The Constitution of India
Article 289
Exemption of property and income of a State from Union taxation
(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 of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government 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.
Why this exists
Article 289 reflects the federal principle that the Union and the States are co-equal sovereigns within their own spheres, and neither should be able to tax the other's core governmental property or income. This mirrors similar immunities in other federations like the United States and Australia. At the same time, the framers recognized that States sometimes run commercial ventures (like transport corporations or trading operations) that go beyond core governance, and it seemed unfair to let such commercial activity escape taxation just because a State runs it. So the Article balances federal courtesy with practical taxation needs.
How courts read it
The Supreme Court clarified the scope of this immunity in Andhra Pradesh State Road Transport Corporation v. Income Tax Officer (1964), holding that a statutory corporation, even if wholly owned and controlled by a State, is a separate legal entity distinct from 'the State' itself. Therefore, its income is not automatically exempt under Article 289(1) merely because the State owns it. Courts have generally read the Article narrowly, protecting only property and income that truly belongs to the State government directly, not to independent bodies or corporations it creates.
Common misconceptions
- Myth: Any company or corporation owned by a State government is automatically tax-exempt under Article 289.
Fact: Courts have held that state-owned corporations are separate legal entities, not 'the State' itself, so their income is not automatically protected under Article 289(1). - Myth: The Union can never tax anything connected to a State government.
Fact: Clause (2) allows Parliament to tax a State's trade or business activities and related property/income, if Parliament passes a law to that effect.