Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,

vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U.
ONG, as COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 109446 October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A.

CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and
BENJAMIN A. SOMERA, JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE
and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL
REVENUE, respondents.

Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

VITUG, J.:

These two consolidated special civil actions for prohibition challenge, in G.R. No.
109289, the constitutionality of Republic Act No. 7496, also commonly known as
the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions
of the National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93,
promulgated by public respondents pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued

implementation of the amendatory legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress shall
embrace only one subject which shall be expressed in the title
thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive system of
taxation.
 Article III, Section 1 — No person shall be deprived of . . . property
without due process of law, nor shall any person be denied the equal
protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No.

2-93, argue that public respondents have exceeded their rule-making authority in
applying SNIT to general professional partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with
the Court's directive, have filed their respective memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic
Act No. 7496, is a misnomer or, at least, deficient for being merely entitled,
"Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R.
No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The
Self-Employed and Professionals Engaged In The Practice of Their
Profession, Amending Sections 21 and 29 of the National Internal
Revenue Code, as Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National
Internal Revenue Code, as now amended, provide:

Sec. 21. Tax on citizens or residents. —

xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or

Professionals Engaged in the Practice of Profession. — A tax is
hereby imposed upon the taxable net income as determined in
Section 27 received during each taxable year from all sources, other
than income covered by paragraphs (b), (c), (d) and (e) of this section
by every individual whether
a citizen of the Philippines or an alien residing in the Philippines who
is self-employed or practices his profession herein, determined in
accordance with the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%

but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%

but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%

but not over P350,000 of excess over P120,000
 Over P350,000 P61,600 + 30%
of excess over P350,000

Sec. 29. Deductions from gross income. — In computing taxable

income subject to tax under Sections 21(a), 24(a), (b) and (c); and
25 (a)(1), there shall be allowed as deductions the items specified in
paragraphs (a) to (i) of this section: Provided, however, That in
computing taxable income subject to tax under Section 21 (f) in the
case of individuals engaged in business or practice of profession,
only the following direct costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course

of or pursuant to the business or practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief

organizations for the rehabilitation of calamity stricken areas
declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted

from accredited financial institutions which must be proven to have
been incurred in connection with the conduct of a taxpayer's
profession, trade or business.

For individuals whose cost of goods sold and direct costs are difficult
to determine, a maximum of forty per cent (40%) of their gross
receipts shall be allowed as deductions to answer for business or
professional expenses as the case may be.

On the basis of the above language of the law, it would be difficult to accept
petitioner's view that the amendatory law should be considered as having now
adopted a gross income, instead of as having still retained the net income, taxation
scheme. The allowance for deductible items, it is true, may have significantly been
reduced by the questioned law in comparison with that which has prevailed prior
to the amendment; limiting, however, allowable deductions from gross income is
neither discordant with, nor opposed to, the net income tax concept. The fact of
the matter is still that various deductions, which are by no means inconsequential,
continue to be well provided under the new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to
prevent log-rolling legislation intended to unite the members of the legislature who
favor any one of unrelated subjects in support of the whole act, (b) to avoid
surprises or even fraud upon the legislature, and (c) to fairly apprise the people,
through such publications of its proceedings as are usually made, of the subjects
of legislation.1 The above objectives of the fundamental law appear to us to have
been sufficiently met. Anything else would be to require a virtual compendium of
the law which could not have been the intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional
requirement that taxation "shall be uniform and equitable" in that the law would
now attempt to tax single proprietorships and professionals differently from the
manner it imposes the tax on corporations and partnerships. The contention clearly
forgets, however, that such a system of income taxation has long been the
prevailing rule even prior to Republic Act No. 7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires
that all subjects or objects of taxation, similarly situated, are to be treated alike
both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil.
371). Uniformity does not forfend classification as long as: (1) the standards that
are used therefor are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies, all things being
equal, to both present and future conditions, and (4) the classification applies
equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan,
24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the
legislative intent to increasingly shift the income tax system towards the schedular
approach2 in the income taxation of individual taxpayers and to maintain, by and
large, the present global treatment3 on taxable corporations. We certainly do not
view this classification to be arbitrary and inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating,
in the process, what he believes to be an imbalance between the tax liabilities of
those covered by the amendatory law and those who are not. With the legislature
primarily lies the discretion to determine the nature (kind), object (purpose), extent
(rate), coverage (subjects) and situs (place) of taxation. This court cannot freely
delve into those matters which, by constitutional fiat, rightly rest on legislative
judgment. Of course, where a tax measure becomes so unconscionable and unjust
as to amount to confiscation of property, courts will not hesitate to strike it down,
for, despite all its plenitude, the power to tax cannot override constitutional
proscriptions. This stage, however, has not been demonstrated to have been
reached within any appreciable distance in this controversy before us.

Having arrived at this conclusion, the plea of petitioner to have the law declared
unconstitutional for being violative of due process must perforce fail. The due
process clause may correctly be invoked only when there is a clear contravention
of inherent or constitutional limitations in the exercise of the tax power. No such
transgression is so evident to us.

G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of

whether or not public respondents have exceeded their authority in promulgating
Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general

professional partnership (GPP) and the partners comprising the GPP
are covered by R. A. No. 7496. Thus, in determining the net profit of
the partnership, only the direct costs mentioned in said law are to be
deducted from partnership income. Also, the expenses paid or
incurred by partners in their individual capacities in the practice of
their profession which are not reimbursed or paid by the partnership
 but are not considered as direct cost, are not deductible from his
gross income.

The real objection of petitioners is focused on the administrative interpretation of

public respondents that would apply SNIT to partners in general professional
partnerships. Petitioners cite the pertinent deliberations in Congress during its
enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B.
Perez, minority floor leader of the House of Representatives, in the latter's privilege
speech by way of commenting on the questioned implementing regulation of public
respondents following the effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the

correct impression of this bill. Do we speak here of
individuals who are earning, I mean, who earn through
business enterprises and therefore, should file an
income tax return?

MR. PEREZ. That is correct, Mr. Speaker. This does

not apply to corporations. It applies only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.;

Emphasis ours).

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the

Gentleman from Batangas say that this bill is intended
to increase collections as far as individuals are
concerned and to make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on

the Senate version of the SNITS, it is categorically stated, thus:

This bill, Mr. President, is not applicable to business

corporations or to partnerships; it is only with respect
to individuals and professionals. (Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general
professional partnerships are subject to the payment of income tax or that there is
a difference in the tax treatment between individuals engaged in business or in the
practice of their respective professions and partners in general professional
partnerships. The fact of the matter is that a general professional partnership,
unlike an ordinary business partnership (which is treated as a corporation for
income tax purposes and so subject to the corporate income tax), is not itself an
income taxpayer. The income tax is imposed not on the professional partnership,
which is tax exempt, but on the partners themselves in their individual capacity
computed on their distributive shares of partnership profits. Section 23 of the Tax
Code, which has not been amended at all by Republic Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional

partnerships. — (a) Persons exercising a common profession in
general partnership shall be liable for income tax only in their
 individual capacity, and the share in the net profits of the general
professional partnership to which any taxable partner would be
entitled whether distributed or otherwise, shall be returned for
taxation and the tax paid in accordance with the provisions of this
Title.

(b) In determining his distributive share in the net income of the

partnership, each partner —

(1) Shall take into account separately his distributive

share of the partnership's income, gain, loss,
deduction, or credit to the extent provided by the
pertinent provisions of this Code, and

(2) Shall be deemed to have elected the itemized

deductions, unless he declares his distributive share of
the gross income undiminished by his share of the
deductions.

There is, then and now, no distinction in income tax liability between a person who
practices his profession alone or individually and one who does it through
partnership (whether registered or not) with others in the exercise of a common
profession. Indeed, outside of the gross compensation income tax and the final tax
on passive investment income, under the present income tax system all individuals
deriving income from any source whatsoever are treated in almost invariably the
same manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to

consider Republic Act No. 7496 as an entirely independent, not merely as an
amendatory, piece of legislation. The view can easily become myopic, however,
when the law is understood, as it should be, as only forming part of, and subject
to, the whole income tax concept and precepts long obtaining under the National
Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an
all embracing term used in the Tax Code, and it practically covers all persons who
derive taxable income. The law, in levying the tax, adopts the most comprehensive
tax situs of nationality and residence of the taxpayer (that renders citizens,
regardless of residence, and resident aliens subject to income tax liability on their
income from all sources) and of the generally accepted and internationally
recognized income taxable base (that can subject non-resident aliens and foreign
corporations to income tax on their income from Philippine sources). In the
process, the Code classifies taxpayers into four main groups, namely: (1)
Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4)
Irrevocable Trusts (irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt

partnerships." Ordinarily, partnerships, no matter how created or organized, are
subject to income tax (and thus alluded to as "taxable partnerships") which, for
purposes of the above categorization, are by law assimilated to be within the
context of, and so legally contemplated as, corporations. Except for few variances,
such as in the application of the "constructive receipt rule" in the derivation of
income, the income tax approach is alike to both juridical persons. Obviously, SNIT
is not intended or envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496, aforequoted, to cover
corporations and partnerships which are independently subject to the payment of
income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as
corporations nor even considered as independent taxable entities for income tax
purposes. A general professional partnership is such an example.4 Here, the
partners themselves, not the partnership (although it is still obligated to file an
income tax return [mainly for administration and data]), are liable for the payment
of income tax in their individual capacity computed on their respective and
distributive shares of profits. In the determination of the tax liability, a partner does
so as an individual, and there is no choice on the matter. In fine, under the Tax
Code on income taxation, the general professional partnership is deemed to be no
more than a mere mechanism or a flow-through entity in the generation of income
by, and the ultimate distribution of such income to, respectively, each of the
individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the
above standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual
income taxpayers on their non-compensation income. There is no evident intention
of the law, either before or after the amendatory legislation, to place in an unequal
footing or in significant variance the income tax treatment of professionals who
practice their respective professions individually and of those who do it through a
general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on

costs.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo,
Quiason, Puno, Kapunan and Mendoza, JJ., concur.

Padilla and Bidin, JJ., are on leave.

#Footnotes

1 Justice Isagani A. Cruz on Philippine Political Law 1993 edition, pp.

146-147, citing with approval Cooley on Constitutional Limitations.

2 A system employed where the income tax treatment varies and

made to depend on the kind or category of taxable income of the
taxpayer.

3 A system where the tax treatment views indifferently the tax base
and generally treats in common all categories of taxable income of
the taxpayer.

4 A general professional partnership, in this context, must be formed

for the sole purpose of exercising a common profession, no part of
the income of which is derived from its engaging in any trade
business; otherwise, it is subject to tax as an ordinary business
partnership or, which is to say, as a corporation and thereby subject
to the corporate income tax. The only other exempt partnership is a
joint venture for undertaking construction projects or engaging in
petroleum operations pursuant to an operating agreement under a
service contract with the government (see Sections 20, 23 and 24,
National Internal Revenue Code).