Actual Article
Article 289: Exemption of property and income of a State from Union taxation
- The property and income of a State shall be exempt from Union taxation.
- Nothing in clause (1) shall prevent the Union from imposing, or authorizing 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.
- Nothing in clause (2) applies 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.
UPSC Notes for Article 289
Explanation:
- Exemption from Union Taxes: Clause (1) of Article 289 exempts the property and income of a State from Union taxation.
- Trade or Business Exception: Clause (2) allows the Union to impose taxes on trade or business carried on by a State government or operations connected with it, as well as on property used for such trade or business and the income arising from it, if Parliament so provides by law.
- Government Functions Exception: Clause (3) specifies that the exception in clause (2) does not apply to any trade or business that Parliament declares incidental to the ordinary functions of government.
Key Points:
- State Autonomy: Article 289 ensures the financial autonomy of States by exempting their property and income from Union taxation.
- Taxation of State Enterprises: The Union can tax trade or business activities conducted by State governments, ensuring that such commercial activities are subject to taxation like private enterprises.
- Ordinary Government Functions: Trade or business activities incidental to government functions remain exempt from Union taxation, maintaining the exemption for activities integral to governance.
Important Cases and Commissions Related to Article 289
Cases:
- New Delhi Municipal Council vs. State of Punjab (1997): The Supreme Court ruled that the income derived by the State from trade or business activities can be subjected to Union taxation, affirming the principles laid out in Article 289.
- State of Andhra Pradesh vs. NTPC (2002): The case highlighted the scope of taxation on business activities of State governments and clarified the applicability of Article 289.
Commissions:
- Finance Commission: Reviews and recommends measures regarding the financial relations between the Union and the States, considering the exemptions and exceptions under Article 289.
- Taxation Enquiry Commission: Examines the impact of taxation policies on State enterprises and recommends measures for equitable taxation.
Important Reports Related to Article 289:
- Finance Commission Reports: Analyze the financial autonomy of States and recommend measures to balance State and Union taxation policies.
- Reports by Taxation Enquiry Commission: Discuss the implications of taxing State enterprises and provide guidelines for fair and effective taxation.
Previous Year Prelims Questions Related to Article 289
- (UPSC Prelims 2016) What does Article 289 of the Indian Constitution exempt from Union taxation?
- A. Income of private enterprises
- B. Property and income of a State
- C. Income from agricultural activities
- D. Income of foreign companies Correct Answer: B. Property and income of a State
- (UPSC Prelims 2018) According to Article 289, when can the Union impose taxes on the trade or business of a State?
- A. Never
- B. Only if authorized by Parliament by law
- C. Always
- D. Only during a financial emergency Correct Answer: B. Only if authorized by Parliament by law
Previous Year Mains Questions Related to Article 289
- Mains 2016: “Discuss the significance of Article 289 in ensuring the financial autonomy of States. How does this article balance the interests of State governments and the Union in the context of taxation?”
- Mains 2019: “Evaluate the impact of Union taxation on trade or business activities conducted by State governments under Article 289. What are the potential benefits and challenges of this taxation policy?”
Additional Insights:
- Promoting State Autonomy: Article 289 plays a crucial role in promoting the financial autonomy of States by exempting their property and income from Union taxes.
- Equitable Taxation: By allowing the Union to tax State-run commercial activities, the article ensures equitable taxation policies, placing State enterprises on a similar footing with private enterprises.
- Supporting Governance: The exemption for activities incidental to government functions ensures that essential government operations remain financially unaffected by Union taxation.
Understanding Article 289 is crucial for UPSC aspirants as it provides insights into the mechanisms for exempting State property and income from Union taxation, emphasizing the importance of financial autonomy and equitable taxation. This knowledge is essential for both preliminary and main examinations, offering a comprehensive understanding of the financial provisions and their impact on governance within the Indian Constitution.