2. Power of Taxation

Taxation

It is the power by which the State raises revenue to defray the necessary expenses of the Government. It is the enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty, for the support of the government and for all public needs. It is as broad as the purpose for which it is given.

Purpose:

• To raise revenue
• Tool for regulation
• Protection/power to keep alive

Lifeblood theory and Necessity theory

Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people [NPC v. Cabanatuan, G.R. No. 149110 (2003)].

Requisites [Section 28(1), Article VI]

• Uniform and Equitable

Taxes should be (a) uniform (persons or things belonging to the same class shall be taxed at the same rate) and (b) equitable (taxes should be apportioned among the people according to their ability to pay).

• Progressive system of taxation

The rate increases as the tax base increases, with social justice as basis. Taxation here is an instrument for a more equitable distribution of wealth.

• Delegated tax legislation

Congress may delegate law-making authority when the Constitution itself specifically authorizes it.

General Limitations

• The power to tax exists for the general welfare. It should be exercised only for a public purpose
• Might be justified as for public purpose even if the immediate beneficiaries are private individuals
• Tax should not be confiscatory. If a tax measure is so unconscionable as to amount to confiscation of property, the Court will invalidate it. But invalidating a tax measure must be exercised with utmost caution, otherwise, the State’s power to legislate for the public welfare might be seriously curtailed.
• Taxes should be uniform and equitable [Section 28(1), Article VI, 1987 Constitution].

Judicial review for unconscionable and unjust tax amounting to confiscation of property

The legislature has discretion to determine the nature, object, extent, coverage, and situs of taxation. But where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down; the power to tax cannot override constitutional prescriptions [Tan v. del Rosario, G.R. No. 109289 (1994)].

Constitutional Limitations

The following are the constitutional limitations of taxation:

• Provisions directly affecting taxation:
• Prohibition against imprisonment for non-payment of poll tax;
• Uniformity and equality of taxation;
• Grant by Congress of authority to the President to impose tariff rates;
• Exemption from taxation of lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes (1987 Constitution, Art. VI, Sec. 28(3));
• Prohibition against taxation of nonstock, non-profit educational institutions;
• Majority vote of Congress for grant of tax exemption;
• Proceeds of a tax levied for a special purpose constitute a special fund and may be used only for that purpose (1987 Constitution, Art. VI, Sec. 29(3));
• President’s veto power on appropriation, revenue, tariff bills;
• Non-impairment of jurisdiction of the Supreme Court;
• Grant of power to the local government units to create its own sources of revenue;
• Flexible tariff clause;
• Exemption from real property taxes; and
• No appropriation or use of public money for religious purposes
• Provisions indirectly affecting taxation:
• Due process;
• Equal protection;
• Religious freedom;
• Non-impairment of obligations of contracts;
• Freedom of speech and expression;
• Presidential power to grant reprieves, commutations, and pardons, and remit fines and forfeitures after conviction by final judgment; and
• No taking of private property for public use without just compensation

Exemptions from Real Property Tax

The following are exempted from payment of the real property tax:

• Real property owned by the Republic of the Philippines or any of its political subdivisions. Except: when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.
• Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable or educational purposes
• All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power.
• All real property owned by duly registered cooperatives under RA No. 9520 (Philippine Cooperative Code of 2008), Sec. 123.
• Machinery and equipment used for pollution control and environmental protection.

Uniformity and equality of taxation

The rule of taxation shall be uniform and equitable. Congress shall evolve a progressive system of taxation [Section 28(1), Article VI, 1987 Constitution].

Uniformity – All taxable articles or properties of the same class shall be taxed at the same rate [City of Baguio v. De Leon, G.R. No. L-24756 (1968)].

• Uniformity of operation throughout tax unit – The rule requires the uniform application and operation, without discrimination, of the tax in every place where the subject of it is found. This means, for example, that a tax for a national purpose must be uniform and equal throughout the country and a tax for a province, city, municipality, or barangay must be uniform and equal throughout the province, city, municipality or barangay.
• Equality in burden – Uniformity implies equality in burden, not equality in amount or equality in its strict and literal meaning. The reason is simple enough. If legislation imposes a single tax upon all persons, properties, or transactions, an inequality would obviously result considering that not all persons, properties, and transactions are identical or similarly situated. Neither does uniformity demand that taxes shall be proportional to the relative value or amount of the subject thereof. Taxes may be progressive.

Majority vote of Congress for grant of tax exemption

SECTION 28, ARTICLE VI. No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress

Basis: The inherent power of the state to impose taxes carries with it the power to grant tax exemptions.

Exemptions may be created by:

• The Constitution, or
• Statutes, subject to constitutional limitations.

Vote required for the grant of exemption: Absolute majority of the members of Congress (at least ½ + 1 of all the members voting separately)

Vote required for withdrawal of such grant of exemption: Relative majority is sufficient (majority of the quorum).

The provision guaranteeing equal protection of the laws and that mandating the rule of taxation shall be uniform and equitable likewise limit, although not expressly, the legislative power to grant tax exemption.

Grants in the nature of tax exemptions:

• Tax amnesties
• Tax condonations

Note:

• Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary [Section 192, LGC].
• The President of the Philippines may, when public interest so requires, condone or reduce the real property tax and interest for any year in any province or city or a municipality within the Metropolitan Manila Area [Section 277, LGC].