What is censorship according to Rushdie?

I assume you are referring to Salman Rushdie's essay "On Censorship," although the author has also given a number of interviews on the subject.
In his essay, Rushdie defines censorship as the antithesis of creativity, because the fear engendered by censorship stifles an artist's impulses and limits his choices. The artist cannot properly express himself through his art because his art must either conform to the censor's rules or risk being suppressed, and possibly destroyed. Only when the artist is free to create his art is that art a true, unfettered expression of the artist's vision. If the artist lives in fear that his art will be censored, his expression cannot be unfettered, and his artistic output will suffer for it. Rushdie explains (my italics):

The creative act requires not only freedom but also this assumption of freedom. If the creative artist worries if he will still be free tomorrow, then he will not be free today. If he is afraid of the consequences of his choice of subject or of his manner of treatment of it, then his choices will not be determined by his talent, but by fear.

Censorship, says Rushdie, is "anti-creation, negative energy, uncreation." It is "No-Thing;" it is the erasure, suppression, repression and denial of created things. It is a form of control, because it restricts what ideas people are exposed to, what media they are allowed to consume. The arts require freedom in order to flourish; restrict that freedom, and the arts will change. As Rushdie says,

when censorship intrudes on art, it becomes the subject; the art becomes "censored art," and that is how the world sees and understands it.

Whatever the artist meant to express is now irrevocably altered by his product's status as "censored art." Rushdie refers to the D.H. Lawrence novel Lady Chatterley's Lover, which is the subject of an infamous obscenity trial. The book was censored for its frank descriptions of sexual intercourse, and that is all most people know about it, if they know anything. The novel's merits as a novel become almost beside the point, as most discussion about the book centers on the fact that it was censored, why it was censored, whether or not it should have been censored, and so on. Whatever Lawrence intended to express with Lady Chatterley became lost when the book was censored, for the book then became an emblem of something taboo.

At its most effective, the censor’s lie actually succeeds in replacing the artist’s truth. That which is censored is thought to have deserved censorship.

Artists, of course, still create art under censorship; in fact some of the greatest art of the past century was produced in extremely oppressive societies, proving that the artistic impulse cannot ever be totally eradicated. However, as Rushdie points out:

[There are] people who will give you the argument that censorship is good for artists because it challenges their imagination. This is like arguing that if you cut a man’s arms off you can praise him for learning to write with a pen held between his teeth.

Censorship "cuts off the arms" of the artists who are subjected to it. It must be resisted in every form if art is truly to flourish in society. Art can be dangerous, ugly, shocking, and upsetting, but Rushdie argues that "original art is never created in the safe middle ground, but always at the edge." Those edges must be defended from censorship in order for artists to continue expanding the boundaries of our thoughts.