Cess levied on sales tax falls within State’s ambit, says SC

Why in the News

Dealers have argued since 1994 that a State’s surcharge on sales tax is a “tax on tax” outside the State’s powers; the Supreme Court has now held that it is simply a higher sales tax rate that the State can levy. A seven judge Constitution Bench confirmed S. Kodar versus State of Kerala (1975) and settled those long pending petitions.

What is a cess on sales tax, and why was it challenged?

1. Cess on sales tax: An extra State levy worked out as a percentage of the sales tax a dealer already owes, not of turnover. It works like a surcharge on income tax, calculated on the tax bill.
2. Entry 54 of the State List: Under the Seventh Schedule, Entry 54 of List II let States tax the sale or purchase of goods other than newspapers. A State tax must fall on that sale or purchase.
3. “Tax on tax” argument: The assessees, the dealers liable to pay, argued that a levy measured by tax already payable does not fall on any sale or purchase, so Entry 54 cannot support it.
4. The takeaway: The case asked whether the way a tax is calculated decides what the tax is, which sets the reach of State taxing power.

What did the Constitution Bench hold?

1. Kodar ruling confirmed: S. Kodar “squarely holds” that an extra tax computed as a percentage of sales tax payable is only an enhancement of the sales tax rate. It “continues to hold the field”, meaning it is still good law.
2. Within State competence: The Chief Justice of India (CJI), writing the lead opinion, held such a levy a tax on the sale or purchase of goods within Entry 54 “as it then stood”, its older, wider form.
3. Concurring opinion: Justice K.V. Viswanathan wrote separately and agreed that the 1975 verdict’s reasoning still stands, or in his words “held the fort”.
4. Same test as the principal tax: A cess added as an increment to an existing sales tax must be judged in the same way as the main tax it builds on.

Why does the method of computing a tax not change its character?

1. States’ position: The States argued that the surcharge only raised the sales tax rate for a class of dealers, and its mode of computation did not alter its character.
2. Subject versus measure: The ruling separates what a tax falls on, the sale of goods, from how its amount is measured. So a levy measured on tax remains a sales tax.
3. Room for targeted levies: A State can raise the burden on a chosen class of dealers through a surcharge without the levy failing as a tax on tax.

Challenges

1. Higher burden on some dealers: A surcharge aimed at one class of dealers raises their effective rate above that of other sellers of the same goods.
2. Prolonged uncertainty: Dealers and States waited over three decades for a final answer on whether these levies were valid.
3. Narrower field after GST: Most sales taxes were folded into the Goods and Services Tax (GST), so the ruling now bears mainly on taxes States still levy. Eg. Taxes on petrol, diesel and liquor.

Way Forward

1. Clear legislative wording: State legislatures should frame any surcharge expressly as a rate increase for a named class of dealers, the form the Court upheld.
2. Time limits for references: The Supreme Court should set timelines for hearing long pending references on taxing powers.
3. Transparent fuel and liquor taxes: States should publish the base rate and the surcharge separately, so the total burden on buyers is visible.

Conclusion

A State’s surcharge on its own sales tax is a valid sales tax, not a forbidden tax on tax. What remains to watch is how States use this settled power over the few goods still outside GST.

Back2Basics: Entry 54 of the State List

1. Seventh Schedule: Under Article 246, it divides law making subjects among the Union List, the State List and the Concurrent List.
2. After GST: The Constitution (One Hundred and First Amendment) Act, 2016 narrowed Entry 54 to petroleum crude, high speed diesel, petrol, natural gas, aviation turbine fuel and alcoholic liquor for human consumption.
3. Article 246A: Inserted by the same amendment, it lets both Parliament and State legislatures levy GST.
4. “As it then stood”: The Court read the earlier, wider Entry 54, because the levies under challenge dated from before GST.

Matching Previous Year Question

“[2014] The sales tax you pay while purchasing a toothpaste is a (a) Tax imposed by the Central Government. (b) Tax imposed by the central Government but collected by the State Government. (c) Tax imposed by the State Government but collected by the Central Government. (d) Tax imposed and collected by the State Government. ANSWER: (d)”