SC upholds power of states to levy additional tax on sales tax in pre-GST regime | Today’s news
NEW DELHI: The Supreme Court on Wednesday reaffirmed the power of states to impose additional tax, surcharge or cess calculated on top of existing sales tax, settling a legal issue that remained unresolved for nearly three decades. A seven-judge Constitution Bench upheld a 1974 judgment that recognized such charges for the exercise of states’ taxing powers under the pre-GST regime.
A bench headed by Chief Justice Surya Kant ruled that the additional tax calculated as a percentage of the sales tax paid by the seller constituted an increase in the rate of sales tax. Thus, it falls under Entry 54 of the State List, which empowered states to tax the sale or purchase of goods other than inter-state sales before the introduction of the Goods and Services Tax (GST) in 2017.
The decision reaffirms the Supreme Court’s 1974 decision in S. Kodar vs State of Kerala, which upheld the additional sales tax imposed by Tamil Nadu on vendors whose annual turnover exceeded specified limits. The court held that the fee, calculated as a percentage of the sales tax due, was an increase in the sales tax rate rather than the sellers’ income tax.
Entry 54 provided the constitutional basis for states’ pre-GST sales tax powers. After the introduction of GST, states retained the power to tax certain products outside its ambit, including petrol, diesel, crude oil, natural gas, aviation turbine fuel and alcoholic beverages for human consumption.
In a concurring judgment, Justice KV Viswanathan said that Kodar was correctly decided and remained good law that required no reconsideration. The court also ruled that there was no conflict between Kodar and the Supreme Court’s 1983 decision in Hoechst Pharmaceuticals, which upheld a similar sales tax surcharge.
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The court noted that the broader reference has become academic after the introduction of GST in 2017 and subsequent changes in constitutional provisions and state tax laws.
The Centre, represented by Solicitor General Tushar Mehta, made a similar argument during the hearing, saying that the GST has replaced the earlier sales tax framework. He also said the decision could affect only a limited number of pending cases.
The bench also included Justices KV Viswanathan, SVN Bhatti, Joymalya Bagchi, NV Anjaria, Arun Palli and V. Mohana.
Question settled since 1998
Although the Supreme Court upheld the power of states to impose additional sales tax in Kodar and subsequent judgments, uncertainty arose after its 1990 decision in India Cements v. State of Tamil Nadu. That case involved a foreclosure imposed on mining royalties, which the court overturned, raising questions about the limits of states’ taxing powers.
The matter came up again in 1994 in Arjun Flour Mills vs State of Orissa, which concerned the power of the State to impose additional tax on dealers based on their annual turnover under the Orissa Sales Tax Act, 1947.
In 1998, the Supreme Court referred the case to a larger bench, citing an apparent conflict between earlier judgments, notably the Kodar (1974) and India Cements (1990) judgments.
Wednesday’s ruling resolved that link by reaffirming Kodar as good law and ruling that the ruling did not require reconsideration.
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