Supreme Court Reaffirms States’ Former Sales-Tax Surcharge Power, Disposes of 27-Year Reference

Seven-judge bench resolves long-running reference

The Supreme Court on 4 November 2026 disposed of a reference pending for approximately 27 years concerning the constitutional authority of States to impose an additional tax or surcharge calculated by reference to sales or purchase tax. A seven-judge Constitution Bench concluded that the referred controversy had become academic following changes in the statutory and constitutional tax framework. At the same time, it clarified that the earlier Constitution Bench ruling in S. Kodar v. State of Kerala continues to govern the character of such levies under the former sales-tax regime. The decision therefore preserves an established legal proposition without treating the old reference as an occasion to decide a live challenge under the present Goods and Services Tax system.

What the dispute concerned

The litigation arose from a provision of the Orissa Sales Tax Act, 1947, which imposed additional tax on dealers crossing specified annual turnover thresholds. Under the provision described in the proceedings, dealers with annual turnover between ten lakh rupees and one crore rupees faced an additional ten per cent levy, while dealers above one crore rupees faced fifteen per cent. The challengers questioned whether the State was truly taxing sales or purchases, a subject historically assigned to the State List, or was indirectly taxing the dealer's income, a subject of Union legislative competence. The distinction mattered because constitutional competence is determined by the nature and substance of a levy, not merely by the name given to it in a statute.

Earlier judgments and the constitutional question

The five-judge decision in S. Kodar had treated additional sales tax as an enhancement of the tax on sales, rejecting the argument that its connection with turnover converted it into a tax on income. The Supreme Court also considered the relevance of Hoechst Pharmaceuticals, which addressed a surcharge linked to sales tax, and India Cement, which had been invoked in arguments concerning the permissible constitutional basis of a levy. The dispute was referred to a seven-judge bench in 1999. By the time it reached final disposal, however, the legal landscape had changed substantially, including the introduction of the Goods and Services Tax regime in 2017 and the replacement or amendment of provisions involved in the old controversy.

What the Constitution Bench held

Chief Justice of India Surya Kant delivered the principal opinion for six members of the bench, while Justice K. V. Viswanathan wrote a separate concurring opinion. The bench included Justices S. V. N. Bhatti, Joymalya Bagchi, N. V. Anjaria, Arun Palli and V. Mohana. The Court considered that the reference no longer required a fresh determination because the original statutory context had largely disappeared. Nevertheless, it expressly confirmed that S. Kodar remains authoritative. In substance, an additional tax or surcharge calculated as a percentage of valid sales tax is an increase in the rate of sales tax, rather than a separate tax on a dealer's income. The Court did not announce that States enjoy an unrestricted power to impose any levy described as a surcharge.

Why the distinction matters

The ruling is important for understanding how courts classify taxes for legislative-competence purposes. A tax can be measured by a financial figure without necessarily becoming a tax on that figure as a separate subject. In the historical scheme, Entry 54 of List II dealt with taxation of sales or purchases of goods, while Entry 82 of List I addressed taxes on income other than agricultural income. The bench's clarification concerns the former sales-tax framework and the legal reasoning of the older cases. It should not be read as a new judicial authorisation to impose an identical surcharge under the contemporary GST regime, which operates through a materially different constitutional and statutory structure.

Practical effect and next steps

For legacy disputes, the Court's affirmation of S. Kodar supplies an important answer to the contention that a turnover-linked additional sales tax necessarily intrudes into the Union's income-tax field. Any surviving challenge would still require examination of its own statutory provisions, relevant assessment period and applicable legal framework. For students of constitutional law, the decision also illustrates judicial restraint: the bench declined to undertake an abstract reconsideration of a controversy rendered largely obsolete, while explaining the continuing authority of a precedent that may remain relevant to older matters. The reference stands disposed of. The reported ruling does not itself create a new levy, reopen completed assessments or direct a fresh collection exercise.