S. Kodar v State of Kerala (1974)

It is a compact statement of three propositions that recur whenever a tax is challenged as unconstitutional, and it is worth learning precisely because tax questions in Constitutional Law are usually answered too loosely.

1. Characterisation. What a tax is does not change because of how it is measured. A tax on sales measured by reference to the sales tax already imposed remains a tax on sales.
2. Reasonableness. Every tax restricts business, but the rate of tax is for the legislature. Unless the levy is confiscatory in the guise of a tax, "its reasonableness is outside the judicial ken."
3. Classification. A graded or progressive levy — a heavier burden as turnover rises — is a reasonable classification under Article 14.

The Tamil Nadu Additional Sales Tax Act 1970 imposed an additional sales tax of 5 per cent on a dealer whose annual total turnover exceeded Rs. 10 lakhs.

Writ petitions challenging the Act's constitutional validity were dismissed by the High Court. On appeal it was argued that:

1. the State legislature had no power to enact the Act, the tax being outside entry 54 of List II;
2. the Act violated Article 19(1)(f) and (g) — the rights to property and to carry on trade; and
3. by imposing different rates on different dealers according to turnover, it violated Article 14.

Appeal dismissed; the Act was valid on all three grounds.

(1) It is a tax on sales, not on income

"The contention of the appellants that the additional sales-tax is not a tax on sales but on the income of the dealers is without any basis. The additional tax is really a tax on the sale of goods. The object of the Act is to increase the tax on the sale or purchase of goods imposed by the Tamil Nadu General Sales-tax Act, 1959 and the fact that quantum of the additional tax is determined with reference to the sales-tax imposed would not alter its character."

Because the additional tax applies only where turnover exceeds Rs. 10 lakhs, "it is in reality a tax on the aggregate of sales effected by a dealer during a year." The measure of a tax is not the same thing as its subject.

(2) The rate is for the legislature

"It is no doubt true that every tax imposes some restrictions upon the right to carry on business but it would not follow that the imposition of tax in question was an unreasonable restriction upon the appellants' fundamental right to carry on trade. Generally speaking, the amount or rate of a tax is a matter exclusively within legislative judgment and as long as a tax retains its avowed character and does not confiscate the property to the State under the guise of a tax, its reasonableness is outside the judicial ken."

And the inability to pass the tax on does not make it unconstitutional: "It is not necessary that the dealer should be enabled to pass on the incidence of the tax on sale to the purchaser in order that it might be a tax on the sale of goods." Although the legal incidence falls on the dealer, he may add it to the price; but "it is not possible to say that because a dealer is disabled from passing on the incidence of tax to the purchaser the provisions of the Act impose unreasonable restriction" under Article 19(1)(f) or (g).

(3) Progressive taxation and Article 14

"It can be said that a legislative classification making the burden of the tax heavier in proportion to the increase in turnover would be reasonable. A flat rate is thought to be less efficient than the graded one as an instrument of social justice. The economic wisdom of a tax is within the exclusive province of legislature. The only question for the Court to consider is whether there is rationality in the belief of the legislature that capacity to pay the tax increases, by and large, with an increase of receipts."

That last sentence is the test to reproduce: the court does not ask whether the graduation is the best one, only whether the belief behind it is rational.

Approved: Kilikar v Sales Tax Officer 21 STC 253; A.S. Ramachandra Rao v State of Andhra Pradesh 25 STC 133. Referred to: J.K. Jute Mills Co v State of U.P. [1962] 2 SCR 1 at 13; Konduri Buchirajalingam v State of Hyderabad [1958] 9 STC 397.

A tax does not change its character because its quantum is measured by reference to another tax; the rate of a tax is for the legislature and is not justiciable unless the levy is confiscatory; and a graded levy imposing a heavier burden as turnover increases is a reasonable classification under Article 14, the only question being whether the legislature's belief that capacity to pay rises with receipts is rational.

• Direct question: Can a taxing statute be challenged as violating fundamental rights? Yes, but within narrow limits — this case marks them. Distinguish legislative competence (entry 54, List II) from fundamental rights (Articles 14 and 19) and answer each separately.
• On Article 14 and taxation: the State has wider latitude in classification for tax than in other fields. Progressive rates, turnover thresholds and differential slabs are ordinarily valid.
• Phrase worth quoting: the reasonableness of a rate "is outside the judicial ken" unless the tax "confiscates the property to the State under the guise of a tax" — that qualification is the limit, and should always be stated with the rule.
• Cross-reference: use with the discussion of Articles 265 and 246 and the distinction between the subject of a tax and its measure.