 98 Phil. 148, 153).

The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which are not
exempt, at the constant rate of 0% or 10%.

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engage in
business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are consequently
exempt from its application. Likewise exempt from the tax are sales of farm and marine products, spared as they are
from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public. 6

The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers Association of the
Philippines that EO 273, more particularly the new Sec. 103 (r) of the National Internal Revenue Code, unduly
discriminates against customs brokers. The contested provision states:

Sec. 103. Exempt transactions. — The following shall be exempt from the value-added tax:

xxx xxx xxx


(r) Service performed in the exercise of profession or calling (except customs brokers) subject to
the occupation tax under the Local Tax Code, and professional services performed by registered
general professional partnerships;

The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was inserted in Sec.
103(r) to complement the provisions of Sec. 102 of the Code, which makes the services of customs brokers subject
to the payment of the VAT and to distinguish customs brokers from other professionals who are subject to the
payment of an occupation tax under the Local Tax Code. Pertinent provisions of Sec. 102 read:

Sec. 102. Value-added tax on sale of services. — There shall be levied, assessed and collected, a
value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the
sale of services. The phrase sale of services" means the performance of all kinds of services for
others for a fee, remuneration or consideration, including those performed or rendered by
construction and service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of personal property; lessors or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or repacking goods for others; and similar services
regardless of whether or not the performance thereof call for the exercise or use of the physical or
mental faculties: ...

With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential conflict between
the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned, is averted.

At any rate, the distinction of the customs brokers from the other professionals who are subject to occupation tax
under the Local Tax Code is based upon material differences, in that the activities of customs brokers (like those of
stock, real estate and immigration brokers) partake more of a business, rather than a profession and were thus
subjected to the percentage tax under Sec. 174 of the National Internal Revenue Code prior to its amendment by EO
273. EO 273 abolished the percentage tax and replaced it with the VAT. If the petitioner Association did not protest
the classification of customs brokers then, the Court sees no reason why it should protest now.

The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the fears expressed
by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of basic commodities and
services, as well as mass actions and demonstrations against the VAT should by now be evident. The fact that
nothing of the sort has happened shows that the fears and apprehensions of the petitioners appear to be more
imagined than real. It would seem that the VAT is not as bad as we are made to believe.

In any event, if petitioners seriously believe that the adoption and continued application of the VAT are prejudicial
to the general welfare or the interests of the majority of the people, they should seek recourse and relief from the
political branches of the government. The Court, following the time-honored doctrine of separation of powers,
cannot substitute its judgment for that of the President as to the wisdom, justice and advisability of the adoption of
the VAT. The Court can only look into and determine whether or not EO 273 was enacted and made effective as
law, in the manner required by, and consistent with, the Constitution, and to make sure that it was not issued in
grave abuse of discretion amounting to lack or excess of jurisdiction; and, in this regard, the Court finds no reason to
impede its application or continued implementation.

WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs.

SO ORDERED.

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