Thursday, August 21, 2008 SC affirms higher excise taxes on cigarette brands
THE Supreme Court (SC) on Wednesday upheld the constitutionality of a provision under the National Internal Revenue Code (NIRC) that levies higher excise taxes on brands of cigarettes that entered the market after 1996.
In a decision penned by Associate Justice Consuelo Ynares-Santiago, the SC en banc unanimously affirmed with modification the May 12, 2004 decision of the Makati City Regional Trial Court (RTC) which upheld the constitutionality of Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order 6-2003.
The petition was filed by the British American Tobacco (BAT) assailing the Makati RTC decision, saying the issuances of the Bureau of Internal Revenue (BIR) violate the equal protection clause of the Constitution as it creates a distinction in the imposition of excise taxes on brands of cigarettes existing prior to the implementation of the said law on January 1, 1997 and on cigarettes brands introduced thereafter.
BAT also asked the SC to enjoin the Department of Finance and the 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.
Revenue Regulations No. 1-97 classified the existing brands of cigarettes as those duly registered or active brands prior to January 1, 1997 while new brands are those registered after January 1, 1997.
Revenue Regulations 9-2003 amended Revenue Regulations No. 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 No. 6-2003 was issued on March 11, 2003 prescribing the guidelines and procedures in establishing current net retail prices of new brands of cigarettes and alcohol products while Revenue Regulations No. 22-2003 was issued on August 8, 2003 to implement the revised tax classification of certain new cigarette brands – Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights – introduced in the market after January 1, 1997.
The SC ruled that Section 4 (B), (e), (c), 2nd paragraph of Revenue Regulations No. 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 Tax Payers Assistance Division II) II (b) of Revenue Memorandum Order No. 6-2003, insofar as pertinent to cigarettes packed by machine, are invalid insofar as they grant the BIR the power to reclassify or update the classification of new brands every two years or earlier.
The tribunal 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 these requisites are met under Republic Act 9334 (An Act Increasing The Excise Tax Rates Imposed on Alcohol and Tobacco Products).
“All in all, the classification freeze provision addressed Congress’ 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.
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, which further amended Section 145 of the NIRC, took effect on January 1, 2005.
This 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 classification under which the BIR has placed them and only Congress has the power to classify.
Other cigarettes manufacturers - Philip Morris Manufacturing, Inc., Fortune Tobacco Corporation, Mighty Corporation, and JT International, S.A. - filed motions for intervention, insisting that “no inequality exists because cigarettes classified by the 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. (ECV/Sunnex)
