Category: Research Paper
Paper Code: RP-BD-15
Page Number: 169 - 177
Date of Publication: February 10, 2021
Citation: Bandita Das, Comparative Study on Intergovernmental Tax Immunities under the Federal Constitutions of Australia, Canada, India and USA, 1, AIJACLA, 169, 169-177, (2021), https://www.aequivic.in/post/aijacla-comparative-study-on-intergovernmental-tax-immunities-under-the-federal-constitutions-of-aus.
Details Of Author(s):
Bandita Das, Advocate, Gauhati High Court
ABSTRACT The Doctrine of Inter-governmental Tax Immunities emerged in the United States for avoiding double taxation on a single subject. Double Taxation might occur in countries where two different sets of Governments parallelly administers governing functions over the same subjects. In such cases, it becomes essential to have a well-drafted mechanism for securing the subjects from double taxation. Countries like Australia, Canada, India, and the USA are Federal in nature which means that there operate two different sets of Government mostly one at the Centre or Union Level and the other at the Stat Level or Provincial Levels. The Constitution of all these four countries does provide a division of powers and functions between the two sets of Governments and as regards taxation powers are concerned; the Doctrine of Intergovernmental Immunities is one kind of tool that allows the Constitution to maintain a parity between the two sets of Government. This article will therefore attempt to comparatively study the extent to which the Constitutions of all these four countries recognize this Doctrine. KEYWORDS Australia; Canada; Constitution; Federation; India; Intergovernmental Tax Immunities; and USA
INTRODUCTION In the Federal Structure of Governance, the powers of governments are distributed amongst the different units of Federation and the manner of such distribution is provided mostly in the Constitution of the Countries concerned. Similarly, the Constitutions of Australis, Canada, India, and the USA are federal providing the framework for regulating the relationships between different units of Governments. Financial powers that are also mostly based on the taxing powers are also regulated by such Constitutions to maintain harmony in the relationship between the different Units of Federation in the Federal countries. Such relationship also requires a kind of limitation on the powers of each Unit of Federation even in matters related to taxation so that there does not arise any overlapping of taxes on the citizens in such Countries due to imposition of taxes by more than one government at the same time. This limitation on the taxation powers on the particular governments in a Federation has been provided by the Doctrine of Inter-governmental tax immunities which immunizes entities who are paying tax to one government from being taxed by one another government at the same time. However, this Doctrine has not been adhered to in the same manner in all the Federal Countries as is adhered in the US due to the unique nature of Federal Governments existing in all the above-mentioned four countries. These differences are important to analyze how far this doctrine is influential in maintaining a harmonious relationship between the Units of Federation in matters related to taxation. This paper will thus focus on the different approaches made by Australia, Canada, United States, and India in applying this doctrine.
INTER-GOVERNMENTAL TAX IMMUNITIES IN UNITED STATES OF AMERICA The Doctrine of inter-governmental tax immunities has its origin in the famous case McCulloch vs. Marylandwhich acutely limited the exercise of both the federal and state power in the United States.In this case, the Court struck down the tax imposed by the State of Maryland on the Bank Constituted by the federal government on the ground that no State has the power to tax, burden, impose or in any manner control the instrumentalities of the federal government. However, it is acknowledged that this doctrine does not extend to a non-discriminatory tax regime that is vested upon the property of the bank or the interest of the Maryland Statue. The reason behind this is that the federal government has been granted specific power by the Constitution and therefore every Constitutional act of this government is constituted as a governmental function and as a result, no question arises as to whether acts of the federal government is governmental or non-governmental to avail privilege of exemption of taxation from the State government. The main purpose of this doctrine was to protect the Centre against the attack on it by the States. It was because the Centre in its initial stage could not protect itself against the hostile act of the States. With time, this doctrine also extended to instrumentalities of Centre, the federal employee, US securities etc. for which they were exempted from State taxations. This doctrine was applied on a reciprocal basis to protect the State agencies from central taxation. In the case of Collector v. Day, the state and its instrumentalities were immunized from central taxation and as a result, the Centre cannot impose tax on the salary of the State officials. Mr. Justice Nelson, on the delivery of the judgment, declares that the states like the Centre were independent and sovereign and the two governments were on equal footing. After two years immunity of the States also extended to municipalities as they were the representatives of the State. However, the Supreme Court has acknowledged one difference between the immunity of the federal and the State instrumentalities in the case of South Carolina v. US , where it was held that immunities of State agencies from federal taxation can be possessed only when it acts strictly in governmental character. If the State agency is engaged in any kind of trade or commercial activities then they won’t be exempted from central taxation. For example- The state carrying on business activities of a private nature i.e. sale of mineral waters, running railways, sale of liquors, no exemption can be granted to the State or its agencies. However, such a limitation did not exist in the case of the immunity of federal instrumentalities. Consequently, national taxing power has increased and it is the function of the Court to protect the federal system but instead the Supreme Court decided that it is the Congress who will determine the issue relating to immunity. As the concept of the doctrine of immunity was developed by the judiciary so it is the judiciary who is, all in all, it should decide in respect of function of government whether it is in the form of governmental or commercial. Moreover, it is the Court that diminished the sovereignty of the State by declaring that the sovereign power of the State is necessarily diminished to the extent of the grants of power to the Federal Government in the Constitution. So, it is the Court who can give an affirmative stand by maintaining the sovereignty of both the federal and State on equal footings.
POSITION IN CANADA In Canada, the Courts have denied applying the American Doctrine of Immunity in totality. This doctrine is applied only to a limited extent i.e. under Section 121 of the British North America Act both the Dominion and provisions are prohibited to impose tax on land or property of each other. That means in Canada, the doctrine of immunity only applies to property or land alike in India. As a result, there is no immunity in respect of the income of the officials of one government from being taxed by the other government.It further reflected that the privilege has only been entitled to safeguard the Crown interest in the property, it did not protect the interest of the beneficiary (such as a private person or corporation) who may have an interest in the Crown property and here the legal title of the property has been conferred on the Crown. Thus, the interest of tenants or lessee who were enjoying the benefits of Dominion’s property was not exempted from provincial taxation. Moreover, a tax can be imposed by the province on the owner of land even if such land is leased to the Crown or on a purchaser who under an agreement of sale with the Crown purchases the Crown property. However, a tax may be imposed on a private person who is an occupant of Crown property by way of enforcement of sale or attachment of occupant’s right without interviewing with the Crown’s interest in the property. Generally, on the value of the contractor’s gadgetry, there was no immunity of taxation. But where the value of the contractor’s gadgetry was the assets of the Crown then no tax can be imposed on that by the provinces as the value of contractor’s gadgetry is constituted as Crown property. Moreover, a corporate body who occupied the government property can claim exemption from provincial taxation if he is occupying such property as a servant or agent of the Crown. But such privilege is not granted to employees of the Crown. Apart from this, Dominion can impose excise and sales tax and custom duty on the property of the provinces, because the Dominion acquires this power from its Constitution under Section 91 which states that Dominion can raise money by any mode of taxation. No doubt Section 125 of the British Act clearly expresses that no tax can be imposed on land and property by one government against another but such immunity can be renounced by making voluntary payments of tax.
POSITION IN AUSTRALIA Section 114 of the Commonwealth of Australia Act, 1900 stated that no tax shall be imposed by the Commonwealth on any kind of property belonging to the State. Similarly, the States shall not impose a tax on any type of property belonging to the Commonwealth unless the Parliament of the Commonwealth has given its consent thereon. Besides under Section 114 of the said Act, the Commonwealth is not liable to pay tax on regard to property which it has occupied during the time of war. The above Section does not apply unless the tax is imposed on the property itself. For example- A custom duty is a tax which is imposed on the person for the act of moving property or act of importation and not on the property so the Commonwealth can impose a duty on State’s importation of property from other foreign countries because there is a basic difference between taxing men for moving property and taxing men for the property. Similarly, in the case of the Octroi tax, State is not immunized from central taxation. Thus, Section 114 is limited to taxes on the ownership or holding of property, it does not involve taxes on dealing with property. Initially, in Australia, the American Doctrine of immunity of instrumentalists applied in full force. That can be seen in the case of D’Emden vs. Pedderwhere servants of the Central government, in respect of their salaries were held to be immunized from State tax. Likewise, State agents such as State railways were held to be immunized from federal taxation. But with the emergence of the case of Amalgamated Society of engineer v The Adelaide Steamship Limited,this doctrine come to an end. Later in the case of Victoria vs. Commonwealth-, payroll tax imposed on all wages payable by an employer (including the State) was held to be valid. While the Commonwealth still enjoys immunity from State taxation. As a result of it, even the Commonwealth who is an occupier of private property could not be held liable to pay municipal tax.Discriminatory laws cannot be enacted by one of the governments against the other government. However, in the case of non-discriminatory tax, State can impose tax on the commonwealth income arising from pension or salaries and it cannot be declared as invalid.
POSITION IN INDIA In India, the scope of intergovernmental tax immunities is very limited. The Articles in the Constitution that specifically deal with the doctrine of intergovernmental tax immunities i.e. Article285, 287, 288, and Article 289 are discussed below in brief- Article 285- Exemption of Union property from state taxation Under this Article, the State is debarred from imposing tax on Union property. Here not only the State but also the authority within the States are debarred because they are creatures of State so they cannot enjoy larger power than that of the State. However, there is an exception where the State can impose a tax that is when the Parliament enacts a law on this behalf. The word property is used in a general sense and includes building, chattels debts, land, and everything that has money value and all types of property i.e. it may be immovable, moveable, intangible, or tangible. Moreover, no distinction is made as to the use of Union property, whether such Union property is used for commercial purposes or for exercising government functions. As a result, the State cannot impose any tax on property of the Union for whatsoever it has been used, it is because Article 285 does not provide for the concept of use. Another aspect of this Article is that immunity from State taxation applies only to the Union and its departments not to the government companies and public corporations where the government has a controlling interest. It is because the government uses such companies only to perform their commercial functions. Along with this, the companies like Hindustan steel private limited are incorporated under the Companies Act as a separate legal entity, who has the power to hold and acquire property, enters into a Contract, which is distinct from government departments, and as a result, these companies are not free from State taxation. So, municipality tax can be imposed on land and building which is owned by the companies because they are the properties of the companies and not the property of the government. In addition to this, even if the government subscribes to the Centre share capital then also it cannot be said that government is the owner of the company, the land and buildings will remain with the companies and only the share capital will be owned by the government. Thus, companies are not immunized from State taxation. In a case, the Court held that a State cannot levy road tax on the vehicles owned by the Central government or the railway which is only a department of the Central Government. However, the Karnataka High Court gave a different approach that States can be debarred from tax if it is directly imposed on the property of the Union. It cannot be debarred from imposing excise duty as the taxable event in this case is not good but manufacture thereof. On being good sold to the government, sales tax can be imposed on the goods as it can be imposed not on good but sales. Under Article 285(2), if an authority within the State was imposing a tax on the Union property before the commencement of the Constitution, it can continue to levy that tax on that State even after its commencement, if it fulfills the two conditions, via- the tax which was imposed before the commencement of the Constitution remained the same after its commencement, and the authority who imposed such tax within the States remained in the same state even after its commencement, or until the Parliament enact a law abrogating the right of the local authority to continue to levy the tax under Article 285(2). Article 289: Property and income of the State and the Union Taxing power Originally, under Article 289(1) the Union is debarred from imposing tax on State property or income, even if such income is derived from commercial or non-governmental function and governmental function. But there is an exception to it whereby the Centre can impose a tax upon the income of the State if it is derived from trade or commercial activities. However, removal of this exemption is not automatic, it can be done only by enacting a law by the Parliament on this behalf. Moreover, there is an exception to Article 289(2) i.e. Article 289(3) which states that if trade in business activities is carried on by the State and is incidental to the ordinary government function then such State’s income is immunized from Union taxation. Another aspect of this Article is that Parliament is empowered to distinguish governmental and commercial functions by passing a law. Moreover, Parliament identifies the trading activities of the State and makes them accountable to Union taxation. However, in the USA, there arises difficulty as to the distinction between the two functions because it is left to the judiciary to decide. Moreover, problem like trading activities auxiliary to the ordinary government function has also been experienced in USA. Article 287: Exemption from taxes on electricity Under this Article when there exist certain situations the State cannot impose a tax on the sale or consumption of electricity whether that electricity is produced by the government or other person. These situations are where electricity is- I. consumed by the government or sold to the government for consumption II. consumed for any purpose related to Railways Thus, the State cannot impose a tax on electricity where there is an existence of these two situations. But where the Parliament enacts law conferring power to the State to impose tax then such bar gets removed. Article 288 – Exemption from taxation by States in respect of water or electricity in certain cases Under this Article, the State by making a law may impose a tax in respect of electricity or water generated, stored, distributed or sold, consumed by any authority created by a law of Parliament for conducting or progressing inter-state river or river valley. But the condition is that the State cannot impose tax by enacting law because mere enacting a law is not sufficient to be effective, it must also receive the assent of the President. As it is clear that the State can impose tax only if it get authorization by the law. One another condition is that the State law which provides fixation of any tax or another incidental tax must follow the orders or rules which are made under the law by any authority. Thus, the State must make provision for the previous consent of the President before making any such rules or orders. The main purpose of this article is to safeguard inter-state (public) utility services such as river valley projects and railways from indiscriminate state taxation as these services are of national interest. However, President consent is not required while imposing a fee for the use or supply of water. Here, President consent is a condition precedent for the legality of State law levying the tax and this condition become necessary to ensure that the State law does not harm the inter-state interests by levying costly taxation on storage and generation of electricity.
CONCLUSION The above study highlights one factor that is common in all the above discussed Federations is that there are inconsistencies between two Units of Government as regards taxation powers are concerned. However, due to the well-drafted written Constitution in India, theoretically, the Doctrine of Inter-Governmental Tax immunity although is not that strictly followed as followed in the US, still seems to have a proper demarcation of the powers and functions between the Union and the State. Most importantly one factor that makes a difference in the distribution of taxation powers in India from other Federations is that in India, the Union Government is more powerful compared to the States Government which makes the States in India more or less dependant on the mercy of the Union as regards for fulfillment of Financial needs. This issue even increases further when the political party forming the Government at the Union is different or is in opposition to the political party forming the Government in any of the States. In such cases, the Doctrine of Inter-governmental immunities could have been given slightly more scope in the Constitution of India along with making the Judiciary a custodian for justifying the balance of taxation powers between the Union and the States in India.
 McCulloh v. Maryland 4 wheat 316(1819).  Ronald Sackville, The doctrine of immunity of instrumentalities in the United States and Australia: Acomparative Analysis, 7 Melb, V.L. Rev. 15 (1969-1970).  James A Doyle, The Immunity of government instrumentalities in Canada, Australia, and The US: A Comparative Study, 18 Nob L. Bull 157 (1939).  Collector v. Day,11 wall 113 (1870).  South Carolina v. US 199 US 437.  Supra note 1.  Supra note 2.  Bank of Torronto v. Lambe, 12 AC 575 (1878).  Forbes v. Att General for Manitoba, (1937) AC 260.  Smith v. Rural Municipality, (1916) 2 AC 569.  Southern Alberta Land Co. v. Mclean, (1916) 53 SCR 151.  Calgary Land Co. v. A.G. of Alberta, (1911) 45 SCR 171.  Bennett v. Sugar City, (1951) 4 DLR 129 (PC).  Regina Industries Limited v. Regima,(1947) SCR 345.  Ottawa Public School v. Ottawa (1953) 1DLR 692.  Supra note 16.  Essendon Corporation v. Criterion Theatres, (1947) 74 CLR 1 (19).  D’Emden v. Pedder ICLR 19.  The Railway servant case 4 ICLR 488 (1906).  Amalgamated Society of engineer v. The Adelaide Steamship Limited 28 CLR 129.  Victoria v. Commonwealth (1971) 122 CLR 353.  Essendon Corporation v. Criterion Theatres, (1947) 74 CLR 1.  West v. Commr. Of Taxation, (1937) 56 CLR 657.  UOI v. City Municipal Council, AIR 2000 Kant 104.  M.P. Jain, Indian Constitutional Law, (Central Law Agency, 8th edn., 2018).  UOI v. State of Punjab, AIR 1990 P&H 183.  The Constitution of India, amended by the constitution (one hundred and first amendment) Act,2016. Supra note 3.