Discriminatory tax on imported sugar breached free trade protections by favoring locally manufactured goods.

A State tax exemption that favored sugar manufactured within the State while taxing imported sugar was discriminatory and violated the constitutional guarantee of free trade under Articles 301 and 304(a). The court applied the principle that imported goods may be taxed only on the same basis as similar locally manufactured goods, without creating fiscal barriers or origin-based preference. It found that the substitution of entry 49 and insertion of entry 152 in the Punjab VAT schedule treated similar goods unequally solely by source, and struck down the notifications to that extent.

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Issues: (i) Whether the impugned notifications creating a tax exemption for sugar manufactured in the State while imposing tax on sugar imported from outside the State violated the constitutional guarantee of free trade and the prohibition against discrimination under Part XIII of the Constitution; (ii) Whether the substitution of entry 49 in Schedule A and insertion of entry 152 in Schedule B to the Punjab Value Added Tax Act, 2005 could be sustained as a valid non-discriminatory levy.

Issue (i): Whether the impugned notifications creating a tax exemption for sugar manufactured in the State while imposing tax on sugar imported from outside the State violated the constitutional guarantee of free trade and the prohibition against discrimination under Part XIII of the Constitution.

Analysis: Article 301 secures freedom of trade, commerce and intercourse throughout India, subject to Part XIII. Article 304(a) permits a State to tax imported goods only so long as similar goods manufactured or produced in the State are subjected to the same tax without discrimination. The established constitutional principle is that a levy which directly or effectively creates preference for local goods and burdens imported goods amounts to a prohibited fiscal barrier. Applying this test, the notifications created a clear distinction between sugar manufactured in Punjab and sugar imported from outside Punjab, resulting in discriminatory taxation.

Conclusion: The levy was held to be violative of Articles 301 and 304(a) of the Constitution of India.

Issue (ii): Whether the substitution of entry 49 in Schedule A and insertion of entry 152 in Schedule B to the Punjab Value Added Tax Act, 2005 could be sustained as a valid non-discriminatory levy.

Analysis: The earlier position under Section 16 of the Punjab Value Added Tax Act, 2005 treated sugar as tax-free without the impugned distinction. By substituting entry 49 to exempt only sugar manufactured in Punjab and by inserting entry 152 to tax sugar imported from outside the State, the notifications introduced unequal treatment between similar goods solely on the basis of origin. Such differentiation could not be justified by reference to the constitutional scheme governing inter-State trade and taxation.

Conclusion: The impugned notifications were struck down to the extent they created discriminatory treatment between locally manufactured sugar and sugar imported from outside the State.

Final Conclusion: The writ petitions succeeded and the challenged tax notifications were invalidated for creating an unconstitutional preference for local goods over imported goods.

Ratio Decidendi: A State tax on imported goods is valid under Article 304(a) only if similar locally manufactured goods bear the same tax and the levy does not create discrimination or fiscal barriers against inter-State trade.

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