Designing Fair Tax Exemption Regime: Revisiting India's Public Body Fiscal Framework

[Aman and Kuldeep are students at Hidayatullah National Law University.]

The recent notification of the Income Tax Rules 2026 and the increasing shift of executive scrutiny and administrative control in determining fiscal relief for public bodies have brought attention to the taxation of statutory and public bodies in India, which persistently presents a problem of concept-based classification within the framework of direct tax law. Such entities, in contrast to normal business activities, are established to execute developmental, regulatory or welfare roles on behalf of the public. They have the right to treatment under the tax law, and this right is not an issue of revenue collection, but it is also an issue of the broader fiscal policy of the state.

They are conferred tax immunity under Section 10(46) of the Income Tax Act 1961 (IT Act); however, there were various shortcomings in this scheme. Therefore, Section 10(46A) was introduced by the Finance Act 2023, to fulfil the structural gaps in the earlier exemption framework. Despite benevolent intentions, the amendment created a significant policy issue, whether this framework helps to increase transparency and responsibility or whether it makes exemption a matter of governmental choice for the public commercial entities.

It is against this background that this article evaluates the structural and functional difference between Sections 10(46) and 10(46A) with reference to their structure, purposes, and how they are applied in practice. It also provides a cross-jurisdictional comparison of the statutory and public taxation regimes in India with those of other jurisdictions. Finally, it gives recommendations to balance administrative control, legal certainty and institutional autonomy.  

Tax Exemptions for Public Bodies: Legislative Framework

Sections 10(46) and 10(46A) of the IT Act address a more structural issue in the Indian tax statute. Section 10(46) allows tax exemption of statutory and public bodies, but only to the extent of the “specified income” that can only be exempted upon the notification of the central government. The exemption is also dependent on the condition that the entity must not engage in a commercial activity.  Such a limited way of establishing the exemption poses difficulties for the entities since they do not satisfy stringent requirements.

This shift is closely linked with the judicial developments, particularly in the case of Ahmedabad Urban Development Authority v. ACIT (2022), wherein the Supreme Court (SC) clarified that statutory bodies providing services of a public nature are prima facie involved in non-commercial activities as their main purpose is to promote the public purposes. In light of these shortcomings, Section 10(46A) was included to accommodate the entities that fell outside the scope of the traditional requirement of being a “non-commercial” entity.

The provision appears to expand the exemption regime by extending its scope to government companies and corporations engaged in public functions that were previously excluded from its scope. In both provisions, it is done through a notification-based approach, which ensures that the exemption continues to operate as a matter of executive recognition. Despite this, they remain embedded within a governance-oriented structure that prioritises administrative oversight over legal certainty.

From Exemption to Executive Control: The Notification Regime

The tax exemption for the statutory and public bodies depends on the government notification. It is through this filter that exemption is not only recognised but also selectively determined. The notification mechanism has attracted certain criticism on the grounds of both principle and practice. As the SC in State of Jharkhand v. Ambay Cements observed, where executive discretion in the grant or withholding of fiscal benefits must take place in a non-arbitrary manner, it particularly focuses on the rational nexus to the objects of empowering legislation.

In practice, the Central Board of Direct Taxes (CBDT) notification process has been marked by several delays. Various authorities need to file writ petitions in the high court for the speedy consideration of notification applications. In Kerala Co‑operative Deposit Guarantee Fund Board v. CIT, the Tribunal directed the CBDT to process the application within a stipulated time frame, underscoring the justiciability of unreasonable delay in the notification process. The Comptroller and Auditor General, in its report, highlighted the delay in tax exemption notifications under Section 10(46). Therefore, the absence of a time-bound framework for the grant or refusal of notifications creates a structurally unsatisfactory condition for the authorities.

Cross-Jurisdictional Analysis: Rethinking Public Body Taxation

A comparative analysis of India’s notification-based approach for granting tax relief provides valuable insights to update the present framework. Various jurisdictions have adopted different models to reduce the administrative role and give a clearer statutory classification, functional analysis, and a better approach to executive discretion.

First, in the US, the Internal Revenue Code primarily exempts the public and quasi-public entities in the US. Unlike India’s model, they adopt a statutory recognition of governmental character, hence not subject to the executive’s individual choice. Such a method helps provide statutory clarity and also reduces arbitrary administrative decisions.

Second, the UK adopts the functional approach to levying corporate tax. Under the HMRC Internal Manual, public authorities carrying out governmental activities are exempt from tax or dealt with under the relevant legislation. Hence, the focus in this approach is on the type of activity and not on the level of executive discretion. Therefore, a similar legislation can be introduced in India as well, providing a blanket waiver from taxes to public bodies serving public purposes. 

Lastly, in Australia, tax exemption is governed by the Income Tax Assessment Act 1997, which provides a hybrid model. The government and public agencies are excluded from tax under certain legislative categories, especially if they fall within the criteria that fit the public benefit requirements. Thus, it relies upon the balance between flexibility and explicitly given requirements and administrative guidelines rather than individual recognition.

Way Forward

The recent notification demonstrates that the exemption framework continues to work as an active instrument of tax administration. During 2025-26, the continuing issuance of notifications under Section 10(46A), particularly for development authorities and regulatory bodies, in respect of specified income through notifications. The structural issue, which includes a notification-based approach that permits target scrutiny and increases reliance on executive discretion, is brought into sharper focus by this developing framework. This ultimately leads to delays, discrepancies, or uncertainty for comparable statutory authorities. In light of these developments, several reforms are needed.

First, the exemption framework must transition from completely discretionary recognition to rule-based eligibility criteria for determining eligible entities. This can be achieved through explicitly stating the exemption criteria, which include the functions performed, degrees of governmental control, and the role of executives in case of any dispute or uncertainty in parameters. This would go a long way towards giving a better and more in-depth idea of the exemption regime, thus making its proper and regular operation easier.

In addition, the notification should have a specified time limit within which the executive is required to convey the decisions on exemptions. The mandatory disposal period would lead to better procedural predictability, transparency, and administrative responsibility.

Finally, the framework must assume a hybrid practice that embraces statutory classification and administrative discretion calibration, according to the comparative models which have successfully delineated and categorised the exemption regimes. Through this, it assists in ensuring that there is flexibility without undermining legal certainty.

This would be a gateway to a superior notification-based exemption system, which will be able to meet its need to give financial backing to the legislative and regulatory authorities. Moreover, that would be consistent with the general principle of accountability, transparency, and certainty in the changing tax system. Hence, the lack of compliance with these requirements may jeopardise the institutional integrity and credibility of the framework in question.

Conclusion

The tax exemption analysis of Sections 10(46) and 10(46A) does not imply that it is a fiscal concession; rather, it functions under a wider framework that is founded on controlled tax governance, with exemptions given on a conditional, selective, and by executive notice. It is a planned legislative move that recognises the uniqueness of these institutions but still retains administrative oversight of the level and quantity of financial aid that these organisations obtain.The notification system, which is fundamentally a law-based system, is greatly dependent on the government's discretion. The permission of a deviation in this case is at the executive’s discretion. Thus, an exemption is not a statutory response, but a limited financial power that requires the approval of the executive.

To manage the classification problems of emphasising certainty over discretion, a comparative study reveals that a statute-based approach or a mixed approach has been adopted by other jurisdictions. India faces the risk of treating public entities unfairly, inconsistently, and slowly due to its continued reliance on executive notice. These problems impact the legitimacy and consistency of the tax system, in addition to being non-procedural.

Thus, when change is at stake, the government can manage budgetary balances of statutory and public groups in accordance with Sections 10(46) and 10(46A) of the IT Act. The effectiveness is long-lasting, owing to their formulation and operation. The institutional freedom overrides formal structure in isolation, since its long life is anchored in the veracity, fairness, and transparency of the processes.