Supreme Court Upholds States' Power to Levy Additional Sales Tax — What the 27-Year-Old Case Means for Fuel and Liquor Taxes Today
Tax law · Supreme Court · Centre-state finance
Supreme Court Upholds States’ Power to Levy Additional Sales Tax — What the 27-Year-Old Case Means for Fuel and Liquor Taxes Today
A seven-judge bench led by Chief Justice Surya Kant reaffirmed that a surcharge calculated on sales tax is simply a higher sales tax rate, closing a reference pending since 1999.
Look closely at what a state charges on a litre of petrol and you often find more than one layer: a percentage VAT, then a fixed amount per litre, sometimes a cess, and in Punjab a 10% “additional tax” calculated on the VAT itself. For decades a legal question hung over levies like that last one. If a state calculates a surcharge as a percentage of the sales tax you already owe, is it still a sales tax, which states may impose, or a tax on a dealer’s income, which only Parliament can? On 4 November 2026, a seven-judge Supreme Court bench gave its answer, by reaffirming a ruling from 1974.
The bench, the opinions and the one-line holding
According to Verdictum and ThePrint, Chief Justice Surya Kant wrote the 47-page lead judgment for himself and Justices S.V.N. Bhatti, Joymalya Bagchi, N.V. Anjaria, Arun Palli and V. Mohana. Justice K.V. Viswanathan wrote a separate 46-page opinion agreeing with the result. The bench had reserved judgment on 22 September 2026.
“S. Kodar 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. “That decision continues to hold the field.”
Chief Justice Surya Kant, lead judgment, as reported by PTI via ThePrintThe core reasoning turns on a distinction tax lawyers have used for decades: the subject of a tax is different from the measure used to calculate it. A surcharge is still a tax on the sale or purchase of goods, even if the rupee amount is worked out by reference to the sales tax already payable. It does not become a tax on a dealer’s income just because it rises with turnover.
- 47 pagesLead judgment by CJI Surya Kant
- 46 pagesConcurring opinion by Justice K.V. Viswanathan
- 22 Sep 2026Date judgment was reserved
- 8763/1994Civil appeal number of the lead Odisha case
- 10%Surcharge on sales tax in the Punjab provision challenged
- 2 issuesPunjab questions left open for regular benches
Why a “tax on tax” was ever in doubt
India’s Constitution splits taxing powers between lists. Entry 54 of the State List lets states tax the sale or purchase of goods. Entry 82 of the Union List reserves taxes on income to Parliament. Assessees challenging the Odisha and Punjab levies argued that a surcharge pegged to sales tax and triggered by turnover thresholds was really a levy on the dealer’s earnings, and so beyond the states’ reach.
That argument should have been settled in 1974. In S. Kodar, a five-judge Constitution Bench upheld the Tamil Nadu Additional Sales Tax Act, 1970, which, according to TaxGuru, charged an additional 5% of sales tax payable on dealers with turnover above ₹10 lakh. In 1983, a three-judge bench in Hoechst Pharmaceuticals upheld a 10% surcharge under the Bihar Finance Act on the same reasoning.
The 1989 ruling that muddied the water
Then came India Cement v. State of Tamil Nadu, a seven-judge decision that struck down a cess on mining royalty after treating royalty as a tax. Because it was a larger bench, and because it rejected a levy calculated on another levy, it appeared to conflict with Hoechst. In 1999 the court referred the Odisha challenge, together with the question of Kodar’s correctness, to seven judges. It then waited 27 years.
The piece that finally resolved it: in 2024, a nine-judge bench in Mineral Area Development Authority held that royalty is not a tax and overruled India Cement to that extent. The 4 November judgment noted that India Cement never held a percentage-based levy beyond legislative competence, and that its premise had since been overruled. With that conflict gone, nothing stood against Kodar.
Every ruling in the chain, decoded
The judgment is short on new law and long on clarifying old law. This table sets out where each precedent stands after 4 November 2026, based on the reports cited.
| Case | Year | Bench | What it held | Status now |
|---|---|---|---|---|
| S. Kodar v. State of Kerala | 1974 | 5 judges | Additional sales tax as a % of sales tax is valid under Entry 54 | Affirmed as good law |
| Hoechst Pharmaceuticals v. Bihar | 1983 | 3 judges | 10% surcharge upheld as a sales tax | Consistent with Kodar |
| India Cement v. Tamil Nadu | 1989 | 7 judges | Cess on mining royalty struck down; royalty treated as a tax | Premise overruled in 2024 |
| Kesoram Industries | 2004 | 5 judges | Clarified the royalty characterisation | Context only |
| Mineral Area Development Authority | 2024 | 9 judges | Royalty is not a tax | Binding; removes the conflict |
| Arjun Flour Mills v. Odisha | 2026 | 7 judges | Reference academic; Kodar holds the field | Latest word |
So why call the question “academic”?
The court did not answer the 1999 reference in the formal sense. It declared it “rendered academic” because the laws under challenge no longer exist in that form. Odisha replaced its sales tax law with the Orissa Value Added Tax Act, 2004, and Punjab with the Punjab Value Added Tax Act, 2005. Then the Constitution (One Hundred and First Amendment) Act, 2016 substituted Entry 54 itself when GST arrived on 1 July 2017.
Under the new Entry 54, the states’ power to tax sales is confined to six items: petroleum crude, high-speed diesel, petrol, natural gas, aviation turbine fuel, and alcoholic liquor for human consumption. Everything else moved into GST. At the hearing in September, the Solicitor General said the practical relevance was much reduced and that only a small number of legacy cases might remain, possibly fewer than three digits, according to Jurishour.
- Pre-2017Old Entry 54States taxed sales of almost all goods; surcharges were common.
- 2004 to 2005VAT eraOdisha and Punjab replaced the challenged sales tax laws with VAT.
- 1 Jul 2017New Entry 54State sales tax limited to 6 items: crude, diesel, petrol, gas, ATF and liquor.
Where the ruling still bites: petrol, diesel and liquor
That last list is where the judgment matters going forward. TaxGuru’s analysis notes that comparable questions for goods still within the amended Entry 54 would continue to be governed by Kodar. The court did not rule on any current fuel or liquor levy, but the principle it reaffirmed is the one such levies rely on.
The money involved is large. Data from the Petroleum Planning and Analysis Cell shows states collected ₹3,18,893 crore in sales tax and VAT on petroleum products in 2025-26, on provisional figures, more than double the ₹1,37,157 crore of 2014-15.
₹ crore, by financial year. Source: PPAC, contribution to state exchequer. 2025-26 is provisional.
Additional tax layers already in use
PPAC’s state-wise table, last updated 6 November 2026, shows several states stacking levies on fuel. Punjab charges 16.58% VAT on petrol plus a 10% additional tax, alongside a cess, an Urban Transport Fund charge and a Special Infrastructure Development Fee. Kerala charges 30.08% sales tax plus ₹1 a litre additional sales tax, a 1% cess and a ₹2 a litre social security cess. Maharashtra adds ₹5.12 a litre of additional tax to its 25% VAT on petrol.
Percentage rate only. Most states add fixed per-litre charges, cesses or additional tax on top. Source: PPAC, as on 6 November 2026.
What people get wrong: reading “states can levy additional sales tax” as permission for new fuel taxes from tomorrow. The judgment created no new power. It confirmed that a power states have used since at least 1970 was always valid, and it did not examine any specific current levy, many of which are fixed per-litre charges rather than percentage surcharges.
How a surcharge on tax works, in rupees
The mechanics are simple once you separate the base tax from the add-on. Taking Punjab’s petrol structure from PPAC as an example, a 10% additional tax on a 16.58% VAT lifts the effective percentage rate to about 18.24% of the taxable value, our calculation, before the fixed charges.
A dealer-level example from the Odisha case. Reports differ on the exact design of Odisha’s Section 5A: LiveLaw and Jurishour describe 10% of sales tax for turnover between ₹10 lakh and ₹1 crore and 15% above ₹1 crore; TaxGuru describes a flat 10% for turnover above ₹10 lakh. Either way, a dealer owing ₹5 lakh in sales tax would pay a surcharge of ₹50,000 at 10%, or ₹75,000 at 15%, our calculation.
The court’s point is that this ₹50,000 is still a sales tax. It is calculated from the sales tax bill and falls on the sale of goods, not on the dealer’s profit. Whether the dealer made money that year does not change the amount.
Our calculation. Effective rate equals base rate multiplied by 1 plus the surcharge percentage. Illustrative only.
What the court deliberately left unanswered
- Punjab’s exempt unitsWhether Section 30-AA of the Punjab General Sales Tax Act could require industrial units otherwise exempt under Section 30-A to pay the 10% surcharge anyway. Left open.
- Punjab’s social security cessWhether cess collected under the Punjab Social Security Act, 2000 can go straight into its fund without first entering the Consolidated Fund under Article 266. Left open.
The court also preserved individual assessments, the periods of levy and any consequential relief for decision on their merits. The Registry was directed to list the lead Odisha matter and connected cases before regular benches, and Justice Viswanathan directed that the Punjab Social Security Act appeals be separated for a Division Bench. So for the businesses that have litigated since the 1990s, the cases are not over, even though the constitutional question is.
From a 1970 Tamil Nadu law to a 2026 judgment
- Tamil Nadu enacts the Additional Sales Tax Act, levying 5% of sales tax on larger dealers.
- Five-judge bench upholds it in S. Kodar.
- Hoechst upholds Bihar’s 10% surcharge, following Kodar.
- Seven-judge India Cement ruling strikes down a cess on royalty.
- Arjun Flour Mills files Civil Appeal 8763 against Odisha’s levy.
- Question referred to a seven-judge bench, including Kodar’s correctness.
- Seven-judge bench under then-CJI Chandrachud hears the matter briefly.
- Nine-judge bench in Mineral Area Development Authority holds royalty is not a tax.
- Bench under CJI Surya Kant reserves judgment.
- Reference declared academic; Kodar affirmed as good law.
Who gains, and what businesses should check
For state governments, the ruling removes a long-standing cloud over a familiar way of raising revenue on the few goods still outside GST. Petroleum and liquor are among the largest own-tax sources for many states, and percentage surcharges and cesses are one of the simplest tools to adjust that revenue without rewriting base rates.
For businesses still fighting legacy assessments, the constitutional route is now effectively closed. Any remaining challenge will have to succeed on narrower grounds, such as how a particular exemption interacts with a surcharge, which is exactly the Punjab question left open.
- Check whether your pending case relies on the “tax on income” argument
- Note that Kodar now governs surcharges on sales tax
- Track Punjab Section 30-AA issues if you held a Section 30-A exemption
- Watch the regular-bench listing of connected appeals
- Review fuel or liquor surcharge exposure under Entry 54
- Remember GST goods are outside this power since 1 July 2017
- Keep records for assessment periods before 2004 and 2005
- Read the full 2026 INSC 1192 judgment before advising clients
Questions readers are asking about the ruling
What did the Supreme Court decide on additional sales tax?
A seven-judge bench held that S. Kodar (1974) is good law: a surcharge or additional tax calculated as a percentage of sales tax payable is an increase in the sales tax rate and within the states’ power under Entry 54 of List II.
Which case was this?
Arjun Flour Mills v. State of Odisha, Civil Appeal 8763 of 1994, decided by a seven-judge bench led by Chief Justice Surya Kant on 4 November 2026.
Why did the court call the reference academic?
The Odisha and Punjab sales tax laws under challenge were replaced by VAT laws, and GST substituted Entry 54 in 2017. The court said the question had no prospective significance.
Can states now increase taxes on petrol and diesel?
The ruling created no new power. States could already tax petrol, diesel, crude, natural gas, ATF and liquor under the amended Entry 54. The judgment confirms that percentage surcharges on such taxes follow the Kodar principle.
Is a surcharge on sales tax a tax on income?
No. The court held that the subject of the tax is the sale of goods; using sales tax payable as the measure does not turn it into an income tax.
Does this ruling affect GST?
Not directly. Goods under GST are taxed under a different constitutional scheme. The ruling applies to the states’ remaining sales tax powers under Entry 54.
What happened to India Cement v. Tamil Nadu?
The court said India Cement did not hold percentage-based levies invalid, and its premise that royalty is a tax was overruled by a nine-judge bench in 2024.
Are the pending tax appeals over?
No. Individual assessments and relief were preserved, and the appeals were sent to regular benches. Two Punjab questions were expressly left open.
The short version for a busy reader
On 4 November 2026, a seven-judge Supreme Court bench led by CJI Surya Kant reaffirmed S. Kodar (1974): a surcharge calculated on sales tax is a higher sales tax rate, not an income tax, so states may levy it. The 27-year-old reference was declared academic after VAT and GST replaced the laws involved, but the principle now governs state taxes on petrol, diesel, natural gas, ATF and liquor, which raised over ₹3.18 lakh crore from petroleum alone in 2025-26.
