In short: A seven-judge Constitution Bench of the Supreme Court has held that the 1974 ruling in S Kodar v. State of Kerala still stands: a surcharge or additional tax calculated as a percentage of sales tax is part of the sales tax itself, and states could levy it before GST. The detailed judgment is awaited.
What did the Supreme Court decide?
On Wednesday, a seven-judge bench headed by Chief Justice of India Surya Kant ruled on a question that had been before a larger bench since 1999. The bench said that the laws under challenge have since been replaced or amended, and that GST came into force in 2017. So the question had no practical significance and did not need a fresh ruling.
The Court did not leave the legal position open, though. It clarified that Kodar, a five-judge bench decision, "continues to hold the field". According to the Court, Kodar held that an additional tax or surcharge computed as a percentage of the sales tax payable is an increase in the sales tax rate. That makes it a tax on the sale or purchase of goods under Entry 54 of List II (the State List), as that entry then stood.
The Court added that whether a state legislature was competent to levy such a surcharge will be governed by the law declared in Kodar.
How did the dispute arise?
The reference came from a challenge to Section 5A of the Orissa Sales Tax Act, 1947. That provision imposed an additional tax on dealers based on annual turnover:
| Annual turnover | Additional tax |
|---|---|
| Between ₹10 lakh and ₹1 crore | 10 per cent |
| Above ₹1 crore | 15 per cent |
The appellants asked whether a state could impose such a levy under Entry 54 of the State List, which allowed states to tax the sale or purchase of goods. They also asked whether it was really a tax on income, a subject under Entry 82 of the Union List, which falls within Parliament's domain.
Earlier judgments pointed in different directions:
- S Kodar v. State of Kerala (1974): a five-judge bench upheld additional sales tax and rejected the argument that it was a tax on income.
- India Cement v. State of Tamil Nadu: a seven-judge bench struck down a cess linked to mining royalty. The appellants relied on it.
During the hearing, the Chief Justice observed that India Cement was no longer good law. Solicitor General Tushar Mehta also pointed to a nine-judge bench ruling in Mineral Area Development Authority v. Steel Authority of India, which had overruled India Cement.
Why is the case called academic?
At the hearing on 22 September, Mr Mehta submitted that the controversy had largely become academic after GST was introduced in 2017, with relatively few disputes still pending. The Court accepted that the statutes in question have been substituted or replaced. Justice KV Viswanathan wrote a separate concurring opinion. He said Kodar correctly held that a state's power to impose additional sales tax is traceable to Entry 54 of List II, and that such a tax is not a tax on a dealer's income. He described this in the context of a tax on dealers whose turnover exceeds a minimum threshold and where there is no pass-through to consumers.
Who is affected?
- Dealers with old disputes: the few pending cases on pre-GST additional sales tax or surcharges will be decided in line with Kodar.
- State governments: the ruling confirms the constitutional basis for such levies under the earlier sales tax framework.
- Current taxpayers: most businesses are not directly affected, since the ruling concerns the pre-GST regime. States retain the power to tax certain products outside GST, including petrol, diesel, crude oil, natural gas, aviation turbine fuel and alcoholic liquor for human consumption.
What should readers do?
Most readers need not do anything. A business with an old assessment or appeal involving a state surcharge on sales tax should speak to a tax professional and read the full judgment once it is published, as only the operative findings have been reported so far.
Frequently asked questions
Did the Supreme Court answer the original reference?
Not in the usual way. It held that the question was academic and did not survive for a seven-judge bench to decide. It nevertheless confirmed that Kodar continues to hold the field.
Does this ruling affect GST?
No. The ruling concerns states' power to levy additional tax on sales tax before GST was introduced in 2017.
Is the full judgment available?
Reports say the detailed judgment is awaited. This article will need updating once it is published.
Sources
- Bar & Bench: Supreme Court upholds power of State legislatures to impose additional levy on sales tax
- Mint: SC upholds states' power to levy additional tax on sales tax under pre-GST regime
- Hindustan Times: SC upholds states' power to levy additional sales tax, says case has become academic
- BusinessLine: States can impose additional sales tax, Supreme Court reaffirms 1974 ruling