Article 289 of the Indian Constitution is a crucial provision that defines the fiscal relationship between the Union and the States, specifically addressing the immunity of State property and income from Union taxation. It establishes a general rule of exemption while simultaneously providing exceptions, reflecting the complex balance of powers in the Indian federal structure.
This article, located in Part XII of the Constitution dealing with Finance, Property, Contracts, and Suits, is essential for understanding the fiscal autonomy of the states and the limitations on the taxing power of the Union government concerning state assets and activities.
Original Text
(1) The property and income of a State shall be exempt from Union taxation.
(2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition by any such authority as is mentioned in clause (2) of article 285, a tax on any trade or business of any kind carried on by, or on behalf of, a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith.
(3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of Government.
Detailed Explanation
Article 289 lays down the principles governing the taxation of State property and income by the Union government. It operates through three clauses, each building upon or providing an exception to the previous one.
Clause (1) establishes the general rule: The property and income belonging to a State are immune from being taxed by the Union. This is a fundamental aspect of federal comity, ensuring that the Union’s taxing power does not undermine the financial base of the constituent States. “Property” here includes both movable and immovable property. “Income” includes all forms of revenue accruing to the State government.
Clause (2) introduces an exception to the general rule established in Clause (1). It allows the Union to impose taxes, or authorize other authorities mentioned in Article 285(2) (like local authorities in a Union Territory or Cantonment Board), on any trade or business carried on by or on behalf of a State. This includes operations connected with such trade or business, property used for it, and income derived from it. This clause recognises that while governmental property and income are exempt, states engaging in commercial activities akin to private entities should not necessarily be immune from taxes that apply generally to such activities. The reference to Article 285(2) seems slightly misplaced or intended for symmetry with Article 285 which deals with exemption of Union property from State taxation and includes similar provisions for local authorities. However, the core power granted by 289(2) is for the Union to tax State trade/business.
Clause (3) provides an exception to the exception mentioned in Clause (2). It states that the power of the Union to tax State trade or business under Clause (2) shall not apply if Parliament, by law, declares such trade or business, or a class of such trade or business, to be “incidental to the ordinary functions of Government.” This means Parliament has the authority to specify which commercial activities undertaken by a State are considered integral to its governmental functions and thus should remain immune from Union taxation, despite being a trade or business. This clause gives Parliament the power to define the scope of immunity for State commercial activities.
The combined effect of these clauses is a nuanced position: State property and core governmental income are immune (Clause 1). However, States engaging in commercial activities (trade/business) may be taxed by the Union on those activities (Clause 2), unless Parliament deems those specific commercial activities to be incidental to ordinary government functions, in which case they regain immunity (Clause 3).
Detailed Notes
- Article 289(1):
- Grants exemption to State property and income from Union taxation.
- Applies to all property (movable and immovable) owned by a State.
- Applies to all income generated by a State government.
- Fundamental principle ensuring fiscal autonomy of States in the federal structure.
- Article 289(2):
- Provides an exception to the exemption in Clause (1).
- Allows the Union to impose tax on trade or business carried on by or on behalf of a State.
- Includes taxation of operations connected with the trade/business.
- Includes taxation of property used or occupied for the trade/business.
- Includes taxation of income accruing from the trade/business.
- Basis: States engaging in commercial activities similar to private entities may be subject to taxation on those activities.
- Reference to Article 285(2) authorities means Union can potentially authorize local authorities in Union Territories to impose such taxes, but the primary power granted is for the Union itself.
- Article 289(3):
- Provides an exception to the exception in Clause (2).
- Union’s power under Clause (2) is negated if Parliament declares the trade/business (or class of trade/business) to be “incidental to the ordinary functions of Government”.
- Parliament makes this declaration by law.
- Gives Parliament the power to determine which State commercial activities are treated as sovereign/governmental and thus immune from Union tax.
- Examples of activities Parliament might declare incidental could include State lotteries (though contentious), certain public transport services deemed essential services, etc., depending on legislative intent.
Additional Comments
- This article, along with Article 285 (exemption of Union property from State taxation), forms the backbone of the mutual immunity from taxation between the Union and the States concerning their properties and income.
- The distinction between “ordinary functions of Government” and “trade or business” is crucial and can be a subject of interpretation, although Clause (3) gives Parliament the final say through legislation regarding “incidental” activities.
- The rationale behind taxing State trade/business is to ensure a level playing field with private enterprises and prevent States from gaining an unfair advantage in commercial sectors due to tax immunity.
- The power under Clause (3) allows Parliament to define the scope of State immunity, highlighting the Union’s overarching legislative authority in this fiscal matter.
- Judicial interpretation has sometimes been required to distinguish between sovereign/governmental functions and commercial activities carried on by States, although Clause (3) empowers Parliament to settle this specifically for tax immunity purposes under Article 289.
Summary
Article 289 of the Indian Constitution exempts the property and income of a State from Union taxation. This immunity is not absolute; Clause (2) permits the Union to tax any trade or business carried on by a State, including related operations, property, and income. However, Clause (3) carves out an exception to this exception, allowing Parliament by law to declare any such trade or business, or class thereof, as incidental to the ordinary functions of Government, thereby restoring its immunity from Union taxation. This framework balances the fiscal autonomy of States with the Union’s taxing power over commercial activities, with Parliament having the final say on defining governmental functions for tax purposes.