Context
Recently, a seven-judge Bench of the Supreme Court held that an additional tax levied by a State legislature on the sale or purchase of goods does not fall outside the State’s legislative competence.
Issue Before the Court
- Question: Whether a State Legislature has the legislative competence under Entry 54 of List II of the Seventh Schedule to levy a tax on the sale or purchase of goods on the sales tax payable by a dealer, rather than directly on his turnover.
Why Was the Issue Controversial?
There were two different interpretations:
1. Argument of the Assessees (Taxpayers)
- They argued that the additional levy amounted to a ‘Tax on Tax’.
- According to them, Entry 54 of the State List permits taxation on the sale or purchase of goods, not on an existing tax liability.
- Therefore, they questioned whether States had the legislative power to impose such a levy.
2. Argument of the State Governments
- The States argued that the additional levy was simply an increase in the existing rate of sales tax.
- Calculating the additional tax as a percentage of the sales tax payable does not change its basic nature.
- Hence, it falls within the taxation powers of State Legislatures under Entry 54 of List II.
About the Supreme Court Ruling
- An additional tax, surcharge, or cess calculated as a percentage of sales tax payable is not an invalid “tax on tax”.
- It constitutes an enhancement in the rate of sales tax and falls squarely within the legislative competence of State Legislatures under Entry 54 of List II (State List) of the Seventh Schedule.
- The Court reaffirmed the 1975 judgment in S. Kodar v. State of Kerala, holding that an additional tax calculated as a percentage of the sales tax payable is essentially an enhancement of the rate of sales tax.
Constitutional Provisions Governing the Levy
- Article 246 – Distribution of Legislative Powers:
- Distributes legislative powers between Parliament and State Legislatures through the three lists in the Seventh Schedule.
- Seventh Schedule – Entry 54 of List II (State List):
- Empowers State Legislatures to levy taxes on the sale or purchase of goods, other than newspapers, subject to the provisions of Entry 92A of List I.
- Legislative Competence:
- State Legislatures can impose taxes on the sale or purchase of goods within the scope of their constitutionally assigned taxation powers.
Significance of the Judgment
- State Taxation Powers: Reaffirms the legislative competence of States to impose additional tax or surcharge on sales tax.
- Nature of Tax: Clarifies that the method of computation does not necessarily determine the constitutional character of a levy.
- Federalism: Reinforces the taxation powers allocated to States under the Seventh Schedule.
| Important CTC From this article: Cess & surcharge |
Q. Consider the following statements regarding the Supreme Court's verdict on additional sales tax and Entry 54 of the State List:
1. The Supreme Court ruled that a surcharge calculated on existing sales tax is an unconstitutional 'tax on tax'.
2. The Court held that computing a levy as a percentage of sales tax payable is merely an enhancement of the sales tax rate.
3. Following the 101st Constitutional Amendment, Entry 54 of the State List still covers taxes on petroleum products and alcoholic liquor.
4. Article 246A grants concurrent powers to Parliament and State legislatures to levy the Goods and Services Tax (GST).
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 1, 2 and 4 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4
Answer: (c) 2, 3 and 4 only
Explanation:
• Statement 1 is incorrect: The Supreme Court unanimously upheld the 1974 S. Kodar judgment, ruling that the surcharge is not an unconstitutional 'tax on tax' and is perfectly within the State's competence.
• Statement 2 is correct: The Constitution Bench clarified that an additional tax computed as a percentage of the existing sales tax is legally considered an enhancement of the sales tax rate.
• Statement 3 is correct: While GST subsumed most sales taxes, Entry 54 of the State List was amended to retain State taxation powers specifically over petroleum crude, high-speed diesel, petrol, natural gas, aviation turbine fuel, and alcoholic liquor for human consumption.
• Statement 4 is correct: Article 246A, inserted by the 101st Amendment Act, 2016, grants both Parliament and State legislatures the concurrent power to make laws regarding GST.