1988 (4) TMI 380 - SC - VAT and Sales Tax

Whether, for the purpose of ensuring the same rate of tax between the petitioners and the local manufacturers, the levy of the higher rate of tax suffered by the petitioners should be quashed and they be held entitled to the levy of the lower rate applied to the local manufacturers or should the higher rate imposed on the petitioners be maintained and the notifications imposing the lower rate on local manufacturers be quashed? Held that - Appeal allowed. Notifications No. (GHN-51) GST 1081/(S.49) (109)-TH dated 23rd July, 1981 and No. (GHN-22) GST 1086/(S. 49) (173)-TH dated 29th March, 1986 prescribing a lower rate of tax for local manufacturers in respect of television sets and other electronic goods are quashed

Summary

Issues:
Discrimination in sales tax rates between goods imported into the State and goods manufactured within the State of Gujarat. Interpretation of Article 301 of the Constitution in relation to trade, commerce, and taxation. Validity of notifications imposing different sales tax rates on local manufacturers compared to imported goods.

Analysis:
The judgment by the Supreme Court of India, delivered by Chief Justice R.S. Pathak, addressed the issue of discriminatory sales tax rates under the Gujarat Sales Tax Act, 1969, specifically related to electronic goods like television sets. The petitioners, who manufactured electronic goods, argued that the State Government's differential tax rates for goods manufactured within Gujarat and those imported from outside created unfair competition and hindered inter-State trade, violating Article 301 of the Constitution. The Court highlighted Article 303, which prohibits State Legislatures from giving preference or discriminating between States in matters of trade and commerce. It referenced previous cases like A.T.B. Mehtab Majid & Co. v. State of Madras and H. Anraj v. Government of Tamil Nadu to emphasize the importance of non-discrimination in taxation to uphold free trade.

The Court examined the State Government's rationale for lower tax rates on locally manufactured goods as an incentive for local manufacturing units, citing Article 39 of the Constitution. However, it clarified that such reasoning did not justify discriminatory tax practices. The judgment emphasized the significance of Article 304(a) in allowing State laws affecting trade and commerce, provided they do not discriminate between goods from different States. Ultimately, the Court ruled that the differential tax rates imposed by the State of Gujarat were unconstitutional and had to be struck down.

Regarding the remedy, the Court considered whether to equalize the tax rates for petitioners with local manufacturers or maintain the higher rate for petitioners. It noted that the petitioners' grievance stemmed from the preferential treatment of local manufacturers with lower tax rates. Therefore, the Court decided to quash the notifications imposing lower tax rates on local manufacturers, as the higher rate applied to petitioners was the standard levy under the Act. By aligning with the statutory intention and ensuring uniformity in tax treatment, the Court upheld the petition and allowed the quashing of the notifications favoring local manufacturers. The petitioners were granted costs in their favor, and the judgment concluded with the allowance of the petition.