Forum for State Studies

Taxing of Mineral Rights: The Import of the Supreme Court Judgement

 By R. Mohan

1. General Background

The taxation  powers of the Union and the States in the Indian Constitution have never been part of the Concurrent List in the Seventh Schedule. The domains of the Union and the States have been independent of each other.

The 101st constitutional amendment, which brought into existence the Goods and Services Tax (GST), was the first instance of the Union and the States co-occupying the same tax base: the supply of goods and services. This co-occupancy in taxation was achieved by insertion of Article 246A, which reads thus:

  1. Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
  2. Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

Barring this, the entries of taxation for the Union and the States are separate and distinct in the Constitution.

2. Judgement of the Supreme Court

The judgement of the nine-judge bench of the Supreme Court in the case of Mineral Area Development Authority and Anr. vs M/sSteel Authority of India Limited and Anr  (Civil Appeal No’s. 4056-4064 of 1999) — See scourtapp.nic.in for the full judgement — has clearly adumbrated that the taxing of mineral rights is within the rights of the respective States. and that Union legislation — Mines and Minerals (Development and Regulation Act), 1957 — does not impose any restriction on the power of the States to tax mineral rights.  The MMDR Act, 1957, has been enacted on the basis of the Entry 54 of the Union List, which reads thus:

  1. Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.

Entry 23 of the State List is similar and reads thus:

  1. Regulation of mines and mineral development subject to the provisions of List I with respect to regulation and development under the control of the Union.

But in this field, the power of the States is circumscribed by the Union legislation (MMDR Act) enacted on the basis of Entry 54 of the Union List.

The apex court in the present case has clearly held that the restriction on the States is only in the realm of regulation of mines and mineral development and does not extend to taxing power of mineral rights. The Supreme Court has expressed the view in its 8:1 majority judgement that the taxing power on mineral rights is exclusively with the States. It has  been held that this is on the basis of two entries, Entry 49 and Entry 50 of the State List, which read thus:

       49.Taxes on lands and buildings.

      50. Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.

The power of the Union and the States too legislate in the respective Lists is from Article 246.

On analysis of the  provisions of the MMDR Act, 1957, the majority view is that the said legislation does not impose any restriction on the States’ power to impose taxes on mineral rights. The MMDR Act,1957, deals with imposition of royalties and the Court has held that royalty is not a tax. While holding so, it has overruled its previous seven judge bench decision in India Cement Ltd. vs The State of Tamil Nadu (1990 1 SCC 12[34]), wherein it was held that royalty was a tax. The present  judgement sets at rest the conflict between the decisions in the India Cement case and the subsequent one in State of West Bengal vs Kesoram Industries  Ltd. (2004 10 SCC 201 [71]). In the latter case, the Constitution bench had held that the decision in the India Cement case stemmed from an inadvertent error and royalty was not a tax.

The following principles have been laid down in the majority judgement

  1. States have exclusive power to tax mineral rights. This flows from Entry 49, which enables States to impose taxes on lands and buildings – lands in this Entry includes mineral lands too.
  2. The States are also enabled to tax mineral rights under Entry 50 and the MMDR Act, 1957, has not imposed any limitation on the rights of the States to tax mineral
  3. Entry 54 in the Union List, which empowers the Union for regulation of mines and mineral development denudes the authority of the States in the same field as mentioned in Entry 23 of the State List, but it does not impose any limitation on the power to tax mineral rights under Entry 50 of the State List, since MMDR Act has not imposed such limitations. Regulation of mines and mineral rights and power to tax mineral rights are distinct. Parliament does not have legislative competence to tax mineral rights under Entry 54 of the Union List.
  4. The States can use mineral value or mineral produce as a measure to tax the same.
  5. Royalty is not a tax as it is a contractual consideration paid by the mining lease to the lessor for enjoyment of mineral rights. The payments made to a government cannot be considered as a tax merely because the statute provides for their recovery as arrears. The judgement in India Cement Ltd. has been overruled.

The Supreme Court also clarified that the arrears can be retrospectively recovered with effect from April 1,2005, in installments, without penalty and interest.  The dissenting judge pointed out that the above adumbrated principles will lead to excessive taxation and have a bearing on prices of minerals, forcing purchasing States to go  for imports, causing a drain on foreign exchange. The dissenting judge was of the view that Parliament through Entry 54 can restrict power of the States to tax mineral rights. It also opined that the quantity of mineral produced or royalty cannot be used as a measure of taxation.

The majority judgement  lays down certain clear principles on what constitutes tax, what is the domain of the States, what constitutes limitations, that is, general regulation of mines and mineral development does not extend to taxing powers etc. It also has given Entry 49 of the State List a wide amplitude.

2.. The Impact of the Judgement For the mineral rich States, the judgement  will  enrich their coffers. For others, it does not.  To state in brief, this judgement reflects the view of the apex court that the uniformity in taxation is not envisaged in the constitutional provisions. This can be seen from the judgement in the case of Union of India vs Mohit Minerals Pvt.. Ltd.(Civil Appeal 1390 of 2022), which held that the uniform GST rates by the GST Council are only recommendatory.  Interpretation of constitutional provisions do seem to provide for varying taxation by the States, something which many economists and policy makers are not likely to appreciate.

As far as extracted minerals are concerned, their costs are bound to go up in the immediate and long-term future. These are because of two reasons: the impact of retrospective levy and varying taxes likely to be levied by mineral extracting States based on their revenue-expenditure  considerations. Yet another scenario that can emerge (though unlikely) could be the mineral extracting  States forming a cartel and fixing prices and production quotas. But this is remote, as the  types of minerals extracted are different in nature and quality, unlike petroleum in OPEC.  Be that as it may, price distortions are the inevitable consequence. As can be gleaned from the apprehensions expressed in the dissenting judgement, the parastatals or the private sector in buyer States may prefer to import minerals, based on cost considerations.

It will also have impact on Union-State relations, as the apex court has held unambiguously that royalty is not a tax and  the right to tax minerals is the exclusive domain of the States. It has been held that regulation of minerals under the MMDR Act,1957, does not cover taxing rights of the States on mineral extraction. A constitutional amendment is the only way to overcome the impact of this  judgement. This is, however, not easy, in the present scenario, as any constitutional amendment, which involves a change in the lists in the Seventh Schedule, will require ratification by half the number of legislatures, besides a majority of two-thirds of the members present and voting in  Parliament [Article 368(2)].

On the political front, the inter-State relations are already facing friction because of the richer States protesting against the predominance of the equity content in the tax distribution formula followed by the successive Finance Commissions. The exclusive power to tax extraction of natural resources  by mineral-rich States can lead to further differences between the States. Will the Union be in a position to initiate a dialogue and arrive at  consensual rates on extraction of minerals is the question. Even with the constitutional authority in one tier of government, the grain of cooperative federalism is give and take in common interest. Whether this happens is to be watched.