The Supreme Court on Tuesday reserved its judgment on a 27-year-old reference concerning the power of state legislatures to impose a surcharge, additional tax or cess on sales or purchases, calculated with reference to an existing sales or purchase tax. A seven-judge Constitution Bench headed by Chief Justice of India Justice Surya Kant is examining the issue referred to the court in 1999.
The case arose from a challenge to Section 5A of the Odisha Sales Tax Act, 1947, introduced in 1997, which imposed an additional tax of 10 per cent on dealers with annual turnover between Rs 10 lakh and Rs 1 crore and 15 per cent on those with turnover above Rs 1 crore.
The reference followed differing rulings on the legislative competence of states to impose additional levies. In Hoechst Pharmaceuticals v State of Bihar, the Supreme Court had upheld a surcharge under the Bihar Finance Act as a sales tax falling under Entry 54 of the State List. In India Cement v State of Tamil Nadu, a seven-judge Bench had struck down a cess and surcharge linked to mining royalty, holding that states could not legislate beyond their assigned fields.
A five-judge Bench in S Kodar v State of Kerala, meanwhile, upheld an additional sales tax under the Tamil Nadu Additional Sales Tax Act, 1970.
The 1999 reference consequently asked whether a levy on sales or purchases, calculated on the basis of a validly levied sales or purchase tax, could fall outside Entry 54 of the State List (state taxation powers on specific goods) and encroach upon Entry 82 of the Union List (empowers Parliament to levy taxes on income other than agricultural income).
Solicitor General Tushar Mehta, appearing for the Centre, told the Bench that there was broad consensus on the scope of the reference. He also said the issue may have limited practical relevance after the introduction of GST in 2017.
“These questions may have become academic. There may be some very few and far between cases pending, but perhaps not even in three digits. That is our impression,” he said.
Mehta also flagged the Centre’s reservations about India Cement, but said it was not pressing that issue in the present proceedings.
Chief Justice Kant observed that India Cement was no longer good law and that Kodar had subsequently been cited with approval.
“India Cement is no longer a good law. Kodar has been quoted with approval, and the measure of tax liability is not the only dominant factor for determining the nature of a tax,” the CJI said.
Counsel for the opposing side argued that Kodar had only been questioned in the context of its possible conflict with India Cement. Relying on Kodar, counsel submitted that once a legislature has the power to impose a tax, it can impose an additional tax as well.
Justice Joymalya Bagchi observed that legislative competence must be determined by the nature of the tax, rather than merely by describing it as an additional tax.
He also noted that Kodar had been cited with approval in Mineral Area Development Authority v Steel Authority of India (nine-judge Bench affirming state powers to levy taxes on mineral rights).
