In 8:1 Verdict, Supreme Court Upholds States' Rights On Mineral Tax Royalty

The Supreme Court on Thursday upheld state governments' right to levy royalty on mineral-bearing land, reasoning they had competence and power to do so. This will benefit mineral-rich states like Odisha, Jharkhand, Bengal, Chhattisgarh, Madhya Pradesh, and Rajasthan, as their governments can now charge additional levies on mining companies operating in their territories.

The landmark 8:1 verdict was delivered by a bench led by Chief Justice DY Chandrachud, which ruled 'royalty' is not the same as 'tax'; Justice BV Nagarathna delivered the dissenting verdict.

The eight-judge verdict, read by the Chief Justice, said "royalty is a contractual (consideration) paid by lessee to lessor" and that Parliament "does not have power to tax mineral rights under Entry 50, List I".

"We hold that both royalty and debt rent don't fulfil the ingredients of tax," the Chief Justice said.

The verdict also said there is no provision in the MMDRA (the Mines and Minerals (Development and Regulation) Act) that "imposes limitations on state to tax minerals".

Justice Nagarathna said allowing states to tax mineral rights would lead to "unhealthy competition between states to derive revenue... the national market could be exploited... this would lead to a breakdown of the federal system, in the context of mineral development".

The centre had argued only Parliament has the power to impose taxes on minerals.

Right To Tax Affects Federal Balance?

In March, the Chief Justice had asked Solicitor General Tushar Mehta, appearing for the centre, if this contention affects distribution of power between centre and states as in the Constitution.

"Why does the statute not say 'this is the tax that the Union will be charging and, to that extent the power of state is denuded'... or something like that?" the court asked Mr Mehta.

"If such tax is imposed, it would be invalid or unconstitutional tax. There is an in-built statutory mechanism which says that this will be the amount and nothing more..." he responded, pointing to rates of 300 per cent and 500 per cent levied before the top court's 1989 verdict.

READ | "Why By Inference?" Supreme Court To Centre On Tax On Minerals

"To bring uniformity, the centre fixes the rate of tax," he submitted.

"It is a desirable argument - that for uniformity in taxes the centre can fix rates... But the question is if this impinges on federal distribution of power..." the Chief Justice replied.

The court subsequently said the Constitution does not give Parliament an "entire universe" of mineral development, and that states also had powers to regulate and develop mines and minerals.

"Should Not Dilute Taxable Areas"

In February the court underlined a "critical distinction" in this matter. 

READ | Can Parliament Impose Tax On Mineral Rights? What Supreme Court Said

The court pointed out "areas where states have power to tax is very limited under our Constitution" and that most of these are given to the central government. "...states have very few areas of taxation, like liquor. Therefore, these areas must not be diluted," the Chief Justice had reasoned.

Mineral Rights Tax Case Background

Over three decades ago a seven-judge bench had said the centre is the primary authority under the MMDRA. This was in response to a dispute between the Tamil Nadu government and India Cements; the company had secured a mining lease from the state and was paying royalty.

The state then imposed a cess in addition to the royalty. The company argued a cess on the royalty amounted to a tax on royalty, which was beyond the remit of state governments.

The top court then had held royalty as a tax and said "such a cess on royalty, being a tax on royalty, is beyond the competence of the state legislature". But, 15 years later, a smaller bench, in a similar case between the Bengal government and a mining company, said the opposite.

It claimed a typographical error in the 1989 verdict and said the phrase 'royalty is a tax' should be read as 'cess on royalty is a tax', and that the 1989 judgement held royalty is not a tax.

This matter has been in dispute since, with a clutch of 80+ petitions filed, and was finally referred to the Chief Justice Chandrachud-led nine-judge bench to decide if the 1989 verdict stands or there was, as the top court said in 2004, a typographical error in that ruling.

With input from agencies

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