States’ power to impose taxes based on annual turnover

Arjun Flour Mills v State of Orissa

The Supreme Court will decide whether state governments are constitutionally permitted to collect sales tax based on annual turnover.



Petitioner: Arjun Flour Mills; Sambalpur Merchants Association; State of Punjab; Hoshiarpur Large and Medium Industries Association; Golden Plywood Industries Pvt. Ltd; Power Drugs Ltd.; Ludhiana Spinners Association; Indian Acrylics Ltd.

Lawyers: Vinoo Bhagat, AOR; Rajneeta Rohatgi, AOR; K.R. Sasiprabhu, AOR; Varinder Kumar Sharma, AOR; Ramesh Babu, AOR; Gurminder Shingh, Advocate General of Punjab

Respondent: State of Odisha Finance Department Secretary; Sales Tax Officer Sambalpur; Secretary Govt. of India; Central Board of Direct Taxes

Lawyers: B. Krishna Prasad, AOR; Sibo Sankar Mishra, AOR; Raj Bahadur Yadav, AOR; R. Venkatramani, Attorney General; Tushar Mehta, Solicitor General; Kirti Renu Mishra, AOR; Ajit Pudussery, AOR; Ranjeeta Rohatgi, AOR; Kuldeep Singh, AOR; Rakesh Sharma, AOR

Case Details

Case Number: Civil Appeal 8763 of 1994

Next Hearing: January 9, 2024

Last Updated: January 9, 2024

Key Issues


Whether a state legislature has the power to make a law that imposes an extra amount to be paid on sales tax?

Case Description

On 15 November 1997, the Odisha government amended the Odisha Sales Tax Act 1947 (Odisha Act) to insert Section 5A. This provision levied an additional tax of 10% on dealers with an annual turnover between ₹ 10 lakh to ₹ 1 crore. Further, it imposed an additional tax of 15% if the turnover exceeds ₹ 1 crore. 

On 11 February 1994, a Civil Appeal was filed in the Supreme Court challenging the Act on the grounds that it encroached on the domain of the Union legislature. 

As per Article 246 of the Constitution of India, the Union and State Legislatures are allowed to make laws on the subjects mentioned in the Union, State, and Concurrent lists under Schedule 7. Entry 54 of the State List empowers the State Legislature to make law related to taxes on sale and purchase of goods. Under the Odisha Act, the additional tax was calculated on the basis of annual income. The power to impose taxes based on annual turnover is a part of the Union’s domain under Entry 82 of the Union List. A provision of the Bihar Finance Act, 1981, similar to Section 5A, (later repealed by Section 94 of Bihar Value Added Tax Act 2005) was upheld in Hoechst Pharmaceuticals Ltd. v State of Bihar & Ors (1983) where the Supreme Court viewed that the surcharge levied fell into the category of a sales tax, which fell squarely within the state’s power under Entry 54 of the state list. The Supreme Court held that the law-making powers of the state and the Union regarding taxation are distinct and clear, with no overlap. 

The counsel for Arjun Flour Mills argued that the Supreme Court in Hoechst Pharmaceuticals “proceeded upon a concession that the provision was relatable to entry 54 of List II of the Seventh Schedule to the Constitution.”  They cited India Cement Ltd v State Of Tamil Nadu (1989) where a seven-judge bench took a different view regarding the provisions of the Madras Panchayats Act, 1958. Sections 115 of the Act imposed a cess on the land revenue while Section 116 put a surcharge on the cess paid under Section 115 for excavation and mining. The provisions were held ultra vires to the Seventh Schedule of the Indian Constitution. The Court observed that the additional cess was not on the land but on the royalty payable for land excavation which was not within the scope of the state to legislate. 

On 13 August 1998, the Supreme Court bench, faced with these conflicting judgments, referred Arjun Flour Mills to a five-judge bench. The new bench put on record another five-judge bench decision in S Kodar v State of Kerala (1974) where additional sales tax imposed by the Tamil Nadu Additional Sales Tax Act 1970 was challenged. The appellant had argued the tax was on the income rather than on the sales. However, the Court had upheld the Act and regarded the additional tax to have been levied on the sale of goods. 

Seeing that multiple judgements of the Court offered conflicting views on the issue, on 6 October 1999, the Supreme Court referred Arjun Flour Mills, and S. Kodar, to a seven-judge bench for consideration. 

On 7 October 2023, the Supreme Court announced that Arjun Flour Mills along with five seven-judge cases will be taken up on 12 October 2023 for further directions. A seven-judge bench led by Chief Justice D.Y. Chandrachud and Justices S.K. Kaul, Sanjiv Khanna, B.R. Gavai, Surya Kant, J.B. Pardiwala, and Manoj Misra briefly heard the matter.  The seven-judge bench listed the matter for hearings on 9 January 2024. 

On 9 January 2024, a Division Bench led by CJI Chandrachud sat to issue directions in the case. The Bench decided to hear the case in the second week of April 2024.