MODULE 2: DISTINCTION OF TAXATION FROM OTHER IMPOSITIONS

Doctrine of Equitable Recoupment

Where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is barred by
prescription, a tax presently being assessed against a taxpayer may be recouped or set-off against the tax
whose refund is now barred by prescription. The doctrine is not allowed in the Philippines by reason of
lifeblood theory.

Taxation Distinguished from Police Power

a. Taxation is for revenue while police power is for general welfare.

b. As to amount, Taxation is practically unlimited while under police power license fee should not exceed
cost of regulation.
c. As to compensation, in taxation, the enjoyment of public services while in police power, the feeling of
having done something good for society in general.
d. As to property taken, in taxation, generally money while under police power, any property.

Tax Distinguished from License Fee

a. Purpose: Tax imposed for revenue while license fee for regulation. Tax for general public purposes while
license fee for regulatory purposes only.
b. Basis: Tax imposed under power of taxation while license fee under
c. Amount: In taxation, no limit as to amount while license fee limited to cost of the license and the
expenses of police surveillance and
d. Time of Payment: Taxes normally paid after commencement of business while license fee, before.
e. Effect of non-payment: Failure to pay a tax does not make the business illegal while failure to pay license
fee makes business illegal.
f. Surrender: Taxes, being the lifeblood of the state, cannot be surrendered except for lawful consideration.

Tax Distinguished from Debt

a. Basis Tax is based on law while debt is based on contract or judgment.

b. Failure to Pay : Failure to pay a tax ( other than a poll tax) may result in imprisonment while no
imprisonment for non-payment of debt.
c. Mode of Payment : Tax generally payable in money while debt may be payable in money, property or
service.
d. Assignability : A tax is not assignable while debt is assignable.
e. Payment: A tax unless it becomes a debt is not subject to compensation or set-off while a debt may be a
subject
f. Interest: A tax does not draw interest unless delinquent while a debt draws interest if stipulated or
delayed.
g. Authority : Taxes imposed by public authority while debt can be imposed by private individuals.
h. Prescription: Prescription periods for tax under NIRC while debt, Civil Code.
 Taxes cannot be subject to set-off or compensation. Taxes are not in the nature of contracts
between the parties but grow out of duty to and are the positive acts of the government to the
making and enforcements of which, the personal consent of the individual taxpayers is not
required. A taxpayer cannot refuse to pay a tax on the ground that the government owes him an
amount equal to or greater than the tax being collected. The collection of a tax cannot await the
results of a lawsuit against the government.
In the case of Commissioner of Internal Revenue vs. Esso Standard Eastern Inc. ( Apr 18,
1989), a payment made by mistake (overpayment) was allowed to offset one's tax liability. It held:
Since the amount of P 221, 033 belonging to Esso was already in the hands of the government as
of July 1960, although the latter had no right whatever to the amount and indeed was bound to
return it to Esso, it was neither legaliy or logically possible for Esso thereafter to be considered a
debtor of the Government in that amount of P 221,033. Whatever other obligation Esso might
subsequently incur in favor of the Government would have to be reduced by that sum, in respect
of which no interest could be charged."

Tax Distinguished from Toll:

1. Taxes are levied for the support of government while tolls are compensation for the use of another's
property.
2. The amount of the toll is determined by the cost of the property or of the improvement while the amount
of the tax is determined by the
3. Taxes are imposed only by the state while a toll may be imposed by the government or private individual.

Tax Distinguished from Penalty

1. Tax is not a punishment but a revenue measure, while Penalty is a punishment.

2. Tax is legal, while Penalty is legal or contractual
3. Tax is imposed by the state while Penalty is imposed by the state or private parties to a contract.

Taxes Distinguished from Special Assessments

1. Subject : Taxes are levied on land, persons, property, income, business, etc. while special assessments are
levied on land.
2. Liability : Taxes are a personal liability of the taxpayer, while special assessments in some states cannot be
made a personal liability of the person assessed.
3. Benefits : Taxes are based on necessity and partially on benefits while special assessments are based
solely on benefits.
4. Application : A tax has general application, while special assessments have special application as to
particular time and place.

Tax exemption does not include building permit and special assessment. The law is that an
exemption from taxation does not include exemption from special assessment. But the power to tax
carries with it the power to levy a special assessment.

Tax Distinguished from Tariff:

A Tax is an all embracing term to include a various kinds of enforced contributions imposed upon persons for
the attainment of public purposes, while a tariff should be understood to mean a kind of tax imposed on
articles which are traded intentionally.

Significant reason for distinguishing taxes from license fees

It is necessary to determine whether a particular imposition is a tax or a license fee because some
limitations apply only to one and not to the other. Furthermore, exemption from taxes does not include
exemption from license fees.

Public Purpose

The first requisite of lawful taxation is that the tax is laid for a public purpose and this is so whether the
constitution expressly so provides or not since the purpose is inherent and implied in the levy of every tax.
Perhaps the best test of rightful taxation is that the proceed of tax must be used.

1. for the support of the government

2. for any recognized objects of the government
3. to promote the welfare of the community

A tax levied for a private purpose constitutes a taking of property without due process of law, as it is beyond
the power of the government to impose. The purpose to be accomplished by taxation need not be
exclusively public. It is not necessary that the tax be for the use of the whole inhabitants. Although private
individuals are directly benefited, the tax would be still valid provided such benefit is only incidental. The
test is not who receives the money, but the character of the purpose for which it is expended, not the
immediate result of the expenditure, but rather the ultimate.
Any taxpayer has the legal personality to question in the open court the constitutionality of statutes
requiring the expenditure of public funds.

Inherent limitation is also known as the elements, tenets or characteristics of taxation:

The tax imposed should only be for a public purpose.

1. Whether the thing to be appropriated by public revenue is something which is the duty of the state, as a
government, to provide; whether the proceeds of the tax will directly promote the welfare of the
community in equal measure.
2. There should be no improper delegation of the taxing power.
3. The power of taxation is peculiarly and exclusively legislative. Consequently, the taxing power as a
general rule may not be delegated.
4. The power to tax is limited to the territorial jurisdiction of the taxing government.
5. Exemption of government entities recognized.

Non-delegable Legislative Power

1. selection of property to be taxed.

2. determination of the purposes for which taxes shall be levied.
3. fixing of the rate of taxation.
3. rules of taxation in. general.

The power of taxation being purely legislative, Congress cannot delegate the
power to others. This limitation arises from the doctrine of separation of
powers among the different branches of government. Of However, there are
exceptions to the rule against the delegation the taxing power. The
exceptions are:

Article VI, Sec 28(2) 1987 Constitution - The Congress limits, may, and by law, authorized the President to fix within
specified subject to such limitations and restrictions as it may impose tariff rates, import and export quotas, tonnage
and wharfage dues and other duties or imposts within the framework of the national development program of
the Government."

Delegable Legislative Power

1. Authority of the President to fix tariff rates, import and export quotas ( Art. VI ,Sec.28(2) 1987
Constitution) power of local government units to tax subject to limitations as may be provided by Local
Government Code.
2. When the delegation relates merely to administrative implementation that may call for some degree of
discretionary powers under a set of sufficient standards expressed by law or implied from the policy and
purpose of the Act.

Exemption of the Government from taxes

As a matter of public policy, property of the State or any of its political
subdivisions devoted to government uses and purposes are general exempt
from taxation.

International Comity
Among the generally accepted principles of international law ( adopted in the
Phil. Constitution - Art Il, Sec 2) are the principles of sovereign equality among
states and of their freedom from suit without their consent. These principles limit
the authority of the government to effectively impose taxes on a sovereign state
and its instrumentalities, as well as on its property held, an activities undertaken
in that capacity. Even where one enters the territory of another, there is an
implied understanding that the former does not thereby submit itself to the
authority and jurisdiction of the latter.

-Observance of international comity such that property of foreign sovereigns, not

subject to taxation.

-No double taxation.

 Instances of Proper Delegation or when Taxing Power could be Delegated or Exceptions to
the Rule on Non-Delegation:

a. When authorized by the Constitution.

b. Administrative delegation subject to the completeness criteria and the standards rule.
c. Delegation to local governments.

A. Constitutional Limitations
I. Due Process of Law (Sec 1 Art Ill of the Constitution) Requisites

a. The interests of the public generally as distinguished from those Of a particular,class

require the intervention of the State; and

b. The means employed must be reasonably necessary to the accomplishment of the

purpose and not unduly oppressive. In a string of cases, the Supreme Court held that in
order that due process of law will not be avoided, the imposition of the tax must not be
done in an arbitrary, despotic, capricious, or whimsical manner.

B. Equal Protection of the Law

Requisites for a valid classification

a. Must not be arbitrary
b. Must be based upon substantial distinctions
c. Must be germane to the purposes of law
d. Must not be limited to existing conditions only; and
e. Must apply equally to all members of a class.
C. Uniformity, Equitability, and Progressivity of Taxation (Art VI, Sec. 28(1) of the Constitution)

Uniformity means, all taxable articles or kinds of property of the same class shall be taxed at the
same rate. A tax is uniform when it operates with the same force and effect in every place where
the subject of it is found.

Constitutional provision: Article VI, Sec 28(1)The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation. The uniformity rule is observed if a statute
imposes a tax of two pesos a square meter or fraction thereof on every billboard or sign anywhere
in the country. (Churchill vs. Concepcion, 34 Phil 969)

A tax upon receipts of corporation operating taxicabs not levied upon individuals or partnership
engaged in similar business is invalid, the discrimination not being justified by any difference in the
source of receipts or in the situation or character of the property employed. (Quaker City Cab vs.
Pennsylvania)

Equitability Taxation is said to be equitable when its burden falls to those better able to pay.
Progressivity - Rate increases as the tax base increases.
Instances where there is denial of due process

1. If by giving the tax law retroactive effect, there would be harsh ness or oppressiveness
2. If the taxpayer is denied the right to question an assessment.
3. If a tax is levied for a private purpose;
4. If the taxing power is exercised beyond its territorial limits.

General Rule why Taxes cannot be the subject of Compensation or set-off:

1. Lifeblood Theory
2. Taxes are not contractual obligation but arise out of a duty to, and are the positive acts of
government, to the making and enforcing of which the personal consent of the individual taxpayer is
not required.
3. The government and the taxpayer are not mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

Concept of Power of Eminent Domain

The power of eminent domain is the power of the state or those to whom the power has been
delegated to take private property for public use upon paying to the owner a just compensation to
be ascertained according to law.

The conditions imposed by the Constitution for its exercises are:

1. The existence of public use for the taking;
2. The payment of just compensation; and
3. The observance of due process in the taking.

Concept of Police Power

Police power has been referred to as the power of the state to enact such laws in relation to
persons and property as may promote public health, morals, public safety and the general and
welfare of its inhabitants. The power emanates from the obligations of the state to protect its citizens
and provide for the safety and welfare of the society.

Examples of police power, laws are those requiring a license for the practice of medicine regulating
rents and others.

Similarities among Taxation, Eminent Domain and Police Power

The similarities are as follows:

1. They all rest upon necessity because there can be no effective government without them.
2. They all underlie and exist independently of the constitution although the conditions for their
exercise may be prescribed by the constitution and by law.
3. There are ways by which the state interfere with private rights and property.
4. They are legislative in nature and character, although the exercise of the powers given to the
executive authorities, national or local.
5. They all presuppose an equivalent compensation received, directly or indirectly, by the persons
affected by the exercise of these powers by the government.
Distinctions among the 3 Powers

1. As to authority which exercises the power:

a. Taxation and police power maybe exercised only by the government or its political
subdivision.
b. The exercise of the power of the eminent domain maybe granted to public service,
companies or public utilities.
2. As to purpose:
a. In taxation, the property (generally in the form of money) is taken for the support for the
government.
b. Eminent domain, the property is taken for public use; hence, it must be compensated.
c. In police domain, the use of property is regulated for the purpose of promoting the general
welfare; hence, it is not compensable.
3. As to persons affected:
a. Taxation and police power operate upon a community or a class of individuals.
b. Eminent domain operates on an individual as the owner of a particular property.
4. As to effect:
a. In taxation, the money contributed in the concept of taxes becomes part of the public funds;
b. In eminent domain, there is a transfer of the right to property whether it be of ownership or a
lesser right (e.g. possession); and
c. In police power, there is no transfer of tittle, at most there is restraint on the injurious use of
property.
5. As to benefits received:
a. In taxation, it is assumed that the individual receives the equivalent of the tax in the form of
protection and benefits he receives from the government as such.
b. In police power, the person affected receives no direct and immediate benefit but only such as
may arise from the maintenance of a healthy economic standard of society and is often referred to
as damnum abseque injuria, i.e., “damage without injury”
6. As to amount of imposition:
a. In taxation, there is generally no limit on the amount of tax that may be imposed;
b. In eminent domain, there is no amount imposed but rather the owner is paid the market value of
the property taken; and
c. In police power, the amount imposed should not be more than sufficient to cover the cost of the
license and the necessary expenses of police surveillance and inspection, examination, or
regulation as nearly as the same can be estimated.