# SC closes 27-year-old reference, says Kodar governs States' surcharges on sales tax

URL: https://upsc.help/current-affairs/2026-11-05/sales-tax-surcharge-kodar-reference/
Date: 5 November 2026 (2026-11-05)
Source: The Hindu, Page 10
UPSC papers: GS2, GS3
Publisher: upsc.help (Pratidin), free and open-source UPSC Civil Services current affairs. Not affiliated with UPSC. Every fact was checked against the source reports by a separate review before publishing.

**In one line:** A seven-judge Bench has said the old fight over States' surcharges on sales tax is over, and that the 1974 Kodar ruling decides it.

On 4 November 2026, a seven-judge Constitution Bench of the Supreme Court led by Chief Justice Surya Kant answered a reference pending since 1999 in Arjun Flour Mills v. State of Odisha. The question was whether a State legislature could impose a surcharge, additional tax or cess calculated on the sales tax already payable. The challenge was to Section 5-A of the Orissa Sales Tax Act, 1947, which made every dealer with a gross turnover above ₹10 lakh pay a surcharge of ten per cent of the total tax payable. The Court held that the reference had become infructuous (no longer needing a decision), and that the question of State competence is governed by S. Kodar v. State of Kerala (1974), which it said continues to hold the field. Justice K.V. Viswanathan, concurring, said Kodar was correctly decided and remains good law.

The reference arose because earlier rulings seemed to pull in different directions. In Kodar, a five-judge Bench treated an additional tax measured as a percentage of sales tax as simply a higher rate of sales tax, within the States' power under Entry 54 of List II (the State List). In Hoechst Pharmaceuticals v. State of Bihar (1983), a three-judge Bench followed Kodar for a surcharge under the Bihar Finance Act. But in India Cement v. State of Tamil Nadu (1990), a seven-judge Bench treated royalty on minerals as a tax and struck down a cess on it, which some read as casting doubt on taxes calculated on another tax. A two-judge Bench first referred the matter in August 1998, and a five-judge Bench sent it to seven judges on 6 October 1999.

The Court found the conflict had dissolved. In Mineral Area Development Authority v. Steel Authority of India (2024), a nine-judge Bench held that royalty is not a tax, removing the premise that set India Cement against Kodar. The legal landscape had also changed: Odisha and Punjab moved to VAT laws, and the Constitution (101st Amendment) Act, 2016 brought in GST through Article 246A and narrowed Entry 54 to a few goods such as petroleum and alcoholic liquor. Two Punjab questions were left open for regular Benches: whether exempt industrial units could be made to pay a surcharge, and whether cess money under the Punjab Social Security Act, 2000 could bypass the State's Consolidated Fund under Article 266. Individual assessments and other contentions were left open for regular Benches to decide on merits.

## Prelims facts

- On 4 November 2026 a seven-judge Bench led by CJI Surya Kant held the Arjun Flour Mills reference infructuous and said S. Kodar (1974) governs State competence.
- Section 5-A of the Orissa Sales Tax Act, 1947 levied a surcharge of ten per cent of tax payable on dealers with gross turnover above ₹10 lakh.
- The apparent conflict came from India Cement (1990), whose premise that royalty is a tax was overruled by the nine-judge MADA ruling in 2024.
- The 101st Amendment (2016) inserted Article 246A for GST and narrowed Entry 54 of List II to petroleum products and alcoholic liquor.
- Questions on Punjab's surcharge on exempt units and its social security cess under Article 266 were left open for regular Benches.

## Quick recall

- **Case name of the 4 November 2026 seven-judge ruling on sales tax surcharges?** Arjun Flour Mills v. State of Odisha.
- **What did Section 5-A of the Orissa Sales Tax Act, 1947 levy?** A surcharge of ten per cent of tax payable on dealers with gross turnover above ₹10 lakh.
- **Which precedent governs State competence, per the 2026 ruling?** S. Kodar v. State of Kerala (1974), a five-judge decision.
- **Which 1990 seven-judge ruling caused the apparent conflict?** India Cement v. State of Tamil Nadu, which treated royalty as a tax.
- **Which 2024 ruling held royalty is not a tax?** Mineral Area Development Authority v. Steel Authority of India (nine judges).
- **Which Article did the 101st Amendment insert for GST?** Article 246A.
- **Entry 82 of List I covers what?** Taxes on income other than agricultural income.
- **Which issue under Article 266 was left open?** Whether Punjab Social Security Act, 2000 cess money can go to a fund without first entering the Consolidated Fund.

## Prelims practice question

After the Constitution (One Hundred and First Amendment) Act, 2016, Entry 54 of the State List covers taxes on the sale of which of the following?
1. Petroleum crude
2. Natural gas
3. Alcoholic liquor for human consumption
4. Pharmaceutical products
Select the correct answer using the code given below.

(a) 1 and 2 only
(b) 1, 2 and 3 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4

Answer: (b) 1, 2 and 3 only. The substituted Entry 54 covers sale of petroleum crude, high speed diesel, motor spirit, natural gas, aviation turbine fuel and alcoholic liquor for human consumption (not inter-State or international sales). Pharmaceuticals are under GST, which Article 246A governs.

## UPSC previous-year questions this connects to

- UPSC Mains 2023, GS2: Explain the significance of the 101st Constitutional Amendment Act. To what extent does it reflect the accommodative spirit of federalism? (https://upsc.help/pyq/q149-significance-101st-constitutional-amendment-act-extent-does/)
  How to use this story in the answer: Use it to show what States gave up and kept under the 101st Amendment, as evidence on how accommodative the GST bargain is.
- UPSC Mains 2025, GS2: Examine the evolving pattern of Centre-State financial relations in the context of planned development in India. How far have the recent reforms impacted the fiscal federalism in India? (https://upsc.help/pyq/q153-evolving-pattern-centre-state-financial-relations-context-planned/)
  How to use this story in the answer: Cite the ruling as an example of judicial settlement of State taxing powers and of the reduced independent base after GST.
- UPSC Mains 2017, GS2: Explain the salient features of the constitution (One Hundred and First Amendment) Act, 2016. Do you think it is efficacious enough 'to remove cascading effect of taxes and provide for common national market for goods and services'? (https://upsc.help/pyq/q150-salient-features-constitution-one-hundred-first-amendment/)

## Mains practice question

The Supreme Court's 2026 ruling in Arjun Flour Mills closed a long-pending question on State taxing powers. Discuss what it tells us about how the Seventh Schedule and the 101st Amendment divide taxing power between the Union and the States. (150 words)

### Model answer

On 4 November 2026 a seven-judge Bench held a 1999 reference infructuous and confirmed that S. Kodar (1974) governs whether States could levy surcharges on sales tax.

## What the case settles
- Under Kodar, a surcharge measured as a percentage of sales tax payable is an enhanced sales tax rate, within Entry 54 of List II (pre-2016).
- A tax's nature, not its measure, decides its list, so such a surcharge is not a tax on income under Entry 82 of List I.
- India Cement's conflict vanished once MADA (2024, nine judges) held royalty is not a tax.

## The new constitutional map
- The 101st Amendment inserted Article 246A, giving concurrent GST power, and narrowed Entry 54 to petroleum products and alcohol.
- States' independent sales tax base has shrunk, so pre-GST rulings now matter mostly for old disputes.

## Open questions
- Earmarked cesses and Article 266 (Punjab Social Security Act, 2000) remain undecided.

The ruling brings certainty to legacy tax cases and shows how GST reshaped fiscal federalism.

## The basics

## Why this matters
Who may tax what is the hard core of Indian federalism. The Constitution does not let both governments tax the same base freely: it lists taxes separately in the Seventh Schedule. The Arjun Flour Mills ruling is a lesson in how courts decide which list a levy belongs to, and how the 101st Amendment redrew the map.

## Taxes live in lists
Article 246 gives Parliament exclusive power over List I (Union), States exclusive power over List II (State), and both over List III (Concurrent). Unlike other subjects, tax entries are kept apart: there is no general tax entry in the Concurrent List. Before 2016, Entry 54 of the State List allowed States to tax the sale or purchase of goods other than newspapers, subject to Entry 92A of List I (inter-State sales). Entry 82 of List I lets Parliament tax income other than agricultural income.

## Nature versus measure
The classic test is Pith and substance in tax law: look at what a tax truly is, not how its amount is calculated. A surcharge equal to ten per cent of sales tax payable is measured by tax, but in nature it still falls on sales. That was the logic of S. Kodar v. State of Kerala (1974).

## Why the reference took 27 years
India Cement (1990) treated mining royalty as a tax and struck down a cess on it. This seemed to doubt levies built on another levy. The doubt lasted until the nine-judge ruling explained in Mineral Area Development Authority (2024) held that royalty is not a tax.

## What remains live
Cesses earmarked for a fund raise a separate question under Article 266, which says State revenues form its Consolidated Fund. The Court left that issue, from Punjab's Social Security Act, 2000, to a regular Bench.

## Sources

- https://www.verdictum.in/amp/supreme-court/holds-reference-state-legislatures-power-to-levy-surcharge-sales-tax-infructuous-1625117
- https://www.advocatekhoj.com/library/judgments/index.php?go=2026%2Fnovember%2Farjun-flour-mills-vs-state-of-odisha-finance-department-secretary-12
- https://taxguru.in/goods-and-service-tax/27-year-sales-tax-surcharge-reference-closed-sc-upholds-states-levy-powers.html
- https://www.barandbench.com/news/litigation/supreme-court-upholds-power-of-state-legislatures-to-impose-additional-levy-on-sales-tax
- https://www.jurishour.in/indirect-taxes/verdict-state-additional-sales-tax-surcharge-cess/