SC upholds federalism in mining tax ruling

The apex court’s judgment recognises that there is unquestionably an unevenness in the Constitution’s division of fiscal powers. But this cannot be an excuse to permit a further dilution of authority otherwise vested in the states

On July 25, a nine-judge bench of the Supreme Court (SC) provided a fillip to the much-beleaguered condition of Indian federalism. Through an 8:1 judgment, the Court, in Mineral Area Development Authority v. Steel Authority of India, recognised the power of state governments to levy taxes on mineral rights. In doing so, it shored up the fiscal autonomy of regional units, which has been subject to repeated onslaughts throughout India’s history.

The government and a raft of mining corporations argued that the power of the states to tax minerals was constrained by the MMDR Act (Photo by - Deep Mukherjee\ hindustan times)

Our jurisprudence on federalism has largely been predicated on the idea that the Constitution contains a unitary drift, a predisposition towards the Union government. Indeed, the SC has often described India as a quasi-federal State. It may be difficult to quibble with this understanding in and by itself. But our courts have also used this construal as a means to rule in favour of the Union in disputes over constitutional clauses. The argument goes thus: Because the Constitution, read as a whole, tilts the division of power towards the Centre, any ambiguity over the allocation of authority must also be resolved against the states.

In Mineral Area Development Authority, the SC has somewhat bucked this trend. Eight out of the nine judges on the bench, speaking through Chief Justice of India (CJI) DY Chandrachud (with Justice BV Nagarathna dissenting), ruled that state governments possessed an independent and unfettered power to tax mines and minerals. The Court found that this authority flowed from two separate entries in the state list, contained in the Constitution’s Seventh Schedule: Entry 49, which speaks of taxes on lands and buildings, and Entry 50, which speaks of taxes on mineral rights, subject to limitations imposed by parliamentary law relating to mineral development.

The government of India and a raft of mining corporations argued that the power of the states to tax minerals was constrained by the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act). This legislation was enacted under Entry 54 of the Union list, which accords to Parliament an exclusive power to regulate mines and mineral development to the extent that it is expedient in the public interest.

The MMDR Act determines and levies a royalty that is payable by a leaseholder to the owner of the mine — whether that is the government or a private landlord. It was argued that this royalty was in the nature of a tax, in that it was an exaction made by the government in the exercise of its statutory power.

Even otherwise, since the MMDR Act constituted a complete code, in terms of levies, charges, and demands that bear a nexus to mineral rights, it was argued that it also effectively barred state governments from imposing a tax of their own over the same rights.

The majority, through the CJI, disagreed. It recognised the long-established criteria that a levy must fulfil to qualify as a tax. One, there must be a compulsory exaction of money by a public authority; two, the levy must be imposed under statutory power without the taxpayer’s consent; three, the demand must be enforceable by law; and four, the imposition must be made for public purpose to meet the state’s general expenses.

A royalty under the MMDR, the court found, did not meet any of these criteria. This is because, in reality, it is nothing but compensation that is paid for the loss suffered by the owner of the value of the minerals. And the liability to pay royalty arises not under the statute, but under the contractual conditions of the mining lease.

No doubt, the rates of royalty are prescribed under the MMDR Act. But that, by itself, wrote CJI Chandrachud, did not make it a compulsory exaction, since first, the compulsion stems from contractual obligations; second, the demand is not made by a public authority, but the lessor; and third, the payment itself is not for any public purpose but in lieu of consideration.

Having held thus, the Court re-affirmed the basic principle that subject matters of taxation are delineated in distinct entries under Schedule VII of the Constitution and a tax can never be traced to a non-taxing entry. What is more, the taxing powers of Parliament and the state legislatures are always mutually exclusive, that is there can never be any overlap in the granting of such authority.

On a close reading of the Constitution’s text, the majority found that the power to tax mineral rights could only be traced to entries 49 and 50 in the state list, and even here, the two entries dealt with separate subjects of taxation. The former — which was in no way conditional to the exercise of any of Parliament’s powers — accorded state governments the express power to tax land, and a mineral-bearing land would certainly fall within the description of “land”. The latter afforded state governments a clear power to tax mineral rights. This power, the Court ruled, was traceable only to this entry and the general authority to regulate mines, granted to Parliament, can, under no circumstances, include a power to levy a tax.

In ruling this way, the Court was also quite cognisant of the philosophy of fiscal federalism underlining the Constitution. There was unquestionably an unevenness in the Constitution’s division of power. But this cannot be an excuse to permit a further dilution of authority otherwise vested in the states. To permit such erosion, wrote the CJI, would have an impact on the ability of states to raise revenues, impeding, in the process, their ability “to invest in physical infrastructure, health, education, human capacity, and research and development.”

The balance of power between the Union and the states is already heavily skewed. The Constitution’s bare text contains in it a forbidding asymmetry. The job of the courts — and the majority in Mineral Area Development Authority is mindful of this — is to ensure that this distortion isn’t worsened through acts of interpretation.

Quite to the contrary, our courts must do everything within their powers to ensure that the few rights that the states are granted are well-preserved, not just in areas concerning fiscal autonomy, but in other areas too where the state’s powers have come under relentless peril. For, as the Court recognises here, “the Indian states are sovereigns within the legislative competence assigned to them.”

Suhrith Parthasarathy is a lawyer. The views expressed are personal