Supreme Court upholds states’ power to levy surcharge on sales tax

The Supreme Court has ruled that state can impose a surcharge calculated as a percentage of the sales tax payable by dealers, holding that such a levy is effectively an additional sales tax and does not amount to an unconstitutional “tax on tax”.

A seven-judge Constitution Bench closed a reference pending for nearly three decades, observing that the issue had already been settled by a five-judge Bench in the 1974 S. Kodar v. State of Kerala judgment.

The dispute arose from a 1990 amendment to the Odisha Sales Tax Act, which required dealers with an annual gross turnover exceeding Rs 10 lakh to pay an additional 10% of their sales tax liability. Dealers challenged the provision, arguing that Entry 54 of the State List in the Seventh Schedule authorised taxation on the sale or purchase of goods, but not a tax calculated on an existing tax.

Odisha maintained that the surcharge merely increased the effective rate of sales tax for a specified category of dealers. The Orissa High Court upheld the provision, but the matter was referred to larger Supreme Court Benches because of questions surrounding earlier judgments.

Court distinguishes sales tax surcharge from cess on mineral royalty

In S. Kodar, the Supreme Court had upheld a similar additional levy, holding that calculating the surcharge with reference to sales tax did not change its essential character. The position was reiterated in Hoechst Pharmaceuticals (1983), which described a surcharge as a higher rate of tax imposed to raise revenue.

Dealers relied on the 1990 India Cement judgment, which struck down a cess imposed on mineral royalty. However, the Supreme Court said that ruling concerned a different legislative issue and did not establish that every levy calculated on another levy was unconstitutional.

The Bench also referred to the nine-judge judgment in Mineral Area Development Authority (2024), which clarified that royalty is a contractual payment for mineral rights and not a tax.

The court held that the subject of the surcharge remained the sale or purchase of goods; only the method of calculating its amount differed. It further observed that the liability depended on turnover, not profit, and could apply even when a dealer incurred losses.

The Bench clarified that its ruling concerned the pre-GST taxation framework. The 101st Constitutional Amendment, which introduced GST in 2016, significantly narrowed the states’ taxation powers under Entry 54