Supreme Court keeps states’ power to levy sales-tax surcharges intact

The court reaffirmed that a surcharge calculated as a percentage of sales tax remains part of the tax on sales, following the precedent in S Kodar v. State of Kerala.

India’s Supreme Court has reaffirmed that state legislatures can impose an additional levy linked to sales tax, keeping alive a long-standing precedent that treats such charges as part of the tax on sales rather than as a separate impost on income.

In its ruling, the court said the position laid down in S Kodar v. State of Kerala continues to apply. That five-judge decision held that an additional tax or surcharge calculated as a percentage of sales tax payable amounts to an increase in the sales-tax rate and remains a levy on the sale or purchase of goods under the relevant constitutional entry for state taxation. The court today said that ruling “continues to hold the field”.

The clarification matters because S Kodar rejected the argument that an additional sales-related levy was really a tax on dealers’ income. The judgment held that the method used to calculate the amount of the levy did not alter its legal character. In other words, linking the surcharge to sales tax payable did not turn it into something outside the state legislature’s power. A later Supreme Court ruling on a Kerala sales-tax surcharge followed the same basic logic, describing the surcharge as an enhancement of the underlying tax.

The latest decision also makes clear that the question of state legislative competence over the challenged surcharge must be governed by the law declared in S Kodar. That leaves intact a principle that has shaped Indian tax law for decades: a surcharge or additional levy does not necessarily become a distinct tax simply because it is computed by reference to another tax. It can still be treated as part of the original sales-tax structure, so long as its substance remains tied to the taxable sale or purchase of goods.