Cess levied as an addition to sales tax remains within the purview of the state, says the Supreme Court

View of the Supreme Court of India. Phileth | Photo credit: SUSHIL KUMAR VERMA

The Supreme Court on Wednesday (November 4, 2026) ruled that an additional tax levied by the state legislature on the sale or purchase of goods would not fall outside the state’s jurisdiction.

A seven-judge bench upheld a 1975 judgment (S. Kodar v. State of Kerala) that a tax levied in addition to an existing sales tax must be assessed in the same manner as a principal tax.

“S. Kodar (supra) clearly holds that the additional tax or surcharge calculated as a percentage of the sales tax payable is an increase in the rate of sales tax and tax on the sale or purchase of goods under entry 54 of List II as it then stood. This decision continues to stand,” the lead opinion authored by Chief Justice of India (CJI) Surya Kant

In a concurring but separate opinion, Justice KV Viswanathan agreed that the judicial reasoning in the 1975 verdict did indeed hold the fort.

“The levy was a tax on the sale of goods and the fact that the amount of additional tax was determined in view of the sales tax levied would not change the nature of the tax and that it was in fact a tax on the aggregate of sales made by the dealer,” observed Justice Viswanathan.

The Constitution Bench judgment on Wednesday (November 4) was based on 1994 petitions that raised the issue of the legislative power of the state legislature to levy tax on the sale or purchase of goods under Entry 54 of List II of the Seventh Amendment to the Constitution from sales tax paid by a trader and not directly from his turnover.

“Tax on Tax”

The assessees insisted that such a special tax could be construed as a “tax on a tax”. They urged that the levy, measured by the amount of tax already payable, should not fall on “sale” or “purchase of goods”, which alone are subject to entry 54 of the State List in the Seventh Schedule of the Constitution. Item 54 included taxes levied by states on the sale or purchase of goods other than newspapers.

They stated that the additional tax is different in nature from the main sales tax and that it is a charge on the “receipt” or “fiscal burden” of the seller and therefore outside the purview of the state legislature.

States, on the other hand, have argued that such a surcharge is nothing more than an increase in the rate of sales tax for a class of merchants and that the manner in which it is calculated does not change its essential character as a tax on the sale of goods.

“For example, the income tax surcharge has always been calculated as a percentage of the income tax payable,” the court disagreed with the assessees.

The mark-up, the court explained, was only an improvement on the principal, which partook of its character and derived its validity from the same source.

Thus, the Court held that when the State Legislature, acting under its own tax heading (Section 54), decided to increase the tax on the sale or purchase of goods for a class of traders, the additional levy would assume the character and computation of a capital tax and not change color and convert into an income tax.

However, the lead opinion on the judgment, authored by the CJI, noted that the sales tax regime had undergone a change in the subsequent decades, the case being heard by the Supreme Court. More recent legislation, first the Value Added Tax Acts and then the Goods and Services Tax Act 2017, has taken over the mention as a largely “academic” activity.

Published – 04 Nov 2026 22:14 IST