States Cannot Use Weapon Of Taxation To Discriminate Against Goods Imported From Other States : Supreme Court

The Supreme Court ruled that states cannot discriminate between goods manufactured within their territory and those brought in from other states for sale. Striking down a 2007 Rajasthan government notification that granted VAT exemption to local asbestos sheet manufacturers while imposing full VAT on sheets imported outside Rajasthan, the Court held the measure to be “discriminatory” and unconstitutional as it created a fiscal barrier against inter-state trade.

“there cannot be tax barriers or fiscal barriers in the interest of free trade, commerce and intercourse throughout the territory of India guaranteed by Article 301. Thus, the weapon of taxation cannot be used to discriminate against the imported goods vis-à-vis the locally manufactured goods.”, the court said.

The Court said that the States are at liberty to design their fiscal legislations in a such a manner that they do not discriminate between the products manufactures within their State and products manufactures outside their State.

“States are at liberty to design their fiscal legislations in such a manner to ensure that the tax burden on goods imported from other States is equal to the tax burden on those goods produced within the State. Therefore, a tax designed to impose equal burdens cannot be said to be discriminatory. However, whether the tax burden falls equally is a question of fact to be determined in each case when the question arises..”, the Court observed.

The Case

A bench of Justice BV Nagarathna and Justice KV Viswanathan heard the case centered on a Rajasthan government notification dated March 9, 2007, which exempted from Value Added Tax (VAT) the sale of asbestos cement sheets and bricks manufactured within the state, provided they contained 25% or more fly ash by weight.

The manufacturers based outside of Rajasthan challenged the Rajasthan Govt. notification, arguing that while their identical products, which also used fly ash, were subject to full VAT when sold in Rajasthan, local competitors enjoyed a significant price advantage due to the exemption. They contended this was a classic case of discrimination outlawed by the Constitution.

Issue

The issue was whether a tax exemption based solely on the place of manufacture, without clear and compelling justification, amount to “discrimination” under Article 304(a)?

Article 304(a) of the Constitution allows a State Legislature to impose a non-discriminatory tax on goods imported from other states or Union Territories, provided the same tax applies to similar goods manufactured within that state

Decision

Setting aside the Rajasthan High Court's decision, the judgment authored by Justice BV Nagarathna in a detailed judgment struck down the Rajasthan Govt notification calling it a direct discrimination against the manufactures based outside of Rajasthan.

“That if a legislation is discriminatory and discriminates one person or class of persons against others similarly situated and denies to the former the privileges that are enjoyed by the latter, it has to be regarded as “hostile” in the sense that it affects injuriously the interests of that person or class.”, the court said.

The Court said that the situation would have been different if the impugned notification has mentioned that manufacturers of asbestos cement sheets must contain 25% or more fly ash by weight obtained in Rajasthan, then it would not be discrimination against the sheets manufacturers based outside of Rajasthan who uses fly ashes not obtained from Rajasthan. Because, the impugned notification was silent on this aspect, the Court declared the notification to be violative of Article 304(a) of the Constitution as it directly discriminates with the outside of Rajasthan based manufacturers whose asbestos sheets also contained 25% or more fly ash equivalent to fly ash used by the Rajasthan based manufacturers.

“if the notification had prescribed a condition that fly ash sourced from State of Rajasthan and products sold in the State, irrespective of their place of manufacture would have the benefit such exemption, there would not have been any discrimination between products manufactured outside the State of Rajasthan sold within the said State and those manufactured within the State, both having the benefit of exemption as both categories of products would have utilised fly ash available in the State of Rajasthan. This approach would have also met the objective of utilising the available fly ash in the State of Rajasthan. But, that is not so in the present case. Hence, we have no hesitation in holding that the impugned notification violates Article 304(a) of the Constitution as it is discriminatory in nature.”, the court said.

The Court heavily relied on the nine-judge bench decision of Jindal Stainless Ltd. vs. State of Haryana, (2017) 12 SCC 1 to reiterate that the benefit of direct discrimination to a state legislature can be given when the benefit is granted to a specified class for a limited period, the benefit is given in a non-hostile, non-protectionist manner, and it is backed by valid and justifiable reasons, such as developing economically backward areas.

Applying this test, the Court held that the Rajasthan notification warranted interference on several grounds: it reflected a hostile, protectionist attitude toward sheets imported from outside the state; it lacked valid justification, such as a genuine link to the use of 25% Rajasthan-sourced fly ash; and it extended benefits not to a specific class for a limited duration but indiscriminately for many years.

Further, the Court relied on Shree Mahavir Oil Mills vs. State of J&K, (1996) Supp.9 SCR 356, where unconditional exemptions for local goods were struck down for creating a discriminatory fiscal barrier. In this case, it was observed that under Article 304(a), a State Legislature may tax goods imported from other States or Union Territories but in the process ought not to discriminate against them vis-à-vis goods manufactured locally.

Resultantly, the Appeals were allowed, and the impugned notification was struck down as unconstitutional.

Cause Title: M/s. U.P. ASBESTOS LIMITED VERSUS STATE OF RAJASTHAN & OTHERS (and connected matters)

Citation : 2025 LiveLaw (SC) 946

Click here to read/download the judgment

Appearance:

For Appellant(s) Ms. Kavita Jha, Sr. Adv. Mr. Siddhartha Chowdhury, AOR Mr. Shammi Kapoor, Adv. Ms. Swati Agarwal, Adv. Mr. Shaffi Mather, Adv. Mr. Nikhil Goel, Sr. Adv. Mr. Ashutosh Ghade, AOR Ms. Riddhi Jain, Adv. Ms. Saloni Meshram, Adv. Mr. Adithya Koshy Roy, Adv.

For Respondent(s) Dr. Manish Singhvi, Sr. Adv. Mr. Apurv Singhvi, Adv. Ms. Shalini Haldar, Adv. Mr. Milind Kumar, AOR Ms. Nidhi Jaswal, AOR Mr. Punit Dutt Tyagi, AOR