Supreme Court Reaffirms 1974 Ruling on States' Power to Impose Additional Sales Tax

The Supreme Court has held that a 1974 Constitution Bench ruling upholding states' power to impose additional sales tax or surcharge continues to hold the field. A seven-judge bench noted that the legal question had become largely academic following statutory changes and the implementation of the Goods and Services Tax (GST) regime.

The Supreme Court has reaffirmed the validity of a 1974 Constitution Bench ruling regarding the power of states to impose additional sales tax. A seven-judge Constitution bench headed by Chief Justice of India Surya Kant unanimously concluded that a legal reference on the issue, pending for nearly 27 years, no longer required adjudication due to subsequent statutory amendments and the introduction of the Goods and Services Tax (GST) framework.

The bench, which also included Justices K V Viswanathan, S V Bhatti, Joymalya Bagchi, N V Anjaria, Arun Palli, and V Mohana, stated that the question referred to them had become academic and of no practical significance. Justice Viswanathan authored a separate concurring verdict. The court clarified that the five-judge Constitution Bench ruling in S Kodar vs State of Kerala (1974) continues to hold the field.

The 1974 judgment had previously upheld the legality of additional sales tax, rejecting arguments that such levies amounted to a tax on the income of dealers. The CJI noted that an additional tax or surcharge computed as a percentage of the sales tax payable represents an enhancement of the sales tax rate rather than an income tax. Consequently, the legislative competence of state legislatures to impose such surcharges remains governed by the principles established in the S Kodar case under Entry 54 of List II of the Seventh Schedule to the Constitution.

The long-standing legal reference originated from a challenge to Section 5A of the Orissa Sales Tax Act, 1947. This provision levied an additional tax of 10 percent on dealers with an annual turnover ranging between Rs 10 lakh and Rs 1 crore, and 15 percent on those exceeding Rs 1 crore. Appellants had questioned whether state legislatures possessed the competence to enact such levies under Entry 54, which pertains to the sale or purchase of goods, or if the provision encroached upon Parliament's domain over income taxation under Entry 82 of List I.

During the proceedings on September 22, Solicitor General Tushar Mehta submitted that the underlying controversy had largely lost practical relevance following the rollout of the GST regime in 2017, with only a limited number of legacy disputes remaining pending.

"The Supreme Court's decision to uphold the 1974 ruling provides legal clarity on historical tax matters, even though the broader implementation of the GST regime has largely superseded these specific provisions. For businesses and entrepreneurs operating across multiple states, this serves as a reminder of the historical evolution of indirect taxation in India. While the practical impact is limited given current tax laws, understanding jurisdictional boundaries between central and state legislative powers remains crucial for compliance and long-term financial planning." — Dr. Shishir Gupta, Founder & CEO, StartupLanes