“Taxability” vs. “Payability” – Supreme Court Affirms Independent Purchase-Tax Liability Despite Sales-Tax Exemption

1. Introduction

In the consolidated decision C.T. Kochouseph v. State of Kerala & Ors. etc. (2025 INSC 661) a three-judge Bench of the Supreme Court (per Sanjiv Khanna, C.J.I.) has settled a decades-old controversy surrounding the levy of purchase tax under Section 5A of the Kerala General Sales Tax Act, 1963 and its pari materia provision, Section 7A of the Tamil Nadu General Sales Tax Act, 1959.

The appellants – predominantly manufacturers who had bought raw materials from sellers enjoying sales-tax exemption – contended that once the sale was exempt, the purchase could not be taxed. The Court was asked to decide three core issues:

Whether purchases from exempted dealers constitute purchases “liable to tax” for the purposes of Sections 5A/7A.
Whether, in such circumstances, the purchaser can be saddled with purchase-tax liability.
Whether the impugned provisions in substance amount to a tax on manufacture/consignment or an inter-State levy and are, therefore, unconstitutional.

Answering the first two in the affirmative and the third in the negative, the Court reaffirmed the constitutional validity of Sections 5A/7A, overruled strands of contrary reasoning in earlier two-judge decisions, and re-emphasised the conceptual divide between “taxability / liability” and “payability / collection”.

2. Summary of the Judgment

Purchase tax survives even when the sale is exempt. The expression “goods, the sale or purchase of which is liable to tax” looks to the nature or class of goods (taxable goods) and not to the actual incidence of tax on a particular sale.
Sections 5A (Kerala) and 7A (Tamil Nadu) are autonomous charging provisions. They step in precisely when no sales-tax is payable under the primary charging section (Section 5/Section 3) – thereby plugging revenue leakages.
Taxable event remains the purchase; the subsequent use/despatch conditions only trigger the quantification/collection and do not convert the levy into an excise, consignment or inter-State tax.
Constitutional validity upheld. The State legislatures acted within Entry-54, List-II (power to tax “sale or purchase of goods”). Hotel Balaji (1993) and Devi Dass (1994) declared correct; Goodyear (1990) and subsequent decisions that relied on it stand diluted to that extent.
Appeals dismissed; stay vacated. All assessees are liable to pay purchase tax with consequential interest/penalties, if any.

3. Detailed Analysis

3.1 Precedents Cited & Their Role

State of Tamil Nadu v. M.K. Kandaswami (1975) – 3-Judge bench that first characterised Section 7A as a self-contained charge and distinguished “taxable goods–taxable person–taxable event”. Relied upon heavily; its ratio is restored to centre-stage.
Goodyear India Ltd. v. State of Haryana (1990) – 2-Judge bench that viewed a similar Haryana provision as a “deferred levy” attracted only on despatch outside the State, thereby treating it akin to a consignment tax. Current Bench criticises and limits Goodyear.
Hotel Balaji v. State of A.P. (1993) – 3-Judge bench disagreeing with Goodyear, upheld analogous provisions in A.P., Gujarat & U.P. Acts. Present judgment follows this decision.
Mukerian Papers Ltd. v. State Of Punjab (1991) – distinguished Goodyear but did not examine its correctness; present decision notes that Hotel Balaji later resolved the conflict.
Peekay Re-Rolling Mills v. AC (2007) – 2-Judge bench reading “levy” as including collection and limiting purchase tax on declared goods. Reference order doubted this; the present larger Bench implicitly disapproves Peekay’s reading for general goods.
Bhawani Cotton Mills (1967) & Shanmuga Traders (1998) – both confined to declared goods under Section 14 CST Act. Current case clarifies the distinction and confines those precedents to their field.

3.2 Court’s Legal Reasoning

Textual Construction
“Liable to tax” in Sections 5A/7A qualifies goods, not the particular sale; hence even if a specific sale is exempt or below threshold, the goods remain within the tax net.
Conceptual Split – Taxability vs. Payability
• Taxability / Liability = Legislative declaration that a category of goods or transactions attracts tax.
• Payability / Collection = Whether in the given transaction, tax has to be paid now (may be suspended/waived).
Exemption affects only payability; Sections 5A/7A revive the State’s right to collect tax at the purchase stage so revenue loss is avoided.
Three-Stage Analysis of a Tax (re-affirming Chatturam; National Tobacco): (i) Levy/Imposition (declaration of liability), (ii) Assessment (computation), (iii) Collection. Present provisions complete stage (i) & (ii); stage (iii) is triggered upon manufacture/despatch/use events.
Character of the Levy
Although collection is deferred until the purchaser (a) manufactures, (b) despatches outside the State, or (c) disposes of otherwise than sale, the tax remains a purchase tax because it is computed on purchase price and falls on the purchaser — not on the value or movement of the manufactured product.
Federal Competence
The levy does not trench upon Parliament’s exclusive power over inter-State trade (Art 269 & CST Act) because it targets the intra-State purchase. Movement outside the State is only a condition subsequent; taxable event is complete earlier.
Doctrine of “One-Stage” for Declared Goods
Not engaged. Vegetable oils, rubber, etc. in these appeals were not Schedule-14 “declared goods”. Therefore, Bhawani Cotton and Shanmuga Traders do not apply.

3.3 Impact on Future Litigation & Tax Administration

Closes lingering disputes dating back to the 1970s; thousands of pending assessments/appeals under the pre-VAT regime get clarity.
Guidance for GST era. Though GST subsumed these laws, the reasoning on “levy vs. collection” and conditional triggers will influence interpretation of GST “reverse charge”, “time of supply”, exemptions and input-tax-credit restrictions.
Overruling effect. Any High Court or two-judge SC decision applying Goodyear logic to non-declared goods now stands impliedly overruled.
Revenue protection. States can confidently pursue purchase-tax arrears where sellers enjoyed concessions, subject to limitation and equity.
Legislative Drafting. Draft-persons advised to expressly spell out the tri-fold stages and to separate “exigibility” clauses from “exemption/ concession” clauses to avoid future ambiguity.

4. Complex Concepts Simplified

Purchase Tax: A tax collected from the buyer (dealer) on the value of goods purchased, usually levied when for some reason the sale is not taxed.
Sales-Tax Exemption: A statutory notification that frees a seller from collecting & remitting tax on sales, but does not automatically absolve the buyer of liability under a different charging section.
Taxable Event: The legal occurrence that gives rise to a tax liability (here, the purchase of taxable goods).
Taxability v. Payability: Goods may be taxable (fall within the statutory charging provision) yet the tax may not be payable (e.g., because of an exemption, threshold, or deferment).
Declared Goods (CST Act s.14): Goods of national importance (e.g., cotton, iron & steel) subject to special central restrictions: tax cannot exceed a stated % and is collectable only at one stage.
Reverse-Charge Analogy: Sections 5A/7A operate similarly to modern GST reverse-charge – shifting the burden from supplier to recipient when conditions warrant.

5. Conclusion

The Supreme Court has reaffirmed a core fiscal principle: an exemption from payment does not erase tax liability altogether. By recognising the autonomy of purchase-tax provisions and restoring the authority of Kandaswami and Hotel Balaji, the Court has achieved doctrinal coherence, protected State revenues, and provided practitioners with a clear roadmap: whenever goods are intrinsically “taxable”, the legislature may legitimately tax the purchase if the sale escapes tax. The decision also underscores meticulous statutory interpretation — reading words in their legislative setting and distinguishing between the occasions of levy, assessment, and collection.

Even though GST has overtaken the older sales-tax regime, Kochouseph’s case will endure as a touchstone for the architecture of indirect taxes in India, reminding courts and lawmakers alike that fiscal design demands both precision and flexibility.