TAXATION: Constitutional Limitations of the Power of Taxation

 

23.   What are the constitutional limitations of the power of taxation? Explain each briefly.

Limitations does not restrict the power of taxation. They are merely guidelines. Constitutional limitations are limitations set by the people themselves.

Provisions directly affecting taxation:

1. Prohibition against imprisonment for non- payment of poll tax;

●     ·         BASIS: No person shall be imprisoned for debt or non-payment of a poll tax. (Sec. 20, Art. III) -- based on history: during the colonial times, friars have used cedula as a tool to oppress the Filipinos

●     Applies to ordinary debt only not on sovereign debt

●     You can still be imprisoned if you committed a criminal tax offense

●     ·         The only penalty for delinquency is the payment of surcharge in the form of interest at the rate of 24% per annum which shall be added to the unpaid amount, from the due date until it is paid

●     E.g. cedula, residential tax, community tax

2. Progressive system of taxation

●     While it is found in the Constitution, this is not a mandatory requirement to be imposed upon Congress.  This is just a directive to Congress.  When the State imposes more indirect taxes than direct taxes, you could not compel Congress that it should devolve a progressive system of taxation.

●     Tolentino vs. Secretary of Finance (Aug. 25, 1994)

        RA 7716 or the Expanded Value-Added Tax Law (E-VAT Law) seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code.

        The broad argument against the VAT is that it is regressive and that it violates the requirement that "The rule of taxation shall be uniform and equitable [and] Congress shall evolve a progressive system of taxation."

        The SC held that E-VAT may not be questioned on that ground that it is a regressive tax.  What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a DIRECTIVE TO CONGRESS, These provisions are put in the Constitution as moral incentives to legislation, NOT AS JUDICIALLY ENFORCEABLE RIGHTS.

3. Uniformity and equality of taxation

●     ·         Proceeds from the provision of the Constitution that: “The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive of taxation.”

●     ·         Merely a concomitant of the equal protection guarantee

●     ·         Implies that “all taxable articles or properties of the same class shall be taxed at the same rate”

●     Twin requirement of uniformity of taxation: (1)The rule requires the uniform application and operation, without discrimination, of the tax in every place where the subject of it is found; (2) Uniformity implies equality in burden, not equality in amount or equality in its strict and literal meaning

●     ·         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

●     ·         Ex.: those with different incomes are made to pay different rates of tax because in this case the incomes are considered as belonging to different classes

●     ·         The rule of uniformity has been interpreted as equivalent to the requirements of valid classification under the equal protection guarantee for all that is required is that the tax “applies equally to all persons, firms and corporations placed in similar situation.”

●     ·         Uniformity in taxation is effected through the apportionment of the tax burden among the taxpayers which under the Constitution must be equitable

●     ·         The concept of equity in taxation requires that such apportionment be more or less just in the light of the taxpayer’s ability to shoulder the tax burden (ability to pay)

●     2 kinds of equity: Vertical equity [progressive tax rate of income tax] and horizontal equity [capital gain tax]

●     ·         The constitutional requirement of equity in taxation also implies an approach which employs a reasonable classification of the entities or individuals who are to affected by a tax

4. Delegated authority of the president to impose tariff rates, import and export quotas, tonnage and wharfage dues
5. Origin of revenue and tariff bills and appropriations
6. Prohibition on use of tax levied for special purposes
7. Votes required to grant tax exemptions

●     ·         Intended to prevent indiscriminate grant of tax exemptions

●     ·         The phrase “a majority of all the members of the Congress” means at least 1/2 +1 of all the members thereof, voting separately

●     Majority of each houses

●     Why voting separately? Because the House has more members than the Senate

8. Tax exemption of religious, charitable and educational entities

●     ·         BASIS: “Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.” (Sec. 28[3], Art. VI)

●     ·         Exemption covers only property taxes and not other taxes [real property tax]

●     ·         Test of the exemption: it is use of the property and not ownership; ex.: a property leased by the owner to another who uses it exclusively for religious purposes is exempt from property tax but the owner is subject to income tax on rents received

●     ·         To be tax-exempt, the property must be actually, directly, and exclusively used for the purposes mentioned

●     ·         The word “exclusively,” as used in the Constitution, means “primarily” rather than “solely” so that the exemption is not wholly or partly lost because on certain occasions the property exempted or part of it is used for social purposes or let out to others for entertainment.

●     ·         The exemption is not limited to property actually indispensable for religious, charitable, or educational purposes. It extends to facilities which are incidental to or reasonably necessary for the accomplishment of said purposes

●     Abra Valley College vs. Aquino (162 SCRA 106)

        The ground floor of Abra Valley College was used for commercial purposes.  The second floor was used as the residence of the School Director.  The third and the upper floors were used as classrooms.  Are the properties exempted?

       As to the third and upper floors, they are exempted because they are used for educational purposes.  The ground floor, which is being used for commercial purposes, is not covered by exemption.  They are part of the school building but since they are not used for educational purpose but for a commercial purpose, then, they are not exempted.  They will be subject to real property tax.

        The second floor is covered by the exemption because the use, even though it is not actually, directly, and exclusively used for religious, charitable or educational purposes, it includes those which are incidental to those.

●     RATIONALE: because these institutions are considered as partners of the government

9. Non- taxability of non- stock,non profit educational institutions

●     ·         BASIS: “All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties xxx” (Sec. 4[3], Art. XIV); “Subject to conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.” (Sec. 4[4], Ibid)

●     ·         The exemption covers income, property, and donor’s taxes, and customs duties

●     ·         To be exempt from tax or duty, the revenue, assets, property or donations must be used actually, directly, and exclusively for educational purposes

●     ·         In the case of religious and charitable entities and non-profit cemeteries, the exemption is limited to property tax

●     ·         Congress is authorized to grant similar exemptions to proprietary (for profit) educational institutions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment

●     ·         Lands, buildings, and improvements actually, directly, and exclusively used for educational purposes are exempt from property tax, whether the educational institution is proprietary or non-profit

10. LGU’s power to create its own sources of revenue
11. Non- appropriation or use of public money for religious purposes

●     ·         BASIS: “No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister or other religious teacher or dignitary as such, except when such priest, preacher, minister, or dignitary, is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium.” (Sec. 29[2], Art. VI)

●     ·         The above limitation is based on the requirement that taxes can only be levied for a public purpose

●     ·         What the Constitution prohibits is the use of public money or property for the benefit of any priest, etc. as such. When so employed in the armed forces, any penal institution, or government orphanage or leprosarium, they may receive their corresponding compensations for services rendered in their non-religious capacity without violating the constitutional prohibition

12. President’s veto power

●     ·       GR: the president may not veto a bill in part and approve it in part

●     ·         XPN: the president shall have the power to veto any particular item or items in appropriation, revenue or tariff bill

●     WHY? Life blood theory. The government would be paralyzed if hindered ang collection of taxes

●     What is the effect? The bill remains valid and only the parts vetoed are not passed as law

13. Non- impairment of supreme court’s jurisdiction

●     ·         Congress cannot take away from the SC the power given to it by the Constitution as the final arbiter of taxes

Provisions indirectly affecting taxating:

1.    Due process

●     ·         Proceeds from the constitutional provision that: “No persons shall be deprived of life, liberty, or property  without due process of law, nor shall any person be denied the equal protection of the laws (Sec. 1, Art. III)

●     ·         Must comply with substantive due process and procedural due process. Substantive due process is complied with if the tax law observes inherent and constitutional limitation. In procedural due process what is required is notice and hearing. Hearing means to have the opportunity to rebut or counter the arguments of BIR; not necessarily a hearing. It just means you have the opportunity to submit your records. The collection of taxes must be expedited thats why a full blown trial is not needed. Again, taxes are the lifeblood of a state.

●     ·         A tax which is imposed for a private purpose or which is beyond the jurisdiction of the government to levy and collect offends due process of law

●     ·         A tax law which denies a taxpayer a fair opportunity to assert his substantial rights before a competent tribunal is invalid

●     ·         The procedure prescribed on law for paying the tax or contesting the same must be reasonable and not unjust or oppressive to title taxpayer; otherwise, due process of law will be violated although the tax levy itself is valid

2.    Equal protection

●     ·         All persons subject to legislation shall be treated alike under like circumstances and conditions both in the privileges conferred and liabilities imposed

●     ·         A violation of the inherent limitations on taxation would contravene the constitutional injunction against deprivation of property without due process of law

●     Simply means same treatment of same persons are subject to same tax

●     Persons similarly situated are similarly taxed

●     Requisites of a valid classification: (1) the distinction must be substantial; (2) the classification must be germane to the purpose of the law; (3) must apply not only to present conditions but also future conditions; (4)  must apply equally to all members of the same class

●        Sison vs. Ancheta (130 SCRA 654)

 BP 135 was enacted providing for an imposition of the system of net income taxation upon the income arising from the exercise of profession while retaining the gross system of income taxation for salaried individual taxpayers. Petitioner complains that he would be unduly discriminated against by such imposition.

        The SC held that it is a valid exercise of taxation power. It is enough that the classification must rest upon substantial distinctions that make real differences. There is a real distinction between professionals and purely fixed income earners. For the professionals and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. For the purely fixed income earners, there is practically no overhead expense.  These taxpayers are not entitled to make deductions for income tax purposes because they are in the same situation more or less.

        The discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are set apart as a class.

        Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax rate and a tax base. It would not be just to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all like the same tax rates on the basis of gross income. There is ample justification to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

        Dictum of Chief Justice Marshall that “the power to tax involves the power to destroy (Graves v New York).

        Justice Holmes: “The power to tax is not the power to destroy while this Court sits.” So it is in the Philippines.-Chief Justice Fernando.

        Equality and uniformity in taxation means that all taxable articles or kinds or property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation.

 

3.    Non impairment of obligation of contracts

●     ·         BASIS: No law impairing the obligation of contracts shall be passed

●     A government enters into an ordinary contract when it is in pursuit of its proprietary function.

●     Autonomy of contracts -- parties may stipulate whatever they want so long as it is not contrary to law, public policy, good customs, or morals

●     Refers to granting of tax exemption by the government

●     Is not impaired if the exemption is unilaterally given; xpn: franchises, because they may be revoked, altered, or repealed by Congress

4.    Religious freedom

●     ·         BASIS: “No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of a religious profession and worship, without discrimination or preference, shall forever be allowed xxx.” (Sec. 5, Art. III)

●     no tax in any amount, large or small, can be levied to support any religious activity or institution whatever they may be called or whatever form they may adopt to teach or practice religion

●     XPN: when such priest, preacher, minister or dignitary is assigned to:

●     Ø  The armed forces

●     Ø  Any penal institution

●     Ø  Government orphanages

●     Ø  Leprosarium

●     Ø  if they serve the government in a non-ecclesiastical capacity.

●     Why the exemption? These institutions need spiritual ministrations

●     See American Bible Society Case

●     Prohibition applies even to indirect support

●     Public property may be leased to religious institutions provided that the same conditions apply to other private institutions

●     ·         The Constitution, however, does not prohibit imposing a generally applicable tax on the sale of religious materials by a religious organization

5.    Freedom of speech and expression

6.    Presidential power to grant reprieves, commutations, and pardons and remit fines and forfeitures after conviction by final judgement

7.    No taking of private property for public use without just compensation