Introduction

In a landmark decision, the Supreme Court of India has ruled that states have the power to tax mining activities, and that collecting “royalties” from mining leaseholders is distinct from and does not interfere with the authority to impose taxes. This ruling, delivered by a nine-judge Constitution Bench, allows states to generate additional revenue from taxes on mining activities and the land used for these operations.

Background of the Case

• The case, Mineral Area Development Authority v M/s Steel Authority of India, had been pending for over 25 years.
• The judgment was delivered by an 8-1 majority, with Chief Justice of India D.Y. Chandrachud authoring the opinion for himself and seven other justices.
• Justice B.V. Nagarathna provided the lone dissenting opinion.

Journey to the Nine-Judge Bench

• The concept of royalties involves fees paid to the owner of a product for the right to use that product.
• For instance, a movie studio must pay a royalty fee to an artist for using their music in a film.
• Under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDRA), mining leaseholders must pay royalties for any minerals removed.
• A key question arose: If a state government leases land to a mining leaseholder, does this royalty qualify as a tax?
• The Supreme Court first addressed this in India Cement Ltd v State of Tamil Nadu (1989).

• A seven-judge Bench ruled that states could collect royalties but not impose taxes on mining activities, asserting that the Centre had overriding authority over mines and mineral development under Entry 54 of the Union List.
• The court stated that royalty is a type of tax. Therefore, an additional tax on this royalty, called a cess, is beyond the authority of the State Legislature because Section 9 of the Central Act already covers this area.
• However, this statement led to confusion, prompting further legal scrutiny.
• In 2004, a five-judge Constitution Bench in State of West Bengal v Kesoram Industries Ltd found a typographical error in the India Cement decision, suggesting that “royalty is a tax” should read “cess on royalty is a tax.”
• But due to the smaller bench size, the court could not rectify the earlier ruling.
• By 2011, the Mineral Area Development Authority case involved a challenge to a Bihar law imposing a cess on land revenue from mineral-bearing lands.
• The Supreme Court referred the matter to a nine-judge Bench to resolve the legal conflict definitively.

Majority Decision: Royalties vs. Taxes

• The majority opinion held that royalties are not taxes due to a “conceptual difference” between the two.
• Royalties arise from specific contracts or agreements between the mining leaseholder and the lessor, who may be a private party.
• Taxes, on the other hand, are intended for public purposes such as welfare schemes and infrastructure development.
• Additionally, the court examined whether states have the power to tax mineral development activities, considering the Seventh Schedule of the Constitution.
• Entry 50 of the State List grants states the exclusive power to tax mineral rights, subject to limitations imposed by Parliament.
• Conversely, Entry 54 of the Union List gives the Centre power over mines and mineral development regulation.
• The court concluded that the MMDRA provides states with a separate revenue stream through royalties, which does not interfere with states’ taxation powers under Entry 50.
• It held that Parliament’s powers under Entry 54 do not extend to imposing taxes, which is the domain of state legislatures.
• Parliament can, however, impose limitations or prohibitions on states’ power to tax.

Dissenting Opinion

• Justice Nagarathna disagreed with the majority, arguing that royalties under the MMDRA should be considered a tax to promote mineral development.
• She contended that the MMDRA’s aim of encouraging mining activities would be undermined if states could impose additional levies on top of royalties.
• She further held that the MMDRA diminished states’ powers to impose taxes, giving Parliament and the Centre control over mineral development.
• Additionally, she argued that Entry 49 of the State List does not grant states the authority to tax mineral-bearing land.

Conclusion

The Supreme Court’s decision clarifies the distinction between royalties and taxes, affirming states’ powers to tax mining activities. This ruling is significant for state governments, as it opens new avenues for revenue generation from the mining sector while delineating the roles of the Centre and the states in mineral development.