Additional Sales Tax Case Academic After GST: SC 7-Judge Bench

A legal question that sat with the Supreme Court for nearly 27 years has finally been closed. A seven-judge Constitution Bench headed by Chief Justice of India Surya Kant on Wednesday unanimously held that a reference on whether states can levy an additional tax or surcharge on sales tax had become academic after the introduction of GST, while making it clear that a 1974 ruling backing such levies continues to hold the field.

For businesses, tax lawyers and state finance departments, the outcome brings closure to a long-pending constitutional question from the pre-GST era.

What the case was about

The reference arose from a challenge to Section 5A of the Orissa Sales Tax Act, 1947. That provision imposed an additional tax on dealers based on their turnover: 10% for dealers with annual turnover between Rs 10 lakh and Rs 1 crore, and 15% for those above Rs 1 crore.

The dealers argued that the state did not have the power to impose this levy under Entry 54 of the State List, which allows states to tax the sale or purchase of goods. In their view, a turnover-linked extra levy was effectively a tax on income, a subject reserved for Parliament under Entry 82 of the Union List. The question was eventually referred to a larger bench, where it remained pending for decades.

What the Supreme Court decided

The Constitution Bench declined to answer the reference on merits. It noted that the challenged provisions had since been replaced or amended and that the GST regime came into force in 2017, subsuming most state sales taxes. "The question referred to is of no practical significance and now academic," the court said.

At the same time, the bench made an important clarification. It said the five-judge Constitution Bench ruling in S Kodar vs State of Kerala (1974), which upheld additional sales tax and rejected the argument that it was a tax on dealers' income, remains good law. Writing the main judgment, the CJI said a surcharge of this kind is an enhancement of the sales tax rate under Entry 54 as it then stood, and that "that decision continues to hold the field". Justice KV Viswanathan wrote a separate concurring opinion.

Earlier, on September 22, Solicitor General Tushar Mehta had told the court that the dispute had largely become academic after GST, with only a few cases still pending.

Key facts

What it means for businesses and states

In practical terms, very little changes for most businesses today because GST has replaced the old sales tax system for the bulk of goods. However, the ruling matters in three ways.

1. Old disputes: The handful of pre-GST cases still pending in tax tribunals and high courts will now be decided in line with the S Kodar precedent, which favours the states' power to levy such surcharges.
2. Goods outside GST: States still levy sales tax or VAT on certain products kept out of GST, such as petroleum products and alcohol for human consumption. Any future question about state competence to impose surcharges on such levies will be governed by S Kodar.
3. Legal certainty: Closing a reference that has been pending since the late 1990s helps reduce the backlog before Constitution Benches and removes uncertainty around an old but recurring point of tax law.

The case is also a reminder of how long constitutional questions can stay unresolved in India. By the time the bench took it up, the tax system it was meant to clarify had already been largely replaced.

What happens next

The detailed judgment, including Justice Viswanathan's concurring view, is expected to be uploaded on the Supreme Court website. Tax experts will study it closely for any remarks on how the principle applies to state levies on petroleum and liquor, which remain outside GST and are a major source of revenue for state governments.

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