Justice Nagarathna warned that the federal system could collapse if states allowed to levy taxes on minerals. She emphasized that such actions would disrupt the balance of power and undermine the structure of governance. The imposition of mineral taxes by states poses a threat to the integrity of federalism.
New Delhi: Supreme Court Justice B.V. Nagarathna expressed concern that allowing states to levy taxes on mineral resources could lead to a “breakdown of the federal system,” as states might compete against each other, hindering mineral development.
Justice Nagarathna was the only judge on the nine-judge constitution bench to disagree with the majority opinion written by Chief Justice D.Y. Chandrachud.
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The majority held that states have the legislative power to tax mineral rights and that royalty payments on minerals are not considered a tax.
Contrary to this, Justice Nagarathna argued in her 193-page judgment that royalties on minerals should be viewed as a tax rather than merely a contractual payment.
She stated,
“If royalty is not held to be a tax and the same being covered under the provisions of the MMDR Act, 1957, it would imply that despite Entry 54-List I and the declaration made in section 2 of the MMDR Act, 1957 taxes on mineral rights could be imposed by the States over and above payment of royalty on a holder of a mining lease.”
Justice Nagarathna highlighted the importance of Entry 54 of List I of the Constitution, which grants the Centre authority over the regulation of mines and mineral development. She emphasized the risk of unhealthy competition among states aiming to increase their revenue, leading to a sharp, uncoordinated rise in mineral costs. This, in turn, would burden purchasers of minerals with high expenses or expose the national market to arbitrage exploitation.
Justice Nagarathna pointed out that the surge in mineral prices would elevate the cost of all industrial and other products reliant on minerals as raw materials or for infrastructure, negatively impacting India’s overall economy.
This situation could compel entities or states without mineral resources to resort to imports, thereby straining the country’s foreign exchange reserves.
She warned that such dynamics could disrupt the federal structure envisioned in the Constitution regarding mineral development and rights. States with mineral deposits might see a decline in mining activities due to the heavy levies imposed on mining license holders.
Moreover, there would be fierce competition for mining leases in mineral-rich states that avoid additional levies beyond royalty.
Justice Nagarathna highlights the rationale behind the Constitution’s framers drawing inspiration from the Government of India Act, 1935, to allocate legislative powers between the Union and the State Lists concerning the regulation of mines and minerals.