Cess/Surcharge on Sales Tax: Constitution Bench Ruling on the Limit of 'Tax on Tax'

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The Core Dispute

• The taxpayers' argument: A tax calculated from the amount of tax already payable is a "tax on tax"; the subject of Entry 54 is only "sale or purchase of goods", so such a surcharge/cess is beyond legislative competence.
• The states' position: The measure of a tax (the unit from which the amount is worked out) and the subject of a tax (the taxable event) are different things - the subject remains the sale; changing the measure does not change the character of the tax.
• This was the "dichotomy" before the Bench: does quantity-based measurement push a tax outside the scope of the entry?

Importance from the Exam Point of View

• Prelims: Seventh Schedule, List II Entry 54 (sales tax), Entry 56 (pre-GST arrangement), division of federal tax powers (Articles 246, 265 - "no tax without the authority of law").
• Mains (GS-2): The principle of taxable event versus measure of tax, the shrinking of states' independent sources of tax after GST (fiscal federalism), the experience of the GST compensation cess, the importance of a Constitution Bench's interpretation for states' revenue rights.

What Did the Judgment Decide?

On 4 November 2026, a seven-judge Constitution Bench of the Supreme Court disposed of a 27-year-old reference in Arjun Flour Mills v. State of Orissa (Civil Appeal 8763/1994, 2026 INSC 1192). The Bench comprised Chief Justice Surya Kant and Justices K.V. Viswanathan, S.V. Bhatti, Joymalya Bagchi, N.V. Anjaria, Aruna Palli and V. Mohana. Two opinions were delivered: one by the Chief Justice and another by Justice Viswanathan.

Key point: In the Chief Justice's opinion, the question has become academic, that is, answering it now would have no practical result. The reason is that the state laws under which these surcharges were imposed are no longer in force, and Entry 54 has changed under the GST regime. In his separate opinion, Justice Viswanathan said that there is no conflict between the Kodar and Hoechst judgments and that turnover-based sales tax is linked to Entry 54. (Some news headlines write "State's power upheld"; for the exam, read the original text of the judgment and the limit below.)

Background of the Dispute

• The case: Under Section 5A of the Orissa Sales Tax Act, 1947, a surcharge of 10% on the sales tax payable by dealers whose annual gross turnover exceeded Rs 10 lakh (paragraph 7 of the judgment).
• Three earlier judgments: In S. Kodar v. State of Tamil Nadu (1974) the Court held an additional sales tax valid; in Hoechst Pharmaceuticals v. State of Bihar (1983) it held a surcharge valid; in India Cements v. State of Tamil Nadu (1990) a cess on mining royalty was held invalid.
• The apparent conflict: The 1998 order had assumed a conflict between Hoechst and India Cements. The Bench now said that India Cements has been overruled by the 2024 nine-judge Bench (Mineral Area Development Authority v. Steel Authority of India), so no conflict remains.
• The Kodar principle: When a surcharge is levied as a percentage of sales tax and on a class of traders, it is in substance an increase in the rate of sales tax, that is, within Entry 54. In Justice Viswanathan's opinion, Kodar and Hoechst are consistent with each other.

What Changed in Entry 54 after GST?

The Constitution (One Hundred and First Amendment) Act, 2016 added Article 246A, which gave Parliament and the state legislatures the power to make laws on GST. It also changed Entry 54 of List II. It now speaks only of tax on the sale of a few selected goods: crude oil, high speed diesel, petrol, natural gas, aviation turbine fuel and alcoholic liquor for human consumption (except in inter-state trade). That is, the states' old general power of "tax on sale of goods" now survives only in this limited form.

What Remained Open?

The matter of the cess imposed under the Punjab Social Security Act, 2000 was kept apart and will be listed before another Bench (as per the Chief Justice's clarification). The High Court had struck down that law on the ground that the cess amount cannot go directly to the social security fund without going into the Consolidated Fund of the State (Article 266).

Table for the Exam

Issue	What to remember
Bench	Seven judges; decision on 4 November 2026; Chief Justice Surya Kant
Outcome	Reference declared academic; no new opinion on the broader question
Entry 54 (earlier)	Tax on sale or purchase of goods
Entry 54 (now)	Tax on sale of a few selected goods (petroleum, liquor, etc.)
Article 246A	Power to make laws on GST
Article 265	No tax except by authority of law

Additional Sources

1. Supreme Court: Arjun Flour Mills v. State of Orissa, 2026 INSC 1192, 4 November 2026
2. Supreme Court Observer, 4 November 2026: Summary of the Bench and opinions

Mains Practice Question

In the GST era the taxation capacity of states is becoming limited. In the context of the recent Constitution Bench ruling, throw light on the remaining sources of tax of the states and on fiscal federalism. (250 words)

Answer Outline

Introduction: Give the constitutional context of taxation powers under Article 246 and the Seventh Schedule.

Main Body: Explain the difference between the subject of a tax and its measure in the ruling. Put forward the remaining sources of tax of states after GST, cess and surcharge, and the role of revenue from petroleum, liquor and stamps. Analyse the challenge to fiscal federalism between the need for revenue and the constitutional limits on taxation.

Conclusion: Describe the balance between the states' revenue capacity and clear constitutional limits as the basis of sustainable fiscal federalism.

Prelims Exam Practice Questions

Sources

1. Supreme Court of India, Constitution Bench judgment 2026 INSC 1192, 4 November 2026 (sci.gov.in).

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