NATIONAL POWER CORPORATION VS. CITY OF CABANATUAN
G.R. No. 149110, April 09, 2003
Facts:
1. Petitioner is a government-owned and controlled corporation created under Commonwealth Act No. 120, as amended.
2. It is tasked to undertake the “development of hydroelectric generations of power and the production of electricity from nuclear, geothermal and other sources, as well as, the transmission of electric power on a nationwide basis.”
3. For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a gross income of P107,814,187.96 in 1992.
4. Pursuant to section 37 of Ordinance No. 165-92, the respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the latter’s gross receipts for the preceding year.
5. Petitioner, whose capital stock was subscribed and paid wholly by the Philippine Government, refused to pay the tax assessment.
6. It argued that the respondent has no authority to impose tax on government entities. Petitioner also contended that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or fees in accordance with sec. 13 of Rep. Act No. 6395
7. The respondent filed a collection suit in the RTC. Respondent alleged that petitioner’s exemption from local taxes has been repealed by section 193 of Rep. Act No. 7160 (LGC)
8. The trial court issued an Order dismissing the case. It ruled that the tax exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the following reasons:
a. Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act No. 7160 which is a general law;
b. section 193 of Rep. Act No. 7160 is in the nature of an implied repeal which is not favored; and
c. local governments have no power to tax instrumentalities of the national government.
9. On appeal, the Court of Appeals reversed the trial court’s Order on the ground that section 193, in relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the petitioner.
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Ruling:
The petition is without merit.
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.
Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution.
This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing powers.
One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the national government from the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned entities.
However, as this Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos, nothing prevents Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. In enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an instrumentality of the national government, was subject to real property tax.
In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the respondent city government to impose on the petitioner the franchise tax in question.
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Franchise:
In its general signification, a franchise is a privilege conferred by government authority, which does not belong to citizens of the country generally as a matter of common right. In its specific sense, a franchise may refer to a general or primary franchise, or to a special or secondary franchise. The former relates to the right to exist as a corporation, by virtue of duly approved articles of incorporation, or a charter pursuant to a special law creating the corporation. The right under a primary or general franchise is vested in the individuals who compose the corporation and not in the corporation itself. On the other hand, the latter refers to the right or privileges conferred upon an existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect poles or string wires. The rights under a secondary or special franchise are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use.
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or special franchise. This is to avoid any confusion when the word franchise is used in the context of taxation.
As commonly used, a franchise tax is “a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state.” It is not levied on the corporation simply for existing as a corporation, upon its property or its income, but on its exercise of the rights or privileges granted to it by the government. Hence, a corporation need not pay franchise tax from the time it ceased to do business and exercise its franchise.
To determine whether the petitioner is covered by the franchise tax in question, the following requisites should concur:
1. that petitioner has a “franchise” in the sense of a secondary or special franchise; and
2. that it is exercising its rights or privileges under this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395, constitutes petitioner’s primary and secondary franchises. It serves as the petitioner’s charter, defining its composition, capitalization, the appointment and the specific duties of its corporate officers, and its corporate life span.
Petitioner also fulfills the second requisite. It is operating within the respondent city government’s territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as amended.
Fulfilling both requisites, petitioner is, and ought to be, subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because its stocks are wholly owned by the National Government, and its charter characterized it as a “non-profit” organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government. It can sue and be sued under its own name, and can exercise all the powers of a corporation under the Corporation Code.
To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No. 2029 classifies GOCCs into those performing governmental functions and those performing proprietary functions.
Petitioner was created to “undertake the development of hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis.” Certainly, these activities do not partake of the sovereign functions of the government. They are purely private and commercial undertakings, albeit imbued with public interest. The public interest involved in its activities, however, does not distract from the true nature of the petitioner as a commercial enterprise, in the same league with similar public utilities like telephone and telegraph companies, railroad companies, water supply and irrigation companies, gas, coal or light companies, power plants, ice plant among others; all of which are declared by this Court as ministrant or proprietary functions of government aimed at advancing the general interest of society.
We also do not find merit in the petitioner’s contention that its tax exemptions under its charter subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions. In the case at bar, the petitioner’s sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, “all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities.” However, section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by private and public corporations. Contrary to the contention of petitioner, section 193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions from local taxes.
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