SC sales tax ruling: What it means for businesses with old tax disputes | Economy & Policy News

The Supreme Court’s November 4 judgment in Arjun Flour Mills v. State of Odisha has addressed an important issue concerning states’ powers to impose additional taxes on businesses. The Bench reaffirmed that a state can impose an additional levy calculated as a percentage of the sales tax payable by a dealer. However, it treated the 27-year-old case before the introduction of the Goods and Services Tax (GST).

 

Though the judgment has not created any new tax liability under the present GST mechanism, the observations could influence unresolved disputes involving sales tax and surcharges imposed under earlier state laws.

 

What was the additional sales tax, and why did businesses challenge it?

  

The dispute arose from Section 5A of the Orissa Sales Tax Act, 1947. It imposes a surcharge, or an additional sales tax, on dealers based on their annual turnover.

 

It mandated businesses to pay an additional amount over and above their regular sales tax. The levy was calculated at 10 per cent of the total sales tax payable.

 

“The challenge was one of legislative competence,” said Supriya Majumdar, partner, Elarra Law Offices. Businesses contended that taxing the sales tax liability, rather than the sale itself, fell outside the states’ constitutional powers, Majumdar added.

 

The court rejected that premise. A surcharge calculated on sales tax is, in substance, an increase in the effective sales tax rate; its computational basis does not alter its character or take it outside the erstwhile Entry 54 of the State List.

 

Can a state impose a tax calculated on another tax?

 

Yes, a state can impose a tax calculated on another tax if the subject falls under the State List.

 

The issue had already been raised in S. Kidar v. State of Kerala (1974), where a five-judge Bench upheld the validity of an additional sales tax calculated with reference to the tax payable by a dealer.

 

“The Supreme Court’s seven-judge Constitution Bench has clarified that, under the erstwhile sales tax regime, State Governments were constitutionally empowered to levy additional sales tax or surcharge calculated as a percentage of the existing sales tax payable,” said Dr Sachin Sharma, managing partner, KSV Tax Consultants.

 

The court held that such an additional levy retains the character of sales tax and does not automatically become a tax on income, thereby reaffirming the legal position under the erstwhile Entry 54 of List II of the Seventh Schedule to the Constitution, Sharma added.

 

What exactly did the Supreme Court decide?

 

The Bench reaffirmed the principle laid down in S. Kodar. It held that calculating an additional levy on the basis of sales tax does not change its essential character as a tax on the sale of goods.

 

“It may impact certain cases wherein the taxpayers and traders were objecting to the state’s authority of charging higher taxes,” said SR Patnaik, partner (head – taxation), Cyril Amarchand Mangaldas.

 

However, this will have to be evaluated on a case-by-case basis since, even in this case, the SC decided not to comment on a few other cases pending before it, including one pertaining to the levy of certain taxes by the Punjab government relating to the validity of a surcharge under the Punjab General Sales Tax Act, 1948, applicable to industrial units otherwise exempt from sales tax, Patnaik added.

 

Could the ruling affect pending tax demands and refund claims?

 

For businesses involved in old sales tax disputes, the judgement does not automatically settle their cases or validate every demand raised by state tax authorities.

 

The Court expressly left open the scope for individual contentions relating to assessments, the period of levy and consequential relief.

 

For instance, in the case of an industrial unit that enjoyed a sales tax exemption under Punjab law, the Court specifically left open the question of the validity of Section 30AA of the Punjab General Sales Tax Act, 1948, which concerns such exempted units.

 

Businesses should therefore examine their pending notices, appeals and refund claims individually rather than treating the judgement as a blanket decision on all pre-GST liabilities.

 

Does this ruling allow states to impose similar levies under GST?

 

No. The judgement does not give states a general power to introduce additional taxes on GST or impose fresh surcharges calculated on the GST payable by businesses.

 

The ruling concerns the earlier constitutional framework, particularly Entry 54 of the State List, which governed states’ power to tax the sale or purchase of goods before GST.

 

“Importantly, this ruling should not be interpreted as granting states unrestricted authority to impose additional taxes under the present GST framework,” said Prateek Bansal, partner – tax, customs & regulatory, White and Brief – Advocates & Solicitors.

 

Any additional levy must therefore derive authority from the present legal framework rather than the erstwhile sales tax provisions, Bansal added.

 

For businesses, the key takeaway is that the Supreme Court has reaffirmed the legal basis of certain additional sales tax levies under the pre-GST regime but has not closed the door on individual challenges to old tax demands. The outcome of those disputes will depend on the specific law and facts of each case.