In a welfare State, the government imposes tax to generate revenue to fund the welfare objectives that serve the people. One such tax prior to enactment of GST Act, 2017 was sales tax. In a commercial activity, sales tax was collected by the dealer from the purchaser and paid to the State. The Supreme Court on 13^th July, 2026 in Asia Sugar & Chemical Co., Devangere Versus The State of Karnataka & Ors. with analogous case, 2026 INSC 693 has held retrospective sales tax liability valid but not the penalty. The moot question which this judgment has raised is, whether an exempted commodity under the sales tax by way of retrospective legislation becomes taxable for past transactions? Whether it is reasonable to place the burden on the dealers?

Short Facts:

During the relevant assessment periods, the assessees imported sugar from outside the Country and sold the same either within the State of Karnataka or in the course of inter-State trade. Their case is that they proceeded on the footing that sugar, including imported sugar, was exempt and acting on such understanding, they did not charge or collect sales tax from their purchasers. Prior to the amendment, imported sugar was covered under exemption. The Department itself completed the original assessments by granting exemption. The assessees did not collect tax from the purchasers. The transactions related to assessment years long prior to the amendment. The reassessment was initiated only because of the retrospective amendment.

The appeals before the Supreme Court concerned an exemption granted to “sugar” under the Karnataka Sales Tax Act, 1957 and the validity of subsequent legislative amendment by which such exemption was confined to sugar “produced or manufactured in India” with retrospective effect. The case relates to an exemption earlier available and acted upon has been retrospectively withdrawn.

Decision of the Supreme Court:

The Supreme Court held that the Division Bench of the Karnataka High Court was correct in upholding the validity of the amendment, but erred in restoring the reassessment proceedings without protecting the assessees from penal and oppressive consequences that arise from retrospectivity. The State was held entitled to determine and recover the principal tax liability, upon lawful reassessment and recomputation. The Apex Court further held that no penalty shall be imposed or recovered retrospectively. However, with regard to interest, the Apex Court held that interest leviable under the statute shall be computed only from the date of lawful demand pursuant to reassessment after giving effect to the present judgment.

Critique of the decision:

It is important to understand the nature of the sales tax. A dealer who sells goods ordinarily collects sales tax from the purchaser when the law requires him to do so. If the goods are exempt, he does not collect tax. Where the assessment is completed by granting exemption, the dealer has no reason to retain or reserve any amount towards tax. Years later, when the law is amended retrospectively, he cannot go back to purchasers and recover the tax.

In the above context, it is clear that if a sales tax legislation is retrospective, then the dealer bears the burden of tax. Exemption might be a fiscal policy which the government can withdraw at any given point in time. But such withdrawal of exemption has to be reasonable. The State must justify on reasonable grounds the withdrawal of an exemption since it acts within the teeth of Article 19 (1) (g) of the Constitution. The withdrawal cannot be whimsical since it hits the dealers with immense tax liability concerning several years. It has the possibility of creating severe financial hardship to the dealers since payment of tax under the sales tax is not the liability of the dealer rather it is collected from the purchaser and then paid to the State.

The Supreme Court in its judgment has no where discussed as to what was the pressing need of the State to withdraw a certain category of exemption. The proper balance should have been an estimation as to what extent the exemption was causing revenue loss for which the State had no option but to withdraw the exemption and place tax liability on the dealers after a long lapse of time.

There are plethora of judgments of the Supreme Court which supports reasonableness of retrospective operation of a fiscal legislation. In Empire Industries Limited and Others v. Union of India and Others, 1985 INSC 124, the Supreme Court upheld retrospective fiscal legislation, but made it clear that the question in such cases is whether the retrospective operation is unreasonable. In R.C. Tobacco (P) Ltd. And Another v. Union of India and Another, 2005 INSC 431, the Supreme Court upheld retrospective withdrawal of and exemption, but observed that the unreasonableness of retrospectivity must be founded on the facts of the particular case. In D. Cawasji & Co. v. State of Mysore, Civil Appeal Nos. 1353 & 1354 of 1973, the Supreme Court was concerned with a retrospective amendment imposing a heavy burden after a long lapse of time. It is an authority for the more measured proposition that the duration, purpose and impact of retrospectivity are relevant in testing Constitutional reasonableness.

In Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited, Civil Appeal No. 8750 of 2014, the Supreme Court held that legislation which imposes a new burden or attaches a new disability is ordinarily presumed to be prospective unless the language clearly indicates otherwise. It does not altogether exclude constitutional scrutiny where the burden imposed is said to be unreasonable.

There are case laws that support retrospectivity of fiscal legislation as well. In Kasinka Trading and Another v. Union of India and Another, 1994 INSC 463 and Shrijee Sales Corporation and Another v. Union of India, Civil Appeal No. 3000 0f 1984, makes it clear that exemption is a matter of fiscal policy. A concession granted by the State does not create an indefeasible right that it shall continue. Public interest and revenue considerations may justify withdrawal. In Epari Chinna Krishna Moorthy v. State of Orissa and Others, Writ Petition Nos. 125-135 and 233 of 1963 and M/s. Hiralal Rattanlal Etc. Etc. v. State of U.P. and Another Etc. Etc., Civil Appeals 821, 822, 1625 and 2008 of 1971, the Supreme Court upheld retrospective sales tax legislation and validation laws, subject to legislative competence and Constitutional limitations. In M/s. Hiralal case, the Court observed that the retrospective amendment became necessary as otherwise the State would have to refund large sums of money. In Epari case, the Court observed that the retrospective operation does not spread over a long period.

A bare reading of the aforesaid case laws explain the various circumstances under which a fiscal legislation can operate retrospectively. These conditions broadly are legislative competence and not in teeth of the Constitution. Apart from these, other conditions are public interest and revenue considerations.

However, there are equally good number of judgments that promulgate legislation to be prospective and not retrospective and to test the retrospective application on reasonableness and long lapse of time.

The present judgment has upheld the retrospective application of the fiscal legislation without placing on record as to 'why' the exemption was withdrawn. Legislative competence too, has to pass the test of reasonableness. An exemption given under a fiscal policy if allowed to be withdrawn in a cavalier manner placing the tax liability on the dealer in sales tax is in direct violation of the fundamental right of the dealer to do business. The principle in sales tax is clear that the dealer does not have the liability to pay the tax but the dealer has to collect that tax from the purchaser and then pay to the State. Through retrospective legislation, there is a shift in the tax liability from the purchaser to the dealer and the backlog of tax liability can consist of several years. The nature of indirect tax turns into that of direct tax. Therefore, it becomes imperative to understand 'why' a granted exemption is withdrawn and the power of withdrawal of exemption has to be 'reasonable' since the payment of tax liability of many years shall have serious financial implication on the dealer.

Author is an Advocate practicing at Patna High Court. Views are personal.