Section 40(a)(iib) of the Income Tax Act : Appraising Fiscal Autonomy Concerns of the States

Reacting to the judicial ruling opining against its stand, the Government of India proposed to amend the provisions of the Income Tax Act, 1961 (“Act”) to bring to tax the amount of royalty/license fee etc. earned by the States from their undertakings. This proposal, which was accepted by the Parliament and thus legislated by the Finance Act, 2013, applies indirectly by disallowing such payment as deductible expenditure in the hands of the undertaking making such payments. This article examines various dimensions of this provision and the implications flowing therefrom with a critical perspective on the concerns relating to infringement of fiscal autonomy of the States, if any, arising therefrom