Smart Communications v. Davao
REITERATIONFacts
The Antecedents: Smart Communications, Inc. (Smart) filed a special civil action for declaratory relief seeking to ascertain its rights and obligations under the Tax Code of the City of Davao, which imposes a franchise tax. Smart averred that its telecenter in Davao City is exempt from paying franchise tax to the City, citing the "in lieu of all taxes" clause in its franchise, Republic Act No. 7294 (RA 7294), and the equality clause in Section 23 of Republic Act No. 7925 (RA 7925). Procedural History: The Regional Trial Court (RTC) of Davao City denied Smart's petition. Smart's motion for reconsideration was also denied. Smart appealed to the Supreme Court, which denied the appeal. The present case is Smart's Motion for Reconsideration of the Supreme Court's denial. The Petition: Smart sought reconsideration, arguing that the "in lieu of all taxes" clause in RA 7294 covers local taxes, that the rule of strict construction against tax exemptions is not applicable, that the clause is not rendered ineffective by the Expanded VAT Law, that Section 23 of RA 7925 includes a tax exemption, and that imposing a local franchise tax violates the constitutional prohibition against impairment of the obligation of contracts.
Issue(s)
Whether the "in lieu of all taxes" clause in Smart’s franchise (RA 7294) covers local taxes. Whether the "in lieu of all taxes" clause is rendered ineffective by the Expanded VAT Law. Whether Section 23 of RA 7925 includes a tax exemption applicable to local franchise taxes. Whether the imposition of a local franchise tax on Smart violates the constitutional prohibition against impairment of the obligation of contracts.
Ruling
The motion for reconsideration is DENIED, and this denial is final.
Ratio Decidendi
On the "in lieu of all taxes" clause and local taxes: The Court reiterated that tax exemptions are highly disfavored and must be expressed in clear language. The "in lieu of all taxes" clause in a legislative franchise should categorically state that the exemption applies to both local and national taxes. Otherwise, the exemption claimed should be strictly construed against the taxpayer and liberally in favor of the taxing authority. In this case, Section 9 of RA 7294 does not explicitly state that the exemption applies to local taxes, thus Smart remains liable for the local franchise tax imposed by the City of Davao. On the effect of the Expanded VAT Law: The Court clarified that Republic Act No. 7716, the "Expanded VAT Law," did not remove or abolish the payment of local franchise tax. It merely replaced the national franchise tax previously paid by telecommunications franchise holders with a ten percent (10%) Value Added Tax (VAT). VAT inures to the benefit of the national government, while a local franchise tax is a revenue of the local government unit. Therefore, the imposition of local franchise tax by cities or municipalities is not prohibited or abolished by the VAT law. On Section 23 of RA 7925 (Equality Clause): The Court clarified the meaning of the word "exemption" in Section 23 of RA 7925. It held that the word "exemption" as used in the statute refers merely to an exemption from regulatory or reporting requirements of the Department of Transportation and Communication or the National Transmission Corporation, and not to an exemption from the grantee’s tax liability. Therefore, Section 23 of RA 7925 cannot be considered as having amended Smart’s franchise to entitle it to exemption from local franchise taxes. On the impairment of the obligation of contracts: The Court found no violation of the constitutional prohibition against impairment of the obligation of contracts. The power of local government units to tax emanates from the Constitution, and the imposition of local franchise tax is a valid exercise of this power. Smart’s franchise, as interpreted by the Court, does not grant an absolute exemption from all forms of taxation, including local franchise taxes.
Main Doctrine
The "in lieu of all taxes" clause in a legislative franchise must expressly and unequivocally state that the exemption applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed against the taxpayer and liberally in favor of the taxing authority. The Expanded VAT Law did not abolish local franchise taxes.