The Sales Tax Surcharge Reference, pending since 1999, no longer needs an answer after the GST regime, a seven-judge Constitution Bench has held, yet the Court still clarified that an additional levy computed on sales tax was within State competence.
New Delhi: Whether States could impose an additional tax or surcharge calculated on the sales tax payable by a dealer is a question that has become academic, a seven-judge Constitution Bench of the Supreme Court held on Wednesday (November 4), because the Goods and Services Tax (GST) regime replaced the old constitutional entry and State laws. The reference had been pending since 1999. The Court nonetheless clarified that such a levy is an enhancement of the rate of sales tax and was a tax on the sale or purchase of goods under the then Entry 54 of List II [Arjun Flour Mills v. State of Odisha].
Seven judges sat on the bench: Chief Justice of India Surya Kant, Justice KV Viswanathan, Justice SVN Bhatti, Justice Joymalya Bagchi, Justice NV Anjaria, Justice Arun Palli and Justice V Mohana. CJI Surya Kant pronounced the order, and Justice Viswanathan wrote a separate concurring opinion.
No conflict left, and no question to answer
The Court said India Cement concerned a cess on royalty in a field covered by the Mines and Minerals (Development and Regulation) Act. It did not hold that a levy computed as a percentage of another tax is, for that reason alone, beyond legislative competence, and its premise that royalty is a tax has since been overruled by the larger bench in Mineral Area Development Authority. No conflict therefore subsisted, and an additional tax or surcharge computed as a percentage of the sales tax payable is an enhancement of the rate of sales tax within the then Entry 54.
On whether the reference still needed an answer, the Court said:
“The constitutional entry and the state enactments under which the impugned levies were imposed have since been substituted or replaced, and the question referred to is of no prospective significance. Consequently, the question referred does not survive for adjudication by a 7-judge bench, and the reference has been rendered academic. In light of these conclusions, we deem it appropriate accordingly to direct that the reference is answered as having been rendered infructuous.”
An Odisha levy and a perceived clash of rulings
The reference traces back to a challenge to Section 5A of the Odisha Sales Tax Act, 1947, introduced in 1997. It imposed an additional tax of 10% on dealers with an annual turnover between Rs 10 lakh and Rs 1 crore, and 15% on dealers with a turnover above Rs 1 crore. The question was whether the levy fell within the States’ power to tax the sale or purchase of goods under Entry 54 of List II, or encroached on Parliament’s power to tax income under Entry 82 of List I.
A perceived conflict between earlier rulings led to the matter being sent to a larger bench in 1999. Hoechst Pharmaceuticals Ltd v. State of Bihar had upheld a surcharge under the Bihar Finance Act as a sales tax, and in S Kodar v. State of Kerala a five-judge bench upheld an additional sales tax under the Tamil Nadu Additional Sales Tax Act, 1970. The seven-judge ruling in India Cement Ltd v. State of Tamil Nadu, however, struck down a cess linked to mining royalty. The bench had reserved its verdict on September 22, 2026.
Justice Viswanathan’s concurring opinion
Justice Viswanathan held that Kodar was correctly decided and remains good law, and he found no conflict between Kodar and Hoechst. An additional sales tax fixed with reference to the sales tax payable by a dealer above a turnover threshold, with no pass-through to consumers, is traceable to Entry 54 as a tax on the sale of goods, he held, and is not a tax on the dealer’s income.
Solicitor General Tushar Mehta had submitted during the hearing that the questions had become largely academic after GST came into force in 2017, though some pending cases might still need adjudication.
What stays open
The bench left open the validity of the surcharge under the Punjab General Sales Tax Act, 1948, insofar as it required industrial units otherwise exempt from sales tax to pay it. It also left open whether proceeds of the cess under the Punjab Social Security Act, 2000 could be credited directly to the Punjab Social Security Fund without first forming part of the Consolidated Fund of the State under Article 266. All other contentions in the individual matters, including assessments and consequential reliefs, were kept open too, and the Registry was directed to list the lead matter and connected cases before an appropriate regular bench.
Why the ruling still matters
One of the oldest pending references in the Supreme Court is now closed. The bench chose not to give an advisory answer on a constitutional entry that no longer exists in its old form, recording instead that the GST framework has replaced the field and that the question has no prospective significance.
Its clarification still carries weight for legacy disputes. By confirming that a levy measured as a percentage of sales tax is an increase in the rate of sales tax, and by affirming Kodar, the Court gives the regular benches a settled starting point for the pending assessment cases from the pre-GST period, while the specific Punjab surcharge and cess questions are left to be decided on their own facts.
Case Title: Arjun Flour Mills v. State of Odisha [Civil Appeal No. 8763 of 1994]
Bench: CJI Surya Kant, Justice KV Viswanathan, Justice SVN Bhatti, Justice Joymalya Bagchi, Justice NV Anjaria, Justice Arun Palli and Justice V Mohana, Supreme Court of India
Date of Judgment: November 4, 2026
Appearances: Solicitor General Tushar Mehta for the Union of India