Restrictions on Taxing Power: Articles 276, 285 to 289

Even where a legislature has a tax entry, the Constitution limits how it may use it. Article 276 caps professions tax. Articles 285 and 289 create mutual immunities, protecting Union property from State taxes and State property and income from Union taxes. Article 286 stops a State from taxing supplies outside its territory or in the course of import or export, and Articles 287 and 288 protect certain uses of electricity and water. This note covers each restriction and the leading cases.

1. The Restrictions at a Glance

Figure 1: Articles 276 and 285 to 289

2. Professions Tax: Article 276

• Clause (1). A State law imposing taxes on professions, trades, callings or employments, for the State or a local authority, is not invalid on the ground that it relates to a tax on income.
• Clause (2). The total payable by one person to the State, or to any one local authority in it, cannot exceed Rs 2,500 per annum; the original cap of Rs 250 was raised by the Sixtieth Amendment, 1988.
• Clause (3). The State's power does not limit Parliament's power to tax income arising from the same professions, trades, callings or employments.

3. Sales and Supply: Article 286

• Clause (1). No State law may impose a tax on the supply of goods or services, or both, where the supply takes place outside the State, or in the course of import into or export out of India.
• Clause (2). Parliament may by law formulate principles for deciding when a supply takes place in either of those ways.
• After the 101st Amendment. The Article now speaks of supply rather than sale or purchase of goods, aligning it with GST; the place of supply rules in the IGST Act give effect to clause (2) (Topic 28)

4. Intergovernmental Immunities

Figure 2: Article 289

• Article 285. Property of the Union is exempt from all taxes imposed by a State or by any authority within a State, unless Parliament by law provides otherwise; taxes lawfully levied on such property before the Constitution may continue until Parliament provides otherwise.
• Article 289. The property and income of a State are exempt from Union taxation. Parliament may, however, tax a trade or business carried on by or on behalf of a State, unless it declares that trade or business incidental to the ordinary functions of government.
• Articles 287 and 288. States may not tax electricity consumed by the Government of India or a railway, or sold to them for such use, except as Parliament provides; Article 288 restricts State taxes on water or electricity stored, generated, distributed or sold by authorities set up under laws on inter-State rivers.

5. Leading Cases

Figure 3: Scope of the immunities

In In re Sea Customs Act (1963), a nine judge bench held that the immunity in Article 289(1) covers only taxes on property and income. Customs and excise duties, which are levied on goods and are not taxes on property, can be imposed on goods imported or manufactured by a State. In New Delhi Municipal Council v State of Punjab (1997), a nine judge bench held that municipal taxes imposed in a Union Territory under a law made by Parliament are Union taxes, so property of the States in Delhi is immune from them under Article 289.

6. Frequently Asked Questions

What is the maximum professions tax a State can impose?

Rs 2,500 per person per annum under Article 276(2), payable to the State or to any one local authority in it.

Can the Union levy customs duty on goods imported by a State?

Yes. In re Sea Customs Act (1963) held that Article 289 exempts only taxes on the property and income of a State, not duties on goods such as customs and excise.

7. Related Topics

• Topic 3: Distribution of Taxing Powers. The entries these provisions limit.
• Topic 6: Fiscal Federalism and the Finance Commission. Sharing the revenue.
• Topic 28: Place and Time of Supply, IGST Act. Article 286 in practice.