EN BANC
G.R. No. 166494 June 29, 2007
CARLOS SUPERDRUG CORP., doing business under the name and style "Carlos Superdrug," ELSIE M.
CANO, doing business under the name and style "Advance Drug," Dr. SIMPLICIO L. YAP, JR., doing
business under the name and style "City Pharmacy," MELVIN S. DELA SERNA, doing business under the
name and style "Botica dela Serna," and LEYTE SERV-WELL CORP., doing business under the name and
style "Leyte Serv-Well Drugstore," petitioners,
vs.
DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD), DEPARTMENT OF HEALTH (DOH),
DEPARTMENT OF FINANCE (DOF), DEPARTMENT OF JUSTICE (DOJ), and DEPARTMENT OF INTERIOR and
LOCAL GOVERNMENT (DILG), respondents.
DECISION
AZCUNA, J.:
This is a petition1 for Prohibition with Prayer for Preliminary Injunction assailing the constitutionality of Section 4(a) of
Republic Act (R.A.) No. 9257,2 otherwise known as the "Expanded Senior Citizens Act of 2003."
Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.
Public respondents, on the other hand, include the Department of Social Welfare and Development (DSWD), the
Department of Health (DOH), the Department of Finance (DOF), the Department of Justice (DOJ), and the
Department of Interior and Local Government (DILG) which have been specifically tasked to monitor the drugstores’
compliance with the law; promulgate the implementing rules and regulations for the effective implementation of the
law; and prosecute and revoke the licenses of erring drugstore establishments.
The antecedents are as follows:
On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432,3 was signed into law by President Gloria
Macapagal-Arroyo and it became effective on March 21, 2004. Section 4(a) of the Act states:
SEC. 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels
and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the
death of senior citizens;
...
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost
of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from
gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the
claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code,
as amended.4
On May 28, 2004, the DSWD approved and adopted the Implementing Rules and Regulations of R.A. No. 9257, Rule
VI, Article 8 of which states:
Article 8. Tax Deduction of Establishments. – The establishment may claim the discounts granted under Rule V,
Section 4 – Discounts for Establishments;5 Section 9, Medical and Dental Services in Private Facilities[,]6 and
Sections 107 and 118 – Air, Sea and Land Transportation as tax deduction based on the net cost of the goods sold or
services rendered. Provided, That the cost of the discount shall be allowed as deduction from gross income for the
same taxable year that the discount is granted; Provided, further, That the total amount of the claimed tax deduction
net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be
subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended; Provided,
finally, that the implementation of the tax deduction shall be subject to the Revenue Regulations to be issued by the
Bureau of Internal Revenue (BIR) and approved by the Department of Finance (DOF). 9
On July 10, 2004, in reference to the query of the Drug Stores Association of the Philippines (DSAP) concerning the
meaning of a tax deduction under the Expanded Senior Citizens Act, the DOF, through Director IV Ma. Lourdes B.
Recente, clarified as follows:
1) The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax Deduction (under the
Expanded Senior Citizens Act).
1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act) grants twenty percent (20%) discount
from all establishments relative to the utilization of transportation services, hotels and similar lodging establishment,
restaurants and recreation centers and purchase of medicines anywhere in the country, the costs of which may be
claimed by the private establishments concerned as tax credit.
Effectively, a tax credit is a peso-for-peso deduction from a taxpayer’s tax liability due to the government of the
amount of discounts such establishment has granted to a senior citizen. The establishment recovers the full amount
of discount given to a senior citizen and hence, the government shoulders 100% of the discounts granted.
It must be noted, however, that conceptually, a tax credit scheme under the Philippine tax system, necessitates that
prior payments of taxes have been made and the taxpayer is attempting to recover this tax payment from his/her
income tax due. The tax credit scheme under R.A. No. 7432 is, therefore, inapplicable since no tax payments have
previously occurred.
1.2. The provision under R.A. No. 9257, on the other hand, provides that the establishment concerned may claim the
discounts under Section 4(a), (f), (g) and (h) as tax deduction from gross income, based on the net cost of goods
sold or services rendered.
Under this scheme, the establishment concerned is allowed to deduct from gross income, in computing for its tax
liability, the amount of discounts granted to senior citizens. Effectively, the government loses in terms of foregone
revenues an amount equivalent to the marginal tax rate the said establishment is liable to pay the government. This
will be an amount equivalent to 32% of the twenty percent (20%) discounts so granted. The establishment shoulders
the remaining portion of the granted discounts.
It may be necessary to note that while the burden on [the] government is slightly diminished in terms of its percentage
share on the discounts granted to senior citizens, the number of potential establishments that may claim tax
deductions, have however, been broadened. Aside from the establishments that may claim tax credits under the old
law, more establishments were added under the new law such as: establishments providing medical and dental
services, diagnostic and laboratory services, including professional fees of attending doctors in all private hospitals
and medical facilities, operators of domestic air and sea transport services, public railways and skyways and bus
transport services.
A simple illustration might help amplify the points discussed above, as follows:
Tax Deduction Tax Credit
Gross Sales x x x x x x x x x x x x
Less : Cost of goods sold x x x x x x x x x x
Net Sales x x x x x x x x x x x x
Less: Operating Expenses:
Tax Deduction on Discounts x x x x --
Other deductions: x x x x x x x x
Net Taxable Income x x x x x x x x x x
Tax Due x x x x x x
Less: Tax Credit -- ______x x
Net Tax Due -- x x
As shown above, under a tax deduction scheme, the tax deduction on discounts was subtracted from Net Sales
together with other deductions which are considered as operating expenses before the Tax Due was computed
based on the Net Taxable Income. On the other hand, under a tax credit scheme, the amount of discounts which is
the tax credit item, was deducted directly from the tax due amount. 10
Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the Policies and Guidelines to Implement the
Relevant Provisions of Republic Act 9257, otherwise known as the "Expanded Senior Citizens Act of 2003" 11 was
issued by the DOH, providing the grant of twenty percent (20%) discount in the purchase of unbranded generic
medicines from all establishments dispensing medicines for the exclusive use of the senior citizens.
On November 12, 2004, the DOH issued Administrative Order No 177 12 amending A.O. No. 171. Under A.O. No. 177,
the twenty percent discount shall not be limited to the purchase of unbranded generic medicines only, but shall
extend to both prescription and non-prescription medicines whether branded or generic. Thus, it stated that "[t]he
grant of twenty percent (20%) discount shall be provided in the purchase of medicines from all establishments
dispensing medicines for the exclusive use of the senior citizens."
Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act based on the following
grounds:13
1) The law is confiscatory because it infringes Art. III, Sec. 9 of the Constitution which provides that private property
shall not be taken for public use without just compensation;
2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in our Constitution which states that "no person
shall be deprived of life, liberty or property without due process of law, nor shall any person be denied of the equal
protection of the laws;" and
3) The 20% discount on medicines violates the constitutional guarantee in Article XIII, Section 11 that makes
"essential goods, health and other social services available to all people at affordable cost."14
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property.
Compelling drugstore owners and establishments to grant the discount will result in a loss of profit
and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed
to provide a scheme whereby drugstores will be justly compensated for the discount.
Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the validity of the
tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to
senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the
discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible
expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise, it is an
amount that is allowed by law15 to reduce the income prior to the application of the tax rate to compute the amount of
tax which is due.16 Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but
merely offers a fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments
concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257.
The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for
public use or benefit.17 This constitutes compensable taking for which petitioners would ordinarily become entitled to
a just compensation.
Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator.
The measure is not the taker’s gain but the owner’s loss. The word just is used to intensify the meaning of the
word compensation, and to convey the idea that the equivalent to be rendered for the property to be taken shall be
real, substantial, full and ample.18
A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the
definition of just compensation.19
Having said that, this raises the question of whether the State, in promoting the health and welfare of a special group
of citizens, can impose upon private establishments the burden of partly subsidizing a government program.
The Court believes so.
The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-building, and
to grant benefits and privileges to them for their improvement and well-being as the State considers them an integral
part of our society.20
The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus, the Act
provides:
SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:
SECTION 1. Declaration of Policies and Objectives. – Pursuant to Article XV, Section 4 of the Constitution, it is the
duty of the family to take care of its elderly members while the State may design programs of social security for them.
In addition to this, Section 10 in the Declaration of Principles and State Policies provides: "The State shall provide
social justice in all phases of national development." Further, Article XIII, Section 11, provides: "The State shall adopt
an integrated and comprehensive approach to health development which shall endeavor to make essential goods,
health and other social services available to all the people at affordable cost. There shall be priority for the needs of
the underprivileged sick, elderly, disabled, women and children." Consonant with these constitutional principles the
following are the declared policies of this Act:
...
(f) To recognize the important role of the private sector in the improvement of the welfare of senior citizens
and to actively seek their partnership.21
To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and dental
services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals,
and other similar places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of
services in hotels and similar lodging establishments, restaurants and recreation centers; and purchases of
medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax
deduction.
The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare
for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to
underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible
response to conditions and circumstances, thus assuring the greatest benefits. 22 Accordingly, it has been described
as "the most essential, insistent and the least limitable of powers, extending as it does to all the great public
needs."23 It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the
constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the
same."24
For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the
primacy of police power because property rights, though sheltered by due process, must yield to general welfare. 25
Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of
petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the
absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for
its nullification in view of the presumption of validity which every law has in its favor. 26
Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to
their business, because petitioners have not taken time to calculate correctly and come up with a financial report, so
that they have not been able to show properly whether or not the tax deduction scheme really works greatly to their
disadvantage.27
In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring to the DOF
Opinion, for every ₱1.00 senior citizen discount that petitioners would give, ₱0.68 will be shouldered by them as only
₱0.32 will be refunded by the government by way of a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug Norvasc as an
example. According to the latter, it acquires Norvasc from the distributors at ₱37.57 per tablet, and retails it at ₱39.60
(or at a margin of 5%). If it grants a 20% discount to senior citizens or an amount equivalent to ₱7.92, then it would
have to sell Norvasc at ₱31.68 which translates to a loss from capital of ₱5.89 per tablet. Even if the government will
allow a tax deduction, only ₱2.53 per tablet will be refunded and not the full amount of the discount which is ₱7.92. In
short, only 32% of the 20% discount will be reimbursed to the drugstores. 28
Petitioners’ computation is flawed. For purposes of reimbursement, the law states that the cost of the discount shall
be deducted from gross income,29 the amount of income derived from all sources before deducting allowable
expenses, which will result in net income. Here, petitioners tried to show a loss on a per transaction basis, which
should not be the case. An income statement, showing an accounting of petitioners’ sales, expenses, and net profit
(or loss) for a given period could have accurately reflected the effect of the discount on their income. Absent any
financial statement, petitioners cannot substantiate their claim that they will be operating at a loss should they give
the discount. In addition, the computation was erroneously based on the assumption that their customers consisted
wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their medicines
given the cutthroat nature of the players in the industry. It is a business decision on the part of petitioners to peg the
mark-up at 5%. Selling the medicines below acquisition cost, as alleged by petitioners, is merely a result of this
decision. Inasmuch as pricing is a property right, petitioners cannot reproach the law for being oppressive, simply
because they cannot afford to raise their prices for fear of losing their customers to competition.
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of
the business. While the Constitution protects property rights, petitioners must accept the realities of business and the
State, in the exercise of police power, can intervene in the operations of a business which may result in an
impairment of property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the precept for
the protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation of
contracts and public utilities, continuously serve as a reminder that the right to property can be relinquished upon the
command of the State for the promotion of public good.30
Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners and the
other private establishments concerned. This being the case, the means employed in invoking the active participation
of the private sector, in order to achieve the purpose or objective of the law, is reasonably and directly related.
Without sufficient proof that Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the
same would be unconscionably detrimental to petitioners, the Court will refrain from quashing a legislative act. 31
WHEREFORE, the petition is DISMISSED for lack of merit.
No costs.
SO ORDERED.
