The Supreme Court of India ruled that ‘rebate of tax’ granted by State of Uttar Pradesh to manufacturers in the State discriminates against the goods imported from neighbouring States, and thus is violative of Articles 301 and 304(a) of the Constitution of India.
The State of Uttar Pradesh issued a notification in exercise of its powers under Section 5 of Uttar Pradesh Trade Tax Act, 1948 that provided rebate of tax to cement manufacturing units using flyash as raw material in a unit established in the districts of State of Uttar Pradesh alone.
The Court said, “Rebate is another such device used by the Government which when given on the rate of tax to the full amount of tax levied, it gives favourable treatment to one class of dealers situated within the state barring the dealers similarly placed outside the State manufacturing goods using the same raw material. The grant of such rebate has the colour of exemption/ concessional rate of tax along with the same deleterious effects of an exemption.” “Therefore, the test to be applied to determine whether rebate is within the realm of tax defined in article 304(a) of the Constitution of India so as to say that it discriminates between the two class of goods: locally manufactured goods and the imported goods when both the class of dealers meet the conditions required to qualify for the grant of rebate…”
The Court, hence, severed the discriminatory part from the rest of the notification, which can operate independently without altering the purpose and the object of the notification.