GR 155491; (July, 2009) (Digest)
G.R. No. 155491 ; July 21, 2009
SMART COMMUNICATIONS, INC., Petitioner, vs. THE CITY OF DAVAO, represented herein by its Mayor Hon. RODRIGO DUTERTE, and the SANGGUNIANG PANLUNSOD OF DAVAO CITY, Respondents.
FACTS
Smart Communications, Inc. (Smart) filed a special civil action for declaratory relief seeking a declaration that its Davao City telecenter is exempt from the local franchise tax imposed by the City’s Tax Code. Smart anchored its claim on Section 9 of its legislative franchise ( Republic Act No. 7294 ), which contains an “in lieu of all taxes” clause, stipulating payment of a 3% franchise tax on gross receipts “in lieu of all taxes on this franchise or earnings thereof.” Smart also invoked Section 23 of the Public Telecommunications Policy Act (RA 7925), known as the “most favored treatment” clause, arguing it entitles Smart to any tax exemption granted to other telecommunications franchise holders. The Regional Trial Court denied Smart’s petition, a decision affirmed by the Supreme Court in a September 16, 2008 Decision. Smart filed the instant Motion for Reconsideration.
ISSUE
Whether Smart is exempt from paying the local franchise tax levied by the City of Davao based on the “in lieu of all taxes” clause in its franchise and the “most favored treatment” clause in RA 7925.
RULING
The Supreme Court denied the Motion for Reconsideration, upholding Smart’s liability for the local franchise tax. The Court applied the fundamental principle that tax exemptions are highly disfavored and must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The “in lieu of all taxes” clause in RA 7294 was not deemed a categorical exemption from local taxes. For such a clause to exempt a franchise grantee from local taxes, it must expressly state that the exemption applies to both national and local taxes. The clause in Smart’s franchise lacks this clear language and therefore cannot be interpreted to preclude the City of Davao from exercising its constitutional power to levy taxes.
Furthermore, the Court ruled that Section 23 of RA 7925 does not operate as a blanket tax exemption for the telecommunications industry. The word “exemption” in that provision pertains only to exemptions from regulatory or reporting requirements of the relevant telecommunications agencies, not to exemptions from tax liabilities. The clause ensures equality in regulatory treatment among franchise holders but does not automatically import tax exemptions from one franchise to another. The enactment of the Expanded VAT Law (RA 7716), which replaced the national franchise tax with a value-added tax, did not abolish or prohibit the imposition of local franchise taxes, as these are distinct revenues for local government units derived from their inherent taxing power.