(1) The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State.
(2) Nothing in clause (1) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State.
Draft Article 264, Draft Constitution of India (1948)
The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by or by any authority within a State:
Provided that until Parliament, by law, otherwise provides, any property of the Union which was immediately before the commencement of this Constitution liable or treated as liable to any such tax shall, so long as that tax continues, continue to be liable or to be treated as liable thereto.
Draft Article 264 (Article 285, Constitution of India 1950) was debated on 9 September 1949. It provided that the Union was exempt from all taxes imposed within a State unless the Union was liable to pay such taxes on any property before the commencement of the Constitution. However, it empowered Parliament to make a law to the contrary.
A Member moved an amendment by which the property of the Union would be liable to all taxes imposed by any local authority within a State as any property of an individual. He argued that the local authorities render service to the properties and therefore, they should not be exempted from taxes. A few other Members were in support of this amendment.
The Chairman of the Drafting Committee replied to the proposed amendment and stated that no property of a person whose interests are not represented in any particular organisation should be taxed by that organisation. He also argued that a local body derives its taxing authority from the State Legislature - in such a case the Union would never know what tax a local body is authorised to collect, the nature of the tax and extent of it. He contended that the intent of the Draft Article was not to exempt Parliament from being liable to taxes completely but it is to allow Parliament to examine the taxing power of the local authority.
The amendment was eventually withdrawn, and the Draft Article was adopted on 9 September 1949.