The Supreme Court of India delivered a landmark judgment striking down a 2007 Rajasthan government notification that granted VAT (Value Added Tax) exemption exclusively to goods produced within Rajasthan, while imposing VAT on similar goods manufactured in other states. The court held that this differential treatment violated Article 304(a) of the Constitution.
Article 304(a) of the Indian Constitution prohibits states from imposing discriminatory taxes on goods imported from sister states. It reads: "A state may by law impose on goods imported from other states or 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 essence, if a state levies a tax on goods, it must apply equally to both domestically produced and out-of-state goods — any preferential exemption given only to local produce constitutes discrimination.
The Rajasthan 2007 notification was challenged by businesses and traders from other states who faced competitive disadvantage because locally produced goods were effectively subsidised through the VAT exemption. The Supreme Court, examining the notification, found it squarely in conflict with Article 304(a) as it created an unequal playing field in interstate commerce.
This judgment carries significant implications. It reaffirms the constitutional principle of a unified internal market within India and prevents states from using tax policy as a tool to create economic barriers against goods from other states. The ruling also has resonance for broader trade policy, as it underscores that India's federal structure, while giving states fiscal autonomy, does not permit trade discrimination that fragments the national market.
The case contributes to the evolving jurisprudence on interstate trade (Article 301-307), which protects the freedom of trade and commerce across India and guards against protectionist state practices.