At first glance, the recent decision of the Supreme Court in the case Mineral Area Development Authority v. Steel Authority of India appears to be about royalty and taxation of minerals. The fine print, however, indicates a conflict between the Union and States over the authority to collect taxes on minerals, which is a significant source of revenue.
The Union List (Entry 54) and the State List (Entry 23) of the Seventh Schedule to the Constitution respectively enable Central and State legislatures to regulate mines and mineral development.
In exercise of its legislative authority under Article 246 of the Constitution, the Parliament passed the Mines and Minerals (Development and Regulation) Act, 1957 ("MMDR Act”) which is a comprehensive framework for mineral development and mines regulation. According to Section 9 of MMDR Act, the owner of a mining lease is required to pay royalty at designated rates for minerals taken or used from the leased area.
A seven-Judge Bench of the Supreme Court in India Cement Ltd. v. State of Tamil Nadu, held that royalty by a mining license holder is a ‘tax’ and that State legislatures do not have the authority to impose additional taxes on these leasehold amounts received under the MMDR Act. The Court further ruled that, under Entry 49 of List II, the State government cannot impose taxes on mineral-bearing lands.
Later, a five-judge Constitution Bench of the Supreme Court declared in State of West Bengal v. Kesoram Industries Ltd., that the ruling in India Cement supra was the result of a mistake and held that royalty is not tax. In accordance with Entry 49 of List-II, State legislatures used their legislative authority to levy taxes on mineral-bearing land by using the mineral value or royalty as the basis for measurement of tax.
The leaseholder - faced with the proposition of paying two taxes, one being royalty and the other being State tax on royalty - challenged the State tax as having a cascading effect and being outside the State legislature's purview before various High Courts. The Patna High Court ruled that the tax was not covered by Entry 49 of List-II. A Full Bench of the Supreme Court, on appeal, noted the disparity between India Cement, supra and Kesoram, supra on March 30, 2011and referred the case to the Chief Justice to constitute a nine-judge Bench to settle this dispute.
In Mineral Area Development Authority v. Steel Authority of India, (“MADA”), the nine-judge Bench ruled that the rights to tax mineral rights, as well as land and buildings, are separate and independent taxation powers given to States.
By an 8:1 majority, the Supreme Court overruled India Cements, supra, and held that Parliament has the authority to restrict (even ban) States' abilities (under Entry 50 of List-II) to impose and collect taxes on mineral rights, under Entry 54 of List-I. However, this has not yet been done, either through the MMDR Act or other legislations. The majority held that Entry 49 allows States to levy taxes on lands and buildings without restriction, while Entry 50 is subject to Parliament's authority to limit the States' mineral tax rights. The nine-judge Bench concluded that "royalty" (as per MMDR Act) is not a tax on mineral rights, and that States are empowered to levy tax on such royalty amount.
It was further concluded that States can consider mineral value of land as the basis for imposing taxes on land/ buildings, which is unfettered, unlike the ability to tax mineral rights. In effect, States’ taxing rights were advanced (under Entry 49 of List-II).
Additionally, the Court held that all forms of imposts in the form of mandatory exactions are included in the definition of "tax" under Article 265. A contractual obligation, that is, to pay royalty, cannot be referred to as a tax or impost. According to Article 366(28) of the Constitution, consideration given to the State Government under a contract in exchange for exclusive rights and advantages related to a certain activity cannot be referred to as "tax" or "impost."
After observing the differences between India Cement supra and Kesoram, supra, the majority also came to a conclusion that royalty is not a tax and further observed that royalty is a payment made by a mining lessee to the lessor in exchange for the enjoyment of mineral rights and to make up for the value loss of the minerals incurred by the mineral owner.
With a majority of the license holders being large mining corporations relying on India Cement (supra) to not pay tax to States, the Supreme Court had to consider whether its judgment would be prospective or retrospective. While giving prospective application would lead to an anomalous situation wherein the laws passed by the States in the exercise of their plenary powers under Entries 49 and 50 of List-II would be invalidated based on a position of law that has been overruled by the MADA judgment, a retrospective application would lead to financial burden on license holders (Steel Authority of India alone estimated tax at ₹3,000 crores from different States). The nine-judge Bench denied the mining companies' plea to give the judgment prospective application, and instead established conditions on the implementation of its July order, whereby the mining companies were allowed to make payments over a span of 12 years, despite the States’ power to levy tax being recognized as effective from April 1, 2005 (the fiscal year after the 2004 ruling). According to the directive, mining companies are to start making payments from April 1, 2026. The Supreme Court prohibited States from imposing interest or penalties on the companies for the prior period.
The Supreme Court ruled that the State legislature has jurisdiction over taxation of mineral rights. Since Entry 54 of List-I is a general entry, the Parliament lacks legislative authority to impose taxes on mineral rights. When the subject matter is expressly listed in Entry 50 of List-II, Parliament cannot use residuary powers to impose taxes on the same. The demand in Falgungiri Mines v. Union of India, Sri A.D. Vee Raja Mines & Minerals v. Assistant Commissioner (ST) (FAC), and the whole batch of writ petitions was stayed until the nine-judge Bench of the Supreme Court had decided on the issue. Now that there is a decision of the nine-Judge Bench of the Supreme Court, payment will be made as per the Supreme Court judgment.
About the authors: Rishab J is an Associate Partner and Princess Preet is an Associate with Shivadass & Shivadass (Law Chambers).
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