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THE
Supreme Court (SC) on Wednesday unanimously affirmed the
constitutionality of Section 145 of the National
Internal Revenue Code (NIRC), which imposes higher
excise taxes on brands of cigarettes that entered the
market after 1996.
In a 55-page decision penned by
Associate Justice Consuelo Ynares-Santiago, the Court en
banc affirmed with modification the May 12, 2004,
decision of the Regional Trial Court (RTC) in Makati
City which upheld the constitutionality of Section 145
of the NIRC, Revenue Regulations 1-97, 9-2003, 22-2003
and Revenue Memorandum Order 6-2003.
Revenue Regulations 1-97 classified the
existing brands of cigarettes as those duly registered
or active brands prior to January 1, 1997; new brands
are those registered after January 1, 1997.
Revenue Regulations 9-2003 amended
Revenue Regulations 1-97 by providing, among others, a
periodic review every two years or earlier of the
current net retail price of new brands.
On the other hand, Revenue Memorandum
Order 6-2003, issued on March 11, 2003, prescribed the
guidelines and procedures in establishing current net
retail prices of new brands of cigarettes and alcohol
products; Revenue Regulations 22-2003 issued on August
8, 2003, implemented the revised tax classification of
certain new cigarette brands—Lucky Strike Filter, Lucky
Strike Lights and Lucky Strike Menthol Lights—that were
introduced to the market after January 1, 1997.
In modifying the ruling of the Makati
RTC, the SC ruled: “Section 4 (B) (e) (c), 2nd paragraph
of Revenue Regulations 1-97, as amended by Section 2 of
Revenue Regulations 9-2003, Sections II (1)(b), II
(4)(b), II (6), II (7), III (Large Taxpayers Assistance
Division II) II (b) of Revenue Memorandum Order 6-2003,
insofar as pertinent to cigarettes packed by machine,
are invalid insofar as they grant the BIR [Bureau of
Internal Revenue] the power to reclassify or update the
classification of new brands every two years or
earlier.”
In its petition for review filed before
the SC, British American Tobacco (BAT) assailed the May
12, 2004, decision of the Makati RTC, saying that these
provisions violate the equal-protection clause of the
Constitution by creating a distinction in the imposition
of excise taxes on brands of cigarettes existing before
the law’s implementation on January 1, 1997, and on
cigarettes brands introduced thereafter.
The petitioner also asked the SC to
enjoin the Department of Finance (DOF) and the Bureau
of Internal Revenue (BIR) from enforcing Revenue
Regulations No. 22-2003, which then increased the excise
tax on Lucky Strike cigarettes from P8.96 to P13.44 in
line with Section 145 of the NIRC.
The petition stemmed from the BIR’s 2001
decision to reclassify BAT’s Lucky Strike brand to a
significantly higher rate while its competitor brands
remained unaffected.
While the petition was pending, RA 9334
(An Act Increasing The Excise Tax Rates Imposed on
Alcohol and Tobacco Products), which further amended
Section 145 of the NIRC, took effect on January 1, 2005.
The law increased the excise tax rates
provided in Section 145; mandated that new brands of
cigarettes shall be initially classified according to
their suggested net retail price, until such time that
their correct tax bracket is finally determined under a
specified period and, after which, their classification
shall remain in force until revised by Congress.
It also retained annex D (list of active
brands) as tax base of those surveyed as of October 1,
1996, including the classification of brands for the
same products which were registered on or before January
1, 1997, and were being commercially produced and
marketed on or after October 1, 1996, and which continue
to be commercially produced and marketed after the
effectivity of the law; and provided a legislative
freeze on brands of cigarettes introduced between the
period January 2, 1997, to December 31, 2003.
Under RA 9334, the excise tax due on BAT
products was increased to P25 per pack.
The BIR assessed petitioner’s
importation of 911,000 packs of Lucky Strike based on
the increased tax rate, thus, rendering it liable for
taxes in the amount of P22.77 million.
Thus, BAT filed a supplement to its
petition for review assailing the constitutionality of
RA 9334 insofar as it retained annex D and praying for a
downward classification of Lucky Strike products at the
bracket taxable at P8.96 per pack.
The Office of the Solicitor General
(OSG), however, argued that the passage of RA 9334,
specifically the provision imposing a legislative freeze
on the classification of cigarettes introduced into the
market between January 2, 1997, and December 31, 2003,
rendered BAT’s petition moot and academic.
The OSG explained that the provision in
Section 145, as amended by RA 9334, prohibiting the
reclassification of cigarettes during the said period,
“cured” the perceived defect of Section 145 considering
that, like cigarettes under annex D, petitioner’s brands
and other brands introduced between January 2, 1997, and
December 1, 2003, shall remain in the classification
under which the BIR has placed them, and only Congress
has the power to classify.
Other cigarette manufacturers—Philip
Morris Manufacturing Inc., Fortune Tobacco Corp., Mighty
Corp. and JT International S.A.—filed motions for
intervention, insisting that “no inequality exists
because cigarettes classified by BIR based on their net
retail price as of December 31, 2003, now enjoy the same
status quo provision that prevents the BIR from
reclassifying the cigarettes included in annex D.”
In upholding the lower court’s ruling,
the SC noted that the classification is considered valid
and reasonable provided that it rests on substantial
distinctions; it is germane to the purpose of the law;
it applies, all things being equal, to both present and
future conditions; and it applies equally to all those
belonging to the same.
The Court said that these requisites are
met under RA 9334.
“With the amendments introduced by RA
9334, the freezing of the tax classifications now
expressly applies not just to annex D brands but to
newer brands introduced after the effectivity of RA 8240
on January 1, 1997, and any new brand that will be
introduced in the future,” the Court said.
“All in all, the classification freeze
provision addressed Congress’s administrative concerns:
the simplification of tax administration of sin
products, elimination of potential areas for abuse and
corruption in tax collection, buoyant and stable revenue
generation, and ease of projection of revenues.
Consequently, there can be no denial of the equal
protection of the laws since the rational-basis test is
amply satisfied,” the SC said. |
