Cess levied as increment to sales tax remains within State’s scope, says Supreme Court

The Supreme Court held on Wednesday (November 4, 2026) that an additional tax levied by a State legislature on the sale or purchase of goods will not fall outside the State’s competence. A seven-judge Bench confirmed a 1975 ruling (S.

Kodar versus State of Kerala) that a cess levied as an increment to an existing sales tax has to be judged in the same way as the principal tax. “S. Kodar (supra) squarely holds that an additional tax or surcharge computed as a percentage of the sales tax payable is an enhancement of the rate of sales tax and a tax on the sale or purchase of goods within Entry 54 of List II, as it then stood.

That decision continues to hold the field,” the lead opinion authored by Chief Justice of India (CJI) Surya Kant held. In a concurring but separate opinion, Justice K.V. Viswanathan agreed that the judicial reasoning in the 1975 verdict indeed held the fort.

“The levy was a tax on the sale of goods, and the fact that quantum of the additional tax was determined with reference to the sales tax imposed would not alter the character of the levy and that in reality, it was a tax on the aggregate of the sales effected by a dealer,” Justice Viswanathan observed.

The Constitution Bench’s judgment on Wednesday (November 4) was based on petitions dating as far back as 1994, raising the question as to the legislative competence of a State Legislature, to levy a tax on the sale or purchase of goods under Entry 54 of List II of the Seventh Schedule to the Constitution on sales tax payable by a dealer rather than directly on his turnover.

The assessees had insisted that such an extra tax could be construed as a ‘tax on tax’. They urged that a levy measured by the quantum of tax already payable does not fall upon the ‘sale’ or ‘purchase of goods’, which alone is the subject of Entry 54 of State List in the Seventh Schedule of the Constitution.

Entry 54 covered taxes levied by States on the sale or purchase of goods other than newspapers. They said the additional tax had a different character from the principal sales tax, and was a charge upon the ‘income’ or the ‘fiscal burden’ of the dealer, and therefore, lay beyond the ambit of a State Legislature.

The States, on the other hand, maintained that such a surcharge was nothing more than an enhancement of the rate of sales tax for a class of dealers, and that the mode of its computation did not alter its essential character as a tax on sale of goods.

“A surcharge on income tax, for instance, has always been computed as a percentage of the income tax payable,” the court differed with the assessees. A surcharge, the court explained, was only an enhancement of the principal levy, partaking of its character and drawing its validity from the same source.

Thus, the court reasoned that when a State Legislature, acting within its own taxing entry (Entry 54), chose to enhance the tax on the sale or purchase of goods for a class of dealers, the additional levy would take on the character and computation of the principal tax, and not change colour and transform into a tax on income.

However, the lead opinion of the judgment authored by the CJI noted that the sales tax regime has undergone a change with the ensuing decades the case lay pending in the Supreme Court. Newer legislation, first the Value Added Tax enactments and thereafter the Goods and Services Tax Act, 2017, have taken over, rendering the reference largely an “academic” exercise.