SC disposes reference on state’s power to impose a surcharge on sales tax
States’ power to impose taxes based on annual turnoverJudges: Surya Kant CJI, K.V. Viswanathan J, S.V. Bhatti J, Joymalya Bagchi J, N.V. Anjaria J, Arun Palli J, V. Mohana J
Today, a seven-judge Constitution Bench of the Supreme Court disposed of a 27-year-old reference on whether state governments can impose a surcharge, additional tax, levy or cess calculated on the basis of a validly levied sales or purchase tax. It held that the question was academic and infructuous in light of the Goods and Services Tax (GST) regime.
Two opinions were pronounced today, one authored by Chief Justice Surya Kant and the other authored by Justice K.V. Viswanathan. The Court had heard and reserved judgement on 22 September 2026.
The case, Arjun Flour Mills v State of Orissa, pertains to Section 5A of the Orissa Sales Tax Act, 1947, which imposed an additional tax of 10 per cent on dealers with annual turnover between 10 lakh and 1 crore, and 15 per cent where turnover exceeded 1 crore. The question before the Court was whether a levy on a sale or purchase, calculated with reference to an existing sales or purchase tax, remained within the State’s legislative power under Entry 54 of the State List. The reference arose from a perceived conflict of decisions on how the nature of a tax should be determined.
The matter centred on three decisions in particular. In S. Kodar v State of Kerala (1974) the Court upheld the imposition of an additional sales tax on dealers whose annual turnover exceeded 10 lakh under the Tamil Nadu Additional Sales Tax Act, 1970. In Hoechst Pharmaceuticals v State of Bihar (1983), the Court upheld a surcharge imposed under the Bihar Finance Act, 1981. In India Cements v State of Tamil Nadu (1990) the Court distinguished between tax on land and tax on the royalty payable for excavation and upheld a surcharge on land revenue cess..
When Arjun Flour Mills was challenged, the Supreme Court stated that there was a conflict between Hoechst Pharmaceuticals and India Cements.
CJI Surya Kant’s opinion
CJI Surya Kant noted that India Cements was overruled in 2024 by a nine-judge Constitution Bench in Mineral Area Development Authority v Steel Authority of India. Thus, there is no existing conflict between Hoechst Pharmaceuticals and India Cements.
Further, there is no decision that is in conflict with Kodar which remains the governing precedent on this subject. Reading from his opinion, CJI Surya Kant added that the constitutional entries and the state enactments under challenge have been “substituted or replaced” leaving nothing for the Bench to adjudicate.
In the previous hearing, counsel had requested that a challenge against the Punjab Social Security Act, 2000 be segregated and heard separately. CJI Surya Kant clarified that the issues under that Act will remain open and be listed before another bench.
Justice K.V. Viswanathan’s opinion
Justice Viswanathan held that there is no conflict between Kodar and Hoechst Pharmaceuticals. He stated that both judgements are in consonance. Notably, Justice Viswanathan observed that India Cements dealt with a separate issue and distinct facts, therefore, it was on a different footing. He stated: “India Cements does not create any dent on the holding of Kodar.”
He observed that a sales tax paid by a dealer based on annual turnover exceeding a minimum threshold is traceable to Entry 54 of the State List.