CIR v.

Central Luzon Drug Corporation Ruling:

Facts: Yes, it is clear that Sec. 4a of RA 7432 grants to

senior citizens the privilege of obtaining a 20%
Respondents operated six drugstores under the
discount on their purchase of medicine from any
business name Mercury Drug. From January to
private establishment in the country. The latter
December 1996 respondent granted 20% sales
may then claim the cost of the discount as a tax
discount to qualified senior citizens on their
credit. Such credit can be claimed even if the
purchases of medicines pursuant to RA 7432 for
establishment operates at a loss.
a total of ₱ 904,769.
A tax credit generally refers to an amount that is
On April 15, 1997, respondent filed its annual
“subtracted directly from one’s total tax
Income Tax Return for taxable year 1996
liability.” It is an “allowance against the tax itself”
declaring therein net losses. On Jan. 16, 1998
or “a deduction from what is owed” by a
respondent filed with petitioner a claim for tax
taxpayer to the government.
refund/credit of ₱ 904,769.00 allegedly arising
from the 20% sales discount. Unable to obtain A tax credit should be understood in relation to
affirmative response from petitioner, other tax concepts. One of these is tax deduction
respondent elevated its claim to the Court of Tax – which is subtraction “from income for tax
Appeals. The court dismissed the same but upon purposes,” or an amount that is “allowed by law
reconsideration, the latter reversed its earlier to reduce income prior to the application of the
ruling and ordered petitioner to issue a Tax tax rate to compute the amount of tax which is
Credit Certificate in favor of respondent citing CA due.” In other words, whereas a tax credit
GR SP No. 60057 (May 31, 2001, Central Luzon reduces the tax due, tax deduction reduces the
Drug Corp. vs. CIR) citing that Sec. 229 of RA 7432 income subject to tax in order to arrive at the
deals exclusively with illegally collected or taxable income.
erroneously paid taxes but that there are other
A tax credit is used to reduce directly the tax that
situations which may warrant a tax
is due, there ought to be a tax liability before the
credit/refund.
tax credit can be applied. Without that liability,
CA affirmed Court of Tax Appeal's decision any tax credit application will be useless. There
reasoning that RA 7432 required neither a tax will be no reason for deducting the latter when
liability nor a payment of taxes by private there is, to begin with, no existing obligation to
establishments prior to the availment of a tax the government. However, as will be presented
credit. Moreover, such credit is not tantamount shortly, the existence of a tax credit or its grant
to an unintended benefit from the law, but by law is not the same as the availment or use of
rather a just compensation for the taking of such credit. While the grant is mandatory, the
private property for public use. availment or use is not. If a net loss is reported
by, and no other taxes are currently due from, a
business establishment, there will obviously be
Issue: no tax liability against which any tax credit can
be applied. For the establishment to choose the
Whether or not respondent, despite incurring a immediate availment of a tax credit will be
net loss, may still claim the 20% sales discount as premature and impracticable.
a tax credit.
Commissioner of Internal Revenue vs. Central
Luzon Drug Corporation
GR No. 159647, April 15, 2005 Yes, it is clear that Sec. 4a of RA 7432 grants to
senior citizens the privilege of obtaining a 20%
Facts:
discount on their purchase of medicine from any
Respondent is a domestic corporation engaged private establishment in the country. The latter
in the retailing of medicines and other may then claim the cost of the discount as a tax
pharmaceutical products. In 1996 it operated six credit. Such credit can be claimed even if the
(6) drugstores under the business name and style establishment operates at a loss.
“Mercury Drug.” From January to December
A tax credit generally refers to an amount that is
1996 respondent granted 20% sales discount to
“subtracted directly from one’s total tax
qualified senior citizens on their purchases of
liability.” It is an “allowance against the tax itself”
medicines pursuant to RA 7432. For said period
or “a deduction from what is owed” by a
respondent granted a total of ₱ 904,769.
taxpayer to the government.
On April 15, 1997, respondent filed its annual ITR
A tax credit should be understood in relation to
for taxable year 1996 declaring therein net
other tax concepts. One of these is tax deduction
losses. On Jan. 16, 1998 respondent filed with
– which is subtraction “from income for tax
petitioner a claim for tax refund/credit of ₱
purposes,” or an amount that is “allowed by law
904,769.00 alledgedly arising from the 20% sales
to reduce income prior to the application of the
discount. Unable to obtain affirmative response
tax rate to compute the amount of tax which is
from petitioner, respondent elevated its claim to
due.” In other words, whereas a tax credit
the CTA via Petition for Review. CTA dismissed
reduces the tax due, tax deduction reduces the
the same but on MR, CTA reversed its earlier
income subject to tax in order to arrive at the
ruling and ordered petitioner to issue a Tax
taxable income.
Credit Certificate in favor of respondent citing CA
GR SP No. 60057 (May 31, 2001, Central Luzon Since a tax credit is used to reduce directly the
Drug Corp. vs. CIR) citing that Sec. 229 of RA 7432 tax that is due, there ought to be a tax liability
deals exclusively with illegally collected or before the tax credit can be applied. Without
erroneously paid taxes but that there are other that liability, any tax credit application will be
situations which may warrant a tax useless. There will be no reason for deducting
credit/refund. the latter when there is, to begin with, no
existing obligation to the government. However,
CA affirmed CTA decision reasoning that RA 7432
as will be presented shortly, the existence of a
required neither a tax liability nor a payment of
tax credit or its grant by law is not the same as
taxes by private establishments prior to the
the availment or use of such credit. While the
availment of a tax credit. Moreover, such credit
grant is mandatory, the availment or use is not.
is not tantamount to an unintended benefit from
the law, but rather a just compensation for the If a net loss is reported by, and no other taxes are
taking of private property for public use. currently due from, a business establishment,
there will obviously be no tax liability against
which any tax credit can be applied. For the
ISSUE: W/N respondent, despite incurring a net establishment to choose the immediate
loss, may still claim the 20% sales discount as a availment of a tax credit will be premature and
tax credit. impracticable. Nevertheless, the irrefutable fact
remains that, under RA 7432, Congress has
RULING: granted without conditions a tax credit benefit to
all covered establishments. However, for the
losing establishment to immediately apply such
credit, where no tax is due, will be an
improvident usance.

In addition, while a tax liability is essential to the

availment or use of any tax credit, prior tax
payments are not. On the contrary, for the
existence or grant solely of such credit, neither a
tax liability nor a prior tax payment is needed.
The Tax Code is in fact replete with provisions
granting or allowing tax credits, even though no
taxes have been previously paid.

Petition is denied.