The Supreme Court on Wednesday (November 4) reaffirmed the constitutional authority of state governments to impose additional sales tax or surcharge calculated as a percentage of existing sales tax.
A seven-judge Constitution Bench headed by Chief Justice Surya Kant upheld the legal position established in 1974, bringing clarity to a dispute that had remained before the court for nearly three decades.
The court, however, declined to undertake a fresh examination of the constitutional question, observing that the introduction of the Goods and Services Tax (GST) in 2017 had fundamentally changed India's indirect taxation framework. The laws involved in the dispute had also been amended or replaced, making the reference largely academic.
The central issue was whether states could impose an additional tax, surcharge or cess based on the sales tax already payable by a dealer.
The court reaffirmed its 1974 judgment in S. Kodar vs State of Kerala, which recognised that an additional levy calculated as a percentage of sales tax amounts to an increase in the sales-tax rate rather than a tax on the dealer's income.
Under the constitutional framework applicable before GST, Entry 54 of the State List empowered states to impose taxes on the sale or purchase of goods, subject to constitutional restrictions.
The Supreme Court clarified that the principles established in the Kodar judgment would continue to govern disputes concerning the legislative competence of states to impose such levies.
Justice KV Viswanathan, in a separate concurring judgment, supported the earlier ruling and found no reason to reconsider it.
The latest judgment arose from a challenge involving the Orissa Sales Tax Act, 1947. Section 5A of the legislation provided for additional sales tax based on the annual turnover of dealers.
The disputed provisions included:
10% additional tax for dealers with annual turnover between ₹10 lakh and ₹1 crore.
15% additional tax for dealers with annual turnover exceeding ₹1 crore.
The additional levy was calculated with reference to the sales tax payable, rather than being imposed directly on the dealer's income.
The constitutional question was whether such levies fell within states' powers to tax sales or effectively encroached on Parliament's authority to tax income.
The controversy was complicated by earlier Supreme Court decisions, including the 1983 judgment in Hoechst Pharmaceuticals vs State of Bihar and the 1990 ruling in India Cement vs State of Tamil Nadu.
The matter was initially referred to a larger bench in 1998 and subsequently placed before a seven-judge bench in 1999.
India introduced GST on July 1, 2017, replacing several central and state indirect taxes, including the general sales-tax and value-added-tax systems applicable to most goods.
As a result, the constitutional and statutory framework under which the disputed additional sales taxes were imposed underwent substantial changes.
During the hearings, Solicitor General Tushar Mehta, representing the Union government, argued that the dispute had largely lost its relevance following the introduction of GST.
The court accepted that the broader constitutional reference no longer required fresh adjudication. However, the judgment does not mean that states have received unrestricted powers to introduce additional sales taxes on goods already covered by GST.
The decision primarily clarifies the legal position governing additional sales-tax levies under the earlier taxation system.
It could be relevant to businesses involved in pending disputes over assessments and tax liabilities arising before the introduction of GST.
The Supreme Court has also left certain specific legal questions open, including the validity of a surcharge under Punjab's earlier sales-tax legislation and issues concerning the treatment of cess proceeds.
These matters, along with individual assessment disputes and consequential relief, may require further adjudication.
For businesses operating under the present GST framework, the judgment does not introduce a new tax or immediately change existing GST rates.
The ruling instead reinforces a longstanding constitutional principle: an additional levy calculated on an existing tax can retain the legal character of that underlying tax, provided it falls within the legislature's taxation powers.