The Supreme Court has reaffirmed that State legislatures can impose additional sales tax or surcharge calculated as a percentage of the existing sales tax, relying on its earlier Constitution Bench ruling in S. Kodar v. State of Kerala. A seven-judge Constitution Bench held that a nearly 27-year-old reference questioning the legislative competence of States to impose such additional levies had become academic following the introduction of the Goods and Services Tax (GST) regime in 2017.
The Bench, headed by Chief Justice of India Surya Kant, clarified that the legal position laid down in S. Kodar continues to hold the field. However, it declined to undertake a fresh adjudication of the referred question because the constitutional entry and statutory provisions involved had subsequently been replaced.
Background
The reference arose from Arjun Flour Mills v. State of Odisha, which challenged Section 5A of the Orissa Sales Tax Act, 1947. The provision imposed additional tax at 10% on dealers with an annual turnover between ₹10 lakh and ₹1 crore, and 15% on those whose turnover exceeded ₹1 crore.
The dispute concerned whether State legislatures could impose an additional levy calculated on the sales tax payable by dealers under Entry 54 of List II of the Seventh Schedule, or whether such a levy amounted to a tax on income, falling within Parliament's legislative domain under Entry 82 of List I.
The issue was referred to a seven-judge Bench in 1999 following questions arising from earlier decisions in S. Kodar, Hoechst Pharmaceuticals and India Cement.
The Constitution Bench examined the earlier judicial pronouncements and clarified that India Cement did not establish that an additional levy calculated as a percentage of an existing tax would automatically fall outside the State legislature's competence. It also noted that the nine-judge Bench decision in Mineral Area Development Authority v. Steel Authority of India had subsequently overruled the legal premise concerning royalty in India Cement.
Clarifying the continuing legal position, the Court observed:
"The case clearly held that an additional tax or surcharge computed as a percentage of the sales tax payable is an enhancement of the rate of sales tax and a tax on the sale or purchase of goods within Entry 54 of List II, as it then stood. That decision continues to hold the field."
The Bench then explained why it was unnecessary to reconsider the referred question, observing:
"The constitutional entry and the state enactments under which the impugned levies were imposed have since been substituted or replaced, and the question referred to is of no prospective significance. Consequently, the question referred does not survive for adjudication by a seven-judge Bench, and the reference has been rendered academic."
In a separate concurring opinion, Justice K.V. Viswanathan also upheld the reasoning in S. Kodar, finding no conflict between that decision and Hoechst Pharmaceuticals. He observed:
"Kodar rightly held that the legislative competence of the State government to impose additional sales tax, determined with reference to the sales tax payable by a dealer whose annual turnover exceeds a minimum threshold and where there is no pass-through to consumers, is traceable to Entry 54 of List II as tax on sale of goods and is not ultra vires as a tax on the income of a dealer."
The seven-judge Bench answered the reference as infructuous, holding that the legal question no longer required adjudication in the changed constitutional and statutory framework. It also clarified that the principles laid down in S. Kodar would continue to govern the legislative competence of States to impose such additional sales tax or surcharge.
The Court left certain questions concerning the Punjab General Sales Tax Act, 1948, and the Punjab Social Security Act, 2000, open.
It directed the Registry to place the lead matter and connected cases before the appropriate regular Bench for disposal in accordance with its observations.
