Philippine Supreme Court Jurisprudence > Year 2005 > September 2005 Decisions > DISSENTING and CONCURRING OPINION : TINGA, J.: G.R. No. 168056, G.R. NO. 168207, G.R. NO. 168461, G.R. NO. 168463 and G.R. NO. 168730 - ABAKADA Guro Party List Officers Samson S. Alcantara, et al. v. The Honorable Executive Secretary Eduardo Ermita, et al:

TINGA, J.:

The E-VAT Law,¹as it stands, will exterminate our country's small to medium enterprises. This will be the net effect of affirming Section 8 of the law, which amends Sections 110 of the National Internal Revenue Code (NIRC) by imposing a seventy percent (70%) cap on the creditable input tax a VAT-registered person may apply every quarter and a mandatory sixty (60) -month amortization period on the input tax on goods purchased or imported in a calendar month if the acquisition cost of such goods exceeds One Million Pesos (P1,000,000.00).

Taxes may be inherently punitive, but when the fine line between damage and destruction is crossed, the courts must step forth and cut the hangman's noose. Justice Holmes once confidently asserted that "the power to tax is not the power to destroy while this Court sits”, and we should very well live up to this expectation not only of the revered Holmes, but of the Filipino people who rely on this Court as the guardian of their rights. At stake is the right to exist and subsist despite taxes, which is encompassed in the due process clause.

I respectfully submit these views while maintaining the deepest respect for the prerogative of the legislature to impose taxes, and of the national government to chart economic policy. Such respect impels me to vote to deny the petitions in G.R. NOS. 168056, 168207, 168463,² and 168730, even as I acknowledge certain merit in the challenges against the E-VAT law that are asserted in those petitions. In the final analysis, petitioners therein are unable to convincingly demonstrate the constitutional infirmity of the provisions they seek to assail. The only exception is Section 21 of the law, which I consider unconstitutional, for reasons I shall later elaborate.

However, I see the petition in G.R. No. 168461 as meritorious and would vote to grant it. Accordingly, I dissent and hold as unconstitutional Section 8 of Republic Act No. 9337, insofar as it amends Section 110(A) and (B) of the National Internal Revenue Code (NIRC) as well as Section 12 of the same law, with respect to its amendment of Section 114(C) of the NIRC.

The first part of my discussion pertains to the petitions in G.R. NOS. 168056, 168207, 168463, and 168730, while the second part is devoted to what I deem the most crucial issue before the Court, the petition in G.R. No. 168461.


Undue Delegation and the Increase
Of the VAT Rate

My first point pertains to whether or not Sections 4, 5 and 6 of the E-VAT Law constitutes an undue delegation of legislative power. In appreciating the aspect of undue delegation as regards taxation statutes, the fundamental point remains that the power of taxation is inherently legislative,³ and may be imposed or revoked only by the legislature.⁴ In tandem with Section 1, Article VI of the Constitution which institutionalizes the law-making power of Congress, Section 24 under the same Article crystallizes this principle, as it provides that "[a]ll appropriation, revenue or tariff bills … shall originate exclusively in the House of Representatives.”⁵

Consequently, neither the executive nor judicial branches of government may originate tax measures. Even if the President desires to levy new taxes, the imposition cannot be done by mere executive fiat. In such an instance, the President would have to rely on Congress to enact tax laws.

Moreover, this plenary power of taxation cannot be delegated by Congress to any other branch of government or private persons, unless its delegation is authorized by the Constitution itself.⁶ In this regard, the situation stands different from that in the recent case Southern Cross v. PHILCEMCOR,⁷ wherein I noted in my ponencia that the Tariff Commission and the DTI Secretary may be regarded as agents of Congress for the purpose of imposing safeguard measures. That pronouncement was made in light of Section 28(2) Article VI, which allows Congress to delegate to the President through law the power to impose tariffs and imposts, subject to limitations and restrictions as may be ordained by Congress. In the case of taxes, no such constitutional authorization exists, and the discretion to ascertain the rates, subjects, and conditions of taxation may not be delegated away by Congress.

However, as the majority correctly points out, the power to ascertain the facts or conditions as the basis of the taking into effect of a law may be delegated by Congress,⁸ and that the details as to the enforcement and administration of an exercise of taxing power may be delegated to executive agencies, including the power to determine the existence of facts on which its operation depends.⁹

Proceeding from these principles, Sections 4, 5, and 6 of the E-VAT Law warrant examination. The provisions read:

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) national 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) 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 of 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 exceed same and on-half percent (1 �%).

The petitioners deem as noxious the proviso common to these provisions 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 the satisfaction of the twin conditions that 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 that the national government deficit as a percentage of GDP of the previous year exceed same and on-half percent (1 �%).

At first blush, it does seem that the assailed provisions are constitutionally deficient. It is Congress, and not the President, which is authorized to raise the rate of VAT from 10% to 12%, no matter the circumstance. Yet a closer analysis of the proviso reveals that this is not exactly the operative effect of the law. The qualifier "shall" denotes a mandatory, rather than discretionary function on the part of the President to raise the rate of VAT to 12% upon the existence of any of the two listed conditions.

Since the President is not given any discretion in refusing to raise the VAT rate to 12%, there is clearly no delegation of the legislative power to tax by Congress to the executive branch. The use of the word "shall" obviates any logical construction that would allow the President leeway in not raising the tax rate. More so, it is accepted that the principle of constitutional construction that every presumption should be indulged in favor of constitutionality and the court in considering the validity of the 'statute in question should give it such reasonable construction as can be reached to bring it within the fundamental law.¹⁰ While all reasonable doubts should be resolved in favor, of the constitutionality of a statute,¹¹ it should necessarily follow that the construction upheld should be one that is not itself noxious to the Constitution.

Congress should be taken to task for imperfect draftsmanship at least. Much trouble would have been avoided had the provisos instead read: "that effective January 1, 2006, the rate of value-added tax shall be raised to twelve percent (12%), after any of the following conditions has been satisfied xxx." This, after all is the operative effect of the provision as it stands. In relation to the operation of the tax increase, the denominated role of the President and the Secretary of Finance may be regarded as a superfluity, as their imprimatur as a precondition to the increase of the VAT rate must have no bearing.

Nonetheless, I cannot ignore the fact that both the President and the Secretary of Finance have designated roles in the implementation of the tax increase. Considering that it is Congress, and not these officials, which properly have imposed the increase in the VAT rate, how should these roles be construed?

The enactment of a law should be distinguished from its implementation. Even if it is Congress which exercises the plenary power of taxation, it is not the body that administers the implementation of the tax. Under Section 2 of the National Internal Revenue Code (NIRC), the assessment and collection of all national internal revenue taxes, and the enforcement of all forefeitures, penalties and fines connected therewith had been previously delegated to the Bureau of Internal Revenue, under the supervision and control of the Department of Finance.¹²

Moreover, as intimated earlier, Congress may delegate to other components of the government the power to ascertain the facts or conditions as the basis of the taking into effect of a law. It follows that ascertainment of the existence of the two conditions precedent for the increase as stated in the law could very well be delegated to the President or the Secretary of Finance.¹³

Nonetheless, the apprehensions arise that the process of ascertainment of the listed conditions delegated to the Secretary of Finance and the President effectively vest discretionary authority to raise the VAT rate on the President, through the subterfuges that may be employed to delay the determination, or even to manipulate the factual premises. Assuming arguendo that these feared abuses may arise, I think it possible to seek judicial enforcement of the increased VAT rate, even without the participation or consent of the President or Secretary of Finance, upon indubitable showing that any of the two listed conditions do exist. After all, the Court is ruling that the increase in the VAT rate is mandatory and beyond the discretion of the President to impose or delay.

The majority states that in making the recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is acting as the agent of the legislative branch, to determine and declare the event upon which its expressed will is to take effect.¹⁴ This recognition of agency must be qualified. I do not doubt the ability of Congress to delegate to the Secretary of Finance administrative functions in the implementation of tax laws, as it does under Section 2 of the NIRC. Yet it would be impermissible for Congress to delegate to the Secretary of Finance the plenary function of enacting a tax law. As stated earlier, the situation stands different from that in Southern Cross wherein the Constitution itself authorizes the delegation by Congress through a law to the President of the discretion to impose tariff measures, subject to restrictions and limitations provided in the law.¹⁵ Herein, Congress cannot delegate to either the President or the Secretary of Finance the discretion to raise the tax, as such power belongs exclusively to the legislative branch.

Perhaps the term "agency" is not most suitable in describing the delegation exercised by Congress in this case, for agency implies that the agent takes on attributes of the principal by reason of representative capacity. In this case, whatever "agency" that can be appreciated would be of severely limited capacity, encompassing as it only could the administration, not enactment, of the tax measure.

I do not doubt the impression left by the provisions that it is the President, and not Congress, which is authorized to raise the VAT rate. On paper at least, these imperfect provisions could be multiple sources of mischief. On the political front, whatever blame or scorn that may be attended with the increase of the VAT rate would fall on the President, and not on Congress which actually increased the tax rate. On the legal front, a President averse to increasing the VAT rate despite the existence of the two listed conditions may take refuge in the infelicities of the provision, and refuse to do so on the ground that the law, as written, implies some form of discretion on the part of the President who was, after all, "authorized" to increase the tax rate. It is critical for the Court to disabuse this notion right now.

The Continued Viability of
Tolentino v. Secretary of Finance

One of the more crucial issues now before us, one that has seriously divided the Court, pertains to the ability of the Bicameral Conference Committee to introduce amendments to the final bill which were not contained in the House bill from which the E-VAT Law originated. Most of the points addressed by the petitioners have been settled in our ruling in Tolentino v. Secretary of Finance,¹⁶ yet a revisit of that precedent is urged upon this Court. On this score, I offer my qualified concurrence with the ponencia.

Two key provisions of the Constitution come into play: Sections 24 and 26(2), Article VI of the Constitution. They read:

Section 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.

Section 26(2): 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.

Section 24 is also known as the origination clause, which derives origin from British practice. From the assertion that the power to tax the public at large must reside in the representatives of the people, the principle evolved that money bills must originate in the House of Commons and may not be amended by the House of Lords.¹⁷ The principle was adopted across the shores in the United States, and was famously described by James Madison in The Federalist Papers as follows:

This power over the purse, may in fact be regarded as the most compleat and effectual weapon with which any constitution can arm the immediate representatives of the people, for obtaining a redress of every grievance, and for carrying into effect every just and salutary measure.¹⁸

There is an eminent difference from the British system from which the principle emerged, and from our own polity. To this day, only members of the British House of Commons are directly elected by the people, with the members of the House of Lords deriving their seats from hereditary peerage. Even in the United States, members of the Senate were not directly elected by the people, but chosen by state legislatures, until the adoption of the Seventeenth Amendment in 1913. Hence, the rule assured the British and American people that tax legislation arises with the consent of the sovereign people, through their directly elected representatives. In our country though, both members of the House and Senate are directly elected by the people, hence the vitality of the original conception of the rule has somewhat lost luster.

Still, the origination clause deserves obeisance in this jurisdiction, simply because it is provided in the Constitution. At the same time, its proper interpretation is settled precedent, as enunciated in Tolentino:

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. The possibility of a third version by the conference committee will be discussed later. 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.¹⁹

The vested power of the Senate to " propose or concur with amendments" necessarily implies the ability to adduce transformations from the original House bill into the final law. Since the House and Senate sit separately in sessions, the only opportunity for the Senate to introduce its amendments would be in the Bicameral Conference Committee, which emerges only after both the House and the Senate have approved their respective bills.

In the present petitions, Tolentino comes under fire on two fronts. The first controversy arises from the adoption in Tolentino of American legislative practices relating to bicameral committees despite the difference in constitutional frameworks, particularly the limitation under Section 26(2), Article VI which does not exist in the American Constitution.

The majority points out that the "no amendment rule" refers only to the procedure to be followed by each house of Congress with regard to bills initiated in the house concerned, before said bills are transmitted to the other house for its concurrence or amendment. I agree with this statement. Clearly, the procedure under Section 26(2), Article VI only relates to the passage of a bill before the House and Senate, and not the process undertaken afterwards in the Bicameral Conference Committee.

Indeed, Sections 26 and 27 of Article VI, which detail the procedure how a bill becomes a law, are silent as to what occurs between the passage by both houses of their respective bills, and the presentation to the President of "every bill passed by the Congress”.²⁰ Evidently, "Congress" means both Houses, such that a bill approved by the Senate but not by the House is not presented to the President for approval. There is obviously a need for joint concurrence by the House and Senate of a bill before it is transmitted to the President, but the Constitution does not provide how such concurrence is acquired. This lacuna has to be filled, otherwise no bill may be transmitted to the President.

Even if the Bicameral Conference Committee is not a constitutionally organized body, it has existed as the necessary conclave for both chambers of Congress to reconcile their respective versions of a prospective law. The members of the Bicameral Conference Committee may possess in them the capacity to represent their particular chamber, yet the collective is neither the House nor the Senate. Hence, the procedure contained in Section 26(2), Article VI cannot apply to the Bicameral Conference Committee.

Tellingly, the version approved by the Bicameral Conference Committee still undergoes deliberation and approval by both Houses. Only one vote is taken to approve the reconciled bill, just as only one vote is taken in order to approve the original bill. Certainly, it could not be contended that this final version surreptitiously evades approval of either the House or Senate.

The second front concerns the scope and limitations of the Bicameral Conference Committee to amend, delete, or otherwise modify the bills as approved by the House and the Senate.

Tolentino adduced the principle, adopted from American practice, that the version as approved by the Bicameral Conference Committee need only be germane to the subject of the House and Senate bills in order to be valid.²¹ The majority, in applying the test of germaneness, upholds the contested provisions of the E-VAT Law. Even the members of the Court who prepared to strike down provisions of the law applying germaneness nonetheless accept the basic premise that such test is controlling.

I agree that any amendment made by the Bicameral Conference Committee that is not germane to the subject matter of the House or Senate Bills is not valid. It is the only valid ground by which an amendment introduced by the Bicameral Conference Committee may be judicially stricken.

The germaneness standard which should guide Congress or the Bicameral Conference Committee should be appreciated in its normal but total sense. In that regard, my views contrast with that of Justice Panganiban, who asserts that provisions that are not "legally germane" should be stricken down. The legal notion of germaneness is just but one component, along with other factors such as economics and politics, which guides the Bicameral Conference Committee, or the legislature for that matter, in the enactment of laws. After all, factors such as economics or politics are expected to cast a pervasive influence on the legislative process in the first place, and it is essential as well to allow such "non-legal" elements to be considered in ascertaining whether Congress has complied with the criteria of germaneness.

Congress is a political body, and its rationale for legislating may be guided by factors other than established legal standards. I deem it unduly restrictive on the plenary powers of Congress to legislate, to coerce the body to adhere to judge-made standards, such as a standard of "legal germaneness”. The Constitution is the only legal standard that Congress is required to abide by in its enactment of laws.

Following these views, I cannot agree with the position maintained by the Chief Justice, Justices Panganiban and Azcuna that the provisions of the law that do not pertain to VAT should be stricken as unconstitutional. These would include, for example, the provisions raising corporate income taxes. The Bicameral Conference Committee, in evaluating the proposed amendments, necessarily takes into account not just the provisions relating to the VAT, but the entire revenue generating mechanism in place. If, for example, amendments to non-VAT related provisions of the NIRC were intended to offset the expanded coverage for the VAT, then such amendments are germane to the purpose of the House and Senate Bills.

Moreover, it would be myopic to consider that the subject matter of the House Bill is solely the VAT system, rather than the generation of revenue. The majority has sufficiently demonstrated that the legislative intent behind the bills that led to the E-VAT Law was the generation of revenue to counter the country's dire fiscal situation.

The mere fact that the law is popularly known as the E-VAT Law, or that most of its provisions pertain to the VAT, or indirect taxes, does not mean that any and all amendments which are introduced by the Bicameral Conference Committee must pertain to the VAT system. As the Court noted in Tatad v. Secretary of Energy:²²

[I]t is contended that section 5(b) of R.A. No. 8180 on tariff differential violates the provision 17 of the Constitution requiring every law to have only one subject which should be expressed in its title. We do not concur with this contention. As a policy, this Court has adopted a liberal construction of the one title - one subject rule. We have consistently ruled that the title need not mirror, fully index or catalogue all contents and minute details of a law. A law having a single general subject indicated in the title may contain any number of provisions, no matter how diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and may be considered in furtherance of such subject by providing for the method and means of carrying out the general subject. We hold that section 5(b) providing for tariff differential is germane to the subject of R.A. No. 8180 which is the deregulation of the downstream oil industry. The section is supposed to sway prospective investors to put up refineries in our country and make them rely less on imported petroleum.²³

I submit that if the amendments are attuned to the goal of revenue generation, the stated purpose of the original House Bills, then the test of germaneness is satisfied. It might seem that the goal of revenue generation, which is stated in virtually all tax or tariff bills, is so encompassing in scope as to justify the inclusion by the Bicameral Conference Committee of just about any revenue generation measure. This may be so, but it does not mean that the test of germaneness would be rendered inutile when it comes to revenue laws.

I do believe that the test of germaneness was violated by the E-VAT Law in one regard. Section 21 of the law, which was not contained in either the House or Senate Bills, imposes restrictions on the use by local government units of their incremental revenue from the VAT. These restrictions are alien to the principal purposes of revenue generation, or the purposes of restructuring the VAT system. I could not see how the provision, which relates to budgetary allocations, is germane to the E-VAT Law. Since it was introduced only in the Bicameral Conference Committee, the test of germaneness is essential, and the provision does not pass muster. I join Justice Puno and the Chief Justice in voting to declare Section 21 as unconstitutional.

I also offer this brief comment regarding the deletion of the so-called "no pass on" provisions, which several of my colleagues deem unconstitutional. Both the House and Senate Bills contained these provisions that would prohibit the seller/producer from passing on the cost of the VAT payments to the consumers. However, an examination of the said bills reveal that the "no pass on" provisions in the House Bill affects a different subject of taxation from that of the Senate Bill. In the House Bill No. 3705, the taxpayers who are prohibited from passing on the VAT payments are the sellers of petroleum products and electricity/power generation companies. In Senate Bill No. 1950, no prohibition was adopted as to sellers of petroleum products, but enjoined therein are electricity/power generation companies but also transmission and distribution companies.

I consider such deletions as valid, for the same reason that I deem the amendments valid. The deletion of the two disparate "no pass on" provisions which were approved by the House in one instance, and only by the Senate in the other, remains in the sphere of compromise that ultimately guides the approval of the final version. Again, I point out that even while the two provisions may have been originally approved by the House and Senate respectively, their subsequent deletion by the Bicameral Conference Committee is still subject to approval by both chambers of Congress when the final version is submitted for deliberation and voting.

Moreover, the fact that the nature of the "no pass on" provisions adopted by the House essentially differs from that of the Senate necessarily required the corrective relief from the Bicameral Conference Committee. The Committee could have either insisted on the House version, the Senate version, or both versions, and it is not difficult to divine that any of these steps would have obtained easy approval. Hence, the deletion altogether of the "no pass on" provisions existed as a tangible solution to the possible impasse, and the Committee should be accorded leeway to implement such a compromise, especially considering that the deletion would have remained germane to the law, and would not be constitutionally prohibited since the prohibition on amendments under Section 26(2), Article VI does not apply to the Committee.

An outright declaration that the deletion of the two elementally different "no-pass on" provisions is unconstitutional, is of dubious efficacy in this case. Had such pronouncement gained endorsement of a majority of the Court, it could not result in the ipso facto restoration of the provision, the omission of which was ultimately approved in both the House and Senate. Moreover, since the House version of the "no pass on" is quite different from that of the Senate, there would be a question as to whether the House version, the Senate version, or both versions would be reinstated. And of course, if it were the Court which would be called upon to choose, such would be way beyond the bounds of judicial power.

Indeed, to intimate that the Court may require Congress to reinstate a provision that failed to meet legislative approval would result in a blatant violation of the principle of separation of powers, with the Court effectively dictating to Congress the content of its legislation. The Court cannot simply decree to Congress what laws or provisions to enact, but is limited to reviewing those enactments which are actually ratified by the legislature.


My earlier views, as are the submissions I am about to offer, are rooted in nothing more than constitutional interpretation. Perhaps my preceding discussion may lead to an impression that I whole-heartedly welcome the passage of the E-VAT Law. Yet whatever relief I may have over the enactment of a law designed to relieve our country's financial woes are sadly obviated with the realization that a key amendment introduced in the law is not only unconstitutional, but of fatal consequences. The clarion call of judicial review is most critical when it stands as the sole barrier against the deprivation of life, liberty and property without due process of law. It becomes even more impelling now as we are faced with provisions of the E-VAT Law which, though in bland disguise, would operate as the most destructive of tax measures enacted in generations.

Tax Statutes and the Due Process Clause

It is the duty of the courts to nullify laws that contravene the due process clause of the Bill of Rights. This task is at the heart not only of judicial review, but of the democratic system, for the fundamental guarantees in the Bill of Rights become merely hortatory if their judicial enforcement is unavailing. Even if the void law in question is a tax statute, or one that encompasses national economic policy, the courts should not shirk from striking it down notwithstanding any notion of deference to the executive or legislative branch on questions of policy. Neither Congress nor the President has the right to enact or enforce unconstitutional laws.

The Bill of Rights is by no means the only constitutional yardstick by which the validity of a tax law can be measured. Nonetheless, it stands as the most unyielding of constitutional standards, given its position of primacy in the fundamental law way above the articles on governmental power.²⁴ If the question lodged, for example, hinges on the proper exercise of legislative powers in the enactment of the tax law, leeway can be appreciated in favor of affirming the legislature's inherent power to levy taxes. On the other hand, no quarter can be ceded, no concession yielded, on the people's fundamental rights as enshrined in the Bill of Rights, even if the sacrifice is ostensibly made "in the national interest." It is my understanding that "the national interests," however comported, always subsumes in the first place recognition and enforcement of the Bill of Rights, which manifests where we stand as a democratic society.

The constitutional safeguard of due process is embodied in the fiat "No person shall be deprived of life, liberty or property without due process of law”.²⁵ The purpose of the guaranty is to prevent governmental encroachment against the life, liberty and property of individuals; to secure the individual from the arbitrary exercise of the powers of the government, unrestrained by the established principles of private rights and distributive justice; to protect property from confiscation by legislative enactments, from seizure, forfeiture, and destruction without a trial and conviction by the ordinary mode of judicial procedure; and to secure to all persons equal and impartial justice and the benefit of the general law.²⁶

In Magnano Co. v. Hamilton,²⁷ the U.S. Supreme Court recognized that the due process clause may be utilized to strike down a taxation statute, "if the act be so arbitrary as to compel the conclusion that it does not involve an exertion of the taxing power, but constitutes, in substance and effect, the direct exertion of a different and forbidden power, as, for example, the confiscation of property.”²⁸ Locally, Sison v. Ancheta²⁹ has long provided sanctuary for persons assailing the constitutionality of taxing statutes. The oft-quoted pronouncement of Justice Fernando follows:

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of government." It is, of course, to be admitted that for all its plenitude, the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits. Adversely affecting as it does property rights, both the due process and equal protection clauses may properly be invoked, as petitioner does, to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." In a separate opinion in Graves v. New York, Justice Frankfurter, after referring to it as an "unfortunate remark," characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times [allowing] a free use of absolutes." This is merely to emphasize that it is not and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes's pen: 'The power to tax is not the power to destroy while this Court sits.'" So it is in the Philippines.
   
   
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive act that runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision � as petitioner here alleges � fails to abide by its command, then this Court must so declared and adjudge it null. The inquiry thus is centered on the question of whether the imposition of a higher tax rate on taxable net income derived from business or profession than on compensation is constitutionally infirm.
   
   
4. The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here, does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void on its face, he has not made out a case. This is merely to adhere to the authoritative doctrine 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.
   
   
5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds.³⁰

Sison pronounces more concretely how a tax statute may contravene the due process clause. Arbitrariness, confiscation, overstepping the state's jurisdiction, and lack of a public purpose are all grounds for nullity encompassed under the due process invocation.

Yet even these more particular standards as enunciated in Sison are quite exacting, and difficult to reach. Even the constitutional challenge posed in Sison failed to pass muster. The ponencia cites Sison in asserting that due process and equal protection are broad standards which need proof of such persuasive character to lead to such a conclusion.

It is difficult though to put into quantifiable terms how onerous a taxation statute must be before it contravenes the due process clause.³¹ After all, the inherent nature of taxation is to cause pain and injury to the taxpayer, albeit for the greater good of society. Perhaps whatever collective notion there may be of what constitutes an arbitrary, confiscatory, and unreasonable tax might draw more from the fairy tale/legend traditions of absolute monarchs and the oppressed peasants they tax. Indeed, it is easier to jump to the conclusion that a tax is oppressive and unfair if it is imposed by a tyrant or an authoritarian state.

But could an arbitrary, confiscatory or unreasonable tax actually be enacted by a democratic state such as ours? Of course it could, but these would exist in more palatable guises. In a democratic society wherein statutes are enacted by a representative legislature only after debate and deliberation, tax statutes will most likely, on their face, seem fair and even-handed. After all, if Congress passes a tax law that on facial examination is obviously harsh and unfair, it faces the wrath of the voting public, to say nothing of the media.

In testing the validity of a tax statute as against the due process clause, I think that the Court should go beyond a facial examination of the statute, and seek to understand how exactly it would operate. The express terms of a statute, especially tax laws, are usually inadequate in spelling out the practical effects of its implementation. The devil is usually in the details.

Admittedly, the degree of difficulty involved of judicial review of tax laws has increased with the growing complexities of business, economic and accounting practices. These are sciences which laymen are not normally equipped by their general education to fully grasp, hence the possible insecurity on their part when confronted with such questions on these fields.

However, we should not cede ground to those transgressions of the people's fundamental rights simply because the mechanism employed to violate constitutional guarantees is steeped in disciplines not normally associated with the legal profession. Venality cannot be allowed to triumph simply due to its sophistication. This petition imputes in the E-VAT Law unconstitutional oppression of the fatal variety, but in order to comprehend exactly how and why that is so, one has to delve into the complex milieu of the VAT system. The party alleging the law's unconstitutionality of course has the burden to demonstrate the violations in understandable terms, but if such proof is presented, the Court's duty is to engage accordingly.

The Viability of the Clear and Present
Danger Doctrine as Counterweight
To the Shibboleths of Speculation
and Wisdom

I do not see as an impediment to the annulment of a tax law the fact that it has yet to be implemented, or the fear that doing so constitutes an undue attack on the wisdom, rather than the legality of a statute. However, my position in this petition has been challenged on those grounds, and I see it fit to refute these preemptive allegations before delving into the operative aspect of the E-VAT Law.

If there is cause to characterize my arguments as speculative, it is only because the E-VAT Law has yet to be implemented. No person as of yet can claim to have sustained actual injury by reason of the implementation of the assailed provisions in G.R. No. 168461. Yet this should not mean that the Court is impotent from declaring a provision of law as violative of the due process clause if it is clear that its implementation will cause the illegal deprivation of life, liberty or property without due process of law. This is especially so if, as in this case, the injury is of mathematical certainty, and the extent of the loss quantifiable through easy reference to the most basic of business practices.

These arguments are conjectural for the same reason that the bare statement "firing a gunshot into the head will cause a fatal wound" would be conjectural. Some people are lucky enough to survive gunshot wounds to the head, while many others are not. Yet just because the fear of mortality would be merely speculative, it does not mean that there should be less compulsion to avoid a situation of getting shot in the head.

Indeed, the Court has long responded to strike down prospective actions, even if the injury has not yet even occurred. One of the most significant legal principles of the last century, the "clear and present danger" doctrine in free speech cases, in fact emanates from the prospectivity, and not the actuality of danger. The Court has not been hesitant to nullify acts which might cause injury, owing to the presence of a clear and present danger of a substantive evil which the State has the right to prevent. It has even extended the "clear and present danger rule" beyond the confines of freedom of expression to the realm of freedom of religion, as noted by Justice Puno in his ponencia in Estrada v. Escritor.³²

Justice Teodoro Padilla goes further in his concurring opinion in Basco v. PAGCOR, and asserts that the clear and present danger test squarely applies to the due process clause: "The courts, as the decision states, cannot inquire into the wisdom, morality or expediency of policies adopted by the political departments of government in areas which fall within their authority, except only when such policies pose a clear and present danger to the life, liberty or property of the individual.”

I see no reason why the clear and present danger test cannot apply in this case, or any case wherein a taxing statute poses a clear and present danger to the life, liberty or property of the individual. The application of this standard frees the Court from inutility in the face of patently unconstitutional tax laws that have been enacted but are yet to be fully operational.

If for example, Congress deems it wise to impose the most draconian of tax measures ─ such as trebling the income taxes of all persons over 40, raising the gross sales tax rate to 50%, or penalizing delinquent taxpayers with 50 lashes of the whip ─ there certainly would be a massive public outcry, and an expectation that the Court would immediately nullify the offensive measures even before they are actually imposed. Applying the clear and present danger test, the Court is empowered to strike down the noxious measures even before they are implemented. Yet with this "bar on speculativeness" as argued by the majority, the Court could easily refuse to pay heed to the prayers for injunctive relief, and instead demand that the taxing subjects must first suffer before the Court can act.

In the same vein, the claim that my arguments strike at the wisdom, rather than the constitutionality of the law are misplaced. Concededly, the assailed provisions of the E-VAT law are basically unwise. But any provision of law that directly contradicts the Constitution, especially the Bill of Rights, are similarly unwise, as they run inconsistent with the fundamental law of the land, the enunciated state policies and the elemental guarantees assured by the State to its people. Not every unwise law is unconstitutional, but every unconstitutional law is unwise, for an unconstitutional law contravenes a primordial principle or guarantee on which our polity is founded.

If it can be shown that the E-VAT Law violates these provisions of the Constitution, especially the due process clause, then the Court should accordingly act and nullify. Such is the essence of judicial review, which stands as the sole barrier to the implementation of an unconstitutional law.

The Separate Opinion of Justice Panganiban notes that "[t]he Court cannot step beyond the confines of its constitutional power, if there is absolutely no clear showing of grave abuse of discretion in the enactment of the law”³³. This, I feel, is an unduly narrow view of judicial review, implying that such merely encompasses the procedural aspect by which a law is enacted. If the policy of the law, and/or the means by which such policy is implemented run counter to the Constitution, then the Court is empowered to strike down the law, even if the legislative and executive branches act within their discretion in legislating and signing the law.

It is also asserted that if the implementation of the 70% cap imposes an unequal effect on different types of businesses with varying profit margins and capital requirements, then the remedy would be an amendment of the law.³⁴ Of course, the remedy of legislative amendment applies to even the most unconstitutional of laws. But if our society can take cold comfort in the ability of the legislature to amend its enactments as the defense against unconstitutional laws, what remains then as the function of judicial review? This legislative capacity to amend unconstitutional laws runs concurrently with the judicial capacity to strike down unconstitutional laws. In fact, the long-standing tradition has been reliance on the judicial branch, and not the legislative branch, for salvation from unconstitutional laws.

I do recognize that the Separate Opinion of Justice Panganiban ultimately proceeds from the premise that the assailed provisions of the E-VAT Law may be merely unwise, but not unconstitutional. Hence, its preference to rely on Congress to amend the offending provisions rather than judicial nullification. But I maintain that the assailed provisions of the E-VAT Law violate the due process clause of the Constitution and must be stricken down.

The Nature of VAT

To understand why Sections 8 and 12 of the E-VAT law contravenes the due process clause, it is essential to understand the nature of the value-added tax itself. Filipino consumers may comprehend VAT at its elemental form, having been accustomed for several years now in paying an extra 10% of the listed selling price for a wide class of consumer goods. From the perspective of the end consumer, such as the patron who purchases a meal from a fastfood restaurant, VAT is simply a tax on transactions involving the sale of goods. The tax is shouldered by the buyer, and is based on a percentage of the purchase price. Since an excise or percentage tax shares the same characteristics, there could be some confusion as between such taxes and the VAT.

However, VAT is distinguishable from the standard excise or percentage taxes in that it is imposable not only on the final transaction involving the end user, but on previous stages as well so long as there was a sale involved. Thus, VAT does not simply pertain to the extra percentage paid by the buyer of a fast-food meal, but also that paid by restaurant itself to its suppliers of raw food products. This multi-stage system is more acclimated to the vagaries of the modern industrial climate, which has long surpassed the stage when there was only one level of transfer between the farmer who harvests the crop and the person who eats the crop. Indeed, from the extraction or production of the raw material to its final consumption by a user, several transactions or sales materialize. The VAT system assures that the government shall reap income for every transaction that is had, and not just on the final sale or transfer.

The European Union, which has long required its member states to apply the VAT system, provided the following definition of the tax which I deem clear and comprehensive:

The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions that take place in the production and distribution process before the stage at which tax is charged.

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.³⁵

The above definition alludes to a key characteristic of the VAT system, that the imposable tax remains proportional to the price of goods and services no matter the number of transactions that takes place.

There is another key characteristic of the VAT ─ that no matter how many the taxable transactions that precede the final purchase or sale, it is the end-user, or the consumer, that ultimately shoulders the tax. Despite its name, VAT is generally not intended to be a tax on value added, but rather as a tax on consumption. Hence, there is a mechanism in the VAT system that enables firms to offset the tax they have paid on their own purchases of goods and services against the tax they charge on their sales of goods and services.³⁶ Section 105 of the NIRC assures that ”the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services." The assailed provisions of the E-VAT law strike at the heart of this accepted principle.

And there is one final basic element of the VAT system integral to this disquisition: the mode by which the tax is remitted to the government. In simple theory, the VAT payable can be remitted to the government immediately upon the occurrence of the transaction, but such a demand proves excessively unwieldy. The number of VAT covered transactions a modern enterprise may contract in a single day, plus the recognized principle that it is the final end user who ultimately shoulders the tax; render the remittance of the tax on a per transaction basis impossible.

Thus, the VAT is delivered by the purchaser not directly to the government but to the seller, who then collates the VAT received and remits it to the government every quarter. The process may seem simple if cast in this manner, but there is a wrinkle, due to the offsetting mechanism designed to ultimately make the end consumer bear the cost of the VAT.

The Concepts of Input and
Output VAT

This mechanism is employed through the introduction of two concepts, the input tax and the output tax. Section 110(A) of the National Internal Revenue Code defines the input tax as the VAT due from or paid by a VAT-registered person on the importation of goods or local purchase of goods and services in the course of trade or business, from a VAT registered person.

Let us put this in operational terms. A VAT registered person, engaged in an enterprise, necessarily purchases goods such as raw materials and machinery in order to produce consumer goods. The purchase of such raw materials and machineries is subject to VAT, hence the enterprise pays an additional 10% of the purchase price to the supplier as VAT. This extra amount paid by the enterprise constitutes its input VAT. The enterprise likewise pays input VAT when it purchases services covered by the tax, or rentals of property.

Since VAT is a final tax that is supposed to be ultimately shouldered by the end consumer, the VAT system allows for a mechanism by which the business is able to recover the input VAT that it paid. This comes into play when the business, having transformed the raw materials into consumer goods, sells these goods to the public. As widely known, the consumer pays to the business an additional amount of 10% of the purchase price as VAT. As to the business, this VAT payments it collects from the consumer represents output VAT, which is formally described under Section 110(A) of the NIRC as "the value-added tax due on the sale or lease of taxable goods or properties or services by" by any VAT-registered person.

The output VAT collected by the business from the consumers accumulates, until the end of every quarter, when the enterprise is obliged to remit the collected output VAT to the government. This is where the crediting mechanism comes into play. Since the business is entitled to recover the prepaid input VAT, it does so in every quarter by applying the amount of prepaid input VAT against the collected output VAT which is to be remitted. If the output VAT collected exceeds the prepaid input VAT, then the amount of input VAT is deducted from the output VAT, and it is entitled to remit only the remainder as output VAT to the government. To illustrate, if Business X collects P1,000,000.00 as output VAT and incurs P500,000.00 as input VAT, the P500,000.00 is deducted from the P1,000,000.00 output VAT, and X is required to remit only P500,000.00 of the output VAT it collected from customers.

On the other hand, if the input VAT prepaid exceeds the output VAT collected, then the business need not remit any amount as output VAT for the quarter. Moreover, the difference between the input VAT and the output VAT may be credited as input VAT by the business in the succeeding quarter. Thus, if in the First Quarter of a year, Business X prepays P1,000,000.00 as input VAT, and collects only P500,000.00 as output VAT, it need not remit any amount of output VAT to the government. Moreover, in the Second Quarter, Business X can credit the remaining P500,000.00 as part of its input VAT for that quarter. Hence, if in the Second Quarter, X actually prepays P400,000.00 as input VAT, and collects P500,000.00 as output VAT, it may add the P500,000.00 input VAT from the previous quarter to the P400,000.00 prepaid in the current quarter, bringing the total input VAT it could claim to P900,000.00. Since the input VAT of P900,000.00 now exceeds the output VAT collected of P500,000, then X need not remit any output VAT as well to the government for the Second Quarter.

However, reality is far bleaker than that befaced by Business X. The VAT collected and remitted is not the most relevant statistic evaluated by the business. The figure of primary concern of the enterprise would be the profit margin, which is simply the excess of revenue less expenditures. Revenue is derived from the gross sales of the business. Expenditures encompass all expenses incurred by the business including overhead expenses, wages and purchases of capital goods. Crucially, expenditures would include the input VAT prepaid by the business on its capital expenditures.

Since a significant amount of the capital outlay incurred by a business is subjected to the prepayment of input taxes, the necessity of recovering these losses through the output VAT collected becomes more impelling. These output taxes are obviously proportional to the volume of gross sales the higher the gross sales ─ the higher the output VAT collected. The output taxes collected on sales answer for not only those input taxes paid on the purchase of the raw materials, but also for the input taxes paid on the multifarious overhead expenses covered by VAT. The burden carried by the sales volume on the stability, if not survival of the business thus just became more crucial. The maintenance of the proper equilibrium is not an easy matter. Increasing the selling price of the goods sold does not necessarily increase the gross sales, as it could have the counter-effect of repelling the consumer and diminishing the number of goods sold. At the same time, keeping the selling price low may increase the volume of goods sold, but not necessarily the amount of gross sales.

Profit is a chancy matter, and in cases of small to medium enterprises, usually small if any. It is quite common for retail and distribution enterprises to incur profits of less than 1% of their gross revenues. Low profitability is not an automatic badge of poor business skills, but a reality dictated by the laws of the marketplace. The probability of profit is lower than that of capital expenditures, and ultimately, many business establishments end up with a higher input tax than output tax in a given quarter. This would be especially true for small to medium enterprises who do not reap sufficient profits from its business in the first place, and for those firms that opt to also invest in capital expenses in addition to the overhead. Whatever miniscule profit margins that can be obtained usually spell the difference between life and death of the business.

The possibility of profit is further diminished by the fact that businesses have to shoulder the input VAT in the purchase of their capital expenses. Yet the erstwhile VAT system was not tainted by the label of oppressiveness and neither did it bear the confiscatory mode. This was because of the immediate relief afforded from the input taxes paid by the crediting system. In theory, VAT is not supposed to affect the profit margin. If such margin is affected, it is only because of the prepayment of the input taxes, and this should be remedied by the immediate recovery through the crediting system of the settled input taxes.

The new E-VAT law changes all that, and puts in jeopardy the survival of small to medium enterprises.

The Effects of the 70% Cap on Creditable Input VAT

The first radical shift introduced by the E-VAT law to the creditable input system ─ the 70% cap on the creditable input tax that may be carried over into the next quarter ─ is provided in Section 8 of the law, which amends Section 110(A) of the NIRC, among others. Section 110(A) as amended would now read:

Sec. 110. Tax Credits. -

(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, subject to the provisions of Section 112. (emphasis supplied)

All hope for entrepreneurial stability is dashed with the imposition of the 70% cap. Under the E-VAT Law, the business, regardless of stability or financial capability, is obliged to remit to the government every quarter at least 30% of the output VAT collected from customers, or roughly 3% of the amount of gross sales. Thus, if a quarterly gross sales of Y Business totaled P1,000,000, and Y is prudent enough to keep its capital expenses down to P980,000, it would then appear on paper that Y incurred a profit of P20,000. However, with the 70% cap, Y would be obliged to remit to the government P30,000, thus wiping out the profit margin for the quarter. Y would be entitled to credit the excess input VAT it prepaid for the next quarter, but the continuous operation of the 70% cap obviates whatever benefits this may give, and cause the accumulation of the unutilized creditable input VAT which should be returned to the business.

The difference is even more dramatic if seen how the unutilized creditable input VAT accumulates over a one year period. To illustrate, Business Y prepays the following amounts of input VAT over a one-year period: P100,000.00 - First Quarter; P100,000.00 - 2nd Quarter; P34,000.00 - 3rd Quarter; and P50,000.00 - 4th Quarter. On the other hand, Y collects the following amounts of output VAT from consumers: P60,000.00 - First Quarter; P60,000.00 - 2nd Quarter; P100,000.00 - 3rd Quarter; and P50,000.00 - 4th Quarter. Applying the 70% cap, which would limit the amount of the declarable input VAT to 70% in a quarter, the following results obtain, as presented in tabular form:

Particulars	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Output VAT	60,000	60,000	100,000	50,000
Input VAT (Actual) + Carry Over	100,000	100,000 [input] +58,000 [excess creditable] 158,000	34,000 [input] +116,000 [excess creditable] 150,000	50,000 [input] +80,000 [excess creditable] 130,000
Declarable Input VAT (70% of output VAT)	(60,000x70%) 42,000	(60,000x70%) 42,000	(100,000x70%) 70,000	(50,000x70%) 35,000
Lower of actual and 70% cap - allowable VAT Payable	(60,000 -42,000) 18,000	(60,000 -42,000) 18,000	(100,000- 70,000) 30,000	(50,000- 35,000) 15,000
Creditable Input VAT	(100,000 - 42,000) 58,000	(158,000 - 42,000) 116,000	(150,000- 70,000) 80,000	(130,000- 35,000) 95,000

This stands in contrast to same business VAT accountability under the present system, using the same variables of output VAT and input VAT. The need to distinguish a declarable input VAT is obviated with the elimination of the 70% cap.

Particulars	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Output VAT	60,000	60,000	100,000	50,000
Input VAT (Actual) + Carry Over	100,000	100,000 [input] +40,000 [excess creditable] 140,000	34,000 [input] +80,000 [excess creditable] 114,000	50,000 [input] + 14,000 (excess creditable) 50,000
VAT Payable	0	0	0	0
Creditable Input VAT	40,000	80,000	14,000	14,000

The difference is dramatic, as is the impact on the business's profit margin and available cash on hand. Under normal conditions, small to medium enterprises are already encumbered with the likelihood of obtaining only a minimal profit margin. Without the 70% cap, those businesses would nonetheless be able to expect an immediate return on its input taxes earlier advanced, taxes which under the VAT system it is not supposed to shoulder in the first place. However, with the 70% cap in place, the unutilized input taxes would continue to accumulate, and the enterprise precluded from immediate recovery thereof. The inability to utilize these input taxes, which could spell the difference between profit and loss, solvency and insolvency, will eventually impair, if not kill off the enterprise.

The majority fails to consider one of the most important concepts in finance, time value for money.³⁷ Simply put, the value of one peso is worth more today than in 2006. Money that you hold today is worth more because you can invest it and earn interest.³⁸ By reason of the 70% cap, the amount of input VAT credit that remains unutilized would continue accumulate for months and years. The longer the amount remains unutilized, the higher the degree of its depreciation in value, in accordance with the concept of time value of money. Even assuming that the business eventually recovers the input VAT credit, the sum recovered would have decreased in practical value.

It would be sad, but fair, if a business ceases because of its inability to compete with other businesses. It would be utter malevolence to condemn an enterprise to death solely through the employment of a deceptive accounting wizardry. For the raison d'etre of this 70% cap is to make it appear on paper that the government is more solvent than it actually is. Conceding for the nonce, there is a temporary advantage gained by the government by this 70% cap, as the steady remittance by businesses of the 30% output VAT would assure a cash flow. Such collection may only momentarily resolve an endemic problem in our local tax system, the problem of collection itself.

If the 70% cap was designed in order to enhance revenue collection, then I submit that the means employed stand beyond reason. If sheer will proves insufficient in assuring that the State all taxes due it, there should be allowable discretion for the government to formulate creative means to enhance collection. But to do so by depriving low profit enterprises of whatever meager income earned and consequently assuring the death of these industries goes beyond any valid State purpose.

Only stable businesses with substantial cash flows, or extraordinarily successful enterprises will be able to remain in operation should the 70% cap be retained. The effect of the 70% cap is to effectively impose a tax amounting to 3% of gross revenue. The amount may seem insignificant to those without working knowledge of the ways of business, but anybody who is actually familiar with business would be well aware the profit margins of the retailing and distribution sectors typically amount to less than 1% of the gross revenues. A taxpayer has to earn a margin of at least 3% on gross revenue in order to recoup the losses sustained due to the 70% cap. But as stated earlier, profits are chancy, and the entrepreneur does not have full control of the conditions that lead to profit.

Even more galling is the fact that the 70% cap, oppressive as it already is to the business establishment, even limits the options of the business to recover the unutilized input VAT credit. During the deliberations, the argument was raised that the problem presented by the 70% cap was a business problem, which can only be solved by business. Yet there is only one viable option for the enterprise to resolve the problem, and that is to increase the selling price of goods.³⁹ It would be incorrect to assume that increase the volume of the goods sold could solve the problem, since for items with the same purchasing cost, the effect of the 70% cap remains constant regardless of an increase in volume.

But the additional burden is not limited to the increase of prices by the retailer to the end consumer. Since VAT is a transaction tax, every level of distribution becomes subject not only to the VAT, but also to the 70% cap. The problem increases due to a cascading effect as the number of distribution levels increases since it will result in the collection of an effective 3% percentage tax at every distribution level.

In analyzing the effects of the 70% cap, and appreciating how it violates the due process clause, we should not focus solely on the end consumers. Undoubtedly, consumers will face hardships due to the increased prices, but their threshold of physical survival, as individual people, is significantly less than that of enterprises. Somehow, I do not think the new E-VAT would generally deprive consumers of the bare necessities such as food, water, shelter and clothing. There may be significant deprivation of comfort as a result, but not of life.

The same does not hold true for businesses. The standard of "deprivation of life" of juridical persons employs different variables than that of natural persons. What food and water may be for persons, profit is for an enterprise the bare necessity for survival. For businesses, the implementation of the same law, with the 70% cap and 60-month amortization period, would mean the deprivation of profit, which is the determinative necessity for the survival of a business.

It is easy to admonish both the consumer and the enterprise to cut back on expenditures to survive the new E-VAT Law. However, this can be realistically expected only of the consumer. The small/medium enterprise cannot just cut back easily on expenditures in order to survive the implementation of the E-VAT Law. For such businesses, expenditures do not normally contemplate unnecessary expenses such as executive perks which can be dispensed with without injury to the enterprises. These expenditures pertain to expenses necessary for the survival of the enterprise, such as wages, overhead and purchase of raw materials. Those three basic items of expenditure cannot simply be reduced, as to do so with impair the ability of the business to operate on a daily basis.

And reduction of expenditures is not the exclusive antidote to these impositions under the E-VAT Law, as there must also be a corresponding increase in the amount of gross sales. To do so though, would require an increase in the selling price, dampening consumer enthusiasm, and further impairing the ability of the enterprise to recover from the E-VAT Law. This is your basic Catch-22⁴⁰ situation � no matter which means the enterprise employs to recover from the E-VAT Law, it will still go down in flames.

Section 8 of the E-VAT law, while ostensibly even-handed in application, fails to appreciate valid substantial distinctions between large scale enterprises and small and medium enterprises. The latter group, owing to the limited capability for capital investment, subsists on modest profit margins, whereas the former expects, by reason of its substantial capital investments, a high margin. In essentially prohibiting the recovery of small profit margins, the E-VAT law effectively sends the message that only high margin businesses are welcome to do business in the Philippines. It stifles any entrepreneurial ambitions of Filipinos unfortunate enough to have been born poor yet seek a better life by sacrificing all to start a small business.

Among the enunciated State policies in the Constitution, as stated in Section 20, Article II, is that "the State recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to needed investments.”⁴¹ The provision, as with other declared State policies in the Constitution, have sufficient import and consequence such that in assessing the constitutionality of the governmental action, these provisions should be considered and weighed as against the rationale for the assailed State action.⁴² The incompatibility of the 70% cap with this provision is patent.

Pilipinas Shell Dealers, on whom the burden to establish the violation of due process and equal protection lies, offers the following chart of the income statement of a typical petroleum dealer:

QUARTERLY PROFIT AND LOSS STATEMENT
DEALER "A"

	Price	VAT (without 70% cap)	VAT (with 70% cap)
Sales/Output	32,748,534	3,274,853.40	3,274,853.40
Cost of Sales	31,834,717	3,183,471.70
Gross Margin	913,817
Operating Expenses Non-vatable items Vatable Items	536,249 317,584	31,758.40
Total Cost	853,833
Net Profit	59,984
Total Input Tax		3,215,230.10	2,292,397.38
VAT Payable		59,623.30	982,456.02
Unutilized Input VAT			922,832.72

*computed by multiplying output VAT by 70% [3,274,853.40 x 70% = 2,292.397.38]

The presentation of the Pilipinas Shell Dealers more or less jibes with my own observations on the impact of the 70% cap. The dealer whose income is illustrated above has to outlay a cash amount of P922,832.72 more than what would have been shelled out if the 70% cap were not in place. Considering that the net profit of the dealer is only P59,984.00, the consequences could very well be fatal, especially if these state of events persist in succeeding quarters.

The burden of proof was on the Pilipinas Shell Dealers' to prove their allegations, and accordingly, these figures have been duly presented to the Court for appreciation and evaluation. Instead, the majority has shunted aside these presentations as being merely theoretical, despite the fact that they present a clear and present danger to the very life of our nation's enterprises. The majority's position would have been more credible had it faced the issue squarely, and endeavored to demonstrate in like numerical fashion why the 70% cap is not oppressive, confiscatory, or otherwise violative of the due process clause.

Sadly, the majority refuses to confront the figures or engage in a meaningful demonstration of how these assailed provisions truly operate. Instead, it counters with platitudes and bromides that do not intellectually satisfy. Considering that the very vitality, if not life of our domestic economy is at stake, I think it derelict to our duty to block out these urgent concerns presented to the Court with blind faith tinged with irrational Panglossian⁴³ optimism.

The obligation of the majority to refute on the merits the arguments of the Petroleum Dealers becomes even more grave considering that the respondents have abjectly failed to convincingly dispute the claims. During oral arguments, respondents attempted to counter the arguments that the 70% cap was oppressive and confiscatory by presenting the following illustration, which I fear is severely misleading:

Slide 1
Item	Cost	VAT
Sales	1,000,000.00	100,000.00
Purchases	800,000.00	80,000.00
Due BIR without cap		Due BIR with 70% cap
Output VAT	100,000.00	Output VAT	100,000.00
Actual Input VAT	80,000.00	Allowable Input VAT	70,000.00
Net VAT Payable	20,000.00	Net VAT Payable	30,000.00
		Excess Input VAT	10,000.00
		Carry-over to next quarter

Slide 2
____________________________________________________
Item	Cost	VAT
Sales	1,000,000.00	100,000.00
Purchases	600,000.00	60,000.00
Due BIR without cap		Due BIR with 70% cap
Output VAT	100,000.00	Output VAT	100,000.00
Actual Input VAT	60,000.00	Allowable Input VAT	60,000.00
Net VAT Payable	40,000.00	Net VAT Payable	40,000.00
		Excess Input VAT	0
		Carry-over to next quarter

This presentation of the respondents is grossly deceptive, as it fails to account for the excess creditable input VAT that remains unutilized due to the 70% cap. This excess or creditable input VAT is supposed to be carried over for the computation of the input VAT of the next quarter. Instead, this excess or creditable input VAT magically disappears from the table of the respondents. In their memorandum, the Pilipinas Shell Dealers counter with their own presentation using the same variables as respondents', but taking into account the excess creditable input VAT and extending the situation over a one-year period. I cite with approval the following chart of the Pilipinas Shell Dealers:

Slide 1
Quarter 1
Item No. Cost VAT
Sales	1,000,000.00	100,000.00
Purchases	800,000.00	80,000.00
Due BIR with 70% cap
Output VAT		100,000.00
Allowable Input VAT		70,000.00
Net VAT Payable		30,000.00
Excess Input Vat
Carry-over to next quarter		10,000.00

Quarter 2
Cost VAT
Sales	1,000,000.00	100,000.00
Purchases	800,000.00	80,000.00
Due BIR with 7-% cap
Output VAT
Less: Input VAT		100,000.00
Excess Input VAT fr. 1st Quarter	10,000.00
Input VAT-Current Qtr	80,000.00
Total Available Input VAT	90,000.00
Allowable Input VAT (100,000 x 70%)	70,000.00	70,000.00
Net VAT Payable		30,000.00
		========
Total Available Input VAT		90,000.00
Allowable Input VAT		70,000.00
Excess Input VAT to be carried over to next Quarter		20,000.00
		========

Quarter 3
Cost VAT
Sales	1,000,000.00	100,000.00
Purchases	800,000.00	80,000.00
Due BIR with 70% cap
Output VAT
Less: Input VAT		100,000.00
Excess Input VAT fr. 2nd Quarter	20,000.00
Input VAT-Current Qtr	80,000.00
Total Available Input VAT	100,000.00
Allowable Input VAT (100,000 x 70%)	70,000.00	70,000.00
Net VAT Payable		30,000.00
		=========
Total Available Input VAT		100,000.00
Allowable Input VAT		70,000.00
Excess Input VAT to be carried over to next quarter		30,000.00
		=========

Quarter 4
Cost VAT
Sales	1,000,000.00	100,000.00
Purchases	800,000.00	80,000.00
Due BIR with 70% cap
Output VAT
Less: Input VAT		100,000.00
Excess Input VAT fr. 2nd Quarter	20,000.00
Input VAT-Current Qtr	80,000.00
Total Available Input VAT	110,000.00
Allowable Input VAT (100,000 x 70%)	70,000.00	70,000.00
Net VAT Payable		30,000.00
		=========
Total Available Input VAT		110,000.00
Allowable Input VAT		70,000.00
Excess Input VAT to be carried over to next quarter		40,000.00
		=========

The 70% cap is not merely an unwise imposition. It is a burden designed, either through sheer heedlessness or cruel calculation, to kill off the small and medium enterprises that are the soul, if not the heart, of our economy. It is not merely an undue taking of property, but constitutes an unjustified taking of life as well.

And what legitimate, germane purposes does this lethal 70% cap serve? It certainly does not increase the government's revenue since the unutilized creditable input VAT should be entered in the government books as a debt payable as it is supposed to be eventually repaid to the taxpayer, and so on the contrary it increases the government's debts. I do see that the 70% cap temporarily allows the government to brag to the world of an increased cash flow. But this situation would be akin to the provincial man who borrows from everybody in the barrio in order to show off money and maintain the pretense of prosperity to visiting city relatives. The illusion of wealth is hardly a legitimate state purpose, especially if projected at the expense of the very business life of the country.

The majority, in an effort to belittle these concerns, points out that that the excess input tax remains creditable in succeeding quarters. However, as seen in the above illustration, the actual application of the excess input tax will always be limited by the amount of output taxes collected in a quarter, as a result of the 70% cap. Thus, it is entirely possible that a VAT-registered person, through the accumulation of unutilized input taxes, would have in a quarter an express creditable input tax of P50,000,000, but would be allowed to actually credit only P70,000 if the output tax collected for that quarter were only P100,000.

The burden of the VAT may fall at first to the immediate buyers, but it is supposed to be eventually shifted to the end-consumer. The 70% cap effectively prevents this from happening, as it limits the ability of the business to recover the prepaid input taxes. This is unconscionable, since in the first place, these intervening players � the manufacturers, producers, traders, retailers � are not even supposed to sustain the losses incurred by reason of the prepayment of the input taxes. Worse, they would be obliged every quarter to pay to the government from out of their own pockets the equivalent of 30% of the output taxes, no matter their own particular financial condition. Worst, this twin yoke on the taxpayer of having to sustain a debit equivalent to 30% of output taxes, and having to await forever in order to recover the prepaid taxes would impair the cash flow and prove fatal for a shocking number of businesses which, as they now stand, have to make do with a minimum profit that stands to be wiped out with the introduction of the 70% cap.

Nonetheless, the majority notes that the excess creditable input tax may be the subject of a tax credit certificate, which then could be used in payment of internal revenue taxes, or a refund to the extent that such input taxes have not been applied against output taxes.⁴³What the majority fails to mention is that under Section 10 of the E-VAT Law, which amends Section 112 of the NIRC, such credit or refund may not be done while the enterprise remains operational:

SEC. 10. Section 112 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 112. Refunds or Tax Credits of Input Tax.�

xxx

"(B) Cancellation of VAT Registration.� A person whose registration has been cancelled due to retirement from or cessation of business or due to changes or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes.

xxx

This stands in marked contrast to Section 112(B) of the NIRC as it read prior to this amendment. Under the previous rule, a VAT-registered person was entitled to apply for the tax credit certificate or refund paid on capital goods even while it remained in operation:

SEC. 112. Refunds or Tax Credits of Input Tax.�

xxx

"(B) Capital Goods .� A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made.

This provision, which could have provided foreseeable and useful relief to the VAT-registered person, was deleted under the new E-VAT Law. At present, the refund or tax credit certificate may only be issued upon two instances: on zero-rated or effectively zero-rated sales, and upon cancellation of VAT registration due to retirement from or cessation of business.⁴⁴This is the cruelest cut of all. Only after the business ceases to be may the State be compelled to repay the entire amount of the unutilized input tax. It is like a macabre form of sweepstakes wherein the winner is to be paid his fortune only when he is already dead. Aanhin pa ang damo kung patay na ang kabayo.

Moreover, the inability to immediately credit or otherwise recover the unutilized input VAT could cause such prepaid amount to actually be recognized in the accounting books as a loss. Under international accounting practices, the unutilized input VAT due to the 70% cap would not even be recognized as a deferred asset. The same would not hold true if the 70% cap were eliminated. Under the International Accounting Standards⁴⁵, the unutilized input VAT credit is recognized as an asset "to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utili[z]ed”⁴⁶ Thus, if the immediate accreditation of the input VAT credit can be obtained, as it would without the 70% cap, the asset could be recognized.

However, the same Standards hold that "[t]o the extent that it is not probable that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised, the deferred tax asset is not recogni[z]ed”.⁴⁷ As demonstrated, the continuous operation of the 70% cap precludes the recovery of input VAT prepaid months or years prior. Moreover, the inability to claim a refund or tax credit certificate until after the business has already ceased virtually renders it improbable for the input VAT to be recovered. As such, under the International Accounting Standards, it is with all likelihood that the prepaid input VAT, ostensibly creditable, would actually be reflected as a loss.⁴⁸ What heretofore was recognized as an asset would now, with the imposition of the 70% cap, be now considered as a loss, enhancing the view that the 70% cap is ultimately confiscatory in nature.

This leads to my next point. The majority asserts that the input tax is not a property or property right within the purview of the due process clause.⁴⁹ I respectfully but strongly disagree.

Tellingly, the BIR itself has recognized that unutilized input VAT is one of those assets, corporate attributes or property rights that, in the event of a merger, are transferred to the surviving corporation by operation of law.⁵⁰ Assets would fall under the purview of property under the due process clause, and if the taxing arm of the State recognizes that such property belongs to the taxpayer and not to the State, then due respect should be given to such expert opinion.

Even under the International Accounting Standards I adverted to above, the unutilized input VAT credit may be recognized as an asset "to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utili[z]ed”⁵¹ If not probable, it would be recognized as a loss.⁵² Since these international standards, duly recognized by the Securities and Exchange Commission as controlling in this jurisdiction, attribute tangible gain or loss to the VAT credit, it necessarily follows that there is proprietary value attached to such gain or loss.

Moreover, the prepaid input tax represents unutilized profit, which can only be utilized if it is refunded or credited to output taxes. To assert that the input VAT is merely a privilege is to correspondingly claim that the business profit is similarly a mere privilege. The Constitution itself recognizes the right to profit by private enterprises. As I stated earlier, one of the enunciated State policies under the Constitution is the recognition of the indispensable role of the private sector, the encouragement of private enterprise, and the provision of incentives to needed investments.⁵³ Moreover, the Constitution also requires the State to recognize the right of enterprises to reasonable returns on investments, and to expansion and growth.⁵⁴ This, I believe, encompasses profit.

60-Month Amortization Period

Another portion of Section 8 of the E-VAT Law is unconstitutional, essentially for the same reasons as above. The relevant portion reads:

SEC. 8. Section 110 of the same Code, as amended, is hereby further amended to read as follows:

"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): 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 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 licensee upon payment of the compensation, rental, royalty or fee.

Again, this provision unreasonably severely limits the ability of an enterprise to recover its prepaid input VAT. On its face, it might appear injurious primarily to high margin enterprises, whose purchase of capital goods in a given quarter would routinely exceed P1,000,000.00. The amortization over a five-year period of the input VAT on these capital goods would definitely eat up into their profit margin. But it is still possible for such big businesses to survive despite this new restriction, and their financial pain alone may not be sufficient to cause the invalidity of a taxing statute.

However, this amortization plan will prove especially fatal to start-ups and other new businesses, which need to purchase capital goods in order to start up their new businesses. It is a known fact in the financial community that a majority of businesses start earning profit only after the second or third year, and many enterprises do not even get to survive that long. The first few years of a business are the most crucial to its survival, and any financial benefits it can obtain in those years, no matter how miniscule, may spell the difference between life and death. For such emerging businesses, it is already difficult under the present system to recover the prepaid input VAT from the output VAT collected from customers because initial sales volumes are usually low. With this further limitation, diminishing as it does any opportunity to have a sustainable cash flow, the ability of new businesses to survive the first three years becomes even more endangered.

Even existing small to medium enterprises are imperiled by this 60 month amortization restriction, especially considering the application of the 70% cap. The additional purchase of capital goods bears as a means of adding value to the consumer good, as a means to justify the increased selling price. However, the purchase of capital goods in excess of P1,000,000.00 would impose another burden on the small to medium enterprise by further restricting their ability to immediately recover the entire prepaid input VAT (which would exceed at least P100,000.00), as they would be compelled to wait for at least five years before they can do so. Another hurdle is imposed for such small to medium enterprise to obtain the profit margin critical to survival. For some lucky enterprises who may be able to survive the injury brought about by the 70% cap, this 60 month amortization period might instead provide the mortal head wound.

Moreover, the increased administrative burden on the taxpayer should not be discounted, considering this Court's previous recognition of the aims of the VAT system to "rationalize the system of taxes on goods and services, [and] simplify tax administration”.⁵⁷ With the amortization requirement, the taxpayer would be forced to segregate assets into several classes and strictly monitor the useful life of assets so that proper classification can be made. The administrative requirements of the taxpayer in order to monitor the input VAT from the purchase of capital assets thus has exponentially increased.

5% Withholding VAT on Sales

Pilipinas Shell Dealers argue that Section 12 of the E-VAT law, which amends Section 114(C) of the NIRC, is also unconstitutional. The provision is supremely unwise, oppressive and confiscatory in nature, and ruinous to private enterprise and even State development. The provision reads:

SEC. 12. Section 114 of the same Code, as amended, is hereby further amended to read as follows:

"SEC. 114. Return and Payment of Value-Added Tax. –

xxx

"(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 payment. xxx

The principle that the Government and its subsidiaries may deduct and withhold a final value-added tax on its purchase of goods and services is not new, as the NIRC had allowed such deduction and withholding at the rate of 3% of the gross payment for the purchase of goods, and 6% of the gross receipts for services. However, the NIRC had also provided that this tax withheld would also be creditable against the VAT liability of the seller or contractor, a mechanism that was deleted by the E-VAT law. The deletion of this credit apparatus effectively compels the private enterprise transacting with the government to shoulder the output VAT that should have been paid by the government in excess of 5% of the gross selling price, and at the same time unduly burdens the private enterprise by precluding it from applying any creditable input VAT on the same transaction.

Notably, the removal of the credit mechanism runs contrary to the essence of the VAT system, which characteristically allows the crediting of input taxes against output taxes. Without such crediting mechanism, which allows the shifting of the VAT to only the final end user, the tax becomes a straightforward tax on business or income. The effect on the enterprise doing business with the government would be that two taxes would be imposed on the income by the business derived on such transaction: the regular personal or corporate income tax on such income, and this final withholding tax of 5%.

Granted that Congress is not bound to adopt with strict conformity the VAT system, and that it has to power to impose new taxes on business income, this amendment to Section 114(C) of the NIRC still remains unconstitutional. It unfairly discriminates against entities which contract with the government by imposing an additional tax on the income derived from such transactions. The end result of such discrimination is double taxation on income that is both oppressive and confiscatory.

It is a legitimate purpose of a tax law to devise a manner by which the government could save money on its own transactions, but it is another matter if a private enterprise is punished for doing business with the government. The erstwhile NIRC worked towards such advantage, by allowing the government to reduce its cash outlay on purchases of goods and services by withholding the payment of a percentage thereof. While the new E-VAT law retains this benefit to the government, at the same time it burdens the private enterprise with an additional tax by refusing to allow the crediting of this tax withheld to the business's input VAT.

This imposition would be grossly unfair for private entities that transact with the government, especially on a regular basis. It might be argued that the provision, even if concededly unwise, nonetheless fails to meet the standard of unconstitutionality, as it affects only those persons or establishments that choose to do business with the government. However, it is an acknowledged fact that the government and its subsidiaries rely on contracts with private enterprises in order to be able to carry out innumerable functions of the State. This provision effectively discourages private enterprises to do business with the State, as it would impose on the business a higher rate of tax if it were to transact with the State, as compared to transactions with other private entities.

Established industries with track records of quality performance could very well be dissuaded from doing further business with government entities as the higher tax rate would make no economic sense. Only those enterprises which really need the money, such as those with substandard track records that have affected their viability in the marketplace, would bother seeking out government contracts. The corresponding sacrifice in quality would eventually prove detrimental to the State. Our society can ill afford shoddy infrastructures such as roads, bridges and buildings that would unnecessarily pose danger to the public at large simply because the government wanted to skimp on expenses.

The provision squarely contradicts Section 20, Article II of the Constitution as it vacuously discourages private enterprise, and provides disincentives to needed investments such as those expected by the State from private businesses. Whatever advantages may be gained by the temporary increase in the government coffers would be overturned by the disadvantages of having a reduced pool of private enterprises willing to do business with the government. Moreover, since government contracts with private enterprises will still remain a necessary fact of life, the amendment to Section 114(C) of the NIRC introduced by the E-VAT Law.

Double taxation means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, for the same purpose and with the same kind of character of tax.⁵⁶ Double taxation is not expressly forbidden in our constitution, but the Court has recognized it as obnoxious "where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose.”⁵⁷ Certainly, both the 5% final tax withheld and the general corporate income tax are both paid for the benefit of the national government, and for the same incidence of taxation, the sale/lease of goods and services to the government.

The Court, in Re: Request of Atty. Bernardo Zialcita⁵⁸ had cause to make the following observation I submit apropos to the case at bar, on double taxation in a case involving the attempt of the BIR to tax the commuted accumulated leave credits of a government lawyer upon his retirement:

Section 284 of the Revised Administrative Code grants to a government employee 15 days vacation leave and 15 days sick leave for every year of service. Hence, even if the government employee absents himself and exhausts his leave credits, he is still deemed to have worked and to have rendered services. His leave benefits are already imputed in, and form part of, his salary which in turn is subject to withholding tax on income. He is taxed on the entirety of his salaries without any deductions for any leaves not utilized. It follows then that the money values corresponding to these leave benefits both the used and unused have already been taxed during the year that they were earned. To tax them again when the retiring employee receives their money value as a form of government concern and appreciation plainly constitutes an attempt to tax the employee a second time. This is tantamount to double taxation.⁵⁹

Conclusions

The VAT system, in itself, is intelligently designed, and stands as a fair means to raise revenue. It has been adopted worldwide by countries hoping to employ an efficient means of taxation. The concerns I have raised do not detract from my general approval of the VAT system.

I do lament though that our government's wholehearted adoption of the VAT system is endemic of what I deem a flaw in our national tax policy in the last few decades. The power of taxation, inherent in the State and ever so powerful, has been generally employed by our financial planners for a solitary purpose: the raising of revenue. Revenue generation is a legitimate purpose of taxation, but standing alone, it is a woefully unsophisticated design. Intelligent tax policy should extend beyond the singular-minded goal of raising State funds ─ the old-time philosophy behind the taxing schemes of war-mongering monarchs and totalitarian states ─ and should sincerely explore the concept of taxation as a means of providing genuine incentives to private enterprise to spur economic growth; of promoting egalitarian social justice that would allow everyone to their fair share of the nation's wealth.

Instead, we are condemned by a national policy driven by the monomania for State revenue. It may be beyond my oath as a Justice to compel the government to adopt an economic policy in consonance with my personal views, but I offer these observations since they lie at the very heart of the noxiousness of the assailed provisions of the E-VAT law. The 70% cap, the 60-month amortization period and the 5% withholding tax on government transactions were selfishly designed to increase government revenue at the expense of the survival of local industries.

I am not insensitive to the concerns raised by the respondents as to the dire consequences to the economy should the E-VAT law be struck down. I am aware that the granting of the petition in G.R. No. 168461 will negatively affect the cash flow of the government. If that were the only relevant concern at stake, I would have no problems denying the petition. Unfortunately, under the device employed in the E-VAT law, the price to be paid for a more sustainable liquidity of the government's finances will be the death of local business, and correspondingly, the demise of our society. It is a measure just as draconian as the standard issue taxes of medieval tyrants.

I am not normally inclined towards the language of the overwrought, yet if the sky were indeed truly falling, how else could that fact be communicated. The E-VAT Law is of multiple fatal consequences. How are we to survive as a nation without the bulwark of private industries? Perhaps the larger scale, established businesses may ultimately remain standing, but they will be unable to sustain the void left by the demise of small to medium enterprises. Or worse, domestic industry would be left in the absolute control of monopolies, combines or cartels, whether dominated by foreigners or local oligarchs. The destruction of subsisting industries would be bad enough, the destruction of opportunity and the entrepreneurial spirit would be even more grievous and tragic, as it would mark as well the end of hope. Taxes may be the lifeblood of the state, but never at the expense of the life of its subjects.

Accordingly, I VOTE to:

1)	DENY the Petitions in G.R. NOS. 168056, 168207, and 168730 for lack of merit;
2)	PARTIALLY GRANT the Petition in G.R. NOS. 168463 and declare Section 21 of the E-VAT Law as unconstitutional;
3)	GRANT the Petition in G.R. No. 168461 and declare as unconstitutional Section 8 of Republic Act No. 9337, insofar as it amends Section 110(A) and (B) of the National Internal Revenue Code (NIRC) as well as Section 12 of the same law, with respect to its amendment of Section 114(C) of the NIRC.

Endnotes:

---

¹ Republic Act No. 9337. Referred to intext as "E-VAT Law.”

² Except insofar as it prays that Section 21 of the E-VAT Law be declared unconstitutional. Infra.

³J. Vitug and E. Acosta, Tax Law and Jurisprudence (2nd ed., 2000), at 7-8.

⁴See National Power Corporation v. Province of Albay, G.R. No. 87479, 4 June 1990, 186 SCRA 198, 203.

⁵See Section 24, Article VI, Constitution.

⁶ The recognized exceptions, both expressly provided by the Constitution, being the tariff clause under Section 28(2), Article VI, and the powers of taxation of local government units under Section 5, Article X.

⁷ G.R. No. 158540, 8 July 2005, 434 SCRA 65.

⁸See People v. Vera, 65 Phil. 56, 117 (1937).

⁹Decision, infra.

¹⁰ Carpio v. Executive Secretary, GR No. 96409 February 14,1992, 206 SCRA 290, 298; citing In re Guarina, 24 Phil. 37.

¹¹ People v. Vera, supra note 8.

¹²See Section 2, National Internal Revenue Code.

¹³ There are two eminent tests for valid delegation, the "completeness test" and the "sufficient standard test”. The law must be complete in its essential terms and conditions when it leaves the legislature so that there will be nothing left for the delegate to do when it reaches him except enforce it. U.S. v. Ang Tang Ho, 43 Phil. 1, 6-7 (1922). On the other hand, a sufficient standard is intended to map out the boundaries of the delegate's authority by defining legislative policy and indicating the circumstances under which it is to be pursued and effected; intended to prevent a total transference of legislative power from the legislature to the delegate.

¹⁴Decision, infra, citing Alunan v. Mirasol, G.R. No. 108399, 31 July 1997, 276 SCRA 501, 513-514.

¹⁵ Notwithstanding, the Court in Southern Cross did rule that Section 5 of the Safeguard Measures Act, which required a positive final determination by the Tariff Commission before the DTI or Agriculture Secretaries could impose general safeguard measures, operated as a valid restriction and limitation on the exercise by the executive branch of government of its tariff powers.

¹⁶ G.R. No. 115455, 25 August 1994, 235 SCRA 630.

¹⁷ M. Evans, ‘A SOURCE OF FREQUENT AND OBSTINATE ALTERCATIONS': THE HISTORY AND APPLICATION OF THE ORIGINATION CLAUSE.

¹⁸ The Federalist No. 58, at 394 (J. Madison) (J.Cooke ed. 1961), cited in J. M. Medina, The Orignation Clause in the American Constitution: A Comparative Survey, 23 Tulsa Law Journal 2, at 165.

¹⁹ Tolentino v. Secretary of Finance, supra note 16 at 661.

²⁰See Section 27(1), Article VI, CONSTITUTION.

²¹ Tolentino v. Secretary of Finance, supra note 16 at 668.

²² G.R. No. 124360, 5 November 1997, 281 SCRA 330.

²³Id. at 349-350.

²⁴ People v. Tudtud, G.R. No. 144037, 26 September 2003, 412 SCRA 142, 168.

²⁵See Section 1, Article III, CONSTITUTION. Private corporations and partnerships are persons within the scope of the guaranty insofar as their property is concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136, 145 (1919).

²⁶ 16 C.J.S., at 1150-1151.

²⁷ 292 U.S. 40 (1934).

²⁸Id. at 44.

²⁹ G.R. No. L-59431, 25 July 1984, 130 SCRA 654.

³⁰Id. at 660-662.

³¹ Justice Isagani Cruz offers the following examples of taxes that contravene the due process clause: "A tax, for example, that would claim 80 percent of a person's net income would clearly be oppressive and could unquestionably struck down as a deprivation of his property without due process of law. A property tax retroacting to as long as fifty years back would by tyrannical and unrealistic, as the property might not yet have been then in the possession of the taxpayer nor, presumably, would he have acquired it had he known of the tax to be imposed on it." I. CRUZ, CONSTITUTIONAL LAW, p. 85.

³² "After defining religion, the Court, citing Tanada and Fernando, made this statement, viz:

The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any restraint of such right can only be justified like other restraints of freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has the right to prevent. (Tanada and Fernando on the Constitution of the Philippines, vol. 1, 4th ed., p. 297) (emphasis supplied)

This was the Court's maiden unequivocal affirmation of the "clear and present danger" rule in the religious freedom area, and in Philippine jurisprudence, for that matter." Estrada v. Escritor, A.M. No. P-02-1651, 4 August 2003, 408 SCRA 1.

³³ Separate Opinion, infra.

³⁴Ibid.

³⁵ Art. 2, European Commission First Council Directive 67/227 of 11 April 1967 on the Harmonization of Legislation of Member States Concerning Turnover Taxes, 1971 O.J. (L 71) 1301.

³⁶ Liam & Ebrill, THE MODERN VAT.

³⁷ "The most basic law in finance!" Understand the Time Value of Money. http://www.free-financial-advice.net/time-value-of-money.html. Last visited, 30 August 2005.

³⁸Time Value of Money. http://www.jetobjects.com/components/finance/ TVM/concepts.html. Last visited, 30 August 2005.

³⁹ There is also the option for the business to go underground and avoid VAT registration, and consequently avoid remitting VAT payments to the government. It would be facetious though for a Justice of the Supreme Court to characterize this illegal option as "viable.”

⁴⁰In Joseph Heller's Catch-22, Yossarian, a World War II pilot reasoned that if he feigned insanity, he would be necessarily exempt from assignment to dangerous bombing runs in enemy territory. However, his superiors reasoned that if he were truly insane, he then would be heedless enough to be sent on those dangerous bombing runs he had sought to avoid in the first place.

⁴¹ Pangloss was a famed character ridiculed in Voltaire's Candide, renowned for his absolute blind faith in optimism, no matter how dire the circumstances.

⁴² Id. at 29-30.

⁴³ Decision, infra.

⁴⁴ This is confirmed by the BIR in its draft Revenue Memorandum Circular dated 12 July 2005, submitted by respondents in its Compliance dated 16 August 2005:

"[Q]: Is there a way by which such unapplied excess input tax credits can be claimed for refund or issuance of TCC?

[A]: The only time application for refund/issuance of TCC is allowed for input taxes incurred on the purchase of domestic goods/services is when the same are directly attributable to zero-rated or effectively zero-rated sales (of goods/services). xxx

For those engaged purely in domestic transactions, the only time that unapplied input taxes may be applied for the issuance of TCC is when the VAT registration of the taxpayer is cancelled due to retirement or cessation of business or change in the status of the taxpayer as a VAT registered taxpayer. As provided for in Section 112(B0, in case of cancellation of VAT registration due to cessation of business or change in status of taxpayer, the only recourse given to such taxpayer is to apply for the issuance of TCC on his excess input tax credits which may be used in payment of his other internal revenue taxes, application for refund thereof is not an option.”

See Annexes "18-N" and "18-O”, Compliance dated 12 July 2005.

⁴⁵ See SRC Rule 68(1)(b)(c), IMPLEMENTING RULES AND REGULATIONS TO THE SECURITIES AND REGULATIONS CODE.

⁴⁶ Section 34, INTERNATIONAL ACCOUNTING STANDARDS 12.

⁴⁷Section 36, id.

⁴⁸ In his Separate Opinion, Justice Panganiban asserts that the deferred input tax credit is not really confiscated by the government, as it remains an asset in the accounting records of a business. See Separate Opinion, infra. By the same logic, a law requiring all businesses to surrender to the government 100% of its gross sales subject to reimbursement only after a five year period, would pass muster, since the amount is "not really confiscated by the government as it remains an asset in the accounting records of a business.”

⁵¹Justice Panganiban cites United Paracale Mining Co. v. De la Rosa (cited as 221 SCRA 108, 115, April 7, 1993) to bolster his stated position that ""[t]here is no vested right in a deferred input tax account; it is a mere statutory privilege”. Separate Opinion, infra. United Paracale does not pertain to any deferred input taxes, but instead to "mining claims which according to [petitioners] is private property would constitute impairment of vested rights since by shifting the forum of the petitioner's case from the courts to the Bureau of Mines…[the] substantive rights to full protection of its property rights shall be greatly impaired." United Paracale Mining Co. v. Hon. Dela Rosa, G.R. NOS. 63786-87, 7 April 1993, 221 SCRA 108, `115. Clearly, United Paracale is not even a tax case, involving as it does, questions of the jurisdiction of the Bureau of Mines.

⁵⁰See Part III, Paragraph 3, Revenue Memorandum Ruling No. 1-2002.

⁵¹ Section 32, International Accounting Standards 12.

⁵²Supra note 47.

⁵³ Supra note 9.

⁵⁴ Section 3, Article XIII, CONSTITUTION.

⁵⁵ Kapatiran ng Mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. et al. v. Tan, G.R. No. L-81311, 30 June 1988.

⁵⁶ J. Vitug and E. Acosta, supra note 3 at 41.

⁵⁷ Pepsi-Cola Bottling Co. of the Philippines, Inc. v. Municipality of Tanauan, G.R. No. L-31156, 27 February 1976, 69 SCRA 460, 466-67; citing CIR v. Lednicky, L-18169, July 31, 1964, 11 SACRA 609 and SMB, Inc. v. City of Cebu, L-20312, February 26, 1972, 43 SCRA 280.

⁵⁸ A.M. No. 90-6-015-SC, 18 October 1990, 190 SCRA 851.

⁵⁹ Id. at 856.