Read Time: 11 minutes

Synopsis

The Supreme Court's nine-judge bench has on July 25, 2024 declared that States have got legislative competence to levy tax on mineral-bearing lands. The court explained that the tax is different from royalty, as it is just a contractual consideration paid by the mining lesse to the lessor for enjoyment of mineral rights.

The bench headed Chief Justice of India D Y Chandrachud, by a majority view of 8:1, upheld the power of the states to impose tax and the Mines and Minerals (Development and Regulation) Act 1957 does not limit the power of the States in this regard. 

The judgment comes as a big boost for mineral rich States, like Karnataka, Odisha, Andhra Pradesh, Jharkhand, West Bengal Chhattisgarh, Madhya Pradesh, and Rajasthan. It is also likely to settle the tussle between the Centre and states for revenue from mineral bearing land.

The Constitution bench also consisted of Justices Hrishikesh Roy, Abhay S Oka, J B Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih.

Justice B V Nagarathna, however, differed with the majority view and held that royalty is in nature of tax and exaction. She declared that the Centre possessed the exclusive right to tax mineral rights in the country.

Justice Nagarathna said that if States were given the authority to impose additional levy on the royalty paid by the miners, then it would lead to an anomalous situation.

She said allowing States to impose tax would affect the federal system and under the Constitution in the context of mineral development and exercise of mineral rights and could lead to a slump in mining activity.

The bench examined issues whether royalties on minerals constitute a tax under the MMDR Act 1957 and whether only the Centre can levy such exactions, or if state governments possess the authority to impose levies on mineral-bearing land within their territories.

The majority view noted one of the basic features of fiscal federalism is that both the Union government and the state governments ought to have adequate fiscal resources to discharge their constitutional responsibilities. Any dilution in the taxing powers of the state legislatures will necessarily impact their ability to raise revenues, which in turn will impede their ability to deliver welfare schemes and services to the people, the court added.

It also pointed out that federalism is one of the basic features of the Indian Constitution which embodies a division of powers between the units of the federation, that is, the Union and the states.

The majority judgment, authored by the CJI on behalf of himself and remaining of other judges, said, “The liability to pay royalty arises from the contractual conditions of the mining lease. The payments made to the government cannot be deemed to be a tax merely because of the statute for their recovery as arrears.''

It said that the legislative powers to tax mineral rights vest in the state legislature and the Parliament does not have legislative competence to tax mineral rights under Entry 54 of List I.

"Since the power to tax mineral rights is enumerated in Entry 50 of List II, Parliament cannot use its residuary powers with respect to that subject matter," the bench said.

The bench also said Entry 50 of List II envisages that Parliament can impose “any limitations” on the legislative field created by that entry under a law relating to mineral development. The MMDR Act as it stands has not imposed any limitations as envisaged in Entry 50 of List II, it said.

It held the State legislatures have legislative competence under Article 246 read with Entry 49 of List II to tax lands which comprised of mines and quarries. 

"Mineral-bearing land falls within the description of “lands” under Entry 49 of List II. The yield of mineral bearing land, in terms of the quantity of mineral produced or the royalty, can be used as a measure to tax the land under Entry 49 of List II," the court said.

The bench also said Entries 49 and 50 of List II deal with distinct subject matters and operate in different fields. 

"Mineral value or mineral produce can be used as a measure to impose a tax on lands under Entry 49 of List II; the “limitations” imposed by Parliament in a law relating to mineral development with respect to Entry 50 of List II do not operate on Entry 49 of List II because there is no specific stipulation under the Constitution to that effect," the court said.

The decisions in India Cement, Orissa Cement, Federation of Mining Associations of Rajasthan, Mahalaxmi Fabric Mills, Saurashtra Cement, Mahanadi Coalfields, and P Kannadasan are overruled to the extent of the observations made in the present case, the bench said.

With the pronouncement of the judgment, the CJI said the court would hear the parties on July 31 on the aspect of whether the judgment should be applied retrospectively or prospectively. A retrospective application would mean enriching the state governments with local laws to impose additional levy on the miners.

The matter emanated out of more than 80 appeals filed by different state governments, mining companies and public sector undertakings. 

Case Title: Steel Authority of India & Anr Etc.