SC Affirms States' Power to Levy Sales Tax Surcharge

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Key takeaways

A seven-judge Constitution Bench ruled in 2026 that states have the power to levy a surcharge calculated on sales tax as a valid additional sales tax.
The Court clarified that calculating a surcharge based on tax payable is merely an arithmetical method and does not constitute an illegal tax on tax.
Because the surcharge depends on turnover and must be paid even during business losses, it cannot be classified as an income tax.
The decision upheld the 1974 S. Kodar precedent while relying on the 2024 nine-judge bench ruling that royalty is not a tax.
Under the 101st Constitutional Amendment Act, 2016, state sales tax powers under Entry 54 of List II are limited to select petroleum items and alcoholic liquor.

A seven-judge Constitution Bench of the Supreme Court resolved a 30-year-old legal dispute in the Arjun Flour Mills v. State of Orissa (2026) case.
The Court ruled that states hold the constitutional power to impose a surcharge calculated on sales tax.
The judgment declared this levy a valid additional sales tax instead of an unconstitutional tax on tax.

The legal dispute began in 1994 when businesses challenged an amendment to the Orissa Sales Tax Act, 1947.
The state law introduced an additional tax surcharge for dealers whose annual turnover passed Rs 10 lakh and Rs 1 crore thresholds.
Dealers argued that calculating the surcharge from tax payable created an invalid tax on tax.
They claimed the surcharge acted like an income tax, placing it outside state powers under Entry 54 of List II in the Seventh Schedule.

The Supreme Court rejected the dealers' arguments and sustained the state law.
The Court explained that the true subject of the tax remains the sale or purchase of goods.
Using a percentage of tax payable is simply a mathematical method to set the final tax amount.
Because dealers must pay the surcharge even when suffering financial losses, it cannot be classified as an income tax.

Dealers previously relied on the 1990 India Cement Ltd. v. State of Tamil Nadu ruling to argue against taxes calculated on existing taxes.
A nine-judge bench resolved this conflict in the 2024 Mineral Area Development Authority v. SAIL case by ruling that royalty is not a tax.
The Supreme Court reaffirmed its 1974 judgment in S. Kodar v. State of Kerala, confirming state powers to levy additional sales tax on high-turnover dealers.

A surcharge serves as an additional tax on existing tax payments, and its revenues flow into the Consolidated Fund for general spending.
A cess is collected for a specific target purpose, such as an Education Cess, and must be placed in a dedicated fund.

The 101st Constitutional Amendment Act, 2016 restricted state powers under Entry 54 of List II to petroleum crude, high-speed diesel, petrol, natural gas, aviation turbine fuel, and human-consumption alcohol.
Article 246A gives both Parliament and State Legislatures the authority to pass GST laws, while Article 269A gives Parliament exclusive control over inter-state trade.