RUFINO R. TAN, PETITIONER, VS. RAMON R. DEL ROSARIO, JR., AS SECRETARY OF FINANCE & JOSE U. ONG, AS COMMISSIONER OF INTERNAL REVENUE, RESPONDENTS.

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. 2­93, 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 x x x
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:

“Section 21. Tax on citizens or residents. –

“x x x                            x
x x

“(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 P 10,000 but not over
P 30,000                                                         P 300 + 9% of excess over P 10,000

Over P 30,000 but not over
P120,000                                                         P 2,100 + 15% of excess over P 30,000

Over P120,000 but not over P350,000                                                         P15,600 + 20%
of excess over P120,000

Over P350,000                                                                                             P61,600
+ 30% of excess over P350,000″

“SECTION 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 771).

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 approach^[2] in
the income taxation of individual taxpayers and to maintain, by and large, the
present global treatment^[3] 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 the
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 on 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:

“SECTION 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.,
on leave.

^[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).