The Supreme Court on Wednesday upheld the power of State legislatures to impose additional tax, surcharge or cess calculated as a percentage of the existing sales tax, holding that such levies fall within the States' legislative competence under Entry 54 of List II of the Seventh Schedule, as it then stood.

A seven-judge Constitution Bench headed by Chief Justice of India (CJI) Surya Kant, and comprising Justices KV Viswanathan, SVN Bhatti, Joymalya Bagchi, NV Anjaria, Arun Palli and V Mohana, delivered the judgment.

The legal question had been referred to a seven-judge Bench nearly 27 years ago, in 1999, following conflicting decisions of the Supreme Court on the legislative competence of States to impose additional levies on sales tax.

The Court, however, observed that the statutes under which the impugned levies were imposed had since been substituted or replaced. Consequently, the question referred to the larger Bench had become academic and did not survive for adjudication.

"The question referred to is of no practical significance and now academic. Consequently, the question referred to does not survive for adjudication by a seven-judge Bench, and the reference has to be answered accordingly," the Court held.

The ruling effectively reaffirms the five-judge Constitution Bench decision in S Kodar v. State of Kerala, which upheld the validity of additional sales tax and rejected the argument that such a levy amounted to a tax on the income of dealers.

Clarifying the legal position, the Court observed that Kodar had held that an additional tax or surcharge calculated as a percentage of the sales tax payable constitutes an enhancement of the rate of sales tax and falls within the scope of Entry 54 of List II, as it then stood.

"That decision continues to hold the field," the Bench said, adding that the question of the State legislature's competence to impose the impugned surcharge would be governed by the law declared in S Kodar.

The dispute arose from a challenge to Section 5A of the Orissa Sales Tax Act, 1947, which imposed additional tax at the rate of 10% on dealers with an annual turnover between ₹10 lakh and ₹1 crore and 15% on dealers whose turnover exceeded ₹1 crore.

The appellants questioned whether the State legislature could impose such a levy under Entry 54 of the State List, which empowers States to tax the sale or purchase of goods, or whether it encroached upon Parliament's taxation powers under Entry 82 of the Union List, which deals with taxes on income other than agricultural income.

The controversy stemmed from differing interpretations in earlier Supreme Court decisions.

In S Kodar v. State of Kerala, a five-judge Bench had upheld additional sales tax, rejecting the contention that it was effectively a tax on the income of dealers.

Similarly, in Hoechst Pharmaceuticals v. State of Bihar, a three-judge Bench upheld a surcharge on sales tax, holding that the levy retained the character of sales tax.

However, the appellants argued that the decision in Hoechst Pharmaceuticals proceeded on a concession regarding legislative competence. They also relied on the seven-judge Bench ruling in India Cement v. State of Tamil Nadu, which had invalidated a cess linked to mining royalty.

The apparent conflict between these decisions led to the matter being referred to a seven-judge Bench in 1999.

During the hearing on September 22, Solicitor General Tushar Mehta submitted that the controversy had largely become academic following the introduction of the Goods and Services Tax (GST) regime in 2017, with only a limited number of disputes remaining pending.

Mehta also relied on the nine-judge Bench decision in Mineral Area Development Authority v. Steel Authority of India, which overruled the decision in India Cement.

During the hearing, CJI Surya Kant had observed that India Cement was no longer good law and that the decision in Kodar had subsequently received judicial approval. However, he clarified that the Bench would independently examine the legal issue.

Justice Joymalya Bagchi had also observed that legislative competence must be determined by the nature of the tax rather than merely by its additional character.

The judgment was pronounced by CJI Surya Kant. Justice KV Viswanathan authored a concurring opinion examining the decisions in Hoechst Pharmaceuticals and India Cement.

Justice Viswanathan observed that Kodar had correctly held that the State legislature's power to impose additional sales tax, calculated with reference to the sales tax payable by dealers crossing a prescribed turnover threshold and without any pass-through to consumers, could be traced to Entry 54 of List II.

He held that such a levy was a tax on the sale of goods and could not be characterised as an unconstitutional tax on the income of dealers.