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Inter Government Tax Immunity

Inter-governmental tax immunities in Indian law prevent one level of government from taxing the property or income of another without explicit parliamentary authorization, as outlined in Articles 285 and 289. These provisions aim to maintain fiscal autonomy and uphold the federal structure of India, with judicial interpretations reinforcing their importance. While the introduction of GST has altered some aspects of inter-governmental taxation, the constitutional protections remain significant.

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161 views4 pages

Inter Government Tax Immunity

Inter-governmental tax immunities in Indian law prevent one level of government from taxing the property or income of another without explicit parliamentary authorization, as outlined in Articles 285 and 289. These provisions aim to maintain fiscal autonomy and uphold the federal structure of India, with judicial interpretations reinforcing their importance. While the introduction of GST has altered some aspects of inter-governmental taxation, the constitutional protections remain significant.

Uploaded by

Abhay Mishra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Inter-Governmental Tax Immunities in Indian Law

1. Introduction

Inter-governmental tax immunities refer to the constitutional principle that one level of
government (Union or State) cannot tax the instrumentalities or property of the other without
express authorization. This doctrine preserves federalism by ensuring autonomy between the
Union and States.

2. Constitutional Basis
Article 285 – Exemption of Union Property

• Article 285(1): "The property of the Union shall, save insofar as Parliament may by
law otherwise provide, be exempt from all taxes imposed by a State or by any
authority within a State."
• Key Point: States cannot tax Union property unless Parliament authorizes it.

Article 289 – Exemption of State Property

• Article 289(1): "The property and income of a State shall be exempt from Union
taxation."
• Article 289(2): Exception: The Union can tax the income of a State from commercial
ventures if Parliament so provides by law.
• Key Point: Union cannot tax State property or income unless it's a commercial
activity and Parliament enacts a law enabling it.

3. Purpose of These Provisions

• To maintain fiscal and functional autonomy of each government.


• To prevent financial coercion of one government by another.
• To uphold the federal structure of India.

4. Judicial Interpretation
A. Union Immunity – Article 285

Case: Union of India v. State of Punjab, AIR 1961 SC 552

• Issue: Whether property owned by the Union and leased to private entities can be
taxed by the State.
• Held: Immunity under Article 285 applies even if the property is leased; unless
Parliament permits, States cannot tax Union property.
Case: State of West Bengal v. Union of India, AIR 1963 SC 1241

• Held: The Union has supremacy in legislative and executive fields. Inter-
governmental immunities are essential to this balance.

B. State Immunity – Article 289

Case: State of West Bengal v. Union of India (1963)

• Reiterated that State property and income are immune from Union taxation unless
derived from commercial activity and so taxed by law.

Case: Bangalore Water Supply v. ITO, AIR 1965 SC 1240

• Held: If a State carries on commercial activities, its income can be taxed by the Union
provided there is a specific law (per Article 289(2)).

5. Commercial Activity Exception (Article 289(2))

• Union can tax the income of a State from trading or business activities.
• Illustration: If a State runs a transport company, its profits may be taxable if
Parliament enacts such a law.

6. Practical Application and Limitations


Property Tax by Municipalities

• Municipalities derive their taxing power from State laws.


• Union property is immune under Article 285 unless Parliament authorizes the levy.

Case: NDMC v. State of Punjab, AIR 1997 SC 2847

• The Supreme Court upheld that the municipal authority could not levy tax on Union
property unless Parliament permitted it.

Inter-Governmental Contracts and GST

• Under the GST regime, inter-governmental transactions are generally exempt from
tax if there is no consideration.
• Article 246A and Article 279A allow both Centre and States to legislate on GST,
reducing traditional inter-governmental immunities.
7. Comparative Notes

• The Indian Constitution is influenced by Australian and American doctrines on inter-


governmental immunity.
• However, unlike the absolute immunity in the U.S., the Indian system permits mutual
taxation with legislative authorization (e.g., Articles 285 and 289).

8. Key Distinctions
Feature Article 285 Article 289

Applies to Union property State property/income

Taxing
State/Local Union
authority

Default rule Exempt from State tax Exempt from Union tax

Parliament may allow Income from commercial activity if Parliament


Exception
tax enacts law

Protect Union
Objective Protect State revenues
property

9. Current Challenges

• Lack of clear definitions for "property", "income", and "commercial activity" can lead
to disputes.
• GST has reduced the need for separate immunities but hasn't overridden constitutional
protections under Articles 285 and 289.

10. Conclusion

Inter-governmental tax immunities form a crucial part of Indian federalism. While they
ensure mutual independence of the Union and States, constitutional provisions like Articles
285 and 289 also allow for flexibility through parliamentary legislation. Judicial
interpretations have largely upheld the sanctity of these provisions, reinforcing the federal
balance envisioned by the Constitution.

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