New Delhi: A nine-judge bench in the Supreme Court, by a majority, on Thursday ruled that states' have legislative competence to levy taxes on minerals and mineral-bearing lands.
The bench led by Chief Justice of India D Y Chandrachud held that royalty is not a tax. "Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease. The payments made to the government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears," said the CJI.
The CJI authored 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 B V Nagarathna dissented, holding that the Centre possessed the exclusive right to tax mineral rights in the country. She said that if states were given the authority to impose additional levy on the royalty paid by the miners, then it would lead to an anomalous situation.
The majority judgment
The apex court, by an 8-1 judgment, said that the legislative power to tax mineral rights vests with the state legislatures. "Parliament does not have legislative competence to tax mineral rights under Entry 54 of List I, it being a general entry. 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," said the CJI.
The apex court 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 Mines and Minerals (Development and Regulation) (MMDR) Act 1957, as it stands, has not imposed any limitations as envisaged in Entry 50 of List II, said the bench, in the 393-page judgment.
"The decisions in India Cement, Orissa Cement, Federation of Mining Associations of Rajasthan, Mahalaxmi Fabric Mills, Saurashtra Cement, Mahanadi Coalfields, and P Kannadasan are overruled to the extent of the observations made in the present case," said the bench.
The apex court said 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 and 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," said the apex court.
The apex court 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.
'A breakdown of the federal system', Justice Nagarathna's dissent
Justice Nagarathna said If royalty is not held to be a tax and the same being covered under the provisions of the MMDR Act, 1957, it would imply that despite Entry 54 – List I and the declaration made in Section 2 of the MMDR Act, and Section 9, 9A and other provisions thereof, taxes on mineral rights could be imposed by the states over and above payment of royalty on a holder of a mining lease.
Justice Nagarathna said this would also mean that the limitation that the Parliament has made by law on the taxing power of a State explicitly stated in Entry 50 – List II would be given a go by. She said this would further imply that despite such a Parliamentary limitation, the States could pass laws imposing taxes, cesses, surcharge on cess, etc. on the basis of royalty which is in addition to payment of royalty.
"Further, that such levies could also be imposed under Entry 49 – List II thereby making Entry 50 – List II redundant is not acceptable. As a sequitur, this would result in mineral development in the country in an uneven and haphazard manner and increase competition between the States and engage them into what has been termed by Louise Tillin in a 'race to the bottom' in a nationally sensitive market”, she said.
She stressed that there would be unhealthy competition between the states to derive additional revenue and consequently, the steep uncoordinated and uneven increase in cost of minerals would result in the purchasers of such minerals coughing up huge monies, or even worse, would subject the national market being exploited for arbitrage.
She said the overall economy of the country would be affected adversely which may result in certain entities or even non-extracting States resorting to importing minerals which would hamper the foreign exchange reserves of the country.
"There would lead to a breakdown of the federal system envisaged under the Constitution in the context of mineral development and exercise of mineral rights. It could also lead to a slump in mining activity in States which have mineral deposits owing to huge levies that have to be met by holders of mining licences," she said.
Justice Nagarathna said further, that another impact of this would be unhealthy competition to obtain mining leases in states which have mineral deposits and who do not wish to impose any other levy apart from royalty.
Justice Nagarathna did not agree with the majority bench overruling several judgments. She said that the overruling of the judgment in India Cement would mean that all judgments which are akin to the ratio of India Cement whether prior to or subsequent thereto, stand overruled irrespective of whether they are the judgments of the high Courts or this court.
"Consequently, all States would once again start levying taxes on mineral rights under Entry 49 - List II and thereby bypass Entry 50 - List II so as to not be bound by any limitation that the Parliament had imposed by law on the power of the States to levy taxes on mineral rights," she said.
Justice Nagarathna said the circle would come around when Parliament would have to again step in to bring about a uniformity in the prices of minerals and in the interest of mineral development so as to curb the States from imposing levies, taxes, etc. on mineral rights.
The apex court 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 that have local laws to impose additional levy on the minors.
The apex court, on March 14, had reserved its verdict on a contentious issue -- whether royalties on minerals constitute a tax under the MMDRA. It also examined whether only the Centre can levy such exactions, or if state governments possess the authority to impose levies on mineral-bearing land within their territories.
During the hearing, Attorney General R Venkataramani, appearing for Centre, had contended that Centre holds overriding powers to tax mines and minerals. The Centre's counsel stressed that the MMDRA limits the state government's legislative power to impose taxes on minerals, and it grants authority to the Centre to fix royalties.
