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All that a judge should do, in cases of great difficulty, is

to request for an extension of time. (Commercial Trial
Lawyers of Manila vs. Veneracion, 488 SCRA 285 [2006])

o0o

G.R. No. 167260. February 27, 2009.*

The CITY OF ILOILO, Mr. ROMEO V. MANIKAN, in his

capacity as the Treasurer of Iloilo City, petitioners, vs.
SMART COMMUNICATIONS, INC. (SMART), respondent.

Statutory Construction Taxation Tax Exemptions This

Court has declared that he who claims an exemption from his
share of the common burden of taxation must justify his claim by
showing that the Legislature intended to exempt him by words too
plain to be beyond doubt or mistake.The basic principle in the
construction of laws granting tax exemptions has been very
stable. As early as 1916, in the case of Government of the
Philippine Islands v. Monte de Piedad, 35 Phil. 42 (1916), this
Court has declared that he who claims an exemption from his
share of the common burden of taxation must justify his claim by
showing that the Legislature intended to exempt him by words
too plain to be beyond doubt or mistake. This doctrine was
repeated in the 1926 case of Asiatic Petroleum v. Llanes, 49 Phil.
466 (1926), as well as in the case of Borja v. Commissioner of
Internal Revenue (CIR), 3 SCRA 591 (1961), decided in 1961.
Citing American jurisprudence, the Court stated in E. Rodriguez,
Inc. v. CIR, 28 SCRA 1119 (1969): The right of taxation is
inherent in the State. It is a prerogative essential to the
perpetuity of the government and he who claims an exemption
from the common burden, must justify his claim by the clearest
grant of organic or statute law xxx When exemption is claimed, it
must be shown indubitably to exist. At the outset, every
presumption is against it. A wellfounded doubt is fatal to the
claim it is only when the terms of the concession are too explicit
to admit fairly of any other construction that the proposition can
be supported.

_______________

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*SECOND DIVISION.

333

VOL. 580, FEBRUARY 27, 2009 333

City of Iloilo, The vs. SMART Communications, Inc.

Same Same Same A tax exemption cannot arise from vague

inferencetax exemptions must be clear and unequivocal A
taxpayer claiming a tax exemption must point to a specific
provision of law conferring on the taxpayer, in clear and plain
terms, exemption from a common burden.In the recent case of
Digital Telecommunications, Inc. v. City Government of Batangas,
et al., 573 SCRA 605 (2008), we adhered to the same principle
when we said: A tax exemption cannot arise from vague
inferenceTax exemptions must be clear and unequivocal. A
taxpayer claiming a tax exemption must point to a specific
provision of law conferring on the taxpayer, in clear and plain
terms, exemption from a common burden. Any doubt whether a
tax exemption exists is resolved against the taxpayer.
Local Government Code (LGC) Taxation Tax Exemptions All
tax exemption privileges then enjoyed by all persons, save those
expressly mentioned, have been withdrawn effective January 1,
1992, however, the withdrawal of exemptions, whether under
Section 193 or 137 of the Local Government Code (LGC), pertains
only to those already existing when the LGC was enactedthe
intention of the legislature was to remove all tax exemptions or
incentives granted prior to the LGC.We have indeed ruled that
by virtue of Section 193 of the LGC, all tax exemption privileges
then enjoyed by all persons, save those expressly mentioned, have
been withdrawn effective January 1, 1992the date of effectivity
of the LGC. The first clause of Section 137 of the LGC states the
same rule. However, the withdrawal of exemptions, whether
under Section 193 or 137 of the LGC, pertains only to those
already existing when the LGC was enacted. The intention of the
legislature was to remove all tax exemptions or incentives granted
prior to the LGC. As SMARTs franchise was made effective on
March 27, 1992after the effectivity of the LGCSection 193
will therefore not apply in this case.

PETITION for review on certiorari of a decision of the

Regional Trial Court of Iloilo City, Br. 28.
The facts are stated in the opinion of the Court.
The City Legal Officer for petitioner.
Picazo, Buyco, Tan, Fider & Santos for respondent.

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334

334 SUPREME COURT REPORTS ANNOTATED

City of Iloilo, The vs. SMART Communications, Inc.

BRION, J.:
Before this Court is the appeal by certiorari filed by the
City of Iloilo (petitioner) under Rule 45 of the Rules of
Court seeking to set aside the decision of the Regional Trial
Court (RTC) of Iloilo City, Branch 28, which declared that
respondent SMART Communications, Inc. (SMART) is
exempt from the payment of local franchise and business
taxes.

BACKGROUND FACTS

The facts of the case are not in dispute. SMART received

a letter of assessment dated February 12, 2002 from
petitioner requiring it to pay deficiency local franchise and
business taxes (in the amount of P764,545.29, plus
interests and surcharges) which it incurred for the years
1997 to 2001. SMART protested the assessment by sending
a letter dated February 15, 2002 to the City Treasurer. It
claimed exemption from payment of local franchise and
business taxes based on Section 9 of its legislative
franchise under Republic Act (R.A.) No. 7294 (SMARTs
franchise). Under SMARTs franchise, it was required to
pay a franchise tax equivalent to 3% of all gross receipts,
which amount shall be in lieu of all taxes. SMART contends
that the in lieu of all taxes clause covers local franchise
and business taxes.
SMART similarly invoked R.A. No. 7925 or the Public
Telecommunications Policy Act (Public Telecoms Act)
whose Section 23 declares that any existing privilege,
incentive, advantage, or exemption granted under existing
franchises shall ipso facto become part of previously
grantedtelecommunications franchise. SMART contends
that by virtue of Section 23, tax exemptions granted by the
legislature to other holders of telecommunications
franchise may be extended to and availed of by SMART.
Through a letter dated April 4, 2002, petitioner denied
SMARTs protest, citing the failure of SMART to comply
with Section 252 of R.A. No. 7160 or the Local Government
Code
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City of Iloilo, The vs. SMART Communications, Inc.

(LGC) before filing the protest against the assessment.

Section 252 of the LGC requires payment of the tax before
any protest against the tax assessment can be made.
SMART objected to the petitioners denial of its protest
by instituting a case against petitioner before the RTC of
Iloilo City.1 The trial court ruled in favour of SMART and
declared the telecommunications firm exempt from the
payment of local franchise and business taxes2 it agreed
with SMARTs claim of exemption under Section 9 of its
franchise and Section 23 of the Public Telecoms Act.3
From this judgment, petitioner files this petition for
review on certiorari raising the sole issue of whether
SMART is exempt from the payment of local franchise and
business taxes.

THE COURTS RULING

SMART relies on two provisions of law to support its

claim for tax exemption: Section 9 of SMARTs franchise
and Section 23 of the Public Telecoms Act. After a review of
pertinent laws and jurisprudence particularly of SMART
Communications, Inc. v. City of Davao,4 a case which,
except for the respondent, involves the same set of facts
and issueswe find SMARTs claim for exemption to be
unfounded. Consequently, we find the petition meritorious.
The basic principle in the construction of laws granting
tax exemptions has been very stable. As early as 1916, in
the case of Government of the Philippine Islands v. Monte
de Piedad,5 this Court has declared that he who claims an
exemption from his share of the common burden of taxation
must justify his claim by showing that the Legislature
intended to exempt

_______________

1Civil Case No. 0227144.

2 Decision dated January 19, 2005, penned by Judge Loida J. Diestro
Maputol Rollo, pp. 3539.
3Id., p. 37.
4G.R. No. 155491, September 16, 2008, 565 SCRA 237.
535 Phil. 42 (1916).

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336 SUPREME COURT REPORTS ANNOTATED

City of Iloilo, The vs. SMART Communications, Inc.
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him by words too plain to be beyond doubt or mistake. This

doctrine was repeated in the 1926 case of Asiatic Petroleum
v. Llanes,6 as well as in the case of Borja v. Commissioner
of Internal Revenue (CIR)7 decided in 1961. Citing
American jurisprudence, the Court stated in E. Rodriguez,
Inc. v. CIR:8

The right of taxation is inherent in the State. It is a prerogative

essential to the perpetuity of the government and he who claims
an exemption from the common burden, must justify his claim by
the clearest grant of organic or statute law xxx When exemption
is claimed, it must be shown indubitably to exist. At the outset,
every presumption is against it. A wellfounded doubt is fatal to
the claim it is only when the terms of the concession are too
explicit to admit fairly of any other construction that the
proposition can be supported.

In the recent case of Digital Telecommunications, Inc. v.

City Government of Batangas, et al.,9 we adhered to the
same principle when we said:

A tax exemption cannot arise from vague inferenceTax

exemptions must be clear and unequivocal. A taxpayer claiming a
tax exemption must point to a specific provision of law conferring
on the taxpayer, in clear and plain terms, exemption from a
common burden. Any doubt whether a tax exemption exists is
resolved against the taxpayer.

The burden therefore is on SMART to prove that, based on

its franchise and the Public Telecoms Act, it is entitled to
exemption from the local franchise and business taxes
being collected by the petitioner.

_______________

649 Phil. 466 (1926).

7 G.R. No. L12134, November 30, 1961, 3 SCRA 591, citing House v.
Posadas, 53 Phil. 338 (1929) and CIR v. Manila Jockey Club, Inc., 98 Phil.
670 (1956).
8 G.R. No. L23041 , July 31, 1969, 28 SCRA 1119, citing Memphis v. U
& P Bank, 91 Tenn. 546, 550, and Farrington v. Tennessee and County of
Shelby, 95 U.S. 679, 686.
9G.R. No. 156040, December 11, 2008, 573 SCRA 605.

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City of Iloilo, The vs. SMART Communications, Inc.
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Claim for Exemption under

SMARTs franchise
Section 9 of SMARTs franchise states:

Section 9. Tax provisions.The grantee, its successors or

assigns shall be liable to pay the same taxes on their real estate
buildings and personal property, exclusive of' this franchise, as
other persons or corporations which are now or hereafter may be
required by law to pay. In addition thereto, the grantee, its
successors or assigns shall pay a franchise tax equivalent
to three percent (3%) of all gross receipts of the business
transacted under this franchise by the grantee, its
successors or assigns and the said percentage shall be in
lieu of all taxes on this franchise or earnings thereof:
Provided, That the grantee, its successors or assigns shall
continue to be liable for income taxes payable under Title II of the
National Internal Revenue Code pursuant to Section 2 of
Executive Order No. 72 unless the latter enactment is amended or
repealed, in which case the amendment or repeal shall be
applicable thereto.
The grantee shall file the return with and pay the tax due
thereon to the Commissioner of Internal Revenue or his duly
authorized representative in accordance with the National
Internal Revenue Code and the return shall be subject to audit by
the Bureau of Internal Revenue. [Emphasis supplied.]

The petitioner posits that SMARTs claim for exemption

under its franchise is not equivocal enough to prevail over
the specific grant of power to local government units to
exact taxes from businesses operating within its territorial
jurisdiction under Section 137 in relation to Section 151 of
the LGC. More importantly, it claimed that exemptions
from taxation have already been removed by Section 193 of
the LGC:

Section 193. Withdrawal of Tax Exemption Privileges.Unless

otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether
natural or juridical, including governmentowned or controlled
corporations, except local water districts, cooperatives duly
registered under RA No. 6938, nonstock and nonprofit hospitals
and

338

338 SUPREME COURT REPORTS ANNOTATED

City of Iloilo, The vs. SMART Communications, Inc.

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educational institutions, are hereby withdrawn upon the

effectivity of this Code. [Emphasis supplied.]

The petitioner argues, too, that SMARTs claim for

exemption from taxes under Section 9 of its franchise is not
couched in plain and unequivocal language such that it
restored the withdrawal of tax exemptions under Section
193 above. It claims that if Congress intended that the tax
exemption privileges withdrawn by Section 193 of RA 7160
[LGC] were to be restored in respondents [SMARTs]
franchise, it would have so expressly provided therein and
not merely [restored the exemption] by the simple
expedient of including the in lieu of all taxes provision in
said franchise.10
We have indeed ruled that by virtue of Section 193 of the
LGC, all tax exemption privileges then enjoyed by all
persons, save those expressly mentioned, have been
withdrawn effective January 1, 1992the date of
effectivity of the LGC.11 The first clause of Section 137 of
the LGC states the same rule.12 However, the withdrawal
of exemptions, whether under Section 193 or 137 of the
LGC, pertains only to those already existing when the LGC
was enacted. The intention of the legislature was to remove
all tax exemptions or incentives granted prior to the LGC.13
As SMARTs franchise was made

_______________

10Rollo, p. 20.
11Philippine Long Distance Telephone Company, Inc. (PLDT) v. City of
Bacolod, et al., G.R. No. 149179, July 15, 2005, 463 SCRA 528 Mactan
Cebu International Airport Authority v. Marcos, G.R. No. 120082,
September 11, 1986, 261 SCRA 667.
12Section 137. Franchise Tax.Notwithstanding any exemption
granted by any law or other special law, the province may impose a
tax on businesses enjoying a franchise, at the rate not exceeding fifty
percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized within
its territorial jurisdiction. x x x. [Emphasis supplied.]
13SMART v. City of Davao, supra note 4.

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City of Iloilo, The vs. SMART Communications, Inc.

effective on March 27, 1992after the effectivity of the

LGCSection 193 will therefore not apply in this case.
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But while Section 193 of the LGC will not affect the
claimed tax exemption under SMARTs franchise, we fail to
find a categorical and encompassing grant of tax exemption
to SMART covering exemption from both national and local
taxes:

R.A. No 7294 does not expressly provide what kind of taxes

SMART is exempted from. It is not clear whether the in lieu of
all taxes provision in the franchise of SMART would include
exemption from local or national taxation. What is clear is that
SMART shall pay franchise tax equivalent to three percent
(3%) of all gross receipts of the business transacted under
its franchise. But whether the franchise tax exemption
would include exemption from exactions by both the local
and the national government is not unequivocal.
The uncertainty in the in lieu of all taxes clause in R.A.
No. 7294 on whether SMART is exempted from both local
and national franchise tax must be construed strictly
against SMART which claims the exemption. [Emphasis
supplied.]14

Justice Carpio, in his Separate Opinion in PLDT v. City of

Davao,15 explains why:

The proviso in the first paragraph of Section 9 of Smarts

franchise states that the grantee shall continue to be liable for
income taxes payable under Title II of the National Internal
Revenue Code. Also, the second paragraph of Section 9 speaks of
tax returns filed and taxes paid to the Commissioner of Internal
Revenue or his duly authorized representative in accordance with
the National Internal Revenue Code. Moreover, the same
paragraph declares that the tax returns shall be subject to audit
by the Bureau of Internal Revenue. Nothing is mentioned in
Section 9 about local taxes. The clear intent is for the in lieu of
all taxes clause to apply only to taxes under the National
Internal Revenue Code and not to local taxes.

_______________

14Id.
15G.R. No. 143867, March 25, 2003, 399 SCRA 442.

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340 SUPREME COURT REPORTS ANNOTATED

City of Iloilo, The vs. SMART Communications, Inc.

Nonetheless, even if Section 9 of SMARTs franchise can

be construed as covering local taxes as well, reliance
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thereon would now be unavailing. The in lieu of all taxes

clause basically exempts SMART from paying all other
kinds of taxes for as long as it pays the 3% franchise tax it
is the franchise tax that shall be in lieu of all taxes, and not
any other form of tax.16 Franchise taxes on
telecommunications companies, however, have been
abolished by R.A. No. 7716 or the Expanded ValueAdded
Tax Law (EVAT Law), which was enacted by Congress on
January 1, 1996.17 To replace the franchise tax, the EVAT
Law imposed a 10%18 valueadded tax on
telecommunications companies under Section 108 of the
National Internal Revenue Code.19 The in lieu of all taxes
clause in the legislative franchise of SMART has thus
become functus officio, made inoperative for lack of a
franchise tax.20
SMARTs claim for exemption from local business and
franchise taxes based on Section 9 of its franchise is
therefore unfounded.
Claim for Exemption
Under Public Telecoms Act
SMART additionally invokes the equality clause under
Section 23 of the Public Telecoms Act:

SECTION 23. Equality of Treatment in the

Telecommunications Industry.Any advantage, favor,
privilege, exemption, or

_______________

16Id.
17 Amended by R.A. No. 9337 or the Revised ValueAdded Tax Law (RVAT
Law).
18The tax rate is now 12% per RVAT Law.
19Radio Communications of the Philippines, Inc. (RCPI) v. Provincial Assessor
of South Cotabato, et al., G.R. No. 144486, April 13, 2005, 456 SCRA 1.
20 Digital Telecommunications Philippines, Inc. v. Province of Pangasinan, G.R.
No. 152534, February 23, 2007, 516 SCRA 541.

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City of Iloilo, The vs. SMART Communications, Inc.

immunity granted under existing franchises, or may

hereafter be granted, shall ipso facto become part of
previously granted telecommunications franchise and
shall be accorded immediately and unconditionally to the
grantees of such franchises: Provided, however, That the
foregoing shall neither apply to nor affect provisions of
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telecommunications franchises concerning territory covered by

the franchise, the life span of the franchise, or the type of service
authorized by the franchise. [Emphasis supplied.]

As in the case of SMART v. City of Davao,21 SMART posits

that since the franchise of telecommunications companies
granted after the enactment of its franchise contained
provisions exempting these companies from both national
and local taxes, these privileges should extend to and
benefit SMART, applying the equality clause above. The
petitioner, on the other hand, believes that the claimed
exemption under Section 23 of the Public Telecoms Act is
similarly unfounded.
We agree with the petitioner.
Whether Section 23 of the cited law extends tax
exemptions granted by Congress to new franchise holders
to existing ones has been answered in the negative in the
case of PLDT v. City of Davao.22 The term exemption in
Section 23 of the Public Telecoms Act does not mean tax
exemption rather, it refers to exemption from certain
regulatory or reporting requirements imposed by
government agencies such as the National
Telecommunications Commission. The thrust of the Public
Telecoms Act is to promote the gradual deregulation of
entry, pricing, and operations of all public
telecommunications entities, and thus to level the playing
field in the telecommunications industry. The language of
Section 23 and the proceedings of both Houses of Congress
are bereft of anything that would signify the grant of tax
exemptions to all telecommuni

_______________

21Supra note 15.

22G.R. No. 143867, August 22, 2001, 363 SCRA 522 see also note 15.

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342 SUPREME COURT REPORTS ANNOTATED

City of Iloilo, The vs. SMART Communications, Inc.

cations entities.23 Intent to grant tax exemption cannot

therefore be discerned from the law the term exemption
is too general to include tax exemption and runs counter to
the requirement that the grant of tax exemption should be
stated in clear and unequivocal language too plain to be
beyond doubt or mistake.
Surcharge and Interests
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Since SMART cannot validly claim any tax exemption

based either on Section 9 of its franchise or Section 23 of
the Public Telecoms Act, it follows that petitioner can
impose and collect the local franchise and business taxes
amounting to P764,545.29 it assessed against SMART.
Aside from these, SMART should also be made to pay
surcharge and interests on the taxes due.
The settled rule is that good faith and honest belief that
one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement
the tax laws are sufficient justification to delete the
imposition of surcharges and interest.24 In refuting liability
for the local franchise and business taxes, we do not believe
SMART relied in good faith in the findings and conclusion
of the Bureau of Local Government and Finance (BLGF).
In a letter dated August 13, 1998, the BLGF opined that
SMART should be considered exempt from the franchise
tax that the local government may impose under Section
137 of the LGC.25 SMART, relying on the letteropinion of
the BLGF, invoked the same in the administrative protest
it filed against petitioner on February 15, 2002, as well as
in the petition for

_______________

23SMART v. City of Davao, supra note 4.

24 Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal
Revenue, G.R. No. 166786, September 11, 2006, 501 SCRA 450, citing
Connell Bros. Co. (Phil.) v. Collector of Internal Revenue, 119 Phil. 40 9
SCRA 735 (1963).
25Rollo, p. 48.

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VOL. 580, FEBRUARY 27, 2009 343

City of Iloilo, The vs. SMART Communications, Inc.

prohibition that it filed before the RTC of Iloilo on April 30,

2002. However, in the 2001 case of PLDT v. City of
Davao,26 we declared that we do not find BLGFs
interpretation of local tax laws to be authoritative and
persuasive. The BLGFs function is merely to provide
consultative services and technical assistance to the local
governments and the general public on local taxation, real
property assessment, and other related matters.27 Unlike
the Commissioner of Internal Revenue who has been given
the express power to interpret the Tax Code and other
national tax laws,28 no such power is given to the BLGF.
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SMARTs dependence on BLGFs interpretation was thus

misplaced.
WHEREFORE, we hereby GRANT the petition and
REVERSE the decision of the RTC dated January 19, 2005
in Civil Case No. 0227144 and find SMART liable to pay
the local franchise and business taxes amounting to
P764,545.29, assessed against it by petitioner, plus the
surcharges and interest due thereon.
SO ORDERED.

Quisumbing (Chairperson), CarpioMorales, Velasco,

Jr. and Nachura,** JJ., concur.

Petition granted, judgment reversed.

Note.The rule is that tax exemptions should be

granted only by clear and unequivocal provision of law
expressed in a

_______________

26Supra note 22 see also note 15.

27 Administrative Code, Title II, Chapter 4, Section 33 (4).
28 SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Cases.The power to interpret the provisions of this Code [NIRC]
and other tax laws shall be under the exclusive and original jurisdictions
of the Commissioner, subject to review by the Secretary of Finance. x x x.
** Designated ad ditional member of the Second Division per Special
Order No. 571 dated February 12, 2009.

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