States cannot impose taxes that discriminate against goods imported from other states compared with those manufactured within the state, unless there are special circumstances, the Supreme Court has held.

It has quashed a 2007 Rajasthan government notification that exempted certain manufacturers of asbestos cement within the state from a special value-added tax that applied to those supplying it from other states.

The government notification exempted Rajasthan companies that made asbestos cement sheets and bricks with a fly ash content of 25 per cent or more.

Asbestos cement manufacturers from Uttar Pradesh had challenged a Rajasthan High Court judgment of 2007 that upheld the constitutional validity of the state government order.

They argued that clauses of the order ran counter to the constitutional right to free movement of trade and commerce under Articles 301 and 304.

"…The reason stated by the State Government to exempt from payment of tax was simply that 'it was expedient in the public interest so to do'," the bench of Justice B.V. Nagarathna and Justice K.V. Viswanathan said.

"We have no hesitation in holding that the impugned notification violates Article 304(a) of the Constitution as it is discriminatory in nature," Justice Nagarathna, who authored the judgment, said.

The apex court referred to a nine-judge constitution bench ruling of 2017 in the Jindal Stainless Ltd case where, analysing Article 304(a), the majority had held that taxing goods imported from other states was constitutionally permissible as long as the state legislature abided by the limits placed on the exercise of that power.

For instance, a tax on goods imported from another state would not be discriminatory if no similar goods are produced within the home state.

Similarly, states are free to design their fiscal legislations in a manner that ensures that the tax burden on goods imported from other states is equal to the tax burden on goods produced within the state.

However, whether the tax burden falls equally is a matter to be determined in each case, the nine-judge bench had held.