When Incentives Become Barriers: Supreme Court on Discriminatory Tax Notifications.

Background

• Rajasthan issued a Notification (09.03.2007) under RVAT Act, 2003 granting VAT exemption to asbestos cement products manufactured within the State.
• Goods imported from outside Rajasthan were excluded.
• The Notification was challenged as violative of Article 304(a) (prohibition against discriminatory taxation in inter-State trade).

---

Key Legal Issue

• Whether the VAT exemption favouring local manufacturers discriminated against goods imported from other States, thus breaching Articles 301–304 (freedom of trade & commerce).

---

Petitioners’ Arguments

1. Blanket exemption for local goods = discrimination against imports, violating Article 304(a).
2. Jindal Stainless (2016) held: any “intentional and unfavourable bias” = unconstitutional.
3. Reliance on Video Electronics misplaced — that case dealt with time-bound, limited exemptions, unlike this open-ended one.
4. No estoppel against fundamental rights.
5. Promoting local industry ≠ justification for discrimination.

---

State’s Arguments

1. Taxing power under Articles 245 & 246 only limited by Article 304(a).
2. Incentives are valid if non-hostile, time-bound, and developmental.
3. Exemption meant to encourage use of local fly ash & attract industries.
4. Relied on Video Electronics (1989) and Shree Digvijay Cement (1999).

---

Supreme Court’s Findings

• Principles reaffirmed:
  • Taxation is not barred, but discriminatory taxation is prohibited under Art. 304(a).
  • Exemptions must be:
    • Non-hostile
    • Limited in duration
    • Supported by contemporaneous reasoning in the notification
• Post facto justifications (in affidavits) cannot cure defects.
• Rajasthan’s Notification = discriminatory because:
  • Open-ended, no time limit.
  • Favoured all local industries across the board.
  • No rationale stated in the Notification itself.

---

Conclusion of the Court

1. Article 304(a) & (b) operate separately — non-discrimination is mandatory.
2. Tax on imports not discriminatory if no similar goods manufactured locally.
3. States may equalize tax burdens, but exemptions must be narrow, justified, and time-bound.
4. Rajasthan’s Notification = violative of Article 304(a) → struck down.

---

Landmark Judgments Referenced

• Atiabari Tea (1960)
• Automobile Transport (1962)
• Video Electronics (1989)
• Shree Digvijay Cement (1999)
• Jaiprakash Associates (2013)
• Jindal Stainless (2016 – 9J Bench)
• Mohit Minerals (2022) – fiscal federalism under GST

---

Key Takeaways

• Industrial incentives permissible, but must be non-discriminatory, justified, and time-bound.
• Reasons must exist in the notification itself; later explanations have no value.
• Reinforces that Article 304(a) ensures equal tax treatment for inter-State goods.
• Even under GST, the principle applies — exemptions & concessional rates must pass the non-discrimination test.
• Sets a benchmark for judicial scrutiny of GST notifications and circulars granting selective benefits.

---

This judgment strengthens constitutional discipline in fiscal policy and serves as a caution to States while framing tax incentives.

To explore the complete analysis, read the full article here: https://vilgst.com/showiframe?V1Zaa1VsQlJQVDA9=TVRjMU5nPT0=&page=articles

(The author is a practicing advocate, Co-Founder and Legal Head of RB LawCorp.
He specializes in GST law. Suggestions or queries can be directed to
ashsharma@rblawcorp.in. The views expressed in this article are strictly
personal.)