The doctrine of Immunity of State Instrumentalities

The Doctrine of Immunity of State Instrumentalities was first put forth in the US Supreme Court in the case of McCulloch v. Maryland. At that junction, the centre in the US was comparatively weaker than the State Government, and the US Supreme Court had to decide on the validity of a tax levied by a state on the Bank of United States which had been incorporated by the Congress. At this point, the court presented this doctrine and stated that “The states had no power, taxation or otherwise,” to retard, hitch, burden, or in any way control, the operation of constitutional laws enforced by Congress to execute the powers vested in the general government.”  The doctrine’s application was restricted later on by the Supreme Court as it was subjected to extreme usage by private institutions associated with the state.

India is characterized by a federal feature in its functioning where each unit is given independence and power to legislate wherever it is deemed to be necessary. But it is also necessary that the instrumentalities of the centre of the units of our federal national maintain non-interference which if exists will hamper the stability of the state. As such, there can be the destruction of the existence of the state, too, if they are given mutual taxation power. This “principle of mutual tolerance and non-interference” is coined as the Doctrine of Immunity. In India, this doctrine finds its application with respect to immunity from taxation of states by states. The doctrine finds its place in Article 285 and Article 289 of the Constitution of India.

Article 285 states that “1) The property of the union may be provided by Parliament by law, otherwise exempt from all taxes levied by the state or by any authority within the state.

(2) Nothing in clause (1) shall, unless Parliament provides otherwise by law, prevent any authority within a State from levying any tax on any property of the union, for which Such property is deemed liable or as liable before the commencement of this constitution, as long as the state continues to be taxed. “

The centre’s property thus enjoys exemption from imposition of tax by a state or authority of such state. Parliament has got the power to lift this ban. The property includes “land, buildings, chattel, shares, loans, everything that has a value of money, and every kind of property is movable or immovable and tangible or intangible”. This property is used for sovereign or commercial activity. The Corporations which are opened by the centre do not hold immunity from such taxation as they have their own legal entity that is not the same as that of the centre.

Article 289 states that “(1) The property and income of a state shall be exempt from central taxation. (2) Nothing in clause (1) shall prevent the union from enforcing, or authorizing any tax to the extent, if any, by law in the form of Parliament in relation to any trade or business of any kind, Or the State Government, or any business connected with any operation, or in connection with property used or occupied for the purposes of such trade or occupation, or arising out of or arising in connection therewith Any income. (3) Nothing in clause (2) shall apply to any trade or business, or to any class of business or occupation, which Parliament may by law declare incidental to ordinary functions. Government. “

The state’s property and any income enjoy exemption from any taxation that may be imposed by the centre. This input of money may be from the discharge of any sovereign or commercial activity. The commercial activities of such a state may be subject to taxation if the Parliament decides to. But if the Parliament declares any of such activities incidental to that of the Government’s, it enjoys exemption. It must be noted that any of such income of the authorities within the state does not have an exemption from central taxation. Likewise, even the institution that the state owns may be taxed.

In article 287 and 288 of the constitution also we find the provision of taxation with respect to state and union. Under Article 287, “no State law can impose, unless Parliament provides otherwise, a tax on the consumption or sale of electricity which is (a) consumed by the Government of India or a railway company operating that railway, or sold for such consumption.” Under Article 288, “no State law in force at the time of the inauguration of the constitution was competent to impose a tax (unless the President by order provided otherwise) The storage, generation, consumption, distribution of any water or electricity stored by any authority established by Parliament to regulate or develop any inter-state river or river valley. Or in connection with the sale.”

In the case of West Bengal v Union of India, The matter was adjudicated with respect to whether the centre could take into acquisition those lands bearing coal in the State territories exercising power under the Coal Bearing Areas Act of 1957. The court rules in favour of the union. The court rejected the Doctrine of Immunity in this case and stated that such power was only subject to express prohibition. In the case of In Re Sea Customs Act, the question that the court dealt with was whether the exemption of state would extend to imports and manufactures of the state from customs of the centre. The court held that such exemption was not extended and held that, “The duties of customs, held by the court, were not a tax on property but an impost on imports which formed an essential aspect of the Central power to regulate foreign trade. Similarly, excise is not a tax on property but on the process of manufacture and production.”

Later in the case of Andhra Pradesh State RT Corporation v Income Tax Officer, it was held that,” a corporation had a personality of its own, distinct from its shareholders and so also from its creator, the state. Therefore, the income derived by a corporation could not be regarded as the income of the state, and the constitutional provision exempting State income from Central-taxation could not be extended to grant an exemption to the income of a corporation. It made no difference that under the relevant law the corporation was required to turn over a part of its income to the state to be spent on road development, as this did not render the corporation’s income as that of the state.”

It can be said that the doctrine functions in favour of cooperative federalism where the centre and the states work collectively to achieve the welfare of the nation. The application of the same has been restrictive as observed from the various judicial decisions and thus proves to maintain financial independence amongst the states from states and centre.