Supreme Court nine-judge bench rules in favour of state’s authority to tax minerals

By an 8-1 judgment, the top court also declared that royalty charged on mining is not a tax, but a form of contractual payment made by the minors to the Centre for extraction of minerals

A nine-judge bench in the Supreme Court on Thursday ruled by majority that states have legislative competence to levy taxes on minerals and mineral-bearing lands in addition to the royalty imposed by the Centre.

The bench held that states were well within their rights to impose extra levy and surcharge. (HT file photo)

By an 8-1 judgment, the top court also declared that royalty charged on mining is not a tax, but a form of contractual payment made by the minors to the Centre for extraction of minerals.

Therefore, the bench, headed by Chief Justice of India (CJI) Dhananjaya Y Chandrachud, held that states were well within their rights to impose extra levy and surcharge on such mineral rights.

At the same time, the majority judgment clarified that the central government has the right under the Union List to impose limitations, including a prohibition, on the states’ power to tax mineral rights through a parliamentary law.

However, it noted that since the central law on the subject - Mines and Minerals (Development and Regulation) Act, 1957 (MMDRA), has not made any such provision so far, states’ authority cannot be said to be circumscribed.

The CJI read out the majority view, supported by justices Hrishikesh Roy, Abhay S Oka, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih.

Justice BV Nagarathna dissented, holding that the Centre possessed the exclusive right to tax mineral rights in the country and lending states equal authority to impose additional levy on the royalty paid by the miners will lead to an anomalous situation where the legislative competence of the states will have an overarching impact.

She also emphasised that not only authorising states to impose additional levy will be destructive of the federal structure and detrimental to the mineral development in the country, but it might also lead to unhealthy competition among the states to impose surcharges, in turn leading to rise in the prices of minerals and consequently the prices of industrial products.

The bench will 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, including West Bengal, Odisha and Jharkhand that have local laws to impose additional levy on the minors.

On March 14, the Supreme Court had reserved its verdict on a contentious issue -- whether royalties on minerals constitute a tax under the MMDRA. This case also questioned whether only the central government can levy such exactions, or if state governments possess the authority to impose levies on mineral-bearing land within their territories.

deliberated on this matter over eight days earlier this year, reviewing 86 appeals from various state governments, mining companies and public sector undertakings.

During the hearings, the court had noted that the Constitution grants both Parliament and the states the power to tax mineral rights, emphasising that such authority should remain intact.

But attorney general R Venkataramani, representing the Centre, argued that the Union holds overriding powers to tax mines and minerals. Solicitor general Tushar Mehta supported this stance, asserting that the MMDRA limits the states’ legislative power to impose taxes on minerals, granting the central government the authority to fix royalties.

The Centre highlighted the uneven distribution of major minerals across states, with some states possessing significant quantities of resources like coal, iron ore, bauxite, and manganese, while others have little to none. The argument was that mineral-rich states might impose heavy taxes, leading to increased mineral prices, higher imports, and adverse economic effects. Uniformity in this field, the Centre argued, is essential.

Under Entry 54 of the Union List, the Centre claimed exclusive control over mines and minerals, enabling Parliament to enact the MMDRA and, consequently, fix royalties. Although these royalties go to state coffers, the Centre maintained that minerals are vital for national development, necessitating federal regulation to ensure uniform pricing and rational resource use.

Supporting the Centre, mining companies contended that states cannot impose taxes on mineral rights, as this pertains to mineral development—a domain reserved exclusively for the Union government. Senior advocates like Abhishek Manu Singhvi, Harish Salve, Arvind Dattar, and Darius Khambata argued that royalties are a tax, falling solely under the Centre’s purview per Entry 54 and Entry 97 (residuary powers) of the Union List.

They cited Parliament’s authority under these entries to legislate on the regulation of mines, mineral development, and taxing mineral rights, referencing Article 248(2) and Entry 97 of List I to levy taxes on subjects not mentioned in any lists. Several local laws from states like Odisha, Jharkhand, and West Bengal were also challenged in these proceedings.

Senior advocate Rakesh Dwivedi, representing Jharkhand, argued that royalties are not taxes, and states have the power to levy taxes on mines and minerals based on Entries 49 and 50 of the State List. Entry 49 allows states to tax lands and buildings, while Entry 50 permits states to impose taxes on mineral rights, subject to any limitations imposed by Parliament concerning mineral development. Some other states, including Jharkhand and Odisha also adopted Dwivedi’s arguments.

This complex issue first arose in a dispute between India Cement Ltd and the Tamil Nadu government. India Cement, which held a mining lease in Tamil Nadu, paid royalties to the state. The state later imposed a cess in addition to the royalty, prompting India Cement to challenge this in the Madras High Court. The company argued that a cess on royalty equated to a tax on royalty, exceeding the state’s legislative powers.

The Tamil Nadu government contended that the cess was a form of land revenue on mineral rights, within its authority to impose. In 1989, a seven-judge bench of the Supreme Court ruled in favor of India Cement, asserting that the Centre held primary regulatory authority under the MMDRA and that states could collect royalties but not impose additional taxes on mining and mineral development. However, a five-judge bench in 2004, while hearing a similar dispute between West Bengal and Kesoram Industries Ltd, noted a typographical error in the 1989 judgment, clarifying that “royalty is not a tax,” but “cess on royalty is a tax.”

Given these conflicting rulings, the Supreme Court began hearings on February 27, 2023, with a nine-judge bench to resolve whether royalties are a type of tax or if there was an error in the India Cement case judgment. This decision will have significant implications for the regulation and taxation of minerals in India.