Can States Impose Additional Levy On Sales Tax? Supreme Court 7-Judge Bench To Hear On September 22

The Supreme Court will, from September 22, hear a long-pending dispute concerning the constitutional power of State legislatures to impose an additional levy on sales tax, with a seven-judge Constitution Bench set to examine the scope of the States' taxing powers under the Seventh Schedule.

A bench comprising Chief Justice of India Surya Kant, Justice Joymalya Bagchi and Justice V Mohana posted the matter for hearing on September 22. The CJI stated that the 7-judge bench will commence the hearing at 2 PM, so that the hearings of other regular matters can be done during the forenoon session.

The bench framed the issue in the case as follows -  "Whether the imposition of a surcharge/additional tax/levy/cess, which is calculated on the basis of validly levied sales tax, is beyond the competence of the State Legislature?"

The matter arises from Arjun Flour Mills v. State of Odisha, a civil appeal pending before the Supreme Court since 1994. The case concerns the validity of Section 5A of the Odisha Sales Tax Act, 1947, which imposed an additional tax on dealers based on their annual turnover.

The provision, inserted by an amendment in 1997, prescribed an additional tax of 10% for dealers with an annual turnover between ₹10 lakh and ₹1 crore and 15% where the turnover exceeded ₹1 crore.

The challenge raises a constitutional question whether a State legislature can impose an additional amount on sales tax when the levy is calculated with reference to the dealer's annual turnover, a measure of taxation that may fall within the Union's legislative domain.

Under Article 246 of the Constitution, legislative powers are divided between Parliament and the State legislatures through the Union, State and Concurrent Lists in the Seventh Schedule. Entry 54 of the State List, as it stood at the relevant time, empowered States to impose taxes on the sale or purchase of goods, while Entry 82 of the Union List dealt with taxes on income other than agricultural income.

The dispute has remained pending because of apparently conflicting decisions of the Supreme Court on the nature of such additional levies.

In Hoechst Pharmaceuticals Ltd. v. State of Bihar (1983), the Supreme Court upheld a surcharge under the Bihar Finance Act, holding that the levy was in substance a sales tax and therefore fell within the State's legislative competence under Entry 54 of List II.

The petitioners in Arjun Flour Mills, however, argued that Hoechst Pharmaceuticals proceeded on a concession that the levy was relatable to Entry 54. They relied on the seven-judge Constitution Bench judgment in India Cement Ltd. v. State of Tamil Nadu (1989), which struck down a cess and surcharge connected with royalty from mining, holding that the State could not impose a levy outside the field assigned to it by the Seventh Schedule.

The Court subsequently considered another relevant decision, S. Kodar v. State of Kerala (1974), in which a five-judge Bench upheld an additional sales tax imposed under the Tamil Nadu Additional Sales Tax Act, 1970. The Court had rejected the argument that the tax was effectively a levy on income and held that the additional tax was imposed on the sale of goods.

With these decisions raising questions about the proper test for determining the legislative character of an additional sales-tax levy, the Supreme Court on October 6, 1999 referred Arjun Flour Mills and S. Kodar to a seven-judge Bench.

The case resurfaced before a seven-judge Bench in October 2023 along with several other matters requiring consideration by larger Benches. A Bench comprising then Chief Justice D.Y. Chandrachud and Justices S.K. Kaul, Sanjiv Khanna, B.R. Gavai, Surya Kant, J.B. Pardiwala and Manoj Misra heard the matter briefly on October 12, 2023 and directed that it be listed for further hearing.

 Case : Arjun Flour Mills v. State of Odisha | Civil Appeal No. 8763 of 1994.