The Supreme Court on November 4 upheld its 1974 judgment holding that state governments have the power to levy additional tax on sales tax. The decision brings closure to a legal issue that had remained unresolved for 27 years.
In the 1970s, the governments of Tamil Nadu and Kerala imposed additional sales tax based on traders’ gross turnover. Under the Tamil Nadu Additional Sales Tax Act, 1970, traders with an annual gross turnover above Rs 10 lakh had to pay an extra 5 per cent on top of the sales tax due. After the Madras High Court dismissed traders’ challenge, the matter reached the Supreme Court, which ruled in S. Kodar vs State of Kerala that additional sales tax only raises the rate of tax and is not an income tax, and that states have full authority under the State List to levy it.
Following that ruling, Odisha around 1994 added Section 5A to its Sales Tax Act, 1947, imposing an additional 10 to 15 per cent tax on traders with annual gross turnover above Rs 10 lakh. Traders including Arjun Flour Mill challenged the levy in the High Court and then the Supreme Court, questioning the validity of the Kodar judgment. They pointed to inconsistencies in later Supreme Court rulings on whether a tax based on gross turnover takes on the character of an income tax, while Odisha and other states relied on Kodar as legal protection.
In 1999, a five-judge bench referred the matter to a larger seven-judge Constitution Bench, where the Odisha Section 5A case and related appeals remained pending for 27 years. The bench comprising Chief Justice Surya Kant and Justices K.V. Viswanathan, S.V. Bhatti, Joymalya Bagchi, N.V. Anjaria, Aravind Kumar and V. Mohana delivered the final verdict.
The court said it was unnecessary to decide whether states can levy a percentage surcharge or additional charge on sales tax, because GST was implemented nationwide in 2017, leaving the Odisha Section 5A case without practical significance. However, on the main question of whether states can levy additional tax, it held that the 1974 Kodar judgment remains valid, and closed the case.
