Nature and Scope of the Power of Taxation

Nature and Scope of the Power of Taxation NATURE OF THE POWER OF TAXATION 1. Legislative- this power can only be exercised by the law making body (Congress) not the executive or the judicial branch of the government, except when delegated by the national legislative body to a local legislative body or to the executive branch, subject to limitations as may be provided by law; 2. Inherent in sovereignty- the power exists as an incident or attribute of sovereignty, as it is essential to the existence of every government. The power can therefore be exercised even without the constitution or any law expressly conferring such power. Scope of the Power of Taxation It is comprehensive, unlimited, supreme and plenary, but subject to constitutional and inherent limitations. Limitations on The Power of Taxation The power of taxation, is however, subject to constitutional and inherent limitations. Constitutional limitations are those provided for in the constitution or implied from its provisions, while inherent limitations are restrictions to the power to tax attached to its nature. The following are the inherent limitations. 1. Purpose. Taxes may be levied only for public purpose; 2. Territoriality. The State may tax persons and properties under its jurisdiction; 3. International Comity. the property of a foreign State may not be taxed by another. 4. Exemption. Government agencies performing governmental functions are exempt from taxation 5. Non-delegation. The power to tax being legislative in nature may not be delegated. (subject to exceptions)

Constitutional limitations. 1. Observance of due process of law and equal protection of the laws. (sec, 1, Art. 3) Any deprivation of life , liberty or property is with due process if it is done under the authority of a valid law and after compliance with fair and reasonable methods or procedure prescribed. The power to tax, can be exercised only for a constitutionally valid public purpose and the subject of taxation must be within the taxing jurisdiction of the state. The government may not utilize any form of assessment or review which is arbitrary, unjust and which denies the taxpayer a fair opportunity to assert his rights before a competent tribunal. All persons subject to legislation shall be treated alike under like circumstances and conditions, both in the privileges conferred in liabilities imposed. Persons and properties to be taxed shall be group, and all the same class shall be subject to the same rate and the tax shall be administered impartially upon them. 2. Rule of uniformity and equity in taxation (sec 28(1)Art VI) All taxable articles or properties of the same class shall be taxed at the same rate. Uniformity implies equality in burden not in amount. Equity requires that the apportionment of the tax burden be more or less just in the light of the taxpayers ability to bear the tax burden. 3. No imprisonment for non-payment of poll tax (sec. 20, Art III) A person cannot be imprisoned for non-payment of community tax, but may be imprisoned for other violations of the community tax law, such as falsification of the community tax certificate, or for failure to pay other taxes. 4. Non-impairment of obligations and contracts, sec 10, Art III . the obligation of a contract is impaired when its terms and conditions are changed by law or by a party without the consent of the other, thereby weakening the position or the rights of the latter. IF a tax exemption granted by law and of the nature of a contract between the taxpayer and the government is revoked by a later taxing law, the said law shall not be valid, because it will impair the obligation of contract. 5. Prohibition against infringement of religious freedom Sec 5, Art III, it has been said that the constitutional guarantee of the free exercise and enjoyment of religious profession and worship, which carries the right to disseminate religious belief and information, is violated by the imposition of a license fee on the distribution and sale of bibles and other religious literatures not for profit by a non-stock, non-profit religious corporation. 6. Prohibition against appropriations for religious purposes, sec 29, (2) Art. VI, Congress cannot appropriate funds for a private purpose, or

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for the benefit of any priest, preacher or minister or for the support of any sect, church except when such priest, preacher, is assigned to the armed forces or to any penal institutions, orphanage or leprosarium. exemption of all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes from income, property and donor’s taxes and custom duties (sec. 4 (3 and 4) art. XIV. Concurrence by a majority of all members of Congress in the passage of a law granting tax exemptions. Sec. 28 (4) Art. VI. Congress may not deprive the Supreme Court of its jurisdiction to review, revise, reverse, modify or affirm on appeal or certiorari, final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment or any penalty imposed in the relation thereto.

PRINCIPLES AND DOCTRINES ON TAXATION I. PRINCIPLE OF NECESSITY The existence of the government is a necessity; the main source of revenue of the government is taxes. These are the life-blood of the government. The primary purpose of taxation is to generate funds for the State to finance the needs of the citizenry and to advance the common wealth. The government chiefly relies on taxation to obtain the means to carry on its operation. Cases: Commissioner vs. Pineda, 21 SCRA 105- Taxes are the lifeblood of the government and their prompt and certain availability are an imperious need. CIR vs. Algue, 158 SCRA 8- The government will not be able to survive and continue to perform its functions without taxes. II. TAXATION IS INHERENTLY LEGISLATIVE Along with police power ( for public good and welfare ) and eminent domain ( for public use ), taxation ( for revenue ) is an inherent power of the sovereignty. Cases: National Power Corporation vs. Albay, 186 SCRA 198- Power of taxation is legislative in character and is a legislative prerogative. Petro vs. Petilla, 198 SCRA 82- The legislative taxing power includes the authority: a. to determine the nature, object, extent, coverage, and situs of the tax imposition, b. to grant tax exemptions or condonations, and c. to specify or provide for the administrative, as well as judicial remedies that either the government or the taxpayers may avail themselves of in the proper implementation of the tax measure. III. TAXATION INCLUDES THE POWER TO DESTROY The power of taxation is sometime also called the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kills the ‘hen that lays the golden egg.’ And, in order to maintain the general public’s trust and confidence in the government, this power must be used justly and not treacherously. Cases: Roxas vs. CTA, 23 SCRA 276- The power of taxation includes the power to destroy if it is used validly as an implement of the police power of the state. If it is used solely for the purpose of raising revenue, it does not include the power to destroy. Standard Oil Co. vs. Posadas, 55 Phil 715- While ordinarily the government does not tax its own political subdivisions or its other entities, it may, however, do so by providing for it explicitly.

IV. TAXATION IS FOR A PUBLIC PURPOSE The proceeds of the tax must be used a. for the support of the State or b. for some recognized objects of government or directly to promote the welfare of the community. Cases: Pascual vs. Sec. of Public Works, 110 Phil 331- The legislature is without power to appropriate public revenues for anything but a public purpose. Valentin Tio vs. Videogram Regulatory Board, 151 SCRA 208- The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another.

It is the most pervasive, the least limitable, and the most demanding of the three fundamental powers of the State.

V. TAXPAYER SUIT It is the remedy available to a taxpayer when taxes are used for illegal activities or when the public funs are used by the government for projects which are not intended for a public purpose. Cases: Pascual vs. Sec. of Public Works, 110 Phil 331- It is only when an act complained of, which may include a legislative enactment, directly involves illegal disbursement of public funds derived from taxation. Maceda vs. Macaraig, 197 SCRA 771- When the issue involve the legality of expenditure of tax money, a taxpayer suit could be filed.

The justification is found in the Latin maxims salus populi est suprema lex (the welfare of the people is the supreme law) and sic utere tuo ut alienum non laedas (so use your property as not to injure the property of others). As an inherent attribute of sovereignty which virtually extends to all public needs, police power grants a wide panoply of instruments through which the State, asparens patriae, gives effect to a host of its regulatory powers. (JMM Promotions & Mgt. Inc. v. CA, G.R. No. 120095, August 5, 1996, 260 SCRA 319). The power to “regulate” means the power to protect, foster, promote, preserve, and control, with due regard for the interests, first and foremost, of the public, then of the utility and of its patrons. (Phil. Assn. of the Service Exporters, Inc. v. Torres, G.R. No. 101279, August 6, 1992, 212 SCRA 298). The conservative and pivotal distinction between these two powers rests in the purpose for which the charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax.(Progressive Dev. Corp. v. Quezon City, G.R. No. 36081, April 24, 1989, 172 SCRA 629; Gerochi, et al. v. Dept. of Energy, et al., G.R. No. 159769, July 17, 2007, Nachura, J).

DISTINCTION: THE STATE’S POWER OF TAXATION FROM THE POLICE POWER.

General Principles - Part I

The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency that is to pay it. (Mactan Cebu Int’l. Airport Authority v. Marcos, 330 Phil. 392 (1996)). It is based on the principle that taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need. (Proton Pilipinas Corp. v. Republic of the Philippines, G.R. No. 165027, October 16, 2006, citing Province of Tarlac v. Alcantara, 216 SCRA 790, 798 (1992)). Thus, the theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people. (NPC v. City of Cabanatuan, 449 Phil. 233 (2003)). On the other hand, police power is the power of the state to promote public welfare by restraining and regulating the use of liberty and property.

Taxation is the act of levying the tax, i.e., the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of the government. It is merely a way of apportioning the cost if the government among those who in some measures are privileged to enjoy its benefits and, therefore, must bear its burdens. (71 Am Jur. 2 nd 342; 1 Cooley 72-73). Tax is defined as the lifeblood of the government. Major revenue of the government is sourced from taxation so that in the most pressing times of financial and economic crisis, the agency authorized to administer taxes – the Bureau of Internal Revenue (BIR) should always be on the front line. As a matter of fact, BIR nowadays are becoming stricter in the implementation of the tax laws and are seeking ways to collect much revenue from taxes. Lately the BIR has widened the coverage of mandatory withholding of virtually all income payments certain taxpayers by the implementation of the Top Twenty Thousand Corporations (TTC) from the previous Top Ten Thousand Corporation list. Under the program, on top of those income

payments subjected to expanded withholding tax, these corporations are required to withhold 1% for payments to its suppliers of goods and 2% for regular suppliers of services. Additionally, reportorial requirements are required to be submitted to BIR to monitor and verify compliance through its computer systems. Currently, the BIR is coming up with a similar scheme for individual taxpayers, expectedly, under the same procedures of TTC above. A draft regulation is now in place for comments at the BIR website. By a simple definition, tax may be defined as an enforced proportional contribution levied by the law making body of the state to raise revenue to support the indispensable and all the necessary expenses of the government.  Enforced as it involves the mandate of the law so that its imposition is mandatory to those covered by it. Unreasonable deviation from the mandate is subject to penalties imposable to an organized society which gives due respect to each and every humanly right. This implies that the sanction, nevertheless, undergoes a due process.  Proportional as theoretically, tax is proportioned upon a taxpayer’s ability to pay. This goes to show that the cost of the entire governance in the state is being apportioned among the inhabitants through a certain rule of apportionment being put into play.  Raise revenue goes with the very heart of taxation, to earn income for the government. Secondary however to this primary purpose, tax is being seconded to serve some other concerns for the majority. Example is the import duties and taxes of imported articles. At some point where quality of local and imported article is of no moment, imported ones prove to be more costly that the local ones because of this import duties and taxes being imposed as a way of encouraging the public to buy locally produced for the comparable quality.  Support the expenses of the government is related to public purpose of the imposition of taxation. While the government is empowered to collect from among its inhabitants by the power of taxation, proceeds are bound to serve the public needs and expenditure only. For this purpose, a collection of taxes for a sugar industry was held to constitute as a public purpose for the sugar industry represents and directly affects the public. Nature of the power of taxation as an inherent power Power to tax, being inherent in an independent state for its existence and survival by the furtherance of its multifarious functions, the same does not require delegation from the supreme law of the land. However, exercise of such power upon the inhabitants is subject to limitations imposed by the power, by its very nature, or by the Supreme law of the land, the Philippine Constitution. To tax a subject matter, person, property or excise, there must be a valid law imposing the same. Validity of a tax measure presupposes the

fact that it has overcome the test and scrutiny against it. Tax measures duly passed by the legislative department, the Congress or the local legislative under its delegated power, enjoy the presumption of validity and he who controverts has the duty of proving that the same is otherwise. By nature, power to tax is inherent in a sovereign estate so that the grant of which is not necessary but the exercise is provided safeguards and limitations. This means that the state needs not be empowered by its constitution or any mandate for it to be allowed to tax. Such power co-exists with the state and thus, grant is not necessary. What are being provided by the supreme law of the land, the Constitution, are the guidelines and the limit on the exercise of the power. It wishes to curtail the exercise in such a way as not to abuse and misuse said power to the detriment of the majority and to the advantage of the selected few. Under our tax system, compliance is initially voluntary on the part of the taxpayers. Nevertheless, the government through the administrative agency empowered to administer the tax, the BIR , is clothed with such remedies, under proper procedures, to imposed correct amount of taxes due to the government upon finding that the compliance based on the declarations in the return is insufficient. It can issue deficiency assessment and impose such measures provided under the law within the prescribed period to see to it that taxes are paid and that tax measures are complied with. This does not however follow that a taxpayer being assessed is doing an illegal business because non-payment of the tax does not make the business illegal. Scope of the taxing power To give a more meaningful power, power of taxation is essentially unlimited and plenary. This means that the state can tax on anything, anytime, anywhere, and at any amount. Example is the issue on taxing short messaging (SMS or commonly known as text message through mobile phones). The author in on the humble view that there could be nothing wrong on taxing this item as it primarily belongs to the state. What keeps them perhaps in the meantime is the impact to the poor and underprivileged depending primarily on the medium to communicate their loved ones from other places. This follows however, that the limitations and guidelines for the said purpose had been properly observed.