The Supreme Court ruled on Thursday that state governments have no legislative competence to impose luxury tax on goods, including cigarettes and gutkas.
The five bench Constitution Bench headed by Chief Justice R C Lahoti said that the luxury tax can only be imposed on services.
The cigarette companies had approached the Supreme Court challenging the imposition of luxury tax on their products alleging that it was excessive taxation as their products were already taxed under the Central Excise Act.
They said Centre had already imposed additional excise duty on goods like cigarettes and tobacco products on the assurance that the states will not impose additional sales tax on them.
The Centre was giving to the states a part of the excise duty so collected so that they also got some revenue.
The petitioners alleged that to overcome the assurance of the Centre, the state governments had started imposing luxury tax on these items without resorting to the provisions of the Sales Tax Act.
The court said luxury tax cannot be imposed on goods alone unless they were linked with service like massage parlours.