In Re: The Sea Customs Act, 1878, Section 20(2)

Facts

• Article 289(1) provides that the property and income of a State shall be exempt from Union taxation, subject to the exceptions in clauses (2) and (3).
• Article 285(1) provides correspondingly that the property of the Union shall be exempt from all taxes imposed by a State, save as Parliament may otherwise provide.
• The question arose whether a State importing goods was liable to customs duty, and whether goods manufactured by a Government undertaking were liable to excise duty.
• It was contended that since customs and excise are ultimately borne in relation to goods which are the property of the Government, the levy fell on the property of the State and was therefore within the immunity.
• Because the question affected the whole scheme of indirect taxation and involved substantial revenue, the President made a reference to the Supreme Court under Art.143.
• A Bench of nine Judges was constituted to hear the reference.

Issue

1. What is the scope of the immunities in Arts.285 and 289, and do they extend to indirect taxes such as customs and excise duty?

Held

• The immunities are confined to taxes on property and on income as such. Customs duty and excise duty are not taxes on property: the taxable event in the case of customs is the import or export of goods across a customs frontier, and in the case of excise it is the manufacture or production of goods. Neither levy is imposed by reference to ownership, and neither is measured by the value of property held. Accordingly a State importing goods is liable to customs duty in the ordinary way, and property belonging to the Union is not immune from an indirect levy merely because of its ownership. The Court also noted that Art.289(2) expressly permits the Union to tax a trade or business carried on by a State, which confirms that clause (1) is not a general immunity from all Union taxation.

Ratio Decidendi

The character of a tax is determined by its taxable event and not by the identity of the person who ultimately bears it or owns the goods concerned. Articles 285 and 289 are directed against one Government taxing the other on its holdings and receipts, which would allow one level of government to draw revenue from the other's capital and income. They are not directed against a general levy on transactions and activities, which falls on all who engage in them, and reading them otherwise would exempt a large part of governmental commercial activity from taxation and distort the fiscal scheme.