RCD NOTES ON
GENERAL PRINCIPLES OF TAXATION
I. TAXATION
TAXATION is the inherent power by which the sovereign, through its law-making body, raises revenue to defray the
necessary expenses of the government. It is a manner of apportioning the costs of the government among those who, in
some measure, are privileged to enjoy its benefits and must bear its burdens.
INHERENT TO THE STATE: It is inherent in character because its exercise is guaranteed by the mere existence of the state.
It could be exercised even in the absence of a constitutional grant. The power to tax proceeds upon the theory that the
existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as
a matter of right to every independent state or government. (Pepsi-Cola Bottling Co. of the Philippines vs. Municipality of
Tanauan, Leyte, G.R. No. L-31156, February 27, 1976)
SCOPE OF LEGISLATIVE POWER TO TAX
1. The determination of purposes for which taxes shall be levied provided it is for the benefit of the public.
2. The determination of subjects of taxation such as the person, property or occupation within its jurisdiction.
3. The determination as to the amount or rate of tax unless constitutionally prohibited.
4. The determination as to the kind of tax to be collected (i.e. property tax, income tax, inheritance tax, etc.).
5. The determination of agencies to collect the taxes.
6. The power to specify or provide for administrative and judicial remedies.
7. The power to grant tax exemptions and condonations.
THEORY AND BASIS
1. Life Blood Theory – Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. (Commissioner of Internal Revenue vs. Algue; GR No. L-28896; Feb. 17, 1988)
2. Necessity Theory - government is necessary; however, it cannot continue without the means of paying for its existence;
hence, it has the right to compel all citizens and property within its power to contribute for the same purpose.
(71 Am. Jur. 2d 346)
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to preserve
the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of the citizenry and those
which come within the State's territory, and facilities and protection which a government is supposed to provide.
(Phil. Guaranty Co., Inc. vs. CIR; GR No. L-22074; April 30, 965)
3. Symbiotic relationship theory - It is said that taxes are what we pay for a 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. (Commissioner of Internal Revenue vs. Algue, supra)
PURPOSE OF TAXATION
1. Primary – to raise revenues; to support the existence of the State and enable the state to promote the general welfare.
2. Secondary – non-revenue or sumptuary
a. Promotion of general welfare – taxation may be used to implement police power (e.g., grant of VAT exemption and
Discounts to Senior Citizens);
b. Regulation - where taxes are levied on excises or privileges for purposes of rehabilitation and stabilization of threatened
industry which is affected by public interest or to discourage consumption of harmful products (e.g., excise taxes on
cigarettes and alcohol);
c. Reduction of Social Inequity – This is made possible through the progressive system of taxation where the objective is
to prevent the undue concentration of wealth in the hands of few individuals. Progressivity is key stoned on the principle
that those who are able to pay should shoulder the bigger portion of the tax burden. (e.g., Income tax)
d. Encouragement of economic growth – tax incentives and reliefs may be granted to encourage investment (i.e., Income
Tax Holiday, 5% preferential Gross Income Tax for PEZA registered entities);
e. Protectionism – for the protection of local industries, in case of foreign importations, protective tariffs and customs
duties and fees (e.g., Special Duties imposed by the Bureau of Customs)
CHARACTERISTICS OF THE POWER TO TAX (CUPS)
1. Comprehensive – it covers persons, businesses, activities, professions, rights and privileges.
2. Unlimited – it is so unlimited in force and searching in extent that courts scarcely venture to declare that it is subject to
any restrictions, except those that such rests in the discretion of the authority which exercises it. (Tio vs. Videogram
Regulatory Board; GR No. 75697; June 18, 1987)
3. Plenary – it is complete; unqualified; absolute. Under the Tax Code, the BIR may avail of certain remedies to ensure
collection of taxes.
4. Supreme – insofar as the selection of the subject of taxation is concerned.
PRINCIPLES OF A SOUND TAX SYSTEM (FAT)
1. Fiscal Adequacy – revenue raised must be sufficient to meet government/public expenditures and other public needs.
(Chavez vs. Ongpin; GR No. 76778; June 6, 1990)
2. Administrative Feasibility – tax laws must be clear and concise; capable of effective and efficient enforcement;
convenient as to time and manner of payment, must not obstruct business growth and economic development.
The VAT law cannot be considered as violative of the Administrative Feasibility principle because it is principally aimed to
rationalize the system on taxes of goods and services. Thus, simplifying tax administration and making the system more
equitable to enable the country to attain economic recovery. (Kapatiran ng Mga Naglilingkod sa Pamahalaan v. Tan; June
30, 1988)
3. Theoretical Justice – must take into consideration the taxpayer’s ability to pay (Ability to Pay Theory).
Art. VI, Sec. 28(1) of the 1987 Constitution mandates that the rule on taxation must be uniform and equitable and that
the State evolve a progressive system of taxation.