Inter-Governmental Tax Immunities in India

There are certain provisions in the constitution on ‘immunity from mutual taxation’. These are as follows:

Exemption of Central Property from State Taxation

The property of Centre is exempted from all taxes imposed by a state or any authority within a state like municipalities, district boards, panchayats and so on. But, the Parliament is empowered to remove this ban. The word ‘property’ includes lands, buildings, chattels, shares, debts, everything that has a money value, and every kind of property movable or immovable and tangible or intangible. Further, the property may be used for sovereign (like armed forces) or commercial purposes.

The corporations or the companies created by the Central government are not immune from state taxation or local taxation. The reason is that a corporation or a company is a separate legal entity.

Exemption of State Property or Income from Central Taxation

The property and income of a state is exempted from Central taxation. Such income may be derived from sovereign functions or commercial functions. But the Centre can tax the commercial operations of a state if Parliament so provides. However, the Parliament can declare any particular trade or business as incidental to the ordinary functions of the government and it would then not be taxable.

We note here that the property and income of local authorities situated within a state are not exempted from the Central taxation. Similarly, the property or income of corporations and companies owned by a state can be taxed by the Centre.

The Supreme Court, in an advisory opinion24 (1963), held that the immunity granted to a state in respect of Central taxation does not extend to the duties of customs or duties of excise. In other words, the Centre can impose customs duty on goods imported or exported by a state, or an excise duty on goods produced or manufactured by a state.