Doctrine of Immunity of Instrumentalities

The doctrine of immunity of instrumentalities stipulates that both the State and Central (Federal) Governments possess immunity from being subjected to taxes imposed by the other. This immunity applies to entities established by these governments, specifically Statutory Corporations established by them. The origin of the doctrine of immunity of instrumentalities can be traced back to the United States, where it was initially developed as a judicial interpretation, although it was not explicitly outlined in the American Constitution.

In a federal system of government, where the federation and its constituent units possess independent and limited legislative powers, it becomes imperative that each party refrain from encroaching upon the activities of the other or jeopardising their existence through the exercise of taxing authority.

This fundamental principle of mutual tolerance and non-interference is commonly referred to as the immunity of instrumentalities. It can also be described as the doctrine of implied prohibitions, as the authority of each entity should be interpreted as being subject to such an implied limitation.

Meaning of Doctrine of Immunity of Instrumentalities

The doctrine of immunity of instrumentalities grants immunity from taxation to the properties, functions and instrumentalities of one level of government when it operates within the jurisdiction of another level of government in a federal system.

Evolution of Doctrine of Immunity of Instrumentalities

The concept of the doctrine of immunity of instrumentalities had its origins in the United States as a product of judicial interpretation, even though it is not explicitly outlined in the United States Constitution as a provision granting mutual taxation immunity.

This doctrine came into prominence through the landmark case of McCulloch v. Maryland, where the State of Maryland was prohibited from taxing a federally chartered bank. The ruling in this case established that not only the property but also the functions and instrumentalities of the Federal Government were exempt from State taxation.

The underlying purpose of doctrine of immunity of instrumentalities was to safeguard the central government against potential encroachments by individual States, as the States could potentially impose taxes to such an extent that it might impede the functioning of national authorities within their designated sphere of action.

Initially, the judiciary leaned toward an expansive interpretation of this doctrine, extending its protection not only to government instrumentalities but also to private individuals engaged in various capacities with the government, such as suppliers, contractors or creditors.

For example, a manufacturer of motorcycles would not be subject to federal excise tax on sales to a municipality. However, over time, the courts recognised that such a broad interpretation primarily benefited private individuals at the expense of the government, effectively creating a privileged class exempt from taxation.

As a result, the doctrine of immunity of instrumentalities was reevaluated and its broad scope was narrowed. Presently, the doctrine signifies that a discriminatory tax imposed by one government on the activities of another is considered invalid. In this way, it has evolved to protect the autonomy of both National and State Governments within their respective spheres, preventing undue encroachments by each other.

Why Doctrine of Immunity of Instrumentalities is Needed?

The need for the doctrine of immunity of instrumentalities arises from the fact that in a federal system of government, two tiers of government coexist within the same geographical boundaries and hold authority over the same population. Each of these tiers, namely the Union and State Governments, is responsible for carrying out various functions and possesses the power to levy taxes. As a result, their operations inevitably intersect and overlap in several areas.

In such a dual government system established by a federal constitution, the smooth functioning of both levels of government requires that the property of one government is immune from taxation by the other. This is especially crucial because both the Union and State Governments possess autonomous taxing powers and some of these taxes may be applied to governmental properties.

The underlying idea behind doctrine of immunity of instrumentalities is that granting mutual immunity from taxation streamlines administrative processes. It prevents the need for redundant efforts in assessing and calculating taxes, as well as complex cross-accounting of taxes between the two governments. By exempting the property of one government from taxation by the other, it simplifies the tax landscape and avoids potential conflicts over tax liabilities.

It’s worth noting that the application of this doctrine in India is narrower compared to the concept of “Immunity of Instrumentalities” as established in the United States. In India, the doctrine primarily exempts “property” from taxation, whereas in the United States, it also extends to the functions and instrumentalities of the government. This distinction reflects the specific legal and constitutional framework of each country.

Doctrine of Immunity of Instrumentalities: Position in India

In India, the scope of inter-governmental tax immunities or doctrine of immunity of instrumentalities is quite limited. These immunities are primarily addressed in Articles 285, 287, 288 and 289 of the Indian Constitution.

Unlike the United States, the Indian Constitution does not incorporate the broad and general doctrine of immunity of instrumentalities, beyond what can be derived from these specific constitutional provisions.

Constitutional Provisions for Doctrine of Immunity of Instrumentalities

In the Indian Constitution, the provisions governing inter-governmental tax immunities are outlined in a limited scope, primarily within Articles 285, 287, 288 and 289.

Article 285, Clause 1, of the Indian Constitution establishes that property owned by the Union is immune from taxation imposed by a State or any authority within a State. However, Clause 2 introduces an exception, allowing a State to impose taxes on Union properties that were previously liable for taxation by the State before the Constitution’s commencement, as long as such taxes continue to be levied by the State and no contrary legislation is enacted by Parliament.

Articles 287 and 288 partially incorporate the doctrine of immunity of instrumentalities concerning the Union. They grant immunity to specific activities conducted by the Union, rather than its property. These articles specifically exempt the consumption or sale of electricity or water by Union agencies from any State taxation.

Article 289, under Clause 1, restricts the Union’s taxing authority by exempting State property and income from its taxation. Nevertheless, Article 289(2) introduces an exception, allowing for the taxation of business operations of the State, State property used for trade or business or income generated from such activities if authorised by Parliament. Article 289(3) further stipulates that if a trade or business is declared incidental to the ordinary governmental functions, it would be exempted from taxation.

Exception to Doctrine of Immunity of Instrumentalities

The phrase “Save in so far as Parliament may by law otherwise provide” within Article 285 of the Indian Constitution indicates that Parliament has the authority to enact laws allowing a State or any authority within a State to impose taxes on Union property. The primary purpose of Clause (1) in Article 285 is not to completely prevent State or local taxation of Union Property, but rather to bring such taxation under the control and regulation of Parliament.

Similarly, Clause 2 of Article 285 empowers local bodies to tax Union properties that were previously liable for or treated as liable to taxation before the commencement of the Constitution, unless Parliament legislates otherwise. These provisions create exceptions to the doctrine of immunity of instrumentalities, allowing for specific circumstances under which Union property may be subject to State or local taxation.

To benefit from Clause 2, local authorities, such as municipal bodies, must meet two conditions:

• The tax they seek to impose must be the same as the tax that was previously being levied on Union property.
• The local authority making this claim must be within the same State where it is asserting the right to continue the tax levy.

The application of Clause 2 can be better understood through an analysis of a decided legal case, the “Governor-General of India in Council v. Corporation of Calcutta,” which is explained as follows:

In this case, the Calcutta Corporation, operating under Section 141 of the Calcutta Municipal Act, assessed the value of premises, including land and buildings, for the purpose of taxation. The central issue in the case revolved around whether additional buildings constructed on the premises after April 1, 1937 (when Part III of the Act came into effect), were exempt from taxation.

The court’s decision in this case established that, for assessment purposes, the valuation of the property in question should be based on its composition as of March 1, 1937. Any buildings constructed after that date should be entirely excluded from the assessment. The proviso attached to Section 154 of the Government of India Act, 1935, clarified that properties treated as liable immediately before April 1937 would not enjoy the exemption provided by the main provision of the section.

However, this proviso did not affect new buildings that did not exist on March 31, 1937 and were therefore not subject to taxation on that date. Consequently, any additional building was to be excluded from the subsequent valuation, treated as non-existent and the valuation conducted based on the land and buildings as they existed prior to April 1937.

Conclusion

The Doctrine of Immunity of Instrumentalities is a fundamental principle in federations like India, where both the federal government (Centre) and state governments (States/Provinces) coexist, each with its sphere of authority. This doctrine ensures that one sovereign entity does not tax another sovereign entity, preserving their respective powers and autonomy.

In India, Articles 285 and 289 of the Constitution embody this principle, albeit with some distinctions. Article 285 provides an absolute immunity to Union property from state taxation, with the exception being if Parliament itself permits such taxation. Article 285(2) allows for existing taxes to continue temporarily until Parliament decides otherwise.

Article 289, on the other hand, deals with the taxation of State property. Clause (1) exempts State property and income from Union taxation. However, Clause (2) introduces a qualification, permitting taxation if State property is used for commercial purposes related to trade and commerce, subject to Parliament’s decision. Clause (3) grants Parliament the authority to determine whether a function carried out through trade and commerce is incidental or not, highlighting the federal nature of the Indian Constitution with a unitary bias.