Supreme Court upholds power of State legislatures to impose additional levy on sales tax

The Supreme Court on Wednesday upheld the power of State legislatures to impose additional tax, surcharge or cess calculated on existing sales or purchase tax.

A seven-judge Constitution Bench of Chief Justice of India (CJI) Surya Kant and Justices KV Viswanathan, SVN Bhatti, Joymalya Bagchi, NV Anjaria, Arun Palli and V Mohana delivered the judgment.

The legal question was referred to a larger bench nearly 27 years ago.

The Court said that the statutes under which the levies were imposed have since been substituted or replaced. Therefore, it added, the question did not survive for adjudication. 

"The question referred to is of no practical significance and now academic. Consequently, the question referred to does not survive for adjudication by a seven-judge Bench, and the reference has to be answered accordingly," the Court said.

The decision means that the top court has approved the five-judge decision of S Kodar v. State of Kerala, in which additional sales tax was upheld and the contention that the levy was effectively a tax on income was rejected.

"We have clarified that 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 Court ruled today.

The Court added that the question of the legislative competence of the State legislature to levy the impugned surcharge itself shall be governed by the law declared in S Kodar.

The dispute arose from a challenge to Section 5A of the Orissa Sales Tax Act, 1947, which imposed additional tax at 10 per cent on dealers having annual turnover between ₹10 lakh and ₹1 crore and 15 per cent on those exceeding ₹1 crore.

The appellants questioned whether such a levy could be imposed under Entry 54 of the State List, which empowers States to tax the sale or purchase of goods, and whether it encroaches upon Parliament's taxation powers under Entry 82 of the Union List.

The controversy arose from differing approaches adopted in earlier Supreme Court judgments.

In S Kodar v State of Kerala, a five-judge bench upheld additional sales tax, rejecting the contention that the levy was effectively a tax on income.

Similarly, in Hoechst Pharmaceuticals v. State of Bihar, a three-judge bench upheld a surcharge on sales tax, holding that it retained the character of sales tax.

However, the appellants argued that the ruling in Hoechst proceeded on a concession regarding legislative competence. They relied on the seven-judge bench decision in India Cement v. State of Tamil Nadu, which invalidated a cess connected with mining royalty.

The conflicting approaches led to the reference being placed before seven judges in 1999.

During the hearing on September 22, Solicitor General Tushar Mehta submitted that the controversy had become largely academic following the introduction of Goods and Services Tax (GST) in 2017, with relatively few disputes remaining pending.

Mehta also referred to the nine-judge bench ruling in Mineral Area Development Authority v. Steel Authority of India, which had overruled India Cement.

CJI Kant had observed that India Cement was no longer good law and that Kodar had subsequently received judicial approval. However, he clarified that the Bench would examine the issue independently.

Justice Bagchi had observed that legislative competence must be determined by the nature of the tax rather than merely its additional character.

The judgment delivered today was pronounced by CJI Kant. Justice Viswanathan wrote a concurring opinion in which he analysed the decisions in Hoechst and India Cement

“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 income of a dealer,” the judge said.