The Supreme Court has struck down a Rajasthan government notification that gave local asbestos manufacturers a VAT exemption while taxing identical products brought in from other states, calling the measure “discriminatory” and unconstitutional.
A bench comprising Justices BV Nagarathna and KV Viswanathan ruled that states cannot wield taxation as a tool to create a barrier against goods from outside their borders. The 2007 Rajasthan notification allowed VAT exemptions for asbestos sheets and bricks containing at least 25% fly ash by weight if manufactured within the state, but imposed full VAT on the same products from outside Rajasthan, giving local producers a clear pricing advantage.
“The weapon of taxation cannot be used to discriminate against imported goods vis-à-vis locally manufactured goods,” the Court said, emphasizing that Article 301 guarantees free trade, commerce, and intercourse throughout India. States remain free to design fiscal laws, provided these do not impose unequal burdens on similar products based solely on their origin.
The Court clarified that a tax is permissible only if it applies equally to both local and imported goods. Whether a tax meets this standard is a matter of fact to be determined on a case-by-case basis.
The judgment highlighted that discrimination arises when legislation favors one group over another without justification, creating an injurious advantage. In this case, the Rajasthan notification failed to specify that the fly ash used had to be sourced from within the state, which would have been a non-discriminatory condition. By remaining silent, the exemption effectively penalized manufacturers from other states who used equivalent fly ash in their products.
As a result, the Court struck down the notification, reinforcing that states cannot selectively shield local industry at the expense of interstate commerce.