The Supreme Court verdict on States’ power to tax mining activities

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The Supreme Court verdict on States’ power to tax mining activities | Explained

In an overwhelming majority of 8:1, the top court declared that the royalty charged on mining is not a tax and that States are competent to levy taxes on mineral rights. What issues were in consideration in this decades-old case? What do the majority and dissenting opinions stipulate?

A file photo of a mining area at Ramgadh, near Sandur in Ballari district.

A file photo of a mining area at Ramgadh, near Sandur in Ballari district.
| Photo Credit: Bhagya Prakash K

The story so far:

In a landmark ruling on July 25, the Supreme Court affirmed that States have the legislative authority to impose taxes on minerals in addition to the royalty levied by the Centre. Upholding the principles of federalism, the verdict clarified that the power of State legislatures to tax mineral activities within their respective territories is not constrained by Parliament’s Mines and Minerals (Development and Regulation) Act, 1957 (1957 Act). The case which has been pending for more than a quarter century was decided by an 8:1 ruling with Chief Justice of India (CJI) D.Y. Chandrachud authoring the majority opinion. Justice B.V. Nagarathna gave a dissenting opinion where she cautioned that allowing States to impose additional levies could hinder the development of the nation’s mineral resources and disproportionately advantage mineral-rich States.

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What was the case?

Section 9 of the 1957 Act requires those who obtain leases to conduct mining activities to “pay royalty in respect of any mineral removed” to the individual or corporation who leased the land to them. The key question for consideration was whether the royalties paid by mine leaseholders to State governments under the 1957 Act should be classified as “tax.” Additionally, the court needed to determine whether the Centre could impose such charges or if the States possessed the sole authority to levy them within their jurisdictions.

The case has its genesis in a dispute between India Cement Ltd and the Tamil Nadu government which arose after the company secured a mining lease in Tamil Nadu. Although India Cement was already paying royalties, the government imposed a cess — an additional tax on land revenues, including royalties. The company challenged this in the Madras High Court contending that the cess on royalties effectively constituted a tax on royalties, the imposition of which exceeded the State’s legislative authority. In 1989, a seven-judge Bench of the Supreme Court inIndia Cement Ltd. vs. State of Tamil Nadu decided in favour of India Cement by reasoning that States only have the power to collect royalties and not impose taxes on mining activities. It pointed out that the Union government exercises overriding authority over the “regulation of mines and mineral development” under Entry 54 of the Union List, as specified by law (in this case, the 1957 Act). Thus, States are not empowered to levy additional taxes on this subject.

Over a decade later, a five-judge Bench in 2004, while hearing a similar dispute between West Bengal and Kesoram Industries Ltd held that there was a typographical error in the India Cement decision and that the phrase “royalty is a tax” should be read as “cess on royalty is a tax”. However, since the Bench was smaller than the one in the India Cement case, it was unable to overrule or amend the previous ruling.

In 2011, a three-judge Bench led by former Chief Justice S.H. Kapadia, while examining a challenge to a Bihar law imposing a cess on land revenue from mineral-bearing lands, recognised the conflicting precedents set by Kesoram Industries and India Cement. It accordingly referred the issue to a nine-judge Bench to definitively settle the legal position.

What is the difference between royalty and tax?

The majority ruling clarified the distinction between royalty and tax. It defined royalty as the “contractual consideration” paid by the mining lessee to the lessor (who may also be a private party) for the right to extract minerals. In contrast, a tax was characterised as an “imposition by a sovereign authority.” The judges underscored that taxes are determined by law and can only be levied by public authorities to fund welfare schemes and public services. Meanwhile, royalties are paid to a lessor in exchange “for parting with their exclusive privileges in the minerals”.

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Can States tax mining activities?

Entry 50 of the State List under the seventh Schedule of the Constitution gives States the exclusive authority to make laws regarding “taxes on mineral rights”, but this power is limited by any laws Parliament may pass concerning mineral development. On the other hand, Entry 54 of the Union List gives the Centre the power to regulate “mines and mineral development,” especially when Parliament decides it is necessary in public interest. During the proceedings, the Centre argued that Entry 50 in the State List had allowed Parliament to impose “any limitations” on taxes on mineral rights through the promulgation of laws relating to mineral development — in this case, the 1957 Act.

However, the majority reasoned that since royalties could not be classified as a tax, they do not fall within the category of “taxes on mineral rights” as defined in Entry 50 of the State List. As a result, it was held that the 1957 Act merely provided States with another source of revenue through royalties, without interfering with their authority to levy taxes on mineral rights under Entry 50.

While the Centre is empowered to regulate mining development under Entry 54 of the Union List, the court clarified that this authority does not include the power to impose taxes, which is exclusively under the jurisdiction of the State legislatures. However, this express power, it said, is subject to “any limitations” that may be imposed by Parliament which could even include a “prohibition’” against imposing taxes. This implies that if the Centre wanted to modify the existing legislative framework under the 1957 Act to divest States of their power to levy a tax, it could do so.

The majority also held that States have the power to tax the land where mines and quarries are located by virtue of Article 246 read with Entry 49 (taxes on lands and buildings) of the State List. “In other words, mineral-bearing lands also fall within the description of lands under Entry 49 of List 2,” the CJI declared, adding that the income of the land yield can be adopted as a measure of tax.

“Indian federalism is defined as asymmetric because it tilts towards the Centre, producing a strong Central Government. Yet, it has not necessarily resulted in weak State governments. The Indian States are sovereigns within the legislative competence assigned to them. In a federal form of government, each federal unit should be able to perform its core constitutional functions with a certain degree of independence. The Constitution has to be interpreted in a manner which does not dilute the federal character of our constitutional scheme. The effort of the constitutional court should be to ensure that State legislatures are not subordinated to the Union in the areas exclusively reserved for them.”CJI D.Y. Chandrachud authored majority opinion Mineral Area Development Authority & Anr v. M/S Steel Authority of India & Anr (2024)

Why did Justice Nagarathna dissent?

Disagreeing with the majority, Justice Nagarathna held that royalties paid under the 1957 Act should be considered as tax for developing the country’s mineral resources.

She pointed out that a central legislation, like the 1957 Act, was intended to promote mineral development and this objective could be severely undermined if States were allowed to impose levies and cesses (additional taxes) on top of the royalties they collect. The passage of the 1957 Act thus “denuded” States’ powers to levy taxes by entrusting the Centre with complete control over mineral development and limiting States to generating revenue solely through royalties, she underscored.

Fiscal federalism: On taxing mineral rights

Elucidating upon the likely consequences of allowing States to tax mineral rights, the judge highlighted that this would lead to an “unhealthy competition between the States to derive additional revenue” resulting in a steep, uncoordinated, and uneven increase in the cost of minerals. Such a scenario, she warned, might exploit the national market for arbitrage, where differences in pricing could be manipulated for profit, disrupting the market’s stability.

What happens next?

On July 31, the court will consider whether the verdict should be applied retroactively or prospectively.

If applied retroactively, it could result in significant financial benefits for mineral-rich States such as West Bengal, Odisha, and Jharkhand, which have enacted local laws to impose additional taxes on mining lessees.

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