ABAKADA GURO PARTY LIST V.

ERMITA

September 1, 2005

AUSTRIA-MARTINEZ, J

THE VAT REFORM LAW (RA 9337) IS ENTIRELY CONSTITUTIONAL

NATURE OF VAT

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. Being an indirect tax on
expenditure, the seller of goods or services may pass on the amount of tax paid
to the buyer, with the seller acting merely as a tax collector. The burden of VAT
is intended to fall on the immediate buyers and ultimately, the end-consumers.

HISTORICAL PERSPECTIVE

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. 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.

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."

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, R.A.
No. 8241 or the Improved VAT Law, R.A. No. 8424 or the Tax Reform Act of
1997, and finally, the presently beleaguered R.A. No. 9337, also referred to by
respondents as the VAT Reform Act.
ENROLLED BILL DOCTRINE

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.

COURTS GENERALLY DENIED THE POWER TO INQUIRE INTO

CONGRESS FAILURE TO COMPLY WITH ITS OWN RULES

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."

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. 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 the Supreme Court cannot apply to questions regarding only the
internal operation of Congress.

BICAMERAL CONFERENCE COMMITTEE (BCC)

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. 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.

NO AMENDEMENT RULE NOT VIOLATED BY BCC

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.

There is no reason for requiring that the Committee's 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. . . .

EXTENT OF NO AMENDMENT RULE

The No Amendment Rule must be construed as referring only to bills

introduced for the first time in either house of Congress, not to the conference
committee report.

BILLS WHICH MUST EXCLUSIVELY ORIGINATE IN THE HOUSE

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?

YES. In the Tolentino case:

. . . 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 Senate's 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.

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.

NON-DELEGATION OF LEGISLATIVE POWER

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. 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." 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.

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. 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.

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; 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. A sufficient standard is one which defines
legislative policy, marks its limits, maps out its boundaries and specifies the
public agency to apply it.

NO DELEGATION OF LEGISLATIVE POWER TO THE PRESIDENT IN

THIS CASE

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: xxx

The case 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.

SECRETARY OF FINANCE AS AGENT OF LEGISLATURE; PRESIDENTS

POWER OF CONTROL NOT APPLICABLE

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. 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.

NO VIOLATION OF PRINCIPLE OF REPUBLICANISM

As to the argument of petitioners 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.

NEW TAX NOT OPPRESSIVE

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). It simply
means that sources of revenues must be adequate to meet government
expenditures and their variations. 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 country's gloomy state of economic affairs.

. . . 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.

NO DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS

Petitioners 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 person's 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.

EQUAL PROTECTION CLAUSE

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.

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 State's
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.

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.

UNIFORMITY AND EQUITABILITY OF TAXATION

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.

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.

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. Also, basic
marine and agricultural food products in their original state are still not
subject to the tax, thus ensuring that prices at the grassroots level will remain
accessible.

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 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 and natural gas were reduced. Percentage tax on domestic carriers
was removed. Power producers are now exempt from paying franchise tax.

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%. Intercorporate dividends of non-resident foreign corporations
are still subject to 15% final withholding tax but the tax credit allowed on the
corporation's domicile was increased to 20%. The Philippine Amusement and
Gaming Corporation (PAGCOR) is not exempt from income taxes anymore.
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.

PROGRESSIVITY OF TAXATION

Progressive taxation is built on the principle of the taxpayer's ability to pay.

Taxation is progressive when its rate goes up depending on the resources of
the person affected. 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."

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).