KHO, Francis Cedric G.

Constitutional Law 2

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 THE
INTERIOR and LOCAL GOVERNMENT (DILG), respondents

Ponente: Justice Azcuna

FACTS: Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.
Public respondents, on the other hand, are 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.

On February 26, 2004, R.A. No. 9257 (EXPANDED SENIOR CITIZENS ACT), amending R.A. No. 7432, was
signed into law by President Gloria Macapagal-Arroyo and it became effective on March 21 which
granted privileges for Senior Citizens a 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.

On May 28, 2004, the DSWD approved and adopted the Implementing Rules and Regulations of R.A. No.
9257. The Drug Stores Association of the Philippines (DSAP) submitted a query concerning the meaning
of a tax deduction under the Expanded Senior Citizens Act. The DOF, through Director IV Ma. Lourdes B.
Recente differentiated Tax Credit and Tax Reduction. She explained that 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 is
necessary however that 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 if no tax payments have previously occurred. Tax deduction as defined by R.A.
No. 9257 on the other hand is a discount from gross income, based on 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. To sum up, 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.

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.

On October 1, 2004 the DOH released the “Expanded Senior Citizens Act of 2013” providing the grant of
twenty percent (20%) discount in the purchase of prescription and non-prescription medicines whether
branded or generic from all establishments dispensing medicines for the exclusive use of the senior
citizens. 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:

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."
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.

ISSUE: Whether or not, 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? (YES)

HELD: PETITION DISMISSED FOR LACK OF MERIT.

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. A tax deduction does not
offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just
compensation.

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. The priority given to senior citizens finds its
basis in the Constitution as set forth in the law itself [R.A. No. 9257, Section 2 (f)]. 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 described as "the most essential, insistent
and the least limitable of powers, extending as it does to all the great public needs." 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." 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. 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. 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.
Petitioners tried to show a loss on a per transaction basis, which should not be the case as the law states
that the cost of the discount shall be deducted from gross income, the amount of income derived from
all sources before deducting allowable expenses, which will result in net income (See the Norvasc exhibit
by Carlos Super Drug). 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.