Can States Give Tax Benefits to Local Goods? Supreme Court Says Only If It’s Not Discriminatory

This observation came as the court allowed the civil appeals filed by M/s UP Asbestos Limited and others against orders issued by the Rajasthan High Court in 2007 and 2012. These High Court orders had dismissed writ petitions challenging a notification issued by Rajasthan that granted an exemption from payment of Value Added Tax on the sale of asbestos cement sheets and bricks manufactured within the State, provided they contained fly ash 25% or more by weight, subject to specific conditions.

The Supreme Court quashed the notification, dated March 9, 2007, holding it to be "violative of Article 304(a) of the Constitution" and discriminatory in nature.

The appellants had assailed the validity of the notification, arguing that it violated the free movement of trade and commerce as envisioned in Articles 301 to 304 of the Constitution.

The bench said that Clauses (a) and (b) of Article 304 must be read disjunctively. Consequently, the bench observed that "a tax imposed on goods imported from another state would not be discriminatory if no similar goods are produced within that State".

The bench further stated that a tax rebate or other relief, such as incentives or set-off, which is granted to a specified class of dealers, for a limited time period, in a non-hostile fashion, and with the aim of developing economically backward areas, would not be considered discriminatory. However, court reiterated that whether a tax satisfies these criteria is a question of fact to be determined based on the circumstances of each case.

In the present matter, court found nothing on record to suggest that the notification was issued pursuant to an industrial policy or otherwise.

During the submissions, court had specifically inquired if there were any State policies regarding the establishment of asbestos sheet or cement industry under which the notifications were issued. The counsel for the respondent State could not explain any such background policy, only submitting that the reasons for the notification could be understood from the counter affidavit filed before the high court.

court noted the reason stated in the affidavit was to promote the use of fly ash as a raw material for the production of asbestos cement sheets and bricks, with the intention of utilising fly ash from thermal power plants and to promote the production of asbestos cement sheets, for which there was no manufacturing plant in Rajasthan. The bench noted, "There is no other reason stated for why the impugned notification".

Court emphasized a fundamental principle that any order passed by any public authority exercising administrative or executive or statutory powers "must be judged by the reasons so mentioned in that order and cannot be supplemented by fresh reasons in the shape of an affidavit or otherwise".

The bench opined that the State should have explained, for instance, the impact of earlier notifications, the inadequacy, if any, of prior steps in fulfilling the intended objectives, and the resultant necessity for issuing the subsequent notification. The bench concluded, "In the absence of any such explanation, we cannot, but conclude, that the impugned notification is bereft of any reason or justification".

The bench held that the high court erred in concluding that the present case fell under an exceptional category. The bench observed, "We observe that the said finding is incorrect inasmuch as the exemption was not granted to new industries and neither was it given for a limited period of time".

Court added that if the object of the exemption was truly to utilise the fly ash available in the State of Rajasthan itself, this purpose "should have been so spelt out in the impugned notification".

The bench concluded, "Otherwise, we find a discrimination between asbestos products manufactured in the State of Rajasthan and manufactured outside, having content of fly ash to an extent of 25% when sold in the State of Rajasthan".

Court then posted the appeals for directions to ascertain whether the differential amount deposited before the court, pursuant to the interim order passed in 2008, was collected by the appellants from their customers. The bench stated, "If not, the appellants would be entitled to refund of the amount deposited with interest at the rate of 6% per annum from the date of deposit till realisation".

Case Title: M/s UP Asbestos Limited Vs State of Rajasthan & Others

Order Date: September 24, 2025

Bench: Justices B V Nagarathna and K V Vishwanathan