CONSTITUTIONAL LIMITATION ON TAXATION
Ramil F. De Jesus
Introduction
NATURE OF THE POWER OF TAXATION Taxation is the inherent power of the state, acting through the legislature, to impose and collect revenues to support the government and its recognized objects. Simply stated, taxation is the power of the State to collect revenues for public purpose. Where the state is, there is the power to tax; for rulers cannot rule without taxation. The funds that a government spends for whatever purposes are levied by taxation(http://mises.org/daily/1853) . The primary purpose is to provide funds or property with which the government discharges its appropriate functions for the protection and general welfare of the its citizens. Aside from purely financing government operational expenditures, taxation is also utilized as a tool to carry out the national objective of social and economic development. Taxes therefore are enforced proportional contributions from persons and property levied by the lawmaking body of the state by virtue of its sovereignty for the support of the government and all public needs. Tax in a general sense, is any contribution imposed by the government upon individuals for the use and service of the state, whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid, supply or other name. Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the common good.
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Taxation is an inherent attribute of sovereignty. legislative.
It is a power that is purely
Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed. As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.(G.R. 160756, Chamber of Real Estate & Builders Association, Inxc. V.Hon. Executive Secretary). It scope is comprehensive, unlimited, supreme and plenary, but subject to constitutional
and
inherent
limitations.(
http://tax71.blogspot.com/2009/
06/limitations-on-power-of-taxation.html) Objective
To enumerate and discuss the important constitutional limitation of taxation. Discussion
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.
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There are about nine (9) Constitutional limitations on Taxations but we will confined the discussion on the Due Process and Equal Protection Clause as well as the Uniformity in Taxation. 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. In ruling that for the constitutionality of the MCIT, the Court in G.R. No. 160756 stated that 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.” In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But in the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer. There must be a factual foundation to such an unconstitutional taint. This merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed
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rule but rather a broad standard, there is a need for proof of such persuasive character. Petitioner is correct in saying that income is distinct from capital. Income means all the wealth which flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time. Income is gain derived and severed from capital.
For income to be taxable, the following
requisites must exist:
(1) there must be gain; (2) the gain must be realized or received and (3) the gain must not be excluded by law or treaty from taxation.
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax
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due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income. In another case the Court ruled that:
“Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have been reached within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident to us. ”(Tan v. Del Rosario , G.R. No. 109289 October 3, 1994 )”
Due process is usually violated where the tax imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such taxpayer. Due process does not require that the property subject to the tax or the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of law. (G.R. No. L-31156
February 27, 1976)
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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. All persons subject to legislation shall be treated alike under similar circumstances and conditions both in the privileges conferred and liabilities imposed. The doctrine does not require that persons or properties different in fact be treated in law as though they were the same. What it prohibits is class legislation which discriminates against some and favors others. As long as there are rational or reasonable grounds for so doing, Congress may group persons or properties to be taxed and it is sufficient if all members of the same class are subject to the same rate and the tax is administered impartially upon them.
Requisites of a valid classification 1. It must be based on substantial distinctions which make real differences. 2. The classification must be germane to the purpose of the law. 3. The classification must not be limited to existing conditions only but must also apply to future conditions substantially identical to those of the present. 4. The classification must apply equally to all members of the same class. [Tiu v. Court of Appeals, 301 SCRA 278 (1999)]
In G.R. No 160756, The equal protection clause under the Constitution means that “no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances.” Stated differently, all persons belonging to the
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same class shall be taxed alike.
It follows that the guaranty of the equal
protection of the laws is not violated by legislation based on a reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the same class. The taxing power has the authority to make reasonable classifications for purposes of taxation.
Inequalities which result from a singling out of one
particular class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts. To require the customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system.(Chamber of Real Estate and Builders Assn., Inc. v. Executive Secretary). In Tiu v. CA G. R. No. 127410, the Court stated that: We rule in favor of the constitutionality and validity of the assailed EO. Said Order is not violative of the equal
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protection clause; neither is it discriminatory. Rather, we find real and substantive distinctions between the circumstances obtaining inside and those outside the Subic Naval Base, thereby justifying a valid and reasonable classification.
The fundamental right of equal protection of the laws is not absolute, but is subject to reasonable classification. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another.[6] The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class.[7] Explaining the nature of the equal protection guarantee, the Court in Ichong v. Hernandez said: “The equal protection of the law clause is against undue favor and individual or class privilege, as well as hostile discrimination or the oppression of inequality. It is not intended to prohibit legislation which is limited either [by] the object to which it is directed or by [the] territory within which it is to operate. It does not demand absolute equality among residents; it merely requires that all persons shall be treated alike, under like circumstances and conditions both as to privileges conferred and liabilities enforced. The equal protection clause is not infringed by legislation which applies only to those persons falling within a specified class, if it applies alike to all persons within such class, and reasonable grounds exist for making a distinction between those who fall within such class and those who do not.”
Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of the law, (3) not be limited to existing conditions only, and (4) apply equally to all members of the same class.
It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws.[ As long as there are actual and material differences between territories, there is no violation of the constitutional clause.(Tiu v. Ca.). In ruling against the constitutionality of municipal tax ordinance which singularly taxes sugar from a sugar milling co. in the covered city, the Court stated that the Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal protection of the laws." (Sec. 1 [1], Art. III) In Felwa vs. Salas,
We ruled that the equal protection clause applies only to persons or
things identically situated and does not bar a reasonable classification of the subject of legislation, and a classification is reasonable where (1) it is based on substantial distinctions which make real differences; (2) these are germane to the
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purpose of the law; (3) the classification applies not only to present conditions but also to future conditions which are substantially identical to those of the present; (4) the classification applies only to those who belong to the same class. A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, for the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon. The Court in G.R. No. 163583 affirmed the constitutionality of certain provisions of R.A. 9334 it states: Moreover, petitioner’s contention that the assailed provisions violate the uniformity of taxation clause is similarly unavailing. In Churchill v. Concepcion, we explained that a tax “is uniform when it operates with the same force and effect in every place wher e the subject of it is found.” It does not signify an intrinsic but simply a geographical uniformity. A levy of tax is not unconstitutional because it is not intrinsically equal and uniform in its operation. The uniformity rule does not prohibit classification for purposes of taxation. As ruled in Tan v. Del Rosario, Jr.:
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (citations omitted). Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class.
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In the instant case, there is no question that the classification freeze provision meets the geographical uniformity requirement because the assailed law applies to all cigarette brands in the Philippines. And, for reasons already adverted to in our August 20, 2008 Decision, the above four-fold test has been met in the present case.
Petitioner’s reliance on Ormoc Sugar Co. is misplaced. In said case, the controverted municipal ordinance specifically named and taxed only the Ormoc Sugar Company, and excluded any subsequently established sugar central from its coverage. Thus, the ordinance was found unconstitutional on equal protection grounds because its terms do not apply to future conditions as well. This is not the case here. The classification freeze provision uniformly applies to all cigarette brands whether existing or to be introduced in the market at some future time. It does not purport to exempt any brand from its operation nor single out a brand for the purpose of imposition of excise taxes.
At any rate, petitioner’s real disagreement lies with the legitimate State interests. Although it concedes that the Court utilized the rationality test and that the classification freeze provision was necessitated by several legitimate State interests, however, it refuses to accept the justifications given by Congress for the classification freeze provision. As we elucidated in our August 20, 2008 Decision, this line of argumentation revolves around the wisdom and expediency of the assailed law which we cannot inquire into, much less overrule. Equal protection is not a license for courts to judge the wisdom, fairness, or logic of legislative choices. We reiterate, therefore, that petitioner’s remedy is with Congress and not this Court.
Conclusion
The constitution provides for the protection of sovereign against arbitrariness and injustice. Since taxation is one of the inherent powers of the State, it is also the State that provides for its safeguards against abuses in its exercise.
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