SC upholds states' power to levy additional sales tax, says 27-year-old dispute now academic

NEW DELHI, Nov. 4 -- The Supreme Court on Wednesday upheld the legal position allowing states to impose additional sales tax or surcharge calculated as a percentage of existing sales tax, ruling that a 1974 Constitution Bench judgment on the issue remained binding even as a nearly three-decade-old reference had become academic following the introduction of the Goods and Services Tax (GST) regime.

A seven-judge Constitution Bench headed by Chief Justice of India Surya Kant unanimously held that the constitutional question referred to it in 1999 no longer required fresh adjudication because the statutory provisions under challenge had subsequently been amended or replaced and the GST regime had fundamentally altered the country's indirect taxation framework.

The bench comprised Chief Justice Surya Kant and Justices K V Viswanathan, S V N Bhatti, Joymalya Bagchi, N V Anjaria, Arun Palli and V Mohana. Justice Viswanathan delivered a separate concurring opinion, while the Chief Justice authored the principal judgment on behalf of himself and five other judges.

The court observed that the reference had lost its practical relevance in view of the legislative changes introduced over the years. It consequently disposed of the reference without reopening the settled constitutional position governing additional sales tax.

However, the bench clarified that the five-judge Constitution Bench ruling in S Kodar versus State of Kerala (1974), which recognised the legislative competence of states to impose additional sales tax, continued to govern the issue.

The 1974 judgment had held that an additional tax or surcharge calculated as a percentage of the sales tax payable by a dealer amounted to an enhancement of the sales tax rate rather than a tax on the dealer's income.

The distinction was central to the constitutional controversy because taxation of the sale or purchase of goods fell within the legislative competence of states under Entry 54 of List II of the Seventh Schedule to the Constitution, as it stood before the GST-related amendments. Taxation of income other than agricultural income, on the other hand, falls within Parliament's legislative domain under Entry 82 of List I.

The court reaffirmed that the method used to calculate an additional levy did not, by itself, change the essential character of the underlying tax. Consequently, a surcharge linked to an existing sales tax could be treated as an increase in that tax rather than an independent levy on income.

The dispute originated from a challenge to Section 5A of the Orissa Sales Tax Act, 1947, which imposed additional tax on dealers according to their annual turnover.

Under the provision, dealers with annual turnover between Rs 10 lakh and Rs 1 crore were liable to pay additional tax at 10 per cent, while those whose turnover exceeded Rs 1 crore faced an additional levy of 15 per cent.

The appellants questioned whether the state legislature possessed the constitutional authority to impose such an additional levy. They argued that calculating the tax with reference to the existing sales tax liability and applying turnover thresholds raised questions about whether the measure effectively amounted to taxation of income.

The controversy was complicated by differing interpretations of earlier Supreme Court judgments, particularly S Kodar versus State of Kerala, Hoechst Pharmaceuticals versus State of Bihar and India Cement versus State of Tamil Nadu.

In the Hoechst Pharmaceuticals case, the Supreme Court had upheld a surcharge imposed under Bihar's sales tax legislation, recognising it as falling within the state's legislative competence.

However, the subsequent India Cement judgment, which concerned taxation linked to mining royalty, had raised questions about the constitutional limits of state taxation powers and the distinction between the nature of a tax and the basis on which it was calculated.

The seven-judge bench observed that the perceived conflict between these decisions no longer survived. It noted that the relevant legal premise concerning royalty in the India Cement judgment had subsequently been overruled by a larger Constitution Bench in the Mineral Area Development Authority case.

The court consequently found no subsisting judicial precedent that undermined the legal principles established in the Kodar judgment.

Justice Viswanathan, in his separate concurring opinion, also concluded that the earlier decisions in Kodar and Hoechst Pharmaceuticals were consistent with each other and that the India Cement ruling concerned materially different constitutional questions.

He held that additional sales tax determined with reference to the sales tax payable by dealers exceeding a prescribed turnover threshold remained traceable to the state's legislative power to tax the sale or purchase of goods under the constitutional framework applicable at the time.

During the hearing on September 22, Solicitor General Tushar Mehta had submitted that the controversy had largely become academic following the introduction of GST in July 2017, although a limited number of disputes arising under the earlier taxation framework remained pending.

The court accepted that the changes in the constitutional and statutory framework had substantially diminished the prospective significance of the reference.

Nevertheless, the bench left open certain questions arising from the Punjab General Sales Tax Act, 1948, and the Punjab Social Security Act, 2000.

These included whether industrial units otherwise exempted from sales tax could be required to pay a surcharge and whether proceeds collected under the Punjab social security legislation could be credited directly to a designated fund without first entering the Consolidated Fund of the State.

The court also left individual disputes concerning tax assessments and consequential relief open for consideration by appropriate benches.

The Registry was directed to place the lead matter and connected cases before a regular bench for disposal in accordance with the Constitution Bench's findings.

The ruling brings the 27-year-old constitutional reference to a close while preserving the legal principles governing additional sales tax under the pre-GST taxation framework.

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Published by HT Digital Content Services with permission from Millennium Post.