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Last week’s Supreme Court’s judgement, which gave retrospective effect to its recent ruling that granted states the power to tax mining rights and mineral lands, will have a negative impact on many counts. The court’s July 25 judgement had been widely welcomed for upholding the principle of fiscal federalism at a time when states have found their fiscal powers being increasingly constrained.
The court had made a distinction between mining royalties and taxation, and ruled that states had the right to tax their resources. It had overturned its 1991 judgement for this. The latest judgement allows tax to be collected retrospectively. Retrospective taxation is in principle bad, and unfair. Companies and individuals make their tax decisions on the basis of existing laws. It is wrong to change them later to their disadvantage. The apex court has frowned on such practices in the past.
International tribunals ruled against the retrospective tax decisions in the Cairn and Vodafone cases. The government annulled the retrospective tax provision through legislation in 2021, but it has come back with this judgement. An unstable and unpredictable tax regime does no good to India’s reputation. It can dissuade investors from investing in the country.
The judgement will impose a huge financial burden on mining companies. It will also lead to a cascading effect, making all downstream products costlier, and will, thus, add to the inflationary pressure. The power sector will be particularly affected as the higher cost of coal can result in increased electricity charges.
Since power is an input in most industries, it can by itself create inflationary ripples. The increased cost of coal can prompt companies to import coal. It is estimated that the dues that companies may owe under the terms of the judgement would be about Rs 1.5 lakh crore. It is claimed that the liability in some cases would be more than the net worth of the company.
The court has acknowledged this financial impact, and said that retrospective payment will come into effect from 2005 and not from 1991. It has also waived interest and penalty imposed before July 25, and staggered payments over 12 years. But even that would impose a high burden on companies, and impact the economy.
It is for the states to decide whether they should enforce the ruling because the court says it is the prerogative of the state legislatures to determine whether to collect or forgo past dues. Odisha is expected to gain over Rs 1 lakh crore. Other states like Jharkhand, Chhattisgarh, Karnataka, Andhra Pradesh, Rajasthan, and Madhya Pradesh will also gain. Karnataka may gain several thousand crores. Most states need revenues, and may not want to forgo them.