Today(on 25th July),The Supreme Court ruled that states have the authority to tax mines and mineral-bearing lands under the Constitution, with an 8:1 majority. Chief Justice D.Y. Chandrachud clarified that royalty on minerals is not a tax and that Parliament lacks the power to tax mineral rights.
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NEW DELHI: Today(on 25th July), The Supreme Court of India has delivered a landmark ruling, declaring that royalty payments made by mining operators to the Central government do not constitute a tax. This pivotal judgment clarifies that States retain their authority to impose cesses on mining and mineral-use activities.
A nine-judge Bench, led by Chief Justice of India (CJI) DY Chandrachud and comprising Justices Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma, and Augustine George Masih, delivered this comprehensive ruling. The majority opinion was shared by eight judges, including CJI Chandrachud, while Justice BV Nagarathna presented a dissenting view.
CJI Chandrachud, articulating the majority judgment, stated-
“Royalty does not constitute a tax… We find that the India Cements judgment’s assertion that royalty is a tax is incorrect… Payments to the government cannot be classified as a tax solely because a statute allows for their collection in arrears.”
This pronouncement underscores that the payments made as royalties to the government should not be mistaken for taxes. As a result, the majority judgment confirmed that States are not stripped of their powers to levy cesses on mining or related activities.
Further elaborating on the legislative competence, the judgment declared-
“The authority to tax mineral rights rests with the State legislature, as Parliament lacks the legislative competence to impose such taxes under Entry 50 of List 1, being a general entry. Parliament cannot exercise its residuary powers on this matter. Instead, the State legislature possesses the legislative competence under Article 246 in conjunction with Entry 49 of List 2 to tax mineral-bearing lands.”
In contrast, Justice BV Nagarathna dissented, stating-
“I maintain that royalty functions as a tax. States lack the legislative competence to levy any tax or fee on mineral rights. Entry 49 does not pertain to mineral-bearing lands. I affirm that the India Cements decision was correctly adjudicated.”
Her dissent underscores a fundamental disagreement on the nature of royalty and the legislative powers of the States concerning mineral rights.
The case presented a critical question: Are State governments deprived of their powers to tax and regulate mining activities due to the Mines and Minerals (Development & Regulation) Act (Mines Act)? This matter, the oldest pending nine-judge Bench case before the Supreme Court, saw its judgment reserved since March 14.
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The controversy dates back to 1989 when the Supreme Court, in India Cement Ltd v State of Tamil Nadu, ruled that royalty under the Mines Act is a form of ‘tax’ and that States lacked the legislative competence to impose cesses on such royalties. This stance was reaffirmed by a three-judge Bench in 1995 in State of Madhya Pradesh v Mahalaxmi Fabric Mills Ltd, which upheld Section 9 of the Mines Act.
However, a five-judge Bench in 2004, in State of West Bengal v Kesoram Industries Ltd, by a narrow 3:2 majority, clarified that the 1989 judgment had a typographical error, intending to denote that cesses on royalty are a form of tax, not the royalty itself.
In March 2011, a three-judge bench noted a “prima facie” conflict between the 1989 India Cements judgment and the 2004 Kesoram Industries ruling, leading to the referral of the matter to a nine-judge Bench.
During the hearings, the Central government argued against States levying taxes on mineral-bearing lands, emphasizing that the royalties collected by the Central government eventually benefit the States. Solicitor General Tushar Mehta argued-
“The development of the mineral industry requires national uniformity; otherwise, fragmented state-by-state levies could negatively impact both the development of minerals and their systematic utilization for the broader public interest.”
In a significant ruling, the Supreme Court’s nine-judge Bench has delivered a decisive verdict on the contentious issue of state taxation on mineral rights. The majority opinion diverged from the Centre’s stance, upholding the plenary rights of States in the absence of parliamentary limitations. The ruling elucidates the constitutional framework governing the taxation of mineral rights, with far-reaching implications for state and central relations in India’s mining sector.
Majority View: State’s Plenary Right to Taxation
The majority of the Bench firmly stated that unless Parliament imposes specific limitations, the States retain their plenary right to impose taxes on mineral rights.
The ruling specified:
“Unless Parliament imposes a restriction, the State’s broad authority to levy taxes on mineral rights remains unaltered.”
Furthermore, it was clarified that Parliament could impose such limitations under Entry 50 of List 2 of the Constitution through statutory instruments. However, the scope of the Mines and Minerals (Development and Regulation) Act (MMDR Act) cannot be stretched to infringe upon the States’ taxing rights.
“The framework of the MMDR Act cannot be extended to infringe upon the taxing rights of the States.”
The Bench also highlighted that the royalty paid under Section 9 of the MMDR Act is not considered a tax on mineral rights. Consequently, any limitations on the enhancement of royalty do not amount to a tax imposition under Entry 50 of List 2.
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“Since royalty paid under Section 9 is not considered a tax on mineral rights, any restrictions on increasing royalty do not constitute an imposition of a tax under Entry 50 of List 2.”
Interpretation of “Land” and Taxing Rights
The ruling provided a comprehensive interpretation of the term “land,” asserting that it includes land of every description, whether used for agriculture or mineral extraction.
“The term ‘land’ encompasses all types of land, whether used for cultivating tea leaves or extracting minerals. Therefore, we conclude that the State legislature has the authority to impose a levy under Entry 49 of List 2 to tax lands that include mines and quarries.”
This interpretation affirms that mineral-bearing lands also fall under the term “land” as defined in Entry 49 of List 2, thereby empowering State legislatures to levy taxes on such lands.
Distinction Between Royalty and Tax
In a detailed explanation, the majority opinion clarified the fundamental differences between royalty and tax, reinforcing the notion that royalty is not a tax.
“Royalty arises from a mining lease and is typically determined based on the quantity of minerals extracted. The obligation to pay royalty is governed by the contractual terms agreed upon between the lessor and lessee. This payment is not intended for public purposes but serves as consideration for granting exclusive rights to the minerals. Importantly, contractual payments to the government cannot be classified as a tax solely because the statute allows for their recovery as arrears.”
The majority further emphasized three key differences between royalty and tax:
“There are significant conceptual differences between royalty and a tax. First, royalty is charged by a proprietor as compensation for relinquishing rights to minerals, whereas a tax is a sovereign imposition. Second, royalty is paid in exchange for the specific action of extracting minerals from the land, while tax is generally imposed based on a taxable event defined by law. Third, royalty is stipulated in the lease deed, whereas tax is enforced by statutory law.”
Dissenting Opinion: Justice BV Nagarathna
Contrarily, Justice BV Nagarathna, in her dissenting opinion, viewed the nature of royalty under the MMDR Act as a unique form of tax. She argued:
“Under the statutory framework of the MMDR Act, the exercise of mineral rights by the lessee is subject to the payment of royalty. The collection of royalty is statutory in nature. I maintain that royalty functions as a tax or compulsory payment.”
Justice Nagarathna contended that States have no right to levy additional taxes or cesses on mining activities or mineral use.
“Sections 9 and 9A of the MMDR Act impose a restriction on the States’ authority to levy any tax on the exercise of mineral rights. This is because the royalty paid for these rights constitutes a statutory exaction.”
She further supported the Centre’s view that permitting States to impose taxes on mineral use would hinder mineral development across the country.
“Royalty, as a compulsory exaction, fulfills all the criteria of a tax. Therefore, States lack the authority to impose a cess or any other levy on royalty or classify it as land revenue under Entry 49 of List 2. Such State-imposed levies on royalty are counterproductive to the national development of minerals.”
Double Taxation Concerns
Justice Nagarathna also raised concerns about double taxation, concluding that States taxing mineral use or mining activities would result in an impermissible overlap.
“Mineral value or mineral produce cannot serve as a basis for States to tax mineral-bearing land under Entry 49 of List 2, as the term ‘land’ in this Entry does not encompass mineral-bearing lands. Imposing such a tax would result in double taxation—first by the State and then by the Central Act under Section 9 of the MMDR Act. This is contrary to the constitutional intent. Therefore, using royalty as a means to tax mineral-bearing lands is impermissible and would lead to regulatory overlap.”
The Supreme Court’s verdict delineates the boundaries of state and central taxing powers concerning mineral rights, potentially reshaping the fiscal landscape of India’s mining sector.
CASE TITLE:
Mineral Area Development Authority vs. Steel Authority of India and others