The Supreme Court quashed a 2007 Rajasthan government notification that exempted VAT on asbestos cement sheets and bricks manufactured within the state but imposed it on similar goods from outside, holding it discriminatory under Article 304(a) of the Constitution.

Constitutional Provision 

• Article 304 – Restrictions on trade, commerce and intercourse among States.
  • (a) States may impose taxes on goods imported from other States or Union Territories only if similar goods produced within the State are taxed equally.
  • (b) A State may impose reasonable restrictions on trade in the public interest, but such a law requires the President’s prior sanction.
• Article 301 – It guarantees freedom of trade, commerce, and intercourse throughout India, ensuring economic unity.

Supreme Court’s Observations

• No Weaponisation of Taxation: Tax cannot be used to favour local manufacturers at the cost of outside goods.
• Differentiation vs. Discrimination: 
  • Taxation is valid if equal burdens are imposed on both local and outside goods.
  • Discrimination arises when outside goods bear a heavier burden.
• Legitimate Exceptions: Incentives/reliefs to encourage economically backward areas for a limited period in a non-hostile fashion are not discriminatory.
• On Rajasthan’s Notification:
• • Exemption was only for locally manufactured goods with 25% fly ash, excluding similar goods manufactured outside Rajasthan, even when using the same raw material.
  • If exemption had applied to goods using Rajasthan-sourced fly ash, irrespective of origin, it would not be discriminatory.

Previous Judgement

• Video Electronics Pvt. Ltd. v. State of Punjab (1990):
• • The Supreme Court held that Sales tax exemptions that do not directly restrict trade are valid and indirect impacts on trade are permissible.
• Present Case: SC clarified that Rajasthan’s notification did not meet Video Electronics’ criteria as it created a direct price advantage for local goods.

Significance of the Ruling

• Economic Integration: The SC ruling prevents states from adopting protectionist taxation policies.
• Constitutional Clarity: It defines the scope of Articles 301 & 304, safeguarding freedom of trade across India.
• National Market: Advances the idea of a single integrated market, aligning with the GST framework.
• Balanced Federalism: Protects state fiscal autonomy while ensuring constitutional safeguards against discrimination.

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