Discriminatory sales tax exemption for local goods violates free trade and equal tax treatment under the Constitution.

A State may support local industry, but it cannot use sales tax exemption to create a discriminatory fiscal barrier against goods imported from other States. The Supreme Court held that Article 304(a) requires similar tax treatment for locally manufactured and imported goods, and that Part XIII does not permit unconditional exemption of all local edible oil units while similar out-State goods remain taxed. The Court found the exemption notification violative of Articles 301 and 304(a); however, relief was moulded under Article 142 so the invalidity operated prospectively for the period directed.

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Issues: Whether the exemption granted to local manufacturers of edible oil in Jammu and Kashmir, while out-State manufacturers continued to pay sales tax, violated the constitutional guarantee of free trade and the prohibition against discriminatory taxation under Articles 301 and 304(a) of the Constitution of India.

Analysis: The constitutional scheme of Part XIII permits State taxation, but it does not permit a State to use taxation to create a discriminatory fiscal barrier against goods imported from other States. Article 304(a) requires that imported goods and locally manufactured goods be subjected to similar tax treatment, and the clause operates as a prohibition against discriminatory taxation. The earlier decisions recognizing the validity of regulatory or compensatory levies, and the limited exception carved out for narrowly tailored incentives to new industries, did not justify a blanket exemption in favour of all local small-scale edible oil units. The exemption in question was unconditional, extended across the class of local producers, and resulted in a higher tax burden on similar goods brought from outside the State.

Conclusion: The exemption notification was violative of Articles 301 and 304(a) and could not be sustained.

Final Conclusion: The appellants succeeded in challenging the State's discriminatory tax exemption, though relief was moulded under Article 142 so that the declaration of invalidity operated prospectively for the period directed by the Court.

Ratio Decidendi: A State may encourage local industry, but it cannot do so by exempting local goods from sales tax while subjecting similar imported goods to tax at a higher rate, because such discriminatory taxation is prohibited by Article 304(a) of the Constitution of India.

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