SC upholds states' power to levy additional tax on sales tax under pre-GST regime

The Supreme Court settled whether states could add a levy calculated on an existing sales-tax liability. Its seven-judge Constitution Bench held that they could do so under the pre-GST constitutional framework. The ruling reaffirmed states’ authority to increase the effective sales-tax rate through an additional levy.

The key mechanism is how the levy is calculated. If a surcharge is a percentage of the sales tax payable by a dealer, it increases the amount of sales tax rather than taxing the dealer’s income or turnover separately. The court therefore placed it within Entry 54 of the State List, which covered sales or purchases of goods other than inter-state sales.

The judgment upheld the 1974 S. Kodar ruling and said it remains good law. The court noted that GST has made the broader reference largely academic, but the decision may guide states on additional levies for products still outside GST, subject to constitutional limits.

A surcharge is an additional amount imposed on top of an existing tax. A cess is also an additional levy, often linked to a particular purpose or statutory framework. In this dispute, the important question was not the label used, but how the levy operated and what it measured.

The levy was calculated as a percentage of the sales tax already payable by a dealer. That means the underlying sales transaction and sales-tax liability determined the extra amount. The Supreme Court viewed this as an enhancement of the sales-tax rate, not as a separate tax on the dealer’s income. It therefore fell within Entry 54 of the State List.

This distinction mattered because Entry 54 provided the constitutional basis for state sales-tax powers before GST. The ruling confirms that states could increase the effective tax burden through such a linked levy. After GST, its possible relevance is mainly for products that remain outside GST, including petroleum products and alcohol.

The constitutional question remained unresolved for nearly three decades. It arose after later Supreme Court decisions appeared to create uncertainty about the earlier recognition of states’ power to impose additional sales-tax levies. The seven-judge bench’s ruling now settles the reference by reaffirming the earlier position.

The dispute returned to the courts through Arjun Flour Mills in 1994. In 1998, the Supreme Court referred the issue to a larger bench because of an apparent conflict between S. Kodar from 1974 and India Cements from 1990. Wednesday’s judgment held that Kodar was correctly decided and did not require reconsideration.

The ruling is unlikely to affect a large volume of current litigation. The Centre, represented by Solicitor General Tushar Mehta, said GST had replaced the earlier sales-tax framework and indicated that only a limited number of pending cases could be affected. The article does not provide an exact case count.

The ruling gives courts and litigants a clearer rule for older disputes involving additional sales-tax levies. By reaffirming S. Kodar, the Supreme Court removed the need to reconsider whether a levy linked to sales tax was constitutionally valid under the pre-GST framework. The practical effect will depend on the facts and status of each pending case.

The ruling may also influence present-day state taxation. Petrol, diesel, crude oil, natural gas, aviation turbine fuel and alcoholic liquor for human consumption remain outside GST, according to the article. A state could consider an additional levy on such products where it retains constitutional authority. The mechanism must still fit within that authority.

Tax expert Ashish Karundia said the principle could be relevant under the post-GST framework. States may draw on the ruling when framing additional levies, but the judgment does not give them unlimited power. Any levy must remain within the constitutional provisions and applicable state taxation laws.

S. Kodar, decided in 1974, upheld an additional sales tax calculated as a percentage of sales tax payable. It treated the levy as an increase in the sales-tax rate. That position became uncertain after India Cements in 1990, where the Supreme Court struck down a cess imposed on mining royalty. The different outcomes raised questions about the limits of state taxation powers.

The issue resurfaced in Arjun Flour Mills in 1994. That case concerned an additional tax on dealers based on annual turnover under the Orissa Sales Tax Act, 1947. In 1998, the Supreme Court referred the matter to a larger bench, citing an apparent conflict between Kodar and India Cements. The reference kept the constitutional question open.

The seven-judge bench has now resolved the issue. It reaffirmed Kodar as correctly decided and held that it requires no reconsideration. It also said Kodar and the 1983 Hoechst Pharmaceuticals judgment are not in conflict. India Cements therefore did not displace Kodar’s rule on sales-tax-linked levies.

GST replaced the earlier sales-tax framework in 2017, but it did not bring every product within its scope. States have retained power over certain goods outside GST. The article lists petrol, diesel, crude oil, natural gas, aviation turbine fuel and alcoholic liquor for human consumption.

Before GST, Entry 54 of the State List empowered states to tax the sale or purchase of goods, except inter-state sales. The Supreme Court’s ruling concerned that pre-GST power. It held that a surcharge calculated from existing sales tax was an increase in the sales-tax rate. That principle can help explain how a linked additional levy operates.

After GST, states may consider additional levies on products they still control, especially petroleum products and alcohol. However, the ruling does not remove constitutional boundaries. As tax expert Ashish Karundia noted, any new levy must fall within the states’ constitutional powers and applicable legal framework.

India’s Constitution divides legislative and taxation subjects between the Union and the states. Before GST, Entry 54 of the State List gave states power to tax sales or purchases of goods, except inter-state sales. That provision was the foundation for the sales-tax levy examined by the Supreme Court.

The disputed surcharge was calculated as a percentage of sales tax payable by a dealer. The bench held that this was effectively a higher rate under Entry 54. The ruling therefore confirmed that states could use their pre-GST sales-tax power to impose an additional linked levy, rather than treating it as a tax on dealers’ income.

GST changed the earlier sales-tax structure in 2017 and altered the relevant constitutional provisions and state laws. The article says states nevertheless retain taxing power over products outside GST. These include petrol, diesel, crude oil, natural gas, aviation turbine fuel and alcohol, subject to constitutional limits.