The Supreme Court has reserved its judgment on a significant constitutional question concerning the power of State legislatures to impose an additional tax, surcharge or cess on sales or purchases when the levy is calculated with reference to an existing sales or purchase tax.
The issue is being considered by a seven-judge Constitution Bench headed by Chief Justice of India Justice Surya Kant. The reference has remained pending before the Supreme Court for nearly 27 years, having been made in 1999 following conflicting judicial views on the scope of the States’ legislative power to impose additional levies.
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The proceedings have acquired renewed significance because the Bench has examined the relationship between the State’s power to tax sales and purchases and the Union’s taxation fields under the Constitution.
The Supreme Court’s official records show the Constitution Bench headed by the Chief Justice and Justice Joymalya Bagchi was sitting on September 22, 2026.
Dispute Originates from Odisha Sales Tax Act
The reference originated from a challenge concerning Section 5A of the Odisha Sales Tax Act, 1947.
Section 5A was introduced in 1997 and provided for an additional tax calculated with reference to the tax payable under the Odisha sales tax legislation. The provision prescribed an additional levy of 10% for dealers having annual turnover between ₹10 lakh and ₹1 crore and 15% for dealers whose annual turnover exceeded ₹1 crore.
The constitutional question was whether such an additional levy, because it was calculated by reference to an existing sales tax, continued to remain a tax on sales or purchases within the State’s legislative field.
The issue eventually reached the Supreme Court in the context of the constitutional allocation of legislative powers between Parliament and State legislatures.
What Was the Constitutional Question?
At the heart of the reference is the interpretation of the Seventh Schedule to the Constitution, particularly the legislative entries dealing with taxation.
The reference essentially asks whether a levy imposed on sales or purchases, where the quantum of the levy is determined by reference to an existing validly imposed sales or purchase tax, can nevertheless fall outside the State’s taxation field.
The issue also involves the question of whether such a levy could instead be regarded as encroaching upon Entry 82 of the Union List, which deals with taxes on income other than agricultural income.
In other words, the Court is examining whether the basis used for calculating a levy can alter the constitutional character of the levy itself.
Why Earlier Supreme Court Decisions Created Difficulty
The reference arose against the backdrop of apparently differing decisions of the Supreme Court concerning the nature and legislative competence of additional levies.
Hoechst Pharmaceuticals Case
In Hoechst Pharmaceuticals Ltd. v. State of Bihar, the Supreme Court upheld a surcharge imposed under the Bihar Finance Act.
The levy was treated as falling within the State’s power to impose a tax on sales or purchases.
The decision supported the proposition that a surcharge calculated with reference to an existing sales tax could continue to possess the character of a sales tax.
India Cement Case
A different line of reasoning emerged from the seven-judge Bench decision in India Cement Ltd. v. State of Tamil Nadu.
The Court struck down a cess and surcharge connected with mining royalty, holding that the State could not legislate in an area falling outside its constitutionally assigned legislative field.
The judgment consequently became an important part of the debate surrounding the constitutional character of a levy and the distinction between the measure of a tax and its nature or subject matter.
S. Kodar Case
The Court subsequently considered an additional sales tax in S. Kodar v. State of Kerala.
In that case, a five-judge Bench upheld the levy under the Tamil Nadu Additional Sales Tax Act, 1970.
The decision became particularly relevant to the present reference because it recognised the legislative power to impose an additional sales tax in circumstances where the additional levy was linked to the existing sales tax liability.
Supreme Court Examines “Nature of Tax” Versus “Measure of Tax”
One of the important aspects emerging during the hearing concerns the distinction between the nature of a tax and the measure used for calculating the tax.
Chief Justice Surya Kant observed during the proceedings that India Cement was no longer good law, while noting that S. Kodar had subsequently been cited with approval.
The Chief Justice also observed that the measure of tax liability is not by itself the only determining factor for identifying the nature of a tax.
This distinction is significant.
For example, merely because the amount of an additional levy is calculated as a percentage of an existing tax does not necessarily answer the constitutional question of what the additional levy actually is. The Court has therefore been examining the substantive nature of the levy rather than merely the terminology used by the legislature.
Justice Joymalya Bagchi Highlights Legislative Competence
Justice Joymalya Bagchi also focused on the constitutional test for determining legislative competence.
During the hearing, he observed that legislative competence must be determined by the nature of the tax, rather than simply by describing the levy as an “additional tax”.
This approach places emphasis on the substance of the levy and the constitutional field in which it operates.
The observation is particularly relevant because State legislatures have historically used different legislative formulations—such as surcharge, cess, additional tax and other forms of impost—to raise revenue.
The constitutional question is therefore whether the label attached to a levy or the method by which it is quantified should determine its legislative character.
Reliance on S. Kodar and Mineral Area Development Authority
The Bench also considered the subsequent treatment of S. Kodar in later Supreme Court jurisprudence.
Justice Joymalya Bagchi noted that S. Kodar had been cited with approval in Mineral Area Development Authority v. Steel Authority of India Ltd.
The latter decision was delivered by a nine-judge Constitution Bench and dealt with the constitutional power of States to levy taxes on mineral rights.
The reference to S. Kodar in that later Constitution Bench decision has therefore become relevant to the present debate over whether the earlier jurisprudence on additional taxation remains legally sustainable.
Centre Says GST Has Reduced Practical Relevance
Solicitor General Tushar Mehta, appearing for the Union government, told the Constitution Bench that there was broad consensus regarding the scope of the reference.
However, he also pointed out that the practical significance of the questions may have diminished considerably following the introduction of the Goods and Services Tax regime in 2017.
The GST constitutional amendments substantially changed India’s indirect tax structure by subsuming a large number of State and Union indirect taxes into the GST framework.
According to the Solicitor General, only a small number of cases involving the old taxation regime may now remain pending.
He indicated that the number could be very limited, potentially fewer than three digits.
Centre Raises India Cement Issue but Does Not Press It
The Centre also expressed reservations concerning the correctness of the India Cement decision.
However, the Solicitor General indicated that the Union was not pressing that issue in the present proceedings.
The development is significant because the constitutional reference potentially provides the seven-judge Bench an opportunity to clarify the relationship between the earlier decisions dealing with State taxation powers.
The Bench’s observations during the hearing indicate that the continuing validity and relevance of India Cement formed part of the broader legal discussion, even though the Centre did not seek adjudication of that issue as an independent question in the present proceedings.
Argument: Power to Tax Includes Power to Impose Additional Tax
Counsel appearing on the opposing side relied upon S. Kodar and argued that where a legislature possesses the constitutional power to impose a particular tax, it can also impose an additional tax.
The argument essentially proceeds on the basis that an additional levy does not automatically acquire a different constitutional character merely because it is described as an “additional tax”.
According to this line of reasoning, if the underlying tax falls within the State legislature’s competence, an additional levy calculated with reference to that tax may also remain within the same constitutional field.
The Bench, however, is examining whether such a proposition can be applied without first determining the true nature and character of the additional levy.
The Importance of Entry 54
The reference has its roots in the constitutional taxation framework that existed before the introduction of GST.
At the relevant time, Entry 54 of the State List dealt with taxes on the sale or purchase of goods, subject to the constitutional limitations applicable to the field.
The reference therefore required the Court to consider whether a levy calculated on the basis of a sales or purchase tax could continue to fall within the State’s legislative field.
The competing constitutional concern involved Entry 82 of the Union List, under which Parliament has the power to levy taxes on income other than agricultural income.
The question was consequently not merely about the percentage or quantum of the additional levy. It was about whether the levy remained constitutionally connected with the subject matter allocated to the States.
Why the “Measure” of Tax Matters
A recurring issue in constitutional taxation jurisprudence is the difference between the subject matter of a tax and its measure or method of computation.
The measure may be used to quantify a tax without necessarily changing its legal character.
For example, a tax may be calculated by reference to another amount, transaction value, property value, turnover or an existing tax liability. The fact that a particular figure is used for computation does not automatically determine the constitutional entry under which the levy falls.
The present reference requires the Supreme Court to examine this principle specifically in the context of an additional levy on sales or purchases.
GST Has Changed the Practical Landscape
The dispute primarily concerns the pre-GST indirect tax framework.
With the introduction of GST in 2017, the constitutional and statutory landscape governing indirect taxation underwent a major transformation.
As a result, the immediate revenue implications of the judgment may be limited to legacy disputes arising from the earlier sales tax and VAT regime.
Nevertheless, the constitutional principles laid down by the seven-judge Bench could have broader significance for understanding the distribution of taxation powers between Parliament and State legislatures.
The Union’s submission that the issue may have become largely academic does not eliminate the constitutional importance of resolving a reference that has remained pending for decades.
After hearing the arguments, the seven-judge Constitution Bench reserved its judgment.
The eventual ruling is expected to provide clarity on the constitutional principles governing additional levies imposed with reference to an existing tax, particularly in relation to the distinction between the nature of a tax and its measure.
While the introduction of GST has substantially reduced the practical relevance of the old sales tax regime, the judgment could settle an important area of constitutional taxation jurisprudence and clarify how earlier Supreme Court decisions should be reconciled.
Until the judgment is pronounced, the observations made during the hearing remain part of the arguments and judicial discussion and should not be treated as the final determination of the law.
