Facts: City of Cabanatuan filed a collection suit against NAPOCOR, a government-owned and

controlled corporation demanding that the latter pay the assessed franchise tax due, plus

surcharge and interest. It alleged that NAPOCOR’s exemption from local taxes has already

been withdrawn by the Local Government Code. NAPOCOR submitted that it is not liable to pay

an annual franchise because the city’s taxing power is limited to private entities that are

engaged in trade or occupation for profit, and that the NAPOCOR Charter, being a valid

exercise of police power, should prevail over the LGC.

Issue: Whether NAPOCOR is liable to pay annual franchise tax to the City of Cabanatuan

Held: Yes. The power to tax is no longer vested exclusively on Congress; local legislative

bodies are now given direct authority to levy taxes, fees and other charges. Although as a

general rule, LGUs cannot impose taxes, fees or charges of any kind on the National

Government, its agencies and instrumentalities, this rule now admits of an exception, i.e., when

specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the

aforementioned entities. Nothing prevents Congress from decreeing that even instrumentalities

or agencies of the government performing governmental functions may be subject to tax.

A franchise is a privilege conferred by government authority, which does not belong to citizens

of the country generally as a matter of common right. It may be construed in two senses: the

right vested in the individuals composing the corporation and the right and privileges conferred

upon the corporation. A franchise tax is understood in the second sense; it is not levied on the

corporation simply for existing as a corporation but on its exercise of the rights or privileges

granted to it by the government. NAPOCOR is covered by the franchise tax because it

exercises a franchise in the second sense and it is exercising its rights or privileges under this

franchise within the territory of the City.