CASE DIGEST : Diaz v. Secretary of Finance G.R. No. 193007, July 19, 2011

 

FACTS

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol filed a petition questioning the Bureau of Internal Revenue's (BIR) planned imposition of Value-Added Tax (VAT) on toll fees collected by tollway operators. They argued that toll fees are merely user's taxes paid for the use of public roads and do not constitute payment for the sale of services under Section 108 of the National Internal Revenue Code (NIRC), as amended by Republic Act No. 9337 (Expanded VAT Law). According to them, subjecting toll fees to VAT unlawfully expanded the coverage of the VAT law, resulted in an unconstitutional "tax on tax," impaired the Toll Operating Agreements between the government and tollway operators, and was administratively impractical because VAT had not been considered in computing toll rates.

The Secretary of Finance and the Commissioner of Internal Revenue maintained that Section 108 of the NIRC imposes VAT on all kinds of services rendered for a fee, including those performed by franchise grantees, unless specifically exempted by law. Since tollway operators operate under franchises granted by the government through the Toll Regulatory Board (TRB), they are subject to VAT. The Court treated the petition for declaratory relief as one for prohibition because of the public importance of the issue.

ISSUE

Whether the imposition of VAT on tollway operators under Section 108 of the National Internal Revenue Code, as amended by Republic Act No. 9337, is valid, specifically: (1) whether tollway operators are "franchise grantees" rendering services subject to VAT; (2) whether toll fees are taxes such that VAT constitutes an impermissible "tax on tax"; and (3) whether the VAT imposition unlawfully impairs toll operating agreements or is otherwise unconstitutional.

HELD

The Supreme Court dismissed the petition and upheld the validity of the VAT on tollway operations. It ruled that Section 108 of the NIRC imposes VAT on all kinds of services rendered for a fee, and the enumeration of taxable services is merely illustrative rather than exclusive. Tollway operators render a service by allowing motorists to use toll facilities for a fee and are franchise grantees because they operate under authority granted by the government through the Toll Regulatory Board. Since the law does not expressly exempt tollway operators, they are subject to VAT. Tax exemptions must be based on a clear and unequivocal statutory grant.

The Court further held that toll fees are not taxes but payments made to private tollway operators as compensation for the construction, maintenance, and operation of toll facilities and to ensure a reasonable return on investment. Consequently, imposing VAT on tollway operations is not a tax on tax. VAT is an indirect tax imposed on the tollway operator's gross receipts, although its economic burden may be passed on to motorists. Any perceived hardship arising from the VAT is a matter of legislative policy for Congress to address, not for judicial intervention. Accordingly, the Court lifted the temporary restraining order and sustained the implementation of VAT on toll fees.