Supreme Court reaffirms states' power to levy sales tax surcharge, closes old reference

Seven-judge bench says a 1974 ruling remains valid and finds the question academic following changes to legislation and introduction of GST

A seven-judge Constitution bench of the Supreme Court closed a nearly 27-year-old tax reference, reaffirming that a surcharge calculated as a percentage of sales tax amounts to an increase in the tax rate rather than a separate levy on a dealer's income.

The bench headed by Chief Justice Surya Kant said a 1974 Constitution bench ruling upholding such levies remained good law. It held that the reference had become academic because the disputed provisions had since been replaced or amended and the GST framework had come into force.

The CJI wrote the main judgment for himself and Justices S V N Bhatti, Joymalya Bagchi, N V Anjaria, Arun Palli and V Mohana. Justice K V Viswanathan delivered a separate concurring opinion.

In the 47-page main verdict, the court said the legal position had already been settled in S. Kodar v. State of Kerala in 1974.

"S. Kodar squarely holds 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 CJI said.

"The constitutional entry and the State enactments under which the impugned levies were imposed have since been substituted or replaced, and the question referred is of no prospective significance," the verdict said.

Consequently, the bench held that the question no longer survived for adjudication and the reference had been rendered academic.

In his 46-page concurring verdict, Justice Viswanathan also upheld the earlier ruling.

"For the reasons stated..., it is held that, S. Kodar has been correctly decided, continues to be a good law and needs no reconsideration," he said.

The matter arose from a batch of appeals led by Arjun Flour Mills, challenging provisions of the Orissa Sales Tax Act, 1947, and the Punjab General Sales Tax Act, 1948.

The provisions imposed additional levies calculated at 10 per cent of the sales tax payable by dealers who met specified turnover thresholds.

The assessees argued that calculating a levy on tax already payable amounted to a "tax on tax" and fell outside the legislative competence of state legislatures under Entry 54 of List II of the Constitution's Seventh Schedule.

Rejecting the basis of the challenge, the bench explained that the subject matter of a tax and the measure used to calculate it were distinct concepts.

Computing a surcharge with reference to the sales tax payable did not alter its essential character as a tax on the sale or purchase of goods, the court said.

The S. Kodar ruling had already established that an additional levy calculated as a percentage of sales tax was, in substance, an increase in the sales tax rate for a particular class of dealers. That principle had also been reaffirmed in a subsequent decision, the verdict said.

The court also noted that the 101st Constitutional Amendment, which introduced GST, had substantially altered the distribution of taxing powers between the Centre and the states.

The sales tax enactments involved in the litigation had since been replaced by VAT legislation and subsequently by the GST regime, leaving the reference without prospective significance.