CARLOS SUPERDRUG CORP.,
G.R. No. 166494
doing business under the name
and style “Carlos Superdrug,”
Present:
ELSIE M. CANO, doing business
under the name and style “Advance
PUNO, C.J.,
Drug,” Dr.
SIMPLICIO L. YAP, JR., QUISUMBING,*
doing business under the name and
YNARES-SANTIAGO,
style “City Pharmacy,” MELVIN S.
SANDOVAL-GUTIERREZ,**
DELA SERNA, doing business under
CARPIO,
the name and style “Botica dela
Serna,” AUSTRIA-MARTINEZ,
and LEYTE SERV-WELL CORP.,
style="font-size: 14pt; "CORONA,
doing business under the name and
CARPIO MORALES,
style “Leyte Serv-Well Drugstore,”
AZCUNA,
Petitioners, TINGA,
CHICO-NAZARIO,
- versus -
GARCIA,
VELASCO, JR., and
DEPARTMENT OF SOCIAL
NACHURA, JJ.
WELFARE and DEVELOPMENT
(DSWD), DEPARTMENT OF
Promulgated:
HEALTH (DOH), DEPARTMENT
OF FINANCE (DOF), DEPARTMENT
style="font-size: 14pt; "June 29, 2007
OF JUSTICE (DOJ), and
DEPARTMENT OF INTERIOR and
LOCAL GOVERNMENT (DILG),
Respondents.
x
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x
DECISION
AZCUNA, J.:
This is a petition[1]
for Prohibition with Prayer for Preliminary Injunction assailing the
constitutionality of Section 4(a) of Republic Act (R.A.) No. 9257,[2]
otherwise known as the “Expanded Senior Citizens Act of 2003.”
Petitioners are domestic corporations
and proprietors operating drugstores in the style="font-size:
14pt; line-height: 28px; "Philippines.
Public respondents, on the
other hand, include the Department of Social Welfare and Development
(DSWD), the Department of Health (DOH), the Department of Finance
(DOF), the Department of Justice (DOJ), and the Department of
Interior and Local Government (DILG) which have been specifically
tasked to monitor the drugstores’ compliance with the law;
promulgate the implementing rules and regulations for the effective
implementation of the law; and prosecute and revoke the licenses of
erring drugstore establishments.
The antecedents are as
follows:
On style="font-size: 14pt;
line-height: 28px; "February 26, 2004, R.A. No. 9257, amending
R.A. No. 7432,[3]
was signed into law by President Gloria Macapagal-Arroyo and it
became effective on style="font-size: 14pt; line-height: 28px;
"March 21, 2004. Section 4(a) of the Act states:
SEC. 4. Privileges for the
Senior Citizens. – The senior citizens shall be entitled to the
following:
(a) the grant of twenty percent
(20%) discount from all establishments relative to the utilization of
services in hotels and similar lodging establishments, restaurants
and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens,
including funeral and burial services for the death of senior
citizens;
. . .
The establishment may claim the
discounts granted under (a), (f), (g) and (h) as tax deduction based
on the net cost of the goods sold or services rendered: Provided,
That the cost of the discount shall be allowed as deduction from
gross income for the same taxable year that the discount is granted.
Provided, further, That the total amount of the claimed tax deduction
net of value added tax if applicable, shall be included in their
gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue
Code, as amended.[4]
On style="font-size: 14pt;
line-height: 28px; "May 28, 2004, the DSWD approved and adopted
the Implementing Rules and Regulations of R.A. No. 9257, Rule VI,
Article 8 of which states:
Article 8. Tax Deduction of
Establishments. – The establishment may claim the discounts granted
under Rule V, Section 4 – Discounts for Establishments;[5]
Section 9, Medical and Dental Services in Private Facilities[,][6]
and Sections 10[7]
and 11[8]
– Air, Sea and Land Transportation as tax deduction based on the
net cost of the goods sold or services rendered. Provided, That the
cost of the discount shall be allowed as deduction from gross income
for the same taxable year that the discount is granted; Provided,
further, That the total amount of the claimed tax deduction net of
value added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue
Code, as amended; Provided, finally, that the implementation of the
tax deduction shall be subject to the Revenue Regulations to be
issued by the Bureau of Internal Revenue (BIR) and approved by the
Department of Finance (DOF).[9]
On July 10, 2004, in reference to the
query of the Drug Stores Association of the Philippines (DSAP)
concerning the meaning of a tax deduction under the Expanded Senior
Citizens Act, the DOF, through Director IV Ma. Lourdes B. Recente,
clarified as follows:
1) The difference between the
Tax Credit (under the Old Senior Citizens Act) and Tax Deduction
(under the Expanded Senior Citizens Act).
1.1. The provision of Section 4 of
R.A. No. 7432 (the old Senior Citizens Act) grants twenty percent
(20%) discount from all establishments relative to the utilization of
transportation services, hotels and similar lodging establishment,
restaurants and recreation centers and purchase of medicines anywhere
in the country, the costs of which may be claimed by the private
establishments concerned as tax credit.
Effectively, a tax credit is a
peso-for-peso deduction from a taxpayer’s tax liability due to the
government of the amount of discounts such establishment has granted
to a senior citizen. The establishment recovers the full amount of
discount given to a senior citizen and hence, the government
shoulders 100% of the discounts granted.
It must be noted, however, that
conceptually, a tax credit scheme under the Philippine tax system,
necessitates that prior payments of taxes have been made and the
taxpayer is attempting to recover this tax payment from his/her
income tax due. The tax credit scheme under R.A. No. 7432 is,
therefore, inapplicable since no tax payments have previously
occurred.
1.2. The provision under
R.A. No. 9257, on the other hand, provides that the establishment
concerned may claim the discounts under Section 4(a), (f), (g) and
(h) as tax deduction from gross income, based on the net cost of
goods sold or services rendered.
Under this scheme, the establishment
concerned is allowed to deduct from gross income, in computing for
its tax liability, the amount of discounts granted to senior
citizens. Effectively, the government loses in terms of foregone
revenues an amount equivalent to the marginal tax rate the said
establishment is liable to pay the government. This will be an amount
equivalent to 32% of the twenty percent (20%) discounts so granted.
The establishment shoulders the remaining portion of the granted
discounts.
It may be necessary to note that while
the burden on [the] government is slightly diminished in terms of its
percentage share on the discounts granted to senior citizens, the
number of potential establishments that may claim tax deductions,
have however, been broadened. Aside from the establishments that may
claim tax credits under the old law, more establishments were added
under the new law such as: establishments providing medical and
dental services, diagnostic and laboratory services, including
professional fees of attending doctors in all private hospitals and
medical facilities, operators of domestic air and sea transport
services, public railways and skyways and bus transport services.
A simple illustration might help
amplify the points discussed above, as follows:
Tax Deduction Tax
Credit
Gross Sales
x x x x x x x x x x x x
Less : Cost of goods sold
x x x x x x x x x x
Net Sales
x x x x x x x x x x x x
Less: Operating Expenses:
Tax Deduction on Discounts x x x
x --
Other deductions:
x x x x x x x x
Net Taxable Income
x x x x x x x x x x
Tax Due
x x x x x
x
Less: Tax Credit
-- ______x x
Net Tax Due
-- x x
As shown above, under a tax deduction
scheme, the tax deduction on discounts was subtracted from Net Sales
together with other deductions which are considered as operating
expenses before the Tax Due was computed based on the Net Taxable
Income. On the other hand, under a tax credit scheme, the amount of
discounts which is the tax credit item, was deducted directly from
the tax due amount.[10]
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Meanwhile, on October 1, 2004,
Administrative Order (A.O.) No. 171 or the Policies and Guidelines to
Implement the Relevant Provisions of Republic Act 9257, otherwise
known as the “Expanded Senior Citizens Act of 2003”[11]
was issued by the DOH, providing the grant of twenty percent (20%)
discount in the purchase of unbranded generic medicines from all
establishments dispensing medicines for the exclusive use of the
senior citizens.
On style="font-size:
14pt; line-height: 28px; "November 12, 2004, the DOH issued
Administrative Order No 177[12]
amending A.O. No. 171. Under A.O. No. 177, the twenty percent
discount shall not be limited to the purchase of unbranded generic
medicines only, but shall extend to both prescription and
non-prescription medicines whether branded or generic. Thus, it
stated that “[t]he grant of twenty percent (20%) discount shall be
provided in the purchase of medicines from all establishments
dispensing medicines for the exclusive use of the senior citizens.”
Petitioners assail the
constitutionality of Section 4(a) of the Expanded Senior Citizens Act
based on the following grounds:[13]
1) The law is
confiscatory because it infringes Art. III, Sec. 9 of the
Constitution which provides that private property shall not be taken
for public use without just compensation;
2) It violates the
equal protection clause (Art. III, Sec. 1) enshrined in our
Constitution which states that “no person shall be deprived of
life, liberty or property without due process of law, nor shall any
person be denied of the equal protection of the laws;” and
3) The 20% discount on
medicines violates the constitutional guarantee in Article XIII,
Section 11 that makes “essential goods, health and other social
services available to all people at affordable cost.”[14]
Petitioners assert that
Section 4(a) of the law is unconstitutional because it constitutes
deprivation of private property. Compelling drugstore owners and
establishments to grant the discount will result in a loss of profit
and capital because 1) drugstores
impose a mark-up of only 5% to 10% on branded medicines; and 2) the
law failed to provide a scheme whereby drugstores will be justly
compensated for the discount.
Examining petitioners’ arguments, it
is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement mechanism for
the twenty percent (20%) discount that they extend to senior
citizens.
Based on the afore-stated DOF Opinion,
the tax deduction scheme does not fully reimburse petitioners for the
discount privilege accorded to senior citizens. This is because the
discount is treated as a deduction, a tax-deductible expense that is
subtracted from the gross income and results in a lower taxable
income. Stated otherwise, it is an amount that is allowed by law[15]
to reduce the income prior to the application of the tax rate to
compute the amount of tax which is due.[16]
Being a tax deduction, the discount does not reduce taxes owed on a
peso for peso basis but merely offers a fractional reduction in taxes
owed.
Theoretically, the treatment of the
discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the
coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257.
The
permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or
benefit.[17]
This constitutes compensable taking for which petitioners would
ordinarily become entitled to a just compensation.
Just compensation is defined as the
full and fair equivalent of the property taken from its owner by the
expropriator. The measure is not the taker’s gain but the owner’s
loss. The word just is used to intensify the meaning of the word
compensation, and to convey the idea that the equivalent to be
rendered for the property to be taken shall be real, substantial,
full and ample.[18]
A tax deduction does not offer full
reimbursement of the senior citizen discount. As such, it would not
meet the definition of just compensation.[19]
Having said that, this raises the
question of whether the State, in promoting the health and welfare of
a special group of citizens, can impose upon private establishments
the burden of partly subsidizing a government program.
The Court believes so.
The Senior Citizens Act was enacted
primarily to maximize the contribution of senior citizens to
nation-building, and to grant benefits and privileges to them for
their improvement and well-being as the State considers them an
integral part of our society.[20]
The priority given to senior citizens
finds its basis in the Constitution as set forth in the law itself.
Thus, the Act provides:
SEC. 2. Republic Act No. 7432 is hereby
amended to read as follows:
SECTION 1. Declaration of Policies and
Objectives. – Pursuant to Article XV, Section 4 of the
Constitution, it is the duty of the family to take care of its
elderly members while the State may design programs of social
security for them. In addition to this, Section 10 in the Declaration
of Principles and State Policies provides: “The State shall provide
social justice in all phases of national development.” Further,
Article XIII, Section 11, provides: “The State shall adopt an
integrated and comprehensive approach to health development which
shall endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There shall
be priority for the needs of the underprivileged sick, elderly,
disabled, women and children.” Consonant with these constitutional
principles the following are the declared policies of this Act:
. . .
(f) To recognize the important role of
the private sector in the improvement of the welfare of senior
citizens and to actively seek their partnership.[21]
To implement the above
policy, the law grants a twenty percent discount to senior citizens
for medical and dental services, and diagnostic and laboratory fees;
admission fees charged by theaters, concert halls, circuses,
carnivals, and other similar places of culture, leisure and
amusement; fares for domestic land, air and sea travel; utilization
of services in hotels and similar lodging establishments, restaurants
and recreation centers; and purchases of medicines for the exclusive
use or enjoyment of senior citizens. As a form of reimbursement, the
law provides that business establishments extending the twenty
percent discount to senior citizens may claim the discount as a tax
deduction.
The law is a legitimate
exercise of police power which, similar to the power of eminent
domain, has general welfare for its object. Police power is not
capable of an exact definition, but has been purposely veiled in
general terms to underscore its comprehensiveness to meet all
exigencies and provide enough room for an efficient and flexible
response to conditions and circumstances, thus assuring the greatest
benefits. [22]
Accordingly, it has been described as “the most essential,
insistent and the least limitable of powers, extending as it does to
all the great public needs.”[23]
It is “[t]he power vested in the legislature by the constitution
to make, ordain, and establish all manner of wholesome and reasonable
laws, statutes, and ordinances, either with penalties or without, not
repugnant to the constitution, as they shall judge to be for the good
and welfare of the commonwealth, and of the subjects of the
same.”[24]
For this reason, when the conditions so
demand as determined by the legislature, property rights must bow to
the primacy of police power because property rights, though sheltered
by due process, must yield to general welfare.[25]
Police power as an attribute to promote
the common good would be diluted considerably if on the mere plea of
petitioners that they will suffer loss of earnings and capital, the
questioned provision is invalidated. Moreover, in the absence of
evidence demonstrating the alleged confiscatory effect of the
provision in question, there is no basis for its nullification in
view of the presumption of validity which every law has in its
favor.[26]
Given these, it is incorrect for
petitioners to insist that the grant of the senior citizen discount
is unduly oppressive to their business, because petitioners have not
taken time to calculate correctly and come up with a financial
report, so that they have not been able to show properly whether or
not the tax deduction scheme really works greatly to their
disadvantage.[27]
In treating the discount as a tax
deduction, petitioners insist that they will incur losses because,
referring to the DOF Opinion, for every P1.00 senior citizen discount
that petitioners would give, P0.68 will be shouldered by them as only
P0.32 will be refunded by the government by way of a tax deduction.
To illustrate this point, petitioner
Carlos Super Drug cited the anti-hypertensive maintenance drug
Norvasc as an example. According to the latter, it acquires Norvasc
from the distributors at P37.57 per tablet, and retails it at P39.60
(or at a margin of 5%). If it grants a 20% discount to senior
citizens or an amount equivalent to P7.92, then it would have to sell
Norvasc at P31.68 which translates to a loss from capital of P5.89
per tablet. Even if the government will allow a tax deduction, only
P2.53 per tablet will be refunded and not the full amount of the
discount which is P7.92. In short, only 32% of the 20% discount will
be reimbursed to the drugstores.[28]
Petitioners’ computation is flawed.
For purposes of reimbursement, the law states that the cost of the
discount shall be deducted from gross income,[29]
the amount of income derived from all sources before deducting
allowable expenses, which will result in net income. Here,
petitioners tried to show a loss on a per transaction basis, which
should not be the case. An income statement, showing an accounting
of petitioners’ sales, expenses, and net profit (or loss) for a
given period could have accurately reflected the effect of the
discount on their income. Absent any financial statement, petitioners
cannot substantiate their claim that they will be operating at a loss
should they give the discount. In addition, the computation was
erroneously based on the assumption that their customers consisted
wholly of senior citizens. Lastly, the 32% tax rate is to be imposed
on income, not on the amount of the discount.
Furthermore, it is unfair for
petitioners to criticize the law because they cannot raise the prices
of their medicines given the cutthroat nature of the players in the
industry. It is a business decision on the part of petitioners to peg
the mark-up at 5%. Selling the medicines below acquisition cost, as
alleged by petitioners, is merely a result of this decision. Inasmuch
as pricing is a property right, petitioners cannot reproach the law
for being oppressive, simply because they cannot afford to raise
their prices for fear of losing their customers to competition.
The Court is not oblivious of the
retail side of the pharmaceutical industry and the competitive
pricing component of the business. While the Constitution protects
property rights, petitioners must accept the realities of business
and the State, in the exercise of police power, can intervene in the
operations of a business which may result in an impairment of
property rights in the process.
Moreover, the right to property has a
social dimension. While Article XIII of the Constitution provides the
precept for the protection of property, various laws and
jurisprudence, particularly on agrarian reform and the regulation of
contracts and public utilities, continuously serve as a reminder that
the right to property can be relinquished upon the command of the
State for the promotion of public good.[30]
Undeniably, the success of the senior
citizens program rests largely on the support imparted by petitioners
and the other private establishments concerned. This being the case,
the means employed in invoking the active participation of the
private sector, in order to achieve the purpose or objective of the
law, is reasonably and directly related. Without sufficient proof
that Section 4(a) of R.A. No. 9257 is arbitrary, and that the
continued implementation of the same would be unconscionably
detrimental to petitioners, the Court will refrain from quashing a
legislative act.[31]
WHEREFORE, the petition is DISMISSED
for lack of merit.
No costs.
SO ORDERED.