Freedom of trade and non discrimination: a local exemption that taxes identical interstate goods is invalid, and the notification was quashed.

A state executive notification exempting hosiery goods manufactured locally while taxing identical goods imported from other states was held to create a prohibited local preference and to discriminate against inter state trade; such differential taxation by executive notification cannot be sustained under the constitutional guarantee of freedom of trade and the non discrimination principle and is not justified as a public interest restriction. The notification was declared void and quashed, relief granted to petitioners, and arrears of local sales tax falling due during the notification period were ordered not to be collected.

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Issues: Whether Notification No. S.O. 934 dated August 1, 1984, exempting hosiery goods manufactured in the State of Bihar from sales tax while imposing tax on similar hosiery goods imported from other States, discriminates against inter-state trade and commerce and thereby violates Article 301 read with Article 304 of the Constitution of India; and whether the notification must be quashed and appropriate relief granted.

Analysis: Article 301 guarantees freedom of trade, commerce and intercourse throughout India subject to the exceptions in the Part. Article 304 permits a State to impose taxes on goods imported from other States only if there is no discrimination between imported goods and like goods manufactured in that State, and permits reasonable restrictions in the public interest under clause (b). The impugned notification confers an exemption on hosiery goods manufactured in Bihar while subjecting identical goods imported from other States to a 5% sales tax, thereby creating a local preference and a discriminatory tax burden on imported goods. Such a differential levy, effected by executive notification rather than by state legislation, does not fall within the non-discriminatory taxing power under Article 304(a) nor is it shown to be a permissible regulatory or compensatory measure under Article 304(b). Previous decisions of this Court establish that taxes or notifications which, from a normal commercial point of view, directly and immediately hamper the free flow of goods between States offend the constitutional protection of inter-state trade and commerce.

Conclusion: The notification No. S.O. 934 dated August 1, 1984 is void and is quashed; the petitioners succeed and relief is granted in their favour. The arrears of sales tax which would become payable by dealers in Bihar in respect of local hosiery sales during the operation of the notification shall not be collected; no order as to costs.

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