SC closes 27-year-old reference, says Kodar governs States' surcharges on sales tax
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.
Published 5 November 2026. Written by Pratidin from the reports linked at the end; every fact checked by a separate review before publishing. How we work
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.
- 1 and 2 only
- 1, 2 and 3 only
- 2, 3 and 4 only
- 1, 2, 3 and 4
Show answer
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.
Use this in UPSC Mains: previous-year questions
Recurring theme: Fiscal federalism: how the Seventh Schedule and the 101st Amendment divide taxing power
- How to use this
Use it to show what States gave up and kept under the 101st Amendment, as evidence on how accommodative the GST bargain is.
- The 101st Amendment inserted Article 246A, giving Parliament and States concurrent power over GST.
- Entry 54 of List II now covers only petroleum crude, diesel, petrol, natural gas, aviation fuel and alcoholic liquor.
- In 2026 the Supreme Court found pre-GST State surcharge disputes had lost future significance because of this shift.
- How to use this
Cite the ruling as an example of judicial settlement of State taxing powers and of the reduced independent base after GST.
- On 4 November 2026 a seven-judge Bench confirmed, via S. Kodar (1974), that States could levy surcharges on sales tax before GST.
- Earmarked cesses and Article 266 remain contested: Punjab's social security cess question was left open.
Background for explaining what the 101st Amendment changed in the Seventh Schedule.
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.
- 1List I (Union)Income tax (Entry 82), customs, inter-State sales (Entry 92A)
- 2List II (State)Entry 54: sales tax, now limited to petroleum products and alcohol
- 3Article 246ASince 2016, both Parliament and States legislate on GST
- 4Article 270 and 279ASharing of Union taxes, and the GST Council
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.
- 1974S. Kodar: additional tax measured on sales tax is valid sales tax
- 1983Hoechst follows Kodar for a Bihar surcharge
- 1990India Cement treats royalty as a tax
- 1998 to 1999Arjun Flour Mills referred, then sent to seven judges
- 2016101st Amendment brings GST and narrows Entry 54
- 2024MADA: royalty is not a tax
- 4 November 2026Seven judges hold the reference infructuous; Kodar governs
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.
Go deeper
Why it matters for UPSC
The case is a compact lesson in fiscal federalism: the Seventh Schedule's separate tax entries, the nature-versus-measure test, the role of larger Benches, and how the 101st Amendment and GST changed State taxing power. It links GS2 federalism with GS3 resource mobilisation.
The core idea
Before GST, Entry 54 of the State List let States tax sales. Odisha added a surcharge equal to ten per cent of sales tax payable. Was that still a tax on sales? S. Kodar v. State of Kerala (1974) said yes, applying Pith and substance in tax law. India Cement (1990) seemed to cast doubt, but Mineral Area Development Authority (2024) removed that doubt. With GST replacing most State sales taxes, the Court found nothing left for seven judges to decide.
Numbers and dates to remember
- Decided 4 November 2026; Bench of seven led by CJI Surya Kant; Justice K.V. Viswanathan concurred.
- Reference: first August 1998 (two judges), enlarged on 6 October 1999.
- Section 5-A: ten per cent surcharge for gross turnover above ₹10 lakh.
- Kodar 1974 (five judges); Hoechst 1983; India Cement 1990 (seven); MADA 2024 (nine).
- 101st Amendment, 2016: Article 246A.
Where to go next
- Entry 54 of the State List: the State's sales tax power before and after GST.
- S. Kodar v. State of Kerala (1974): the precedent that now governs.
- Pith and substance in tax law: the test that locates a tax in the lists.
- Mineral Area Development Authority (2024): the ruling that ended the conflict.
Go deeper: what a 'closed' reference still teaches
Why courts close references. A larger Bench answers questions only when a real conflict survives. The Court reasoned that once Mineral Area Development Authority (2024) held royalty is not a tax, India Cement no longer stood against S. Kodar v. State of Kerala (1974). And since Odisha and Punjab moved to VAT and then GST, the old Entry 54 of the State List power was no longer live for the future. Answering abstract questions with no practical effect wastes judicial time.
The merits still matter for old cases. Many assessments from the 1990s and 2000s remain pending. Saying Kodar governs means a surcharge calculated on sales tax is to be treated as sales tax, using Pith and substance in tax law, and not as a disguised income tax under Entry 82 of List I.
Federal significance. Before 2016, States' biggest own tax was sales tax. GST pooled that sovereignty: Article 246A gives both levels concurrent power, but rates are set through the GST Council. States now keep independent sales tax power mainly over petroleum products and alcohol. That is why disputes over cesses and surcharges, by the Union and the States, have become sharper: such levies sit outside the shared pool.
The open question. Earmarked cesses raise an accountability issue. Article 266 requires State revenues to enter the Consolidated Fund, from which spending needs legislative appropriation. Whether Punjab could route its social security cess directly to a fund is left for another Bench, and the answer will matter for how cesses are audited.
Entry 54 of the State List
The State's sales tax power, before and after the 101st Amendment.
In one line: Entry 54 of List II was the States' general power to tax sale or purchase of goods; since 2016 it covers only a few goods.
Before 2016
Entry 54 read: taxes on the sale or purchase of goods other than newspapers, subject to Entry 92A of List I. Entry 92A gave the Union power over inter-State sales. This was the base for State sales tax and later VAT, and for surcharges like Odisha's Section 5-A.
After the 101st Amendment
The amendment substituted Entry 54. It now covers taxes on the sale of petroleum crude, high speed diesel, motor spirit (petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, excluding inter-State and international sales. Other goods moved to GST under Article 246A.
Where to go next
S. Kodar v. State of Kerala (1974)
The precedent that now governs State surcharge cases.
In one line: A five-judge Bench held that an additional tax measured as a percentage of sales tax payable is simply sales tax at a higher rate.
What it held
The challenge argued that a levy calculated on tax already payable was a tax on tax, or a tax on the dealer rather than on sales. The Court disagreed: the measure of a tax does not change its nature, so the levy fell within the State's sales tax power. It also accepted classification of dealers by turnover.
Its later life
Hoechst Pharmaceuticals (1983) followed it for a Bihar surcharge. India Cement (1990) seemed to point the other way, prompting the 1999 reference. On 4 November 2026 a seven-judge Bench said Kodar continues to hold the field.
Where to go next
Pith and substance in tax law
The test courts use to place a levy in the right list.
In one line: Courts look at the true nature of a law or tax to decide which legislative list it belongs to, ignoring incidental effects and the method of calculation.
The doctrine
The Seventh Schedule's lists overlap at the edges. When a law seems to touch another list, courts ask what it is in pith and substance. If its core falls within the enacting legislature's list, incidental spill-over is allowed. In tax law, a related rule says the measure of a tax is not its nature: a tax on sales may be calculated by reference to turnover or to tax already payable without becoming an income tax.
Why it matters here
The Odisha surcharge was measured on sales tax and applied above a turnover threshold. Under this test it remained a tax on sales, not a tax on income under Entry 82 of List I.
Where to go next
Mineral Area Development Authority (2024)
The nine-judge ruling that dissolved the old conflict.
In one line: A nine-judge Bench held that royalty paid for mining is not a tax, and that States can tax mineral rights.
What it decided
In Mineral Area Development Authority v. Steel Authority of India, the Court considered whether royalty under mining law is a tax, and whether the Union's mining law limits States' power to tax mineral rights. It held royalty is a contractual payment to the owner of minerals, not a tax, overruling India Cement (1990) to that extent.
Why it matters here
India Cement had treated royalty as a tax and struck down a cess on it, which some read as doubting levies built on another levy. Once that premise fell, the seven-judge Bench in 2026 found no real conflict with Kodar.
Where to go next
Take the 5 November 2026 quiz: 30 Prelims-style questions with answers