Supreme Court upholds states’ power, says royalty on minerals not tax

Verdict to put an end to revenue tussle with Centre.

New Delhi: In a big boost to States revenues, the Supreme Court's nine-judge bench on Thursday held that States have got legislative competence to levy tax on mineral-bearing lands, and distinguished such a tax from royalty, which is just a contractual consideration paid by the mining lesse to the lessor for enjoyment of mineral rights.

By a majority view of 8:1, the bench led by Chief Justice of India D Y Chandrachud upheld the power of the states to impose tax, saying royalty paid by mining lease holders to the central government is not a tax.

The apex court also declared the Mines and Minerals (Development and Regulation) Act 1957 do not limit the power of the States to impose the tax. 

It pointed out 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 ability of the state governments to invest in physical infrastructure, health, education, human capacity, and research and development is directly co-related to the raising of government revenues. Constitutional courts have to be cognisant of this context while adjudicating on issues affecting the taxing powers of the State legislatures," the bench said.

Justice B V Nagarathna, however, dissented with the majority view and held that royalty is in nature of tax. She felt allowing States to impose tax would lead to a "breakdown of the federal system and under the constitution in the context of mineral development and exercise of mineral rights. It would also lead to a slump in mining activity… another impact of this and unhealthy competition to obtain mining leases in states, which have the minerals." 

The majority judgment authored by the CJI 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.''

The judgment is likely to come as a boon for mineral rich States, including Karnataka, Andhra Pradesh, Odisha, Jharkhand, West Bengal Chhattisgarh, Madhya Pradesh, and Rajasthan. 

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

The matter arose out of more than 80 appeals filed by different state governments, mining companies and public sector undertakings. The hearing in the case continued for eight days.

The verdict is likely to put an end to the tussle between the Centre and states for revenue from mineral bearing land.

After pronouncing the judgment, the CJI agreed to look into the applicability of the judgment. If the judgement is finally held to apply retrospectively then it would increase the financial burden on the mining operators as states will recover thousands of crores from them.

The bench said 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.

In its judgment, the bench 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.

The majority view pointed out the State legislatures have legislative competence under Article 246 read with Entry 49 of List II to tax lands which comprise 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," it said.

The court 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," it said.