Indian Constitution envisages an economic union where trade and commerce flow freely across State borders. Part XIII of the Constitution (Articles 301–307) provides the framework for economic integration. Within this, Articles 301–304 are the key provisions that explicitly prohibit States from creating fiscal barriers against goods from other States. A recurring constitutional issue has been whether State taxation policies and exemptions given to local industries can amount to discriminatory treatment of imported goods.
In its recent judgment in M/s U.P. Asbestos Ltd. v. State of Rajasthan & Ors. (2025 INSC 1154), the Supreme Court reaffirmed that States cannot use the weapon of taxation to disadvantage goods imported from other States, striking a balance between the freedom of trade and the States’ power to grant industrial incentives.
Factual Background
- The appellants, U.P. Asbestos Ltd. and Everest Industries Ltd., manufactured asbestos cement products outside Rajasthan but sold them through depots registered in the State.
- Rajasthan issued Notification S.O. 377 (09.03.2007) under Section 8(3) of the Rajasthan VAT Act, 2003, exempting asbestos cement sheets and bricks manufactured within Rajasthan (with 25% fly ash content) from payment of VAT, subject to conditions.
- Goods manufactured outside Rajasthan were not granted this exemption, leading to discrimination against inter-state traders.
- The appellants challenged the notification before the Rajasthan High Court, but their writ petitions were dismissed based on earlier rulings (e.g., Hyderabad Industries case).
- The matter reached the Supreme Court, raising the core issue: whether such an exemption violated Article 304(a) by discriminating against goods imported from other States.
Constitutional Framework
- Article 301 – Guarantees free trade, commerce, and intercourse throughout India.
- Article 303(1) – Prohibits both Parliament and State Legislatures from giving preference to one State over another or discriminating between States.
- Article 304(a) – Allows States to impose taxes on imported goods only if similar local goods are taxed equally; prohibits discriminatory taxation.
- Article 304(b) – Permits States to impose reasonable restrictions in the public interest, but only with prior Presidential sanction.
Arguments
Appellants’ Contentions
- The notification granted blanket exemption to locally manufactured goods without justification, thereby discriminating against imported goods in violation of Article 304(a).
- The State’s claim that the exemption promoted the use of Rajasthan’s fly ash was misleading, as the notification did not mandate sourcing fly ash from within the State.
- Even if fly ash had to be locally sourced, Jaiprakash Associates (2014) held that such conditions still violate Article 304(a).
- Relying on Shree Mahavir Oil Mills (1996), they argued that taxation cannot be used to build “tariff walls” to protect local industries.
- The principle of no estoppel against constitutional rights applied, meaning earlier exemptions not challenged could not validate the discriminatory policy.
State of Rajasthan’s Submissions
- Exemptions were granted to encourage industrialisation and promote environmentally friendly use of fly ash, a by-product of thermal plants.
- The policy was limited to industries commencing production before 31.12.2006 and was valid till 2010 (later extended to 2016).
- Under Video Electronics (1989) and Jindal Stainless Ltd. (2017), differential treatment is permissible if it promotes industrial growth for a limited period and does not create “unfavourable bias.”
- The measure was “differentiation,” not “discrimination,” and hence constitutionally valid.
Judicial Precedents Considered
Atiabari Tea Co. v. State of Assam (1961) – Trade must be free from barriers; taxation cannot impede free flow.
Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan (1962) – Distinction between compensatory taxes (valid) and discriminatory restrictions (invalid).
Firm A.T.B. Mehtab Majid & Co. v. State of Madras (1963) – Struck down discriminatory taxation of hides and skins.
Kalyani Stores v. State of Orissa (1966) – Countervailing duty invalid where no similar goods are manufactured locally.
Weston Electronics v. State of Gujarat (1988) – Struck down lower tax rates for local TV manufacturers.
Video Electronics Pvt. Ltd. v. State of Punjab (1989) – Allowed limited exemptions for new industries to promote growth.
Shree Mahavir Oil Mills v. State of Jammu & Kashmir (1996) – Held that taxation cannot be used as a tool to shield local industries.
Jindal Stainless Ltd. v. State of Haryana (2017, 9-Judge Bench) – Clarified that differentiation without “unfavourable bias” is not discrimination.
Assessment by the Court
- The Court scrutinised whether the Rajasthan notification created a tariff wall disadvantaging goods imported from other States.
- It noted that the exemption was prolonged (2000–2016) and applied broadly, unlike Video Electronics, where benefits were for a narrow class of new industries for a short duration.
- The Court emphasised that every differentiation is not discrimination, but where exemptions show intentional bias against imported goods, Article 304(a) is violated.
- The State’s environmental justification was found insufficient, as the notification itself contained no express rationale. Under Mohinder Singh Gill (1978), administrative/executive orders must stand on the reasons stated within them.
- Industrial incentives are permissible, but they must not discriminate through taxation. States may encourage industries via subsidies, infrastructure, or direct incentives, but not by taxing imported goods differently.
Decision
- The Supreme Court held that the Rajasthan notification violated Article 304(a) by discriminating against goods imported from other States.
- The High Court erred in relying on Video Electronics, as the Rajasthan exemptions were not restricted in duration or scope.
- The Court reaffirmed that States cannot impose discriminatory taxes or exemptions favouring local goods, as it undermines India’s economic unity.
Conclusion
The judgment is a landmark reaffirmation of the constitutional principle that trade must remain free across State boundaries. While States retain the power to promote local industries, they cannot erect fiscal barriers disadvantaging goods from other States.
This decision strengthens the federal economic fabric envisioned by the framers of the Constitution and ensures that taxation policies remain consistent with the principle of “One Nation, One Market.”
Important Link
Law Library: Notes and Study Material for LLB, LLM, Judiciary, and Entrance Exams