NEW DELHI, Sept. 22
The Supreme Court on Tuesday reserved its judgment on a 27-year-old constitutional reference examining whether state legislatures can impose a surcharge, additional tax or cess on sales and purchases when the levy is calculated on the basis of an existing tax.
A seven-judge Constitution Bench headed by Chief Justice of India Surya Kant is considering whether such additional levies fall within the states’ taxation powers or encroach upon a field reserved for Parliament. The dispute has remained before the court since it was referred in 1999, although the introduction of the Goods and Services Tax in 2017 has sharply reduced its practical relevance.
The case originated in a challenge to Section 5A of the Odisha Sales Tax Act, 1947. Introduced in 1997, the provision imposed an additional tax of 10 per cent on dealers with annual turnover between ₹10 lakh and ₹1 crore and 15 per cent on those whose turnover exceeded ₹1 crore.
At the heart of the dispute is a question about legislative competence under the Constitution. The 1999 reference asked whether a levy imposed on sales or purchases, but calculated with reference to an already valid sales or purchase tax, could fall outside the taxation powers assigned to states.
The issue involved the relationship between Entry 54 of the State List, which at the time dealt with state taxation of sales and purchases of goods, and Entry 82 of the Union List, which gives Parliament the power to impose taxes on income other than agricultural income.
The reference arose against the background of different Supreme Court rulings on how such additional levies should be treated.
In Hoechst Pharmaceuticals v State of Bihar, the Supreme Court upheld a surcharge imposed under the Bihar Finance Act, treating it as a sales tax falling within Entry 54 of the State List. In S Kodar v State of Kerala, a five-judge Bench similarly upheld an additional sales tax imposed under the Tamil Nadu Additional Sales Tax Act, 1970.
Another judgment complicated the position.
In India Cement v State of Tamil Nadu, a seven-judge Bench struck down a cess and surcharge connected to mining royalty, holding that states could not legislate beyond the fields assigned to them under the Constitution. The relationship between these decisions eventually contributed to the question being referred to a larger Bench.
During Tuesday’s proceedings, Solicitor General Tushar Mehta, appearing for the Centre, told the court that there was broad agreement over the scope of the reference. He also said the question may now have only limited practical consequences because India’s indirect taxation system changed fundamentally with 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,” Mehta told the Bench.
The Centre also expressed reservations about the reasoning in the India Cement judgment but told the court it was not pressing that issue in the present proceedings.
Chief Justice Kant observed during the hearing that India Cement was no longer good law and pointed to the subsequent judicial treatment of the Kodar decision.
“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 Chief Justice said.
The observation goes to the centre of the constitutional issue before the Bench. A tax cannot necessarily be classified simply by looking at the formula used to calculate the amount payable. The court must instead consider the true nature and character of the levy when determining whether the legislature that imposed it had the constitutional authority to do so.
Counsel on the opposing side argued that Kodar had been questioned only because of its possible inconsistency with India Cement. Relying on the reasoning in Kodar, counsel submitted that once a legislature possesses the constitutional power to impose a particular tax, that power also extends to imposing an additional tax of the same character.
Justice Joymalya Bagchi also indicated that merely describing a levy as an additional tax would not settle the constitutional question. Legislative competence, he observed, must be determined by examining the nature of the tax itself.
The Bench also considered the significance of the Supreme Court’s more recent ruling in Mineral Area Development Authority v Steel Authority of India. In that case, a nine-judge Bench affirmed the power of states to levy taxes on mineral rights.
Justice Bagchi noted that Kodar had been cited with approval in the Mineral Area Development Authority judgment, adding another layer to the court’s consideration of the older precedents.
The dispute reaches back to an indirect-tax system that has largely been replaced. Before GST, states exercised substantial powers over sales taxes, while the Centre administered several other indirect levies. GST brought much of that structure within a common national framework in 2017.
That change explains why the Centre believes relatively few cases may now depend directly on the answer to the 1999 reference. The constitutional question, however, remains relevant to disputes arising from the earlier tax regime and to the broader principles governing how courts determine the character of a levy and the legislative authority behind it.
The Supreme Court has now completed hearings and reserved its judgment. Its eventual ruling will settle a constitutional question that has remained formally unresolved for more than a quarter of a century: whether a state that has the power to impose a tax can also impose an additional levy calculated with reference to that tax without stepping beyond the legislative field assigned to it.
