States’ power to impose surcharge on sales tax | Seven-judge bench reserves judgement

The conflict between Kodar, Hoechst and India Cements

In S. Kodar v State of Kerala (1974), a five-judge Bench upheld the Tamil Nadu Additional Sales Tax Act, 1970, which imposed an additional sales tax on dealers whose annual turnover exceeded 10 lakh. The appellant argued that the levy was a tax on income rather than sales and therefore fell outside Entry 54 of the State List. The Court rejected this and held that the additional tax was “really a tax on the sale of goods”. 

In Hoechst Pharmaceuticals v State of Bihar (1983), the Court considered a surcharge imposed under the Bihar Finance Act, 1981. The surcharge was payable in addition to sales tax by dealers whose gross turnover crossed the prescribed limit and was calculated as a percentage of the tax payable. The Court upheld the levy, holding that the “surcharge partakes of the nature of sales tax”. The Arjun Flour Mills reference order recorded that the decision proceeded on a concession that the provision was relatable to Entry 54 of the State List.

India Cements v State of Tamil Nadu (1990) concerned a different levy. The seven-judge Bench considered a cess imposed on land revenue and a surcharge on that cess in connection with excavation and mining. It held that the additional cess was not a tax on land but on the royalty payable for excavation. This differed from Kodar and Hoechst, where the Court had treated additional levies calculated with reference to sales tax or turnover as taxes on the sale of goods. The Arjun Flour Mills reference order therefore identified a conflict in how the Court had determined the nature of an additional levy for the purpose of deciding whether it fell within the State legislature’s taxing power. 

The Supreme Court referred Arjun Flour Mills and Kodar to a seven-judge Bench on 6 October 1999. The question before the Court was whether a surcharge, additional tax, levy or cess imposed on a sale or purchase and calculated on the basis of a validly levied sales or purchase tax falls beyond the competence of the State legislature.

India Cements no longer good law

Solicitor General Tushar Mehta told the Bench that the issue may have become largely academic after GST replaced the earlier tax regime in 2017. There were very few matters pending on the question, he said, “perhaps not even in three digits”. India Cements was set aside in Mineral Area Development Authority v Steel Authority of India (2024) (MADA) by a nine-judge bench. Mehta argued that a curative plea had been filed against MADA but the present seven-judge bench proceedings need not concern that challenge as MADA was by a bigger bench. “India Cements is no longer good law,” CJI Surya Kant said. He noted that Kodar had been quoted with approval in the nine-judge judgement in MADA.  The CJI said the Bench will examine Kodar with an open mind, since MADA had dealt with royalty while the present case concerned a different levy.

Justice Bagchi noted that, in practical terms, Kodar appeared to have been approved in MADA. Counsel for Petitioner submitted that Kodar proceeded on the principle that where a legislature had the power to impose a tax, it also had the power to impose an additional tax. “Legislative competence comes from the nature of tax, not the tax itself,” Justice Bagchi said. Petitioner and Mehta both indicated that they had reservations about the proposition, but Mehta said the issue was not being pressed in these proceedings.

Punjab issue to be segregated

The Punjab matter raised a separate question of legislative competence. CJI Surya Kant noted that the Punjab Social Security Act, 2000 had been upheld by the High Court, although the Bench would examine the reasons for that decision. He then asked whether a law subsequently enacted by the legislature to displace an earlier executive action could be struck down on the basis of that earlier action. “There cannot be an estoppel against law,” he said.

The Bench reserved judgement after hearing parties.