Origin-based tax differentiation in concessional sales tax scheme failed equality review and was struck down as discriminatory.

The proviso to Explanation II to the Fourth Schedule of the Karnataka Sales Tax Act, 1957, inserted by Karnataka Act No. 5 of 1996, was treated as discriminatory because it denied the concessional rate where input goods were exempt under section 8-A or under deferment under section 19-C, even though the declared goods and first-point tax structure remained the same. The differentiation turned on the origin of the input goods rather than any real distinction in the finished goods, creating a class within a class and making the incentive for new units illusory. Applying reasonable classification and equality principles, the proviso was held to lack a rational basis and was struck down as violative of Article 14.

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Issues: Whether the proviso to Explanation II appended to the Fourth Schedule of the Karnataka Sales Tax Act, 1957, inserted by Karnataka Act No. 5 of 1996, was discriminatory and violative of Articles 14 and 19(1)(g) of the Constitution of India.

Analysis: The impugned proviso denied the concessional rate available under the amended scheme where the input goods were exempt under section 8-A or covered by deferment under section 19-C of the Karnataka Sales Tax Act, 1957, although the goods remained the same declared goods and the tax structure continued to operate at the first point under section 5(4). The differentiation depended on the origin of the input goods rather than on any real distinction in the nature or class of the finished goods. The Court held that such origin-based treatment introduced uncertainty, created a class within a class, and had the practical effect of making the incentive to new units illusory. Applying the principles of reasonable classification and the equality clause, the Court found no rational basis for the differential incidence of tax on similarly situated goods manufactured by new exempted units and units enjoying deferment.

Conclusion: The proviso to Explanation II was discriminatory and violative of Article 14 of the Constitution of India and was struck down. The writ petition was allowed.

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