Limits on the taxing power: inter-governmental immunity, fundamental rights, the commerce clause and delegation

1. Immunity of State agencies and instrumentalities

Article 285: Union property exempt from State taxes. The property of the Union is exempt from all taxes imposed by a State or by any authority within a State, unless Parliament by law otherwise provides. Clause (2) saves taxes that were being lawfully levied on such property immediately before the Constitution. Railways and other Union property therefore pay no municipal property tax, though local bodies often receive service charges in lieu.

Article 289: State property and income exempt from Union taxes. The property and income of a State are exempt from Union taxation (clause (1)). But Parliament may tax the trade or business of any kind carried on by or on behalf of a State, and property and income connected with it (clause (2)), unless Parliament declares a particular trade or business to be incidental to the ordinary functions of government (clause (3)).

The immunity covers taxes on property and income only. In In re the Bill to Amend Section 20 of the Sea Customs Act, 1878 and Section 3 of the Central Excises and Salt Act, 1944, 1963 INSC 147, AIR 1963 SC 1760, a nine-judge Bench advised, on a reference under Article 143, that Article 289(1) does not protect States from customs duty on goods they import or excise duty on goods they manufacture. Those duties are taxes on the act of import or manufacture, not on property as such, so the Union may levy them on the States.

In New Delhi Municipal Council v. State of Punjab, 1996 INSC 1513, (1997) 7 SCC 339, the question was whether properties of various States situated in Delhi were liable to municipal property tax levied under a law made by Parliament for the Union territory. The majority held that the levy was, in law, a Union tax, and that Article 289(1) exempted the States’ properties from it.

2. Other limits on State taxes

• Article 276(2): tax on professions, trades, callings and employments cannot exceed ₹2,500 per person per year.
• Article 286 (as amended in 2016): no State law may tax a supply of goods or services that takes place outside the State or in the course of import into or export out of India. Parliament may lay down principles for determining when a supply takes place in any of these ways; the place-of-supply rules in sections 10 to 13 of the IGST Act, 2017 do this.
• Articles 287 and 288: States may not tax electricity consumed by or sold to the Government of India or the railways, and taxes on water or electricity by authorities established under Union law need the President’s assent.

3. Fundamental rights and taxation

A taxing statute is a law under Article 13 and must satisfy Part III, though courts allow the legislature a wide latitude in choosing what to tax and how to classify.

• Article 14. In Kunnathat Thathunni Moopil Nair v. State of Kerala, 1960 INSC 255, AIR 1961 SC 552, the Travancore-Cochin Land Tax Act imposed a flat rate per acre on all land, whatever its quality or yield, with no machinery for objection. The Court struck it down: treating productive and barren land alike was unequal treatment of unequals, and a levy that could exceed the income of the land was confiscatory. The rule is that classification for tax is permissible if it has a rational basis; uniform treatment of unlike things can itself violate Article 14.
• Article 19(1)(g). A tax is not a restriction on the right to carry on a trade merely because it is a burden, but a tax so heavy that it makes the trade impossible may be an unreasonable restriction.
• Article 27. No person can be compelled to pay a tax the proceeds of which are appropriated for the promotion of any particular religion. A fee for services to religious institutions is not hit (Shirur Mutt, 1954).
• Article 20(1) does not bar retrospective taxation (see the previous note on retrospective taxation).

4. Commerce clause, inter-State commerce and compensatory tax

Article 301 declares that trade, commerce and intercourse throughout India shall be free. Article 302 lets Parliament impose restrictions in the public interest. Article 304(a) lets a State impose on goods from other States any tax that similar goods made in the State are subject to, so long as there is no discrimination; Article 304(b) allows reasonable restrictions in the public interest, with the President’s previous sanction for the Bill.

In Atiabari Tea Co. Ltd. v. State of Assam, 1960 INSC 163, AIR 1961 SC 232, the Court held that a tax which directly and immediately restricts the movement of trade (there, a tax on tea carried through Assam) is a restriction under Article 301 and must satisfy Article 304(b).

In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, 1962 INSC 127, AIR 1962 SC 1406, a seven-judge Bench narrowed this. Regulatory measures and compensatory taxes for the use of trading facilities such as roads and bridges do not hamper trade; they facilitate it, and so are outside Article 301. This was the compensatory tax doctrine: a tax is compensatory if it is a charge for facilities provided to traders and bears a reasonable relation to the cost of providing them.

A nine-judge Bench re-examined the subject in Jindal Stainless Ltd. v. State of Haryana, 2016 INSC 1019, (2017) 12 SCC 1, on State entry taxes. The majority held:

• taxes simpliciter are not within the expression “restrictions” in Article 301; only a tax that is discriminatory against goods from other States offends Part XIII;
• a non-discriminatory tax falling within Article 304(a) is valid without Presidential sanction;
• the compensatory tax test of Automobile Transport, as elaborated in later cases, was rejected as a test of validity; whether a tax is compensatory is no longer the question.

5. Delegation of taxing power

The legislature cannot hand over its essential function of deciding what to tax and on what policy. It may leave the rate or details to a delegate if it provides guidance.

• Devi Das Gopal Krishnan v. State of Punjab, 1967 INSC 100, AIR 1967 SC 1895: a sales-tax law that left the rate to the executive with no guidance was held to be excessive delegation, though the later amendment fixing a ceiling was valid.
• Municipal Corporation of Delhi v. Birla Cotton, Spinning and Weaving Mills, 1968 INSC 47, AIR 1968 SC 1232: power given to an elected municipal corporation to fix the rate of an optional tax, within a statutory framework and for its own needs, was upheld. Elected local bodies are accountable to the taxpayers, which supplies the guidance.
• Articles 243H and 243X allow State legislatures to authorise Panchayats and Municipalities to levy and appropriate taxes, duties, tolls and fees, subject to such procedure and limits as the law specifies. Local bodies have no taxing power of their own.
• Under GST, rates are fixed by notification (section 9(1) of the CGST Act within a ceiling of 20%; section 5(1) of the IGST Act within 40%) on the recommendation of the GST Council. The ceiling in the statute is the guidance that keeps the delegation valid.

6. Problem

State X imposes an entry tax of 4% on motor vehicles brought into the State from other States for sale. Vehicles manufactured in State X pay no corresponding tax. The State says the proceeds are spent on roads used by the dealers. Is the tax valid?

Issue. Whether the levy offends the freedom of trade under Article 301, and whether it is saved as compensatory.

Law. Under Jindal Stainless (2016), a tax is hit by Part XIII only if it discriminates against goods from other States; Article 304(a) permits a State to tax imported goods only if similar goods made in the State are subject to the same tax. The compensatory tax defence from Automobile Transport is no longer the test.

Application. The tax falls only on vehicles from outside the State; local vehicles bear nothing comparable. That is discrimination against inter-State trade. The argument that the money is spent on roads would have mattered under the old compensatory test, but it cannot save a discriminatory levy today. Nor is there anything to suggest the Bill received the President’s previous sanction under Article 304(b).

Conclusion. The levy is invalid as discriminatory under Articles 301 and 304(a). (In practice an entry tax on goods would now also be barred by the omission of List II Entry 52 in 2016, but the question tests Part XIII.)

How this is examined

January 2026 (100-mark paper) Q. 8(a) set a short note on compensatory tax. February 2025 Q. 1(a) asked for the power of taxation and its constitutional limitations. The syllabus names immunity of State agencies, fundamental rights and taxation, the commerce clause, and delegation to State legislatures and local bodies, any of which can come as a 6-mark note.

For the essay on limitations, use the headings of this note in order and give one case under each. For immunity, the Sea Customs reference is the case examiners expect: it shows the immunity is limited to taxes on property and income.