Supreme Court Declares 1974 Ruling on Sales Tax Still Valid Amid GST Changes

Supreme Court's Recent Decision on Sales Tax

New Delhi: On Wednesday, the Supreme Court reaffirmed that a ruling from 1974, which supports the authority of states to impose additional sales taxes or surcharges based on existing sales tax, remains applicable. The court noted that the reference regarding this matter has become largely theoretical.

A seven-judge Constitution bench, led by Chief Justice Surya Kant, unanimously concluded that the legal issue presented nearly three decades ago no longer necessitated a decision, as the relevant statutory provisions have been amended or replaced, and the Goods and Services Tax (GST) law is now in effect.

Chief Justice Kant, who authored the judgment on behalf of himself and five other justices, stated, "The question referred to is of no practical significance and now academic. Therefore, it does not warrant adjudication by a seven-judge Bench, and the reference must be resolved accordingly."

The bench included Justices KV Viswanathan, SVN Bhatti, Joymalya Bagchi, NV Anjaria, Arun Palli, and V Mohana.

Justice Viswanathan provided a separate concurring opinion.

While the court opted not to revisit the reference, it emphasized that the ruling from the five-judge Constitution Bench in S Kodar vs State of Kerala (1974) remains valid.

This earlier ruling upheld the imposition of additional sales tax, dismissing claims that such a charge constituted a tax on dealers' income.

The Chief Justice clarified, "The case clearly established that an additional tax or surcharge calculated as a percentage of the sales tax due is an increase in the sales tax rate and a tax on the sale or purchase of goods under Entry 54 of List II, as it was then. That decision continues to be relevant."

The court also stated that the legislative authority of state legislatures to impose such surcharges would be determined by the principles established in S Kodar.

A comprehensive judgment is still pending.

This reference originated from a challenge to Section 5A of the Orissa Sales Tax Act, 1947, which mandated an additional tax of 10% on dealers with annual turnovers between Rs 10 lakh and Rs 1 crore, and 15% on those exceeding Rs 1 crore.

The appellants questioned the state legislature's authority to impose this tax under Entry 54 of List II of the Seventh Schedule of the Constitution, which grants states the power to tax the sale or purchase of goods, or whether it effectively constituted a tax on income, a matter under Parliament's jurisdiction as per Entry 82 of List I.

The dispute arose from varying interpretations in previous Supreme Court rulings. In S Kodar vs State of Kerala, a five-judge bench had confirmed the validity of additional sales tax, stating that a levy based on the sales tax payable was an increase in the sales tax rate and not a tax on the dealer's income.

During the proceedings on September 22, Solicitor General Tushar Mehta indicated that the issue had largely become theoretical following the implementation of the GST regime in 2017, with only a few disputes remaining unresolved.