City Government of San Pablo v. Reyes
REITERATIONFacts
The Antecedents: Act No. 3648 granted Escudero Electric Service Company a legislative franchise, later transferred to Manila Electric Company (MERALCO) under Republic Act No. 2340. Section 10 of Act No. 3648 stipulated that the franchise tax paid by the grantee was 'in lieu of any and all taxes of any kind nature or description levied, established or collected by any authority whatsoever.' Presidential Decree No. 551 (1974) reiterated that the franchise tax payable by grantees of electric current franchises shall be two percent (2%) of their gross receipts and shall be 'in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on earnings, receipts, income and privilege.' The Local Government Code of 1991 (LGC), effective January 1, 1992, authorized provinces and cities to impose a tax on businesses enjoying a franchise at a rate not exceeding fifty percent (50%) of one percent (1%) of gross annual receipts. The City of San Pablo enacted Ordinance No. 56, imposing a franchise tax of fifty percent (50%) of one percent (1%) of gross annual receipts. MERALCO paid P1,857,711.67 in franchise taxes under protest from 1994 to 1996. Procedural History: MERALCO filed an action before the Regional Trial Court (RTC) seeking to declare Ordinance No. 56 null and void concerning its imposition on MERALCO and to claim a refund of taxes paid. The RTC ruled in favor of MERALCO, declaring the ordinance ineffective and void as to MERALCO and ordering a refund. The Petition: The petitioners raised the issue of whether the LGC repealed the tax incentives enjoyed by MERALCO under its charter and prior laws, and whether the RTC erred in holding that the franchise tax constituted an impairment of contract.
Issue(s)
Whether the Local Government Code of 1991 (LGC) expressly or impliedly repealed the tax exemption/incentive enjoyed by MERALCO under its charter and prior laws. Whether Section 193 of the LGC withdrew the tax incentives, privileges, and immunities enjoyed by MERALCO. Whether the imposition of the franchise tax under Ordinance No. 56 constitutes an impairment of the contract between the government and MERALCO.
Ruling
The Supreme Court granted the petition, reversed the decision of the RTC, and dismissed MERALCO's complaint. The Court held that the LGC effectively withdrew MERALCO's tax exemptions and allowed the City of San Pablo to impose the franchise tax.
Ratio Decidendi
On whether the LGC repealed prior tax exemptions: The Court ruled affirmatively. It found that Section 137 of the LGC, which authorizes provinces to impose a franchise tax 'notwithstanding any exemption granted by any law or other special law,' is clear and all-encompassing. Furthermore, Section 193 of the LGC explicitly withdraws tax exemptions or incentives granted to or enjoyed by all persons, natural or juridical, except for specific enumerated entities. The Court applied the principle of expressio unius est exclusio alterius (the express mention of one excludes all others) to conclude that MERALCO's tax exemption was intended to be withdrawn. The Court clarified that while Section 534(f) of the LGC is a general repealing clause, the specific provisions of Sections 137 and 193 demonstrate a clear legislative intent to withdraw tax privileges. The Court noted that the phrase 'in lieu of all taxes' in MERALCO's franchise, while previously held to exempt franchise holders from certain taxes and protect against impairment of contract, must yield to the peremptory language of the LGC. On whether Section 193 of the LGC withdrew MERALCO's tax incentives: The Court affirmed that Section 193 unequivocally withdraws tax exemptions and incentives. The provision explicitly states that these exemptions are withdrawn upon the effectivity of the LGC, unless otherwise provided within the Code itself. Since MERALCO is not among the enumerated exceptions (local water districts, cooperatives, non-stock and non-profit hospitals and educational institutions), its tax exemption is deemed withdrawn. This withdrawal is a clear manifestation of the legislative intent to limit tax exemptions and ensure that entities contribute to the revenue needs of local government units. On whether the franchise tax constitutes an impairment of contract: The Court ruled that the non-impairment of contract clause cannot be invoked to uphold MERALCO's exemption. The Court cited Mactan Cebu International Airport Authority vs. Marcos where it was held that franchises are subject to amendment or repeal by Congress and that the power to tax, like the police power, cannot be contracted away. The LGC was enacted to ensure local government autonomy and enable them to attain self-reliance, which includes the power to tax. The Court emphasized that Congress can decree that even government instrumentalities performing governmental functions may be subject to tax when done to fulfill a constitutional mandate and national policy. Furthermore, the Court noted that the original franchise under Act No. 3648 contained a reservation clause allowing amendment or repeal, and subsequent constitutions also subjected franchises to amendment or repeal when the public interest requires. The Court also pointed out that the phrase 'in lieu of all taxes' was omitted in PD 551, suggesting an intent not to foreclose future taxes.
Main Doctrine
The Local Government Code of 1991, through Sections 137 and 193, expressly withdrew tax exemption privileges previously enjoyed by entities like MERALCO, allowing local government units to impose franchise taxes notwithstanding prior exemptions, and this withdrawal does not violate the non-impairment of contract clause as franchises are subject to reasonable exercise of police power and the power to tax.