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Part II Taxation Chapter 1 GENERAL PRINCIPLES OF TAXATION A. CONCEPT, NATURE, AND CHARACTERISTICS OF TAXATION AND TAXES Definition of taxation. Taxation is the act of laying a tax, i.e., the process or means by which the sovereign, through its law-making body, raises revenues to defray the necessary expenses of government. Expressed in another way, it is a method of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must, therefore, bear its burdens. 1 Purpose and importance of taxation. The purpose of taxation on the part of the govern ment is to provide funds with which to promote the gen eral welfare and protection of its citizens, and to enable it to finance its multifarious activities. Almost all revenues of the government are derived from the taxes raised through taxation. Clearly, no gov- without funds. Revenue from taxation, as the saying goes, is the lifeblood of a nation. It is, therefore, important that people pay taxes promptly and willingly. Eva- perform its functions nor continue to exist on or non-payment of taxes lessens the opportunity of the people to receive and enjoy essential government services. Definition of taxes. Taxes are the enforced proportional contributions from persons and property levied by the law-making body of the state by virtue of its sovereignty for the support of the government and all public needs. Essential characteristics of tax. As indicated in the definition, they are the following: (1) It is an enforced contribution. — A tax is not a voluntary payment or donation and its imposition is in no way dependent upon the will or assent of the persons taxed; (2) It is generally payable in money. - Unless qualified by law, the terms "taxes" or "tax" is usually understood to be a pecuniary burden - an exaction to be discharged alone in money which must be in legal tender; - A tax is laid by (3) It is proportionate in character. property share the public burden. It is ordinarily based on the ability to pay, (4) It is levied on persons or property, - A tax may also be imposed on acts or transactions or contracts. In each case, however it is only a person who pays the tax; (5) It is levied by the state which has jurisdiction over the person or property. The persons and property must be subject to the jurisdiction of the taxing state. This is necessary in order that the tax can be enforced. The taxing power of a state necessarily stops at its boundary lines,6 (6) It is levied by the law-making body of the state. The power to tax is a legislative power which only the legislative body (national or local) can exercise through the enactment of statutes or ordinances. The power to tax is also granted by the Constitution and by law to local government units (i.e., provinces, cities, municipalities and barangays)
but the power of the latter is subject to such limitations as may be provided by law; and (7) It is levied for public purposes. Taxation involves and a tax constitutes, a charge or burden imposed to pro- vide income for public purposes — the support of the government, the administration of the law, or the payment of public expenses. Theory and basis of taxation. (1) The power of taxation proceeds upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; and that for these means, it has a right to compel all its citizens and property within its limits to contribute. 8 (2) The basis of taxation is found in the reciprocal duties of protection and support between the state and its inhabitants. In return for his contribution, the taxpayer receives benefits and protection from the government. This is the so-called benefits received principle. It does not mean, however, that only those who pay citizen by government. Both are enjoyed who do not, because they are not able to pay taxes. The reason is that protection in the enjoyment of his right is a duty owed by the state to every citizen. Nature of power of taxation. (1) It is inherent in sovereignty. - - The power of taxation is inherent in sovereignty being essential to the existence of every government. 10 Hence, the state can still exercise the power, even if the Constitution had not mentioned anything about the taxation. (2) It is legislative in character. - The power to tax is legislative. It cannot be exercised by the executive or judicial branch of the government. 11 Under the Constitution, only the legislative body (Congress) can impose taxes. The power to tax is also granted by the Constitution to local governments subject to such guidelines and limitations as may be provided by law. (Art. X, Sec. 5 thereof.) 3) It is subject to constitutional and inherent limitations. of taxation is subject to certain limitations. The Most of these limitations are specifically provided in the power fundamental law or implied therefrom while the rest spring from the nature of the taxing power itself. (infra.) Aspects of taxation, The exercise of the power of taxation involves two (2) aspects, and they are: or imposition of the tax which is a legis- (1) Levying lative act; and (2) Collection of the tax levied which is essentially administrative in character. The first is taxation, strictly speaking, while the sec- ond, which involves the implementation of tax laws, may be referred to as tax administration. (Chap. III.) The two processes together constitute the taxation system. Basic principles of a sound tax system. They are: (1) Fiscal adequacy, which means that the sources of revenue should be sufficient to meet the demands of public expenditure; (2) Equality or theoretical justice, which means that the tax burden should be proportionate to the taxpayer's ability to pay. This is the so-called ability to pay principle; and (3) Administrative feasibility, which means that tax laws should be capable of convenient, just, and effective administration. B. CLASSIFICATIONS AND DISTINCTIONS
cannot shift to another. Ex- amples: community tax; corporate and individual in- come taxes. (b) Indirect. Tax which is demanded from one person in the expectation and intention that he should indemnify himself at the expense of another; or tax imposed on goods before they reach the customer who ultimately pays for them, not as a tax but as part of the purchase price to which it is added Examples: all business taxes, such as value-added tax, percent age taxes and others, customs duties, (6) As to graduation or rate; age (a) Proportional, Tax based on a fixed percent- of the amount of the property, income or other basis to be taxed. Examples: real property tax, all per- centage taxes. (b) Progressive or graduated, Tax based on the rate of which increases as the tax base or bracket in- creases. Examples: income tax; estate tax, donor's tax. (c) Regressive. Tax based on the rate of which decreases as the tax base or bracket increases. We have no regressive taxes. A regressive tax, how- ever, must not be confused with regressive system of taxation which exists when there are more indirect taxes imposed than direct taxes. Since the low income groups (they constitute the vast majority of buyers) as a whole, buy more consumption goods on which the indirect taxes are collected, the burden of indirect taxes rests more on them than on the more able segments of society. Taxes distinguished from other terms. (1) Revenue. It refers to all the funds or income derived by the government, whether from tax or any other source. In another sense, it refers to the amount collected, while tax refers to the amount imposed? (2) Internal revenue. - It refers to taxes imposed by the legislature other than duties on imports and exports. Customs duties (or simply duties), They are taxes mposed on goods exported from or imported nto a country. (4) Debt,-A tax is not a debt and the two are dis tinguished as followB: (a) A debt is generally based on contract, while a tax 1s based on law (b) A debt is assignable, while a tax cannot be as signed; (c) A debt may be paid in kind, whilea tax is pen erally payable in money; and (d) A person cannot be imprisoned 1or non-pay ment of debt while imprisonment is a sanction for non-payment of tax (except poll tax), A tax, however, like a debt, is an oblígation (5) Penalty.- It is any sanction impOsed as a pun ishment for violation of law or acts deemed ínjuríous. Thus, the violation of tax laws may give rise to imposi tion of penalty (a) A penalty is designed to regulate conduct while tax is primarily aimed at raising revenue and (b) A penalty may be imposed by either the gov ernment or private entities, while a tax may be im- posed only by the government, C. LIMITATIONS ON THE POWER OF TAXATION Limitations classified. The power to imp0se taxes is not without limítations and these limitations may be classified into: (1) Constitutional. Constitution or implied from its provisions; and Those expressly found in the (2) Inherent. Those which restrict the power al- though they are not embodied in the Constitution
Enumeration of the limitations. Before we discuss the limitations on taxation one by one, it may be advisable to enumerate them first. They are the following: (1) Constitutional: (a) due process of law; (b) equal protection of the laws; (c) rule of uniformity and equity in taxation, (d) no imprisonment for non-payment of a poll tax; (e) non-impairment of the obligation of con- tracts; (f) non-infringement of religious freedom; (g) no appropriation for religious purpose; (h) exemption of religious, charitable and educa- tional entities, non-profit cemeteries, and churches from taxation; (i) exemption of non-stock, non-profit educational institutions from taxation; (j) concurrence by a majority of all the members of Congress for the passage of a law granting tax ex- emption; (k) authority of the President to veto the particu- lar item or items in a revenue or tariff bill; and (1) non-impairment of the jurisdiction of the Su- preme Court in tax cases. The salaries of any public official or employee includng all constitutional officers are now subject to income tax. (2) Inherent: (a) requirement that levy must be for a public purpose (also implied from the Constitution); (b) non-delegation of the legislative power to tax (also implied from the Constitution) (c) exemption from taxation of government entities (d) international comity; and (e) territorial jurisdiction. Requirement of due process of law. This limitation proceeds from the constitutional provision that "No person 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. There is here a recognition that a person may be de- prived by the State of his life, liberty or property as long as due process is observed. But what is due process of law? No precise definition has been given to the expression. For our purpose, however, we can safely say that any deprivation of life, liberty, or property is with due process if it is done (a) under the authority of the Constitution itself or of a law that is valid (i.e., not contrary to the Constitution), and (b) after compliance with rea- sonable methods of procedure prescribed. Applied to taxation-
(supra.) (2) Equity in taxation,- This concept requires that the apportionment of the tax burden among the taxpayers be more or less just in the light of the taxpayer's ability to shoulder the burden (usually measured in terms of the size of the wealth or property and income, gross or net) and, if warranted (in certain cases, like the excise tax on gasoline), on the basis of the benefits he receives from the government. (3) Progressive system of taxation. – To achieve the equity objective in taxation, the Constitution enjoins Congress to "evolve a progressive system of taxation." This means that tax laws shall place more emphasis on direct taxation, with ability to pay as the main criterion. The individual income tax provides the best example of a direct and progressive tax. The rates under Sec- tion 24 (A) of the National Internal Revenue Code of 1997 on taxable income start at 5% on the portion of the in- come not over P10,000 and progressively increase to a maximum of 34%/33%/32% (effective 1998/1999/2000, respectively) on the portion of income exceeding P500, Prohibition against imprisonment for non-payment of poll tax. This principle is based on the provision of the Constitution that "No person shall be imprisoned for debt or non-payment of a poll tax."14 By virtue of the above provision, a person cannot be sent to prison for failure to pay the community tax (formerly residence tax). Under Section 38 (e), Article 6 of the Local Government Code (Chap. IV.), the only penalty for delinquency is the payment of surcharge; and this is not prohibited by the Constitution. But a person is subject to imprisonment for violation other than for non-payment of the community tax (e.g., falsification of the community certificate), and for non-payment of other taxes if so expressly provided by the pertinent law. Prohibition against impairment of obligation of contracts. The above proceeds from the constitutional provision that "No law impairing the obligation ot contracts shall be passed."15 The obligation of contract is impaired when its terms or conditions are changed by law or by party without the consent of the other, thereby weakening the position or rights of the latter. 16 An example of impairment by law is when a tax exemption based on a contract entered into by the government is revoked by the latter through a later taxing statute.17 Prohibition against infringement of religious freedom. The constitutional provision is as follows: "No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall for- ever be allowed. It has been held that the imposition of license or permit fees on the distribution and sale of Bibles and other religious literature by a non-stock, non-profit religious organization violates the above
constitutional guarantee of the free exercise and enjoyment of religious protes- sion and worship which carries with it the right to disseminate religious beliefs and information" because such fees, in effect, operate as a condition for the exercise of religious freedom. but a tax imposed on the sale of such religious materials is valid as it operates only after the activity (sale) taxed is done or completed. Prohibition against appropriation for religious purpose. The constitutional provision reads: "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."20 The above limitation is based on the requirement that taxes can only be levied for a public purpose. (infra.) The legislative body is without power to appropriate funds for a private purpose. Prohibition against taxation of certain entities and properties. This limitation is based on the constitutional provision which reads: “Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improve- ments actually, directly, and exclusively used for re- ligious, charitable or educational purposes, shall be exempt from taxation. The exemption covers only property and not other taxes.22 The test of the exemption is the use of the property and not ownership. Thus, a property leased by the Owner to another who uses it exclusively for charitable Purposes is exempt from property tax but the owner is subject to income tax.
