Part XII - Finance & Property • Article

Article 289 Simplified: Exemption of property and income of a State from Union taxation

Article 289 provides tax immunity for State Governments from Central (Union) taxes. The property and sovereign income of a State are completely exempt from Union taxes. However, if a State government runs a commercial business (like a state-owned enterprise), the Union can tax that business, unless Parliament declares that specific business to be an ordinary function of government.

Official 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 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.

Simple Meaning

Explain Like Ten

Just like the states can't tax the central government, the central government can't tax the states' money or land. But if a state government starts running a regular shop or business to make profit, the central government can tax that business.

Student Mode

Article 289 governs reciprocity of tax immunity (State immunity from Union taxation). Clause (1) exempts State property and sovereign revenue from Union taxes. Clause (2) creates an exception: the Union may tax commercial trades or businesses run by State Governments. Clause (3) exempts from Union taxation any trade or business that Parliament declares to be 'incidental to the ordinary functions of Government' (e.g., public transport or food distribution).

Example

The Central Government cannot charge income tax on the tax revenues or treasury income of the Karnataka State Government, nor tax Maharashtra's state government offices. However, if Goa's state government starts running a commercial resort business for tourists, the Central Government can charge corporate/GST taxes on that business under Article 289(2).

Key Takeaway

State government property and administrative income are exempt from Central taxes, but their commercial business activities can be taxed.

FAQs

Can the Union tax the sovereign income of a State (like stamp duty collected by it)?

No, sovereign revenues and administrative income are completely exempt under Article 289(1).

Can the Union tax public transport run by a State?

If Parliament declares it to be an ordinary/essential function of the government under Article 289(3), it is exempt; otherwise, it is taxable as a commercial trade.

Quiz

Under Article 289, what activity of a State Government is subject to Union taxation?

Answer: Commercial trade or business

Who can declare a state business to be 'incidental to the ordinary functions of government', exempting it from Union tax?

Answer: Parliament by law