Taxation cannot be used as a weapon to discriminate between locally manufactured goods and similar goods imported from other states, the Supreme Court Wednesday reiterated while quashing a 2007 Rajasthan government notification granting exemption from payment of value-added tax (VAT) on sale of locally made asbestos cement sheets and bricks. The March 9, 2007 notification by the Rajathan government exempted VAT from the sale of asbestos cement sheets and bricks manufactured within the state, provided they contained 25 per cent or more fly ash by weight. Manufacturers from outside Rajasthan challenged the notification, arguing that their products, which also used a similar amount of fly ash, were subject to VAT when sold in Rajasthan, and thus local competitors gained a significant price advantage. Violation of Article 304 (a) of the Constitution A bench of Justices B V Nagarathna and K V Viswanathan found the notification violative of Article 304(a) of the Constitution, which says,“…the Legislature of a State may by law…impose on goods imported from other States or the Union territories any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced." In its September 24 ruling, the Supreme Court, which went into various case laws on the subject, clarified in what circumstances “a tax merely differentiates and not discriminates”. It said “a tax imposed on goods imported from another state would not be discriminatory if no similar goods are produced within that State”. It added, “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." “Further, a tax rebate or other relief in the form of incentives or set-off which is…granted to a specified class of dealers…for a limited period of time…in a non-hostile fashion…with a view to developing economically backward areas…would not be held to be discriminatory,” the court said. Rajasthan High Court ruling in pleas against notification The Rajasthan High Court had dismissed petitions challenging the notification, saying that it fell within the exemption carved out by a three-judge bench of the Supreme Court's decision in the case Video Electronics Pvt Ltd vs State of Punjab. In the Video Electronics case, the Supreme Court, while dealing with a question of sales tax exemption for cinematographic films and other equipment manufactured in Uttar Pradesh, said that “taxes which do not directly or immediately restrict or interfere with trade, commerce and intercourse throughout the territory of India, would therefore be excluded from the ambit of Article 301 of the Constitution”, The apex court also said in the Video Electronics case that “sales tax has only an indirect effect on trade and commerce and does not directly impede the free movement of transport”. The bench of Justices Nagarathna and Viswanathan, however, held that the Rajasthan notification did not fall within the criteria laid down in the Vijay Electronics case. The Supreme Court said, “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," it added.
