Part XII: Finance, Property, Contracts and Suits

Article 289: Exemption of State Property and Income from Union Taxation

Original Article:

(1) The property and income of a State shall be exempt from Union taxation.

(2) However, nothing in clause (1) shall prevent the Union from imposing taxes on a trade or business carried on by or on behalf of a State, or income arising from such trade or business.

(3) Parliament may declare by law that certain trades or businesses incidental to the functions of the State remain exempt from Union taxation.

Explanations:

Article 289 provides immunity to state property and income from Union taxes, preserving state autonomy. However, it allows exceptions for state-run trade or business activities, ensuring fairness in the taxation system for revenue-generating ventures.

Key Provisions:

Clause 1: General Tax Exemption for States

State-owned property and income are shielded from Union taxation, supporting state financial autonomy within the federal structure.

• This exemption covers assets like government buildings, lands, and revenues directly managed by the State.

Clause 2: Taxation on State Trades or Businesses

Trade or business activities conducted by states are subject to Union taxation unless declared incidental to government functions.

• Ensures that states do not gain an unfair advantage in commercial sectors over private enterprises.
• Examples include state-run transportation or manufacturing businesses.

Clause 3: Incidental Functions and Exemptions

Parliament may declare specific state activities as incidental to governance, thereby exempting them from taxation.

• Supports essential state functions without imposing financial burdens.
• Examples include healthcare services, educational institutions, or public welfare initiatives.

Real-Life Examples:

For instance, state-owned hospitals and schools are exempt from Union taxation under Clause (1). However, a state-owned transportation company generating revenue may be subject to Union taxation under Clause (2).

Amendments:

Article 289 has remained unamended, reflecting its foundational role in defining state-Union financial relations.

Historical Significance:

The framers of the Constitution emphasized the need for financial autonomy of states to preserve the federal balance. Article 289 was designed to respect this autonomy while allowing for a fair taxation system in revenue-generating sectors.

Debates and Deliberations:

During the Constituent Assembly debates, Dr. B.R. Ambedkar stressed the importance of exempting state property and income from Union taxation to ensure cooperative federalism. Members discussed potential revenue impacts and safeguards for fairness.

• Shri P.T. Chacko suggested ensuring state autonomy while limiting tax exemptions to non-commercial activities.
• Shri Krishnaswamy proposed distinguishing between essential state functions and revenue-generating businesses.

References:

• Constitution of India: Comprehensive details on Article 289.
• Constituent Assembly Debates: Discussions on financial autonomy and taxation policies.