3.

Power of Taxation as Distinguished from Police Power and Eminent Domain

PLANTERS PRODUCTS INC. vs FERTIPHIL CORP

548 SCRA 485
Mar 14, 2008

FACTS:
President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which
provided, among others, for the imposition of a Capital Recovery Component (CRC) on the domestic sale
of all grades of fertilizers which resulted in having FERTIPHIL paying Pph10/bag sold to the Fertilizer and
Pesticide Authority (FPA). FPA remits its collection to Far East Bank and Trust Company who applies to
the payment of corporate debts of PLANTERS.
After the Edsa Revolution, FPA voluntarily stopped the imposition of the Php10 levy. Upon return of
democracy, FERTIPHIL demanded a refund but PLANTERS refused. FERTIPHIL filed a complaint for
collection and damages against FPA and PLANTERS with the RTC on the ground that LOI No. 1465 is
unjust, unreasonable oppressive, invalid and unlawful resulting to denial of due process of law.
FPA answered that it is a valid exercise of the police power of the state in ensuring the stability of the
fertilizing industry in the country and that FERTIPHIL did not sustain damages since the burden imposed
fell on the ultimate consumers.
RTC and CA favored FERTIPHIL holding that it is an exercise of the power of taxation ad is as such because
it is not for public purpose as PLANTERS is a private corporation.

ISSUE:
WON LOI No. 1465 is an invalid exercise of the power of taxation rather the police power

HELD:
Yes.
Police power and the power of taxation are inherent powers of the State. These powers are distinct
and have different tests for validity. Police power is the power of the State to enact legislation that may
interfere with personal liberty or property in order to promote the general welfare, while the power of taxation
is the power to levy taxes to be used for public purpose. The main purpose of police power is the regulation
of a behavior or conduct, while taxation is revenue generation. The “lawful subjects” and “lawful means”
tests are used to determine the validity of a law enacted under the police power. The power of taxation, on
the other hand, is circumscribed by inherent and constitutional limitations. SC agrees with the RTC that the
imposition of the levy was an exercise by the State of its taxation power. While it is true that the power of
taxation can be used as an implement of police power, the primary purpose of the levy is revenue
generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public
purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons.
The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is
the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its
citizens and use the funds generated for a private purpose. As an old United States case bluntly put it: “To
lay with one hand, the power of the government on the property of the citizen, and with the other to bestow
it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery
because it is done under the forms of law and is called taxation.”
The term “public purpose” is not defined. It is an elastic concept that can be hammered to fit modern
standards. Jurisprudence states that “public purpose” should be given a broad interpretation. It does not
only pertain to those purposes which are traditionally viewed as essentially government functions, such as
building roads and delivery of basic services, but also includes those purposes designed to promote social
justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and
urban or agrarian reform. While the categories of what may constitute a public purpose are continually
expanding in light of the expansion of government functions, the inherent requirement that taxes can only
be exacted for a public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only
a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private
enterprise, that law will not satisfy the requirement of “public purpose.” The purpose of a law is evident from
its text or inferable from other secondary sources. Here, SC agrees with the RTC and that CA that the levy
imposed under LOI No. 1465 was not for a public purpose.
Even if the SC considers LOI No. 1695 enacted under the police power of the State, it would still be invalid
for failing to comply with the test of “lawful subjects” and “lawful means.” Jurisprudence states the test as
follows: (1) the interest of the public generally, as distinguished from those of particular class, requires its
exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose
and not unduly oppressive upon individuals. For the same reasons as discussed, LOI No. 1695 is invalid
because it did not promote public interest. The law was enacted to give undue advantage to a private
corporation.
 DRUGSTORE ASSOCIATION OF THE PH vs NAT’L COUNCIL ON DISABILITY AFFAIRS (NCDA)
GR No. 194561
Sept 14, 2016

FACTS:
RA 7277 known as the “Magna Carta for Disabled Persons” was passed into law. In 2007, RA 9442
known as “Magna Carta for Persons with Disability” amended RA 7277 and all references on the law to
“disabled persons” were amended to read as “persons with disability” (PWD). Specifically, RA 9442 granted
the PWDs a 20% discount on the purchase of medicine, and a tax deduction scheme was adopted wherein
covered establishments may deduct the discount granted from gross income based on the net cost of goods
sold or services rendered. The IRR of RA9442 was jointly promulgated by the DSWD, DepEd, Dep’t of
Finance, Dep’t of Tourism, DOTC, DILG, and Dep’t of Agriculture.
The DOH issued an AO specifically stating that the grant of 20% discount shall be provided in the purchase
of branded medicines and unbranded generic medicines from all establishments dispensing medicines for
the exclusive use of the PWDs.
NCDA issued AO No. 1, prescribing guidelines which should serve as a mechanism for the issuance of a
PWD Identification Card (IDC) which shall be the basis for providing privileges and discounts to bona fide
PWDs in accordance with R.A. 9442.
DRUGSTORE filed a prohibition with TRO before the CA to annul and enjoin the above-mentioned laws.
The CA upheld the constitutionality of RA 7277 as amended as well the assailed administrative issuances
yet suspended the effectivity of NCDA AO No. 1. NCDA filed a motion for reconsideration before the CA
to lift the suspension of the implementation of NCDA AO #1, yet the CA dismissed the motion. Upon appeal,
the CA lifted the suspension, hence, DRUGSTORE appealed.

ISSUE:
WON the RA 7277, RA 9442 and NCDA AO #1 violates due process clause.

HELD:
No.
R.A. No. 9442 which amended R.A. No. 7277 grants incentives and benefits including a twenty
percent (20%) discount to PWDs in the purchase of medicines; fares for domestic air, sea and land travels
including public railways and skyways; recreation and amusement centers including theaters, food chains
and restaurants. This is specifically stated in Section 4 of the IRR of R.A. No. 9442: Section 4. Policies and
Objectives.—It is the objective of Republic Act No. 9442 to provide persons with disability, the opportunity
to participate fully into the mainstream of society by granting them at least twenty percent (20%) discount
in all basic services. It is a declared policy of R.A. 7277 that persons with disability are part of Philippine
society, and thus the State shall give full support to the improvement of their total well-being and their
integration into the mainstream of society. They have the same rights as other people to take their proper
place in society. They should be able to live freely and as independently as possible. This must be the
concern of everyone the family, community and all government and nongovernment organizations. Rights
of persons with disability must never be perceived as welfare services. Prohibitions on verbal, nonverbal
ridicule and vilification against persons with disability shall always be observed at all times.
Police power is the power of the state to promote public welfare by restraining and regulating the use of
liberty and property. On the other hand, the power of eminent domain is the inherent right of the state (and
of those entities to which the power has been lawfully delegated) to condemn private property to public use
upon payment of just compensation. In the exercise of police power, property rights of private individuals
are subjected to restraints and burdens in order to secure the general comfort, health, and prosperity of the
state. A legislative act based on the police power requires the concurrence of a lawful subject and a lawful
method. In more familiar words, (a) the interests of the public generally, as distinguished from those of a
particular class, should justify the interference of the state; and (b) that means employed are reasonably
necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.
The PWD mandatory discount on the purchase of medicine is supported by a valid objective or purpose as
aforementioned. It has a valid subject considering that the concept of public use is no longer confined to
the traditional notion of use by the public, but held synonymous with public interest, public benefit, public
welfare, and public convenience. As in the case of senior citizens, the discount privilege to which the PWDs
are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The means
employed in invoking the active participation of the private sector, in order to achieve the purpose or
objective of the law, is reasonably and directly related. Also, the means employed to provide a fair, just and
quality health care to PWDs are reasonably related to its accomplishment, and are not oppressive,
considering that as a form of reimbursement, the discount extended to PWDs in the purchase of medicine
can be claimed by the establishments as allowable tax deductions pursuant to Section 32 of R.A. No. 9442
as implemented in Section 4 of DOF Revenue Regulations No.1-2009. Otherwise stated, the discount
reduces taxable income upon which the tax liability of the establishments is computed.
4. For Basis of Taxation

CIR vs ALGUE, CTA

158 SCRA 9
Feb 17, 1988

FACTS:
In 1965, ALGUE a domestic corporation engaged in engineering, construction and other allied
activities, received a letter from CIR assessing it in the total amount of P83, 183. 85 as delinquency income
taxes for the years 1958- 1959. ALGUE then filed a letter of protest or request for reconsideration which
was received by CIR. A warrant of distraint and levy was presented to ALGUE through its counsel Atty
Guevara, Jr. who refused to receive it on the ground of the pending protest. Atty. Guevara was finally
informed that the BIR was not taking any action on the protest and it was only then that he accepted the
warrant of distraint and levy earlier sought to be served. ALGUE filed a petition for review of the decision
of the CIR with the CTA.

ISSUE:
WON the Collector of CIR correctly disallowed the Php75, 000. 00 deduction claimed by ALGUE
as legitimate business expenses in its income tax returns.

HELD:
No.
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness
will negate the very reason for government itself. It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.
The court finds that these suspicions were adequately met by ALGUE when its President, Alberto Guevara,
and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but
periodically and in different amounts as each payee's need arose. It should be remembered that this was
a family corporation where strict business procedures were not applied and immediate issuance of receipts
was not required. Even so, at the end of the year, when the books were to be closed, each payee made an
accounting of all of the fees received by him or her, to make up the total of P75,000.00. Admittedly,
everything seemed to be informal. This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the
claimed deduction. In the present case, however, the court finds that the onus has been discharged
satisfactorily. ALGUE has proved that the payment of the fees was necessary and reasonable in the light
of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no
mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed
for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender
part of one's hard-earned income to the taxing authorities, every person who is able to must contribute his
share in the running of the government. The government, for its part, is expected to respond in the form of
tangible and intangible benefits intended to improve the lives of the people and enhance their moral and
material values, This symbiotic relationship is the rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those in the seat of power.