28 years on, a seven-judge bench closes the tax-on-tax surcharge reference: S. Kodar already answers it

A seven-judge bench led by Chief Justice Surya Kant holds the Entry 54 question answered by S. Kodar and the reference academic, leaving Orissa and Punjab assessees to regular benches.

A seven-judge bench of the Supreme Court on 4 November 2026 closed a 28-year-old reference on whether a State can levy a surcharge computed on the sales tax a dealer already owes. It held the reference academic, because a Constitution Bench ruling of 1974 already answers the question.

The bench consisted of Chief Justice Surya Kant, Justice S.V.N. Bhatti, Justice Joymalya Bagchi, Justice N.V. Anjaria, Justice Arun Palli, Justice V. Mohana and Justice K.V. Viswanathan. The Chief Justice wrote the main judgment. Justice Viswanathan delivered a separate one.

Both leave S. Kodar v. State of Kerala standing. That case treated an additional tax at a percentage of the sales tax payable as an increase in the sales tax rate for large dealers, which a State may impose under Entry 54 of List II.

Three levies, one question

The lead appeals came from Odisha. Section 5-A of the Orissa Sales Tax Act, 1947, inserted with effect from 1 July 1990, made every dealer with gross turnover above Rs 10 lakh pay a surcharge of 10 per cent of the tax payable. Sub-section (3) barred the dealer from collecting it from buyers.

The Orissa High Court, in a Division Bench judgment by Justice Arijit Pasayat, upheld the surcharge, following S. Kodar and Hoechst Pharmaceuticals. The assessees appealed to the Supreme Court.

The second set came from Punjab. Section 5(1-C) of the Punjab General Sales Tax Act, 1948 imposed a similar 10 per cent surcharge. Section 30-AA made industrial units exempt from sales tax under Section 30-A pay the surcharge anyway. The Punjab and Haryana High Court upheld both provisions.

The third set challenged a cess under the Punjab Social Security Act, 2000, set as a percentage of sales tax payable and meant for the Punjab Social Security Fund. The High Court struck the Act down because the proceeds could not go to that fund without first entering the Consolidated Fund of the State under Article 266.

The assessees argued that a surcharge measured on tax, not on turnover, is a tax on a tax, which no entry in List II authorises. The States said it is simply a higher rate of sales tax for larger dealers.

How a 1998 reference reached seven judges

On 13 August 1998 a two-judge bench of Justice S.P. Bharucha and Justice V.N. Khare saw a conflict between Hoechst Pharmaceuticals, a three-judge decision of 1983, and India Cement, a seven-judge decision of 1990. It asked for a larger bench.

A five-judge bench on 6 October 1999 noted that S. Kodar, a Constitution Bench ruling, would also have to be considered. Only a larger bench could revisit it, so it sent the matter to seven judges.

The Punjab matters were tagged on later. On 9 January 2024 a three-judge bench led by the then Chief Justice appointed Ms. Anindita Pujari as common nodal counsel.

After she was designated a Senior Advocate, Ms. Samapika Biswal took over as nodal counsel. By an order of 12 August 2026 the Chief Justice directed the matter to be listed for hearing.

The question for the seven judges, as that order framed it, is recorded in paragraph 11 of Justice Viswanathan’s judgment.

“Whether the imposition of a surcharge/additional tax/levy/cess/sale/purchase, which is calculated on the basis of a validly levied sales/purchase tax, is beyond the competence of the State Legislature?” (para 11)

Mr. Shubhranshu Padhi appeared for the assessees. Solicitor General Mr. Tushar Mehta appeared for the States, with the Advocate General of Odisha and the Additional Advocate General of Punjab.

The subject of a tax and its measure

At the hearing a preliminary point arose: did the reference still have any life? The Chief Justice framed the single issue as whether, given developments since the 1998 and 1999 orders, the referred question survives.

He began with the constitutional framework. Entry 54 of List II, as it stood before 2016, gave States power to tax the sale or purchase of goods other than newspapers, subject only to Entry 92-A of List I. The bench said such an entry is read in its widest amplitude.

The tax-on-tax argument, it said, confuses two ideas. The subject of a tax is the taxable event, which fixes the entry. The measure is the yardstick that computes the amount.

The bench cited Union of India v. Bombay Tyre International (1984) and Federation of Hotel and Restaurant Association of India (1989) for the point that the measure does not decide the character of the tax.

It added that taxing by percentage of another tax is not new. Article 271 allows Parliament to add a surcharge to Union duties and taxes. A surcharge on income tax has always been computed on the tax payable, and nobody has called it a tax on a tax outside the principal entry.

What Kodar and Hoechst decided

In S. Kodar, five judges upheld the Tamil Nadu Additional Sales Tax Act, 1970. It raised the tax by 5 per cent of the tax payable for dealers with turnover above Rs 10 lakh, and barred them from collecting it from buyers.

The Court held the additional tax was really a tax on the aggregate of sales, within Entry 54. That its amount is fixed by reference to sales tax did not alter its character. It rejected the argument that it was a tax on income because it could not be passed on.

It also upheld the classification by turnover under Article 14, on the ground that large dealers have greater capacity to pay.

Hoechst Pharmaceuticals followed. A three-judge bench upheld a Bihar surcharge of up to 10 per cent on dealers with turnover above Rs 5 lakh, again with a bar on collecting it from buyers. The assessees said the point was conceded there.

The Chief Justice accepted that relatability to Entry 54 was not seriously disputed in Hoechst. But the bench there had still held a surcharge is a higher rate of tax, and rejected the argument that the bar on collection made it a tax on income. In any case, he said, the binding force rests on S. Kodar.

India Cement and a conflict that was not

In India Cement, a seven-judge bench struck down a Tamil Nadu cess levied on royalty from mining leases, with a surcharge on the cess. The Court said royalty is a tax and that the Mines and Minerals (Regulation and Development) Act, 1957 covered the field, so the State could not tax it.

It also held that a cess on royalty is not a tax on land.

The Chief Justice said that decision never held a levy computed on another tax to be invalid for that reason. It was not about sales tax, did not mention S. Kodar or Hoechst, and turned on royalty and the central statute.

The bench noted that India Cement had itself approved the rule in Guruswamy and Co. v. State of Mysore. A cess added to an existing tax is judged like the tax it is added to.

On that rule, a surcharge on a valid sales tax is valid, and a cess on something the State cannot tax is not. The conflict, he said, was more apparent than real even in 1998.

When royalty stopped being a tax

The bench then traced what happened to India Cement. In State of West Bengal v. Kesoram Industries (2004), a Constitution Bench read the line that royalty is a tax as an inadvertent error. The majority said the Court meant that a cess on royalty is a tax.

The question went to nine judges. In Mineral Area Development Authority v. Steel Authority of India (2024), the majority held that royalty is a contractual payment from lessee to lessor, not a tax. It overruled India Cement to that extent.

That removed the premise on which India Cement had called a cess on royalty a tax on a tax. A larger bench’s decision binds a smaller one, so no ruling of equal or greater strength now conflicts with S. Kodar.

The Chief Justice noted that the Union has filed a curative petition against the 2024 decision, and that Parliament inserted Section 9D in the mining statute in 2026. Neither, he said, affects what that decision approved in S. Kodar.

When a reference stops being live

The bench set out the law on references. Article 145(3) requires five judges for substantial constitutional questions. Under Central Board of Dawoodi Bohra Community v. State of Maharashtra (2005), a smaller bench cannot disagree with a larger one and may only ask the Chief Justice for a larger bench.

A reference, the bench said, is tied to a genuine doubt. When a decision of a still larger bench removes the doubt, the reference has no work left. Answering it would restate settled law, and a seven-judge bench is a scarce resource.

Parties also wait while the question that governs them is already answered. The bench added that a reference need not be returned whenever law shifts. The test is whether a genuine doubt remains that only the referred strength can resolve.

“the question referred stands squarely answered by S. Kodar” (para 87)

Why it is not a tax on income

The Chief Justice also rejected the tax-on-tax argument on its merits. Sales tax is a percentage of taxable turnover, so a surcharge on it is a further percentage of the same turnover. A 10 per cent surcharge on a 10 per cent sales tax is, in substance, an additional 1 per cent of turnover.

The levy also rises with turnover, not income. A dealer who made a loss still pays both sales tax and surcharge once turnover crosses the threshold. A levy payable regardless of income, he said, cannot be called a tax on income.

Nothing in the challenge, he added, distinguished the Orissa surcharge or Section 5(1-C) of the Punjab Act from the levy upheld in S. Kodar. Both fall on a class of dealers defined by turnover and are fixed percentages of tax payable.

The sales tax regime has gone

The bench gave a second reason against hearing the reference. The 101st Constitution Amendment of 2016 inserted Article 246A and substituted Entry 54 of List II, which now covers only petroleum crude, high speed diesel, motor spirit, natural gas, aviation turbine fuel and alcoholic liquor for human consumption.

Both States had already replaced their sales tax laws with value added tax Acts, Odisha’s in 2004 and Punjab’s in 2005. The surcharges therefore relate only to assessment periods under Acts no longer in force, and no fresh levy of that kind can be made under them.

The bench said individual assessees still have a stake because past liabilities may be enforced. The conclusion does not close their rights. It leaves them to be decided by regular benches under the law as declared.

Justice Viswanathan’s separate judgment

Justice Viswanathan reached the same practical end by a shorter route. He reviewed S. Kodar, Hoechst, India Cement, Kesoram and the nine-judge decision, and held that India Cement and the mining cases were about different entries and different issues.

He noted the Solicitor General’s statement on the curative petition and the 2026 amendment, and agreed they do not change the position. No other argument against the correctness of S. Kodar was made at the bar, he said. His conclusion on the 1974 ruling was short.

“has been correctly decided, continues to be a good law” (para 65)

His directions sent the Orissa Act appeals, and the Punjab General Sales Tax Act appeals, to be placed before the Chief Justice for assignment to an appropriate bench, to be decided as laid down in S. Kodar.

He directed that the Punjab Social Security Act appeals be segregated and placed before an appropriate Division Bench. Counsel, he recorded, were agreed that these matters should be delinked and heard separately.

Questions left open

The Chief Justice noted that two sets of matters raised questions outside the reference that S. Kodar does not answer. One is whether a surcharge defined as a percentage of tax payable can be levied under Section 30-AA of the Punjab Act on units that owe no tax because of an exemption.

The other is whether the Punjab Social Security cess could be credited directly to the Fund without first forming part of the Consolidated Fund of the State under Article 266. The bench said that is a question of public finance, independent of legislative competence under Entry 54.

It expressed no opinion on either.

Order

The reference is answered as infructuous. The legislative competence of States to levy the impugned surcharges is governed by S. Kodar.

The validity of Section 30-AA of the Punjab Act, the Article 266 question on the Punjab Social Security cess, and all other contentions on assessments, periods of levy and reliefs are left open. The Registry is to list the lead matter and connected matters before appropriate regular benches, after taking directions from the Chief Justice on the administrative side.

The Court recorded its appreciation of counsel and of Ms. Samapika Biswal, nodal counsel.