G.R. No. 127708 March 25, 1999
CITY GOVERNMENT OF SAN PABLO, LAGUNA, CITY TREASURER OF SAN PABLO, LAGUNA and THE SANGGUNIANG PANGLUNSOD OF SAN PABLO, LAGUNA, petitioners, vs. HONORABLE BIENVENIDO V. REYES, in his capacity as Presiding Judge, Regional Trial Court, Branch 29, San Pablo City and the MANILA ELECTRIC COMPANY, respondents.

FACTS

The Manila Electric Company (MERALCO) holds a legislative franchise, originally granted to Escudero Electric Service Company by Act No. 3648 and later transferred to MERALCO under Republic Act No. 2340. The franchise required payment of a two percent (2%) franchise tax on gross earnings to the municipal treasury, which payment was declared to be “in lieu of any and all taxes of any kind.” Presidential Decree No. 551 later affirmed this tax regime, fixing the franchise tax at two percent (2%) of gross receipts and stating it shall be “in lieu of all taxes and assessments” imposed by any national or local authority on the earnings and privilege of the electric business.
After the effectivity of the Local Government Code (LGC) of 1991 (RA 7160), the City of San Pablo enacted Ordinance No. 56, imposing a franchise tax on businesses at a rate of fifty percent (50%) of one percent (1%) of gross annual receipts. The City Treasurer demanded payment from MERALCO, which paid under protest from 1994 to 1996 and subsequently filed an action before the Regional Trial Court (RTC). The RTC declared the ordinance void as to MERALCO, holding it violated the company’s franchise and ordered a refund of the taxes paid.

ISSUE

Whether the Local Government Code of 1991 (RA 7160) repealed or withdrew the tax exemption granted to MERALCO under its franchise laws and Presidential Decree No. 551, thereby authorizing the City of San Pablo to impose a local franchise tax.

RULING

Yes, the Supreme Court granted the petition and reversed the RTC decision. The Court held that the Local Government Code of 1991 expressly withdrew all tax exemptions previously granted to all persons, whether natural or juridical, with the exception of those specifically mentioned in Section 193 of the Code. MERALCO’s tax exemption, derived from its franchise and PD 551, is not among the enumerated exceptions. The legislative intent to withdraw such exemptions is clear from the general and all-embracing language of Section 193, which states that “tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical… are hereby withdrawn upon the effectivity of this Code.”
The Court rejected the argument that this constituted an impairment of contract. Franchises are granted subject to the fundamental power of the State to amend, alter, or repeal them for the public interest, as enshrined in the Constitution. The power to tax, being a legislative prerogative essential for governance, cannot be irrevocably contracted away. The withdrawal of the tax exemption through a subsequent general law like the LGC is a valid exercise of this sovereign power. Consequently, the City of San Pablo was authorized to impose its local franchise tax under Ordinance No. 56, and MERALCO’s complaint was dismissed.