States' Power To Levy Additional Sales Tax Academic After GST: Supreme Court Disposes Of 27-Year-Old Reference

The Supreme Court on Wednesday (November 4) held that the question concerning the power of State legislatures to impose additional sales tax, surcharge, or cess has lost its relevance following the introduction of the Goods and Services Tax (GST) regime.

A seven-judge Constitution Bench headed by Chief Justice of India Surya Kant observed that the laws under which the disputed taxes were imposed have since been replaced or substituted. Therefore, the question referred to the larger Bench no longer required adjudication.

Besides CJI, the bench comprised Justices K.V. Viswanathan, S.V.N. Bhatti, Joymalya Bagchi, N.V. Anjaria, Arun Palli, and V. Mohana.

The reference concerned the legislative competence of States to impose a surcharge, additional tax, levy, or cess calculated on the basis of an existing sales or purchase tax.

The issue arose in relation to Entry 54 of List II of the Seventh Schedule to the Constitution, which deals with the power of States to levy taxes on the sale or purchase of goods.

While pronouncing the judgment, CJI Surya Kant observed that the referred question did not survive for adjudication and that the reference had become infructuous.

"The constitutional entry and the state enactments under which the impugned levies were imposed have since been substituted or replaced, and the question referred to is of no prospective significance. Consequently, the question referred does not survive for adjudication by a 7-judge bench, and the reference has been rendered academic. In light of these conclusions, we deem it appropriate accordingly to direct that the reference is answered as having been rendered infructuous"

The bench left open the validity of the surcharge under the Punjab General Sales Tax Act, 1948, as well as whether cess proceeds could be credited directly to the Punjab Social Security Fund without first entering the Consolidated Fund. Other contentions, including those concerning assessments and consequential reliefs, were also left open.

In a separate opinion, Justice K.V. Viswanathan held that Kodar remains good law and does not conflict with Hoechst. He clarified that additional sales tax falls under Entry 54 of List II and is not a tax on a dealer's income. The 27-year-old reference was disposed of as academic following the GST regime.

The reference arose from Arjun Flour Mills v. State of Odisha, which challenged Section 5A of the Odisha Sales Tax Act, 1947. Introduced in 1997, the provision imposed additional tax of 10% on dealers with an annual turnover between Rs 10 lakh and Rs 1 crore, and 15% on those exceeding Rs 1 crore.

The dispute centred on whether an additional levy calculated with reference to sales tax falls under Entry 54 of the State List or amounts to a tax on income, falling within the Union's powers under Entry 82 of the Union List.

The question arose from differing interpretations in Hoechst Pharmaceuticals, S Kodar and India Cement. While the first two decisions upheld additional levies as sales taxes, India Cement struck down a cess and surcharge linked to mining royalty.

The Supreme Court referred the issue to a larger bench in 1999 to settle the question of States' legislative competence to impose such levies.