Surcharge On Sales Tax Under Entry 54 List II Not Impermissible 'Tax On Tax' Or Tax On Income; S. Kodar Remains Good Law: Supreme Court 7-Judge Bench

"The subject of the surcharge remains the sale or purchase of goods; the only difference lies in the arithmetical route by which the quantum is reached. Accordingly, the measure of a tax, as we have noticed, does not determine its character." A seven-judge bench of the Supreme Court, while holding that a surcharge or additional tax computed as a percentage of sales tax payable by dealers is constitutionally valid under Entry 54 of List II of the Seventh Schedule to the Constitution of India, disposed of a three-decade-old reference on November 4, 2026.

 The bench led by Chief Justice of India Surya Kant and comprising Justices S.V.N. Bhatti, Joymalya Bagchi, N.V. Anjaria, Arun Palli, K.V. Viswanathan, and V. Mohana held that the reference stood answered and rendered academic in light of the Nine-Judge Bench ruling in Mineral Area Development Authority v. SAIL, which removed the perceived conflict between Hoechst Pharmaceuticals and India Cement.

The controversy originated from challenges to Section 5-A of the Orissa Sales Tax Act, 1947 and Sections 5(1-C) and 30-AA of the Punjab General Sales Tax Act, 1948, which levied a 10 per cent surcharge on sales tax payable by dealers crossing a prescribed gross turnover threshold. Dealers contended that computing a levy on sales tax already payable amounted to an unauthorized "tax on tax" or a disguised tax on dealer income beyond State legislative competence. The matter was referred in 1998 and 1999 to resolve an apparent conflict between the Five-Judge Bench in S. Kodar v. State of Kerala, the Three-Judge Bench in Hoechst Pharmaceuticals Ltd. v. State of Bihar, and the Seven-Judge Bench in India Cement Ltd. v. State of Tamil Nadu.

The court examined whether, in view of developments subsequent to the referral orders dated August 13, 1998 and October 6, 1999, the question referred to the larger bench continued to survive for adjudication. It further addressed whether the imposition of a surcharge or cess calculated on validly levied sales tax falls outside the legislative competence of State Legislatures under Entry 54 of List II.

Distinction Between Subject Matter And Measure Of Tax Governs Legislative Competence

The bench emphasized that the challenge to the surcharge rested upon a conflation between the subject matter of a tax and the measure by which it is quantified. The subject of a tax is the taxable event that determines the legislative entry, whereas the measure is the legislative yardstick adopted to compute the quantum payable.

Turnover-Linked Surcharge Operates Strictly As An Enhancement Of Sales Tax Rates

The court highlighted that an additional levy calculated on sales tax payable is merely an arithmetical variation in calculating tax upon taxable turnover. Because sales tax is computed as a percentage of taxable turnover, a percentage surcharge upon that tax is inherently a further percentage of the very same turnover.

Levy Escalate With Sales Turnover Rather Than Profitability Disproving Income Tax Characterisation

Rejecting the argument that the surcharge is a disguised tax on income because dealers were prevented from passing it to purchasers, the court pointed out that liability attaches regardless of whether a dealer registers a profit or incurs a loss. The levy rises and falls solely with aggregate turnover and not with income.

"A dealer who has made no profit in a year, or who has suffered a loss, would nonetheless be liable to pay both the sales tax and the surcharge, so long as his turnover exceeds the prescribed threshold. A levy which is payable irrespective of the existence of income, and which bears no relation to the quantum of income, cannot, by any stretch, be characterised as a tax on income," the bench observed.

Overruling Of India Cement In MADA Put An End To The Perceived Conflict

The court held that the referral itself rested on a fragile premise, as India Cement dealt exclusively with a cess on royalty under mining laws and the MMDR Act, rather than sales tax under Entry 54 of List II. Furthermore, any friction generated by the observation in India Cement that royalty is a tax was conclusively removed by the Nine-Judge Bench in Mineral Area Development Authority v. SAIL.

"The very premise on which India Cement characterised the cess on royalty as a 'tax on a tax', namely, that royalty is itself a tax, has been authoritatively displaced by a Bench of greater strength. Consequently, the observation which the Two Judge Bench perceived to be in tension with Hoechst Pharmaceuticals, no longer holds the field," the court noted.

Five-Judge Bench Ruling In S. Kodar Fully Holds The Field

In a concurring opinion authored by Justice K.V. Viswanathan, the court reiterated that the landmark judgment in S. Kodar v. State of Kerala remains good law and needs no reconsideration. The Constitution Bench in S. Kodar had unambiguously ruled that an additional tax measured against sales tax payable by dealers with large turnover is an enhancement of the sales tax rate.

"The capacity of a dealer, in particular circumstances, to pay tax is not an irrelevant factor in fixing the rate of tax and one index of capacity is the quantum of turnover... An attempt to proportion the payment to capacity to pay and thus bring about a real and factual equality cannot be ruled out as irrelevant in levy of tax on the sale or purchase of goods," the concurring opinion recalled from S. Kodar.

Substitution Of Entry 54 Under GST Regime Extinguished Prospective Relevance Of Reference

The bench noted that Entry 54 of List II has since been substituted under the Constitution (One Hundred and First Amendment) Act, 2016, and the impugned State enactments were subsequently superseded by VAT and GST legislation. Consequently, keeping a Seven-Judge Bench engaged on a superseded legislative field to answer questions already governed by binding precedent was an inefficient use of scarce institutional resources.

The Supreme Court disposed of the reference as having been rendered infructuous and academic, holding that the legislative competence of State Legislatures to levy the impugned surcharges is fully sustained by S. Kodar v. State of Kerala. The court directed the individual appeals to be placed before appropriate regular benches for determination of residual statutory issues, including the validity of Section 30-AA of the Punjab Act regarding exempt units and the appropriation of the Punjab Social Security Cess under Article 266.

Date of Decision: November 4, 2026