G.R. No.

131359
May 5, 1999
MANILA ELECTRIC COMPANY vs. PROVINCE OF LAGUNA and BENITO R. BALAZO, in
his capacity as Provincial Treasurer of Laguna
VITUG, J.: When RA 7160 LGU Code was enacted, enjoining LGUs to create their own
sources of revenue and to levy taxes, the province of Laguna enacted a Provincial Ordinance
imposing 50% tax against 1% of the gross annual receipts of businesses enjoying a franchise.
On the basis of the ordinance, Provincial Treasurer Benito Balazo sent a demand letter to
MERALCO for the payment of corresponding tax. MERALCO paid the tax under protest. A
formal claim for refund was thereafter sent by MERALCO to the Provincial Treasurer of Laguna
claiming that the franchise tax it had paid and continued to pay to the National Government
pursuant to P.D. 551 already included the franchise tax imposed by the Provincial Tax
Ordinance. MERALCO, contended that the imposition of a franchise tax under Sec 2.09 of
Laguna Provincial Ordinance No. 01-92 contravened the provisions of Sec 1 of PD 551 which
defines a different percentage of tax (which is 2% of the gross receipts) for franchise grantees
generating, distributing, and selling electric current for light, heat and power, payable to the
Commissioner of Internal Revenue or his duly authorized representative. Such determination is
said to be in lieu of all taxes and assessments of whatever nature imposed by any national or
local authority on earnings, receipts, income and privilege of generation, distribution and sale of
electric current. However, the claim for refund was denied by Governor Jose D. Lina relying on
a more recent law, i.e. RA 7160 than the old decree invoked by MERALCO. The RTC further
denied a complaint for refund for the same and upheld the validity of the provincial ordinance.
ISSUE: W/N the franchise tax imposed under the Ordinance violates the non-impairment
clause and Sec 1 of PD 551; W/N MERALCO is exempted from taxation under the LGC or Local
Tax Code; thus, should be taxed under PD 551.
RULE: There is no violation of the non-impairment clause. Franchise Taxes are beyond the
purview of the clause for it is not within contractual tax exemptions. In fact, The LGC expressly
repeals laws which are inconsistent with it. Tax exemptions contained in special franchises are
not strictly contractual in nature. Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to
by the taxing authority in contracts, such as those contained in government bonds or
debentures, lawfully entered under enabling laws in which the government, acting in its private
capacity, sheds its cloak of authority and waives its governmental immunity (Because,
government descends to be an ordinary person being a party in a contract). Revocation of this
kind of tax exemptions would impair the obligations of contracts. However, it must not be
confused with tax exemptions granted under franchises. A franchise is in the nature of a grant
which is beyond the purview of the non-impairment clause of the Constitution. Article XII, Sec
11, of the 1987 Constitution, like its precursor provisions is explicit that no franchise for the
operation of a public utility shall be granted except under the condition that such privilege shall
be subject to amendment, alteration or repeal by Congress as and when the common good so
requires. As for the present, no law or amendment has been passed to exempt utility-producing
businesses from franchise taxes.