No Property Tax Exemption for Unaided Schools, Classification Based on Funding Model is Valid: Kerala High Court Upholds Amendment to S.207 Panchayat Raj Act & S.235 Municipality Act

Kerala High Court Upholds State's Decision to End Property Tax Exemption for Unaided Schools

ERNAKULAM: The Kerala High Court has dismissed a series of writ petitions filed by over 30 unaided private schools, upholding the constitutional validity of the Kerala Finance (No.2) Act, 2023, which withdrew their exemption from paying property tax. Justice Ziyad Rahman A.A. ruled that classifying schools based on their funding model—distinguishing between government/aided institutions and unaided private institutions—is a reasonable classification and does not violate Article 14 of the Constitution.

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Background of the Case

The petitioners, a collective of unaided schools including Mar Baselios School and Sarvodaya Vidyalaya, along with the Unaided Schools Management Consortium (USMAC), challenged amendments to Section 207 of the Kerala Panchayat Raj Act, 1994, and Section 235 of the Kerala Municipality Act, 1994.

Prior to April 1, 2023, buildings used for educational purposes by government-recognized unaided schools up to the Higher Secondary level were exempt from property tax. The 2023 amendment removed this exemption, restricting it only to institutions owned, aided, or financially assisted by the Central or State Governments. Consequently, local bodies began issuing property tax demand notices to these unaided schools, prompting the legal challenge.

Arguments Presented

Petitioners' Stance:

The schools, represented by Advocate H. Ramanan, argued that the amendment was discriminatory and created an unreasonable classification. Their core contention was that both aided and unaided schools perform the same essential function of imparting education. By taxing one group while exempting the other, the state was violating the principle of equality enshrined in Article 14 of the Constitution. They asserted that there was no "intelligible differentia" to justify treating the two categories of schools differently for taxation purposes.

State's Defence:

Representing the State of Kerala, Special Government Pleader Smt. Deepa K.R. justified the amendment by highlighting the fundamental differences between the two types of institutions. The government argued that: -

Government and aided schools are established and maintained using public funds. Imposing property tax on them would be an additional, circular burden on the state exchequer. -

Unaided schools, in contrast, operate on a self-financing model, collecting fees from students to cover their expenses. -

This distinction in the source of funding and operational model constitutes a clear and intelligible basis for the classification, which is directly related to the state's fiscal objectives.

Court's Rationale and Precedents

Justice Ziyad Rahman A.A., in his judgment, concurred with the state's reasoning. The court acknowledged that while legislatures have wide latitude in creating tax laws, such laws are not immune to challenges under Article 14. However, for a classification to be struck down, it must be proven to be arbitrary and without a rational basis.

The court found that the distinction made by the legislature was valid. It observed:

"The fact that the Government owned, managed and aided schools are established by the Government at their funds in order to provide education to all classes of persons by collecting nil or meagre fees, is a crucial factor which distinguishes such establishments from an unaided school, where fees is collected from the students for rendering the services... This itself could be a basis for such classification which would in clear terms, would come within the purview of intelligible differentia."

The judgment heavily relied on previous decisions by the High Court in Sreenarayana Gurukulam College of Engineering v. State of Kerala (2016) and Manager, Vimal Jyothi Engineering College v. State of Kerala , which had upheld a similar classification for self-financing professional colleges. The court endorsed the principle laid down in those cases: that exemption for government institutions is a privilege granted to public money, and self-financing institutions, which do not operate under the same financial scrutiny or public funding model, form a distinct class.

Final Decision and Implications

Dismissing all the writ petitions, the High Court concluded that the amendment to the property tax laws is constitutionally valid. The judgment solidifies the state's power to create classifications for taxation based on the financial and administrative structure of educational institutions. As a result, unaided schools across Kerala will now be liable to pay property tax on their buildings, a move that could have significant financial implications for these institutions.