Supreme Court Affirms States' Power To Tax Mineral Rights Beyond MMDR Act; Royalty Not Considered Tax In 8:1 Verdict

Supreme Court Affirms States' Power To Tax Mineral Rights Beyond MMDR Act; Royalty Not Considered Tax In 8:1 Verdict

A nine-judge Constitution Bench of the Supreme Court ruled that royalties paid by mining operators to the Central government are not classified as taxes and that states are authorized to levy cesses on mining and mineral-use activities.

The judgment was delivered by a bench led by Chief Justice of India (CJI) DY Chandrachud, which included Justices Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma, and Augustine George Masih. Justice Nagarathna dissented from the majority opinion.

The Court determined that the Mines and Minerals (Development & Regulation) Act (Mines Act) does not strip states of their authority to tax mineral rights. This decision overruled the Court’s 1989 ruling in India Cement Ltd v. State of Tamil Nadu.

CJI Chandrachud, presenting the majority opinion, observed: "Royalty is not in the nature of tax... We conclude that the observation in the India Cements judgment stating that royalty is tax is incorrect... Payments made to the government cannot be deemed to be a tax merely because a statute provides for its recovery in arrears."

Consequently, the majority on the bench held that states are not denuded of powers to levy cess on mining or related activities.

"The legislative power to tax mineral rights lies with the state legislature, and the Parliament does not have the legislative competence to tax mineral rights under Entry 50 of List 1 since it is a general entry and Parliament cannot use its residuary power regarding this subject matter... The state legislature has the legislative competence under Article 246 read with Entry 49 of List 2 to tax mineral-bearing lands," the majority ruled.

Justice BV Nagarathna, however, disagreed on both aspects.

"I hold royalty is in nature of the tax. States have no legislative competence to impose any tax or fee on mineral rights. Entry 49 is not related to mineral-bearing lands. I hold India cement decision was correctly decided."

Following the judgment delivered today, petitioners urged the Court to specify whether the ruling will apply prospectively only and not affect past transactions.

The Court was informed of the significant implications of today's verdict and agreed to address this matter on July 31. "We will convene on Wednesday to determine whether the ruling should have a prospective application," assured the Chief Justice.

The case centered on whether state governments have lost their authority to tax and regulate mining and mineral-use activities due to the Mines and Minerals (Development & Regulation) Act (Mines Act). This was the oldest pending case before the nine-judge bench of the Supreme Court, which had reserved its judgment on March 14 this year.

In 1989, the Supreme Court ruled in India Cement Ltd v. State of Tamil Nadu that royalty constituted a form of 'tax' under the Mines Act and that States lacked the authority to impose cesses on such royalties.

In February 1995, a three-judge bench reaffirmed this position in State of Madhya Pradesh v. Mahalaxmi Fabric Mills Ltd. by upholding Section 9 of the Mines Act.

A five-judge bench in January 2004, in the state of West Bengal v. Kesoram Industries Ltd, held by a 3:2 majority that the 1989 bench had erroneously referred to royalty as a tax, meaning only cess on royalty could be considered a tax, not the royalty itself.

In March 2011, a three-judge bench identified a prima facie conflict between the 1989 and 2004 judgments, leading to the case being referred to a nine-judge bench.

Before the nine-judge bench, the central government contended that states could not impose taxes on mineral-bearing lands, arguing that royalties collected by the central government are ultimately transferred to the states.

"The development of mineral industry needs uniformity at a national level, failing which fragmented state-wise levy will adversely impact the development of mineral and systemic utilization of minerals in the larger public interest," Solicitor General Tushar Mehta had argued.

The majority of the nine-judge bench today rejected the central government's position.

Key findings the majority on the bench included:

• State Taxing Rights: The Bench determined that unless Parliament imposes specific limitations, states retain their full authority to tax mineral rights.

• Parliamentary Limitations: Parliament may impose limitations under Entry 50 of List 1 of the Constitution through statutory instruments. However, the framework of the Mines and Minerals (Development and Regulation) Act (MMRDA) cannot encroach upon the States' taxing powers.

• Royalty v. Tax: The Court clarified that the royalty paid under Section 9 of the Mines Act is not considered a tax on mineral rights. Therefore, restrictions on increasing royalty payments do not equate to a tax imposition under Entry 50 of List 1. Section 9 merely limits central powers and does not pertain to taxation.

• Definition of Land: The Court held that "land" encompasses all types of land, including those used for mining and quarrying. Consequently, state legislatures have the authority to levy taxes on mineral-bearing lands under Entry 49 of List 2.

• Royalty v. Tax: The majority distinguished between royalty and tax, noting that:

• Royalty Derived from mining leases and determined by the quantity of minerals extracted, it is a contractual payment made for the exclusive rights to minerals. It is not a public levy but a consideration for the rights granted.

• Tax Imposed by law as a sovereign right, generally not linked to specific contractual agreements but to broader legislative mandates.

The Bench's findings emphasize that while royalties are a form of contractual payment, they do not constitute a tax.

"Royalty flows from mining leases it is generally determined from the basis of the quantity of minerals removed. The compulsion of royalty depends on the contractual conditions of the mining lease agreed between the lessor and lessee ... The payment is not for public purposes but it is a consideration paid to the lessor for parting with exclusive privileges in the minerals ... Pertinently, contractual payments due to the government cannot be deemed to be a tax merely because the statute provides the recovery as arrears. There are major conceptual differences between royalty and a tax. One, a proprietor charges royalty as a consideration for parting with rights to minerals while tax is an imposition of a sovereign. Two, royalty is paid in consideration of doing a particular action, that is extracting minerals in the soil while tax is generally levied with respect to a taxable event determined by law. Three, royalty can be foreclosed from the lease deed as compared to tax which is enforced by law."

In her dissent, Justice BV Nagarathna observed that the royalty payment under the Mines and Minerals (Development and Regulation) Act (MMDR Act) is distinct. From this viewpoint, she contended that the royalty payment should be considered a form of tax.

"Under the statutory scheme of MMDR act, any exercise of mineral rights to the lessee is subject to payment of royalty.. exaction of royalty is statutory in nature.. I hold that royalty is in the nature of tax or exaction," she said.

Consequently, Justice BV Nagarathna concluded that states have no authority to levy taxes or cesses on mining activities or the use of minerals.

She stated, "Sections 9 and 9A of the MMDR Act impose a restriction and limitation on the States' power to tax the exercise of mineral rights. The royalty paid for these rights is a statutory exaction of such rights."

Justice Nagarathna concurred with the Center's view that permitting states to levy taxes on mineral use would impede mineral development in the country.

She explained, "Royalty, as a compulsory exaction, fulfills all the criteria of a tax. Therefore, states are deprived of the power to impose a cess or any other levy on royalty or classify it as land revenue under Entry 49 of List 2. Such state levies on royalty contradict the goal of mineral development."

Justice Nagarathna further asserted that allowing states to tax mineral use or mining activities would result in double taxation.

She remarked, "Mineral value or mineral produce cannot be used as a basis for states to tax mineral-bearing land under Entry 49 of List 2. The term 'land' under the same entry does not encompass mineral-bearing lands, leading to double taxation—once by the state and again by the central Act under Section 9 of the MMDR Act. This is inconsistent with constitutional intent. Therefore, royalty cannot be used as a means to tax mineral-bearing lands, and states should not pursue this approach."