Supreme Court upholds States’ power to levy additional sales tax, says case has become academic

The Supreme Court reaffirmed that States may impose an additional sales tax or surcharge calculated as a percentage of the sales tax already payable. A seven-judge Constitution Bench did not reconsider the issue on its merits because the dispute had become academic. Instead, it confirmed that the 1974 S. Kodar ruling continues to apply.

The key mechanism is how the levy is calculated. If the additional charge is linked to the sales tax payable, it is treated as an enhancement of the sales tax rate. It is therefore a tax on the sale or purchase of goods under Entry 54 of the State List, not a tax on a dealer’s income.

This clarification matters because the Court also said State legislative competence must be assessed under S. Kodar. The challenged laws had been replaced or amended, and GST had come into force, but the 1974 precedent remains controlling.

An additional sales tax is an extra charge imposed on a sale or purchase of goods, usually by adding to the existing sales tax. The Supreme Court treated a surcharge calculated as a percentage of sales tax as an enhancement of that sales tax. This places it within the State’s power over sales and purchases.

A tax on a dealer’s income works differently. It targets the dealer’s earnings or income, rather than the transaction involving goods. In the dispute, the appellants argued that the additional levy effectively taxed income because the rates depended on annual turnover. The Court rejected that approach under the S. Kodar principle when the levy is computed from sales tax payable.

The distinction determines which legislature may act. Sales taxation falls under Entry 54 of the State List, while income taxation falls under Entry 82 of the Union List. The levy’s connection to the transaction therefore matters constitutionally.

Section 5A of the Orissa Sales Tax Act, 1947, imposed an additional tax on dealers according to their annual turnover. The provision used two rates. It applied a 10% additional tax to dealers whose turnover was between ₹10 lakh and ₹1 crore. Dealers exceeding ₹1 crore faced a 15% rate.

These percentages were central to the constitutional challenge. The appellants questioned whether the State legislature could impose the levy under Entry 54 of List II, which covers taxes on the sale or purchase of goods. They argued that using turnover as a measure could make the charge resemble a tax on income.

The Supreme Court’s clarification focused on the levy’s legal character. Under S. Kodar, an additional charge calculated as a percentage of sales tax payable is treated as an increased sales-tax rate. The Court did not conduct a fresh merits review because the provisions had changed and GST had arrived.

The seven-judge Bench found that the referred question no longer had practical significance. The reference had been made nearly 27 years earlier, but the statutory provisions under challenge had since been replaced or amended. The Goods and Services Tax law had also come into force, changing the legal setting.

The underlying dispute concerned whether States could impose an additional sales tax under Entry 54 or whether the levy was really a tax on income. By the time of the hearing, the provisions being questioned were no longer operating in their original form. The Solicitor General also told the Court that relatively few disputes remained pending.

Because the answer would not materially affect the changed legal landscape, the Bench declined a fresh adjudication. It answered the reference by holding that the question did not survive for decision, while expressly confirming that S. Kodar remains authoritative for State legislative competence.

The 1974 five-judge Constitution Bench decision in S. Kodar v. State of Kerala upheld an additional sales tax. It rejected the argument that the levy amounted to a tax on dealers’ income. The ruling treated the charge according to what it measured and how it was calculated.

Its key rule was straightforward: when an additional tax or surcharge is computed as a percentage of the sales tax payable, it enhances the sales-tax rate. The levy therefore remains a tax on the sale or purchase of goods. It falls under Entry 54 of List II, as that constitutional entry then stood.

The 2026 Supreme Court Bench did not reopen that conclusion. Although it found the old reference academic, it specifically stated that S. Kodar continues to hold the field. It also said questions about State legislative competence to impose such surcharges must be governed by the law laid down in that case.

The Goods and Services Tax changed the framework in which the dispute was being considered. It came into force in 2017, after the reference concerning the Orissa sales-tax provision had been pending for many years. The article indicates that the GST law replaced or altered the earlier statutory setting.

Before GST, the controversy focused on State sales-tax powers and whether an additional charge was really an income tax. The challenge to Section 5A therefore depended on the division between Entry 54 of the State List and Entry 82 of the Union List. With GST operating, the old provision no longer presented the same practical issue.

The Court consequently described the reference as academic. The article does not detail GST’s full tax structure, but it records the central consequence: relatively few disputes remained, and the earlier provisions had been replaced or amended. The Court still preserved S. Kodar as the governing precedent for the historical question.

India’s Constitution divides legislative subjects between the Union List and the State List. Parliament legislates on subjects assigned to the Union List, while State legislatures act on subjects assigned to the State List. Taxing power is therefore tied to the subject described in the relevant entry.

This case illustrated the division through two entries. Entry 54 of List II empowered States to tax the sale or purchase of goods. Entry 82 of List I placed taxes on income within Parliament’s domain. The appellants argued that the additional sales tax was really an income tax, while the State relied on its sales-tax authority.

The Supreme Court applied the S. Kodar approach. A surcharge calculated as a percentage of sales tax payable is an enhancement of sales tax, so it belongs under Entry 54 rather than Entry 82. The 2026 Bench said this precedent continues to govern State legislative competence, even though the reference itself became academic.