The Supreme Court verdict on States’ power to tax mining activities | Explained

Supreme Court ruling clarifies State authority to tax minerals, upholding federalism principles, with implications for mineral-rich states. Follow more live updates on The Hindu

The story so far:

In a landmark ruling on July 25, the Supreme Court affirmed that States have the legislative authority to impose taxes on minerals in addition to the royalty levied by the Centre. Upholding the principles of federalism, the verdict clarified that the power of State legislatures to tax mineral activities within their respective territories is not constrained by Parliament’s Mines and Minerals (Development and Regulation) Act, 1957 (1957 Act). The case which has been pending for more than a quarter century was decided by an 8:1 ruling with Chief Justice of India (CJI) D.Y. Chandrachud authoring the majority opinion. Justice B.V. Nagarathna gave a dissenting opinion where she cautioned that allowing States to impose additional levies could hinder the development of the nation’s mineral resources and disproportionately advantage mineral-rich States.

Section 9 of the 1957 Act requires those who obtain leases to conduct mining activities to “pay royalty in respect of any mineral removed” to the individual or corporation who leased the land to them. The key question for consideration was whether the royalties paid by mine leaseholders to State governments under the 1957 Act should be classified as “tax.” Additionally, the court needed to determine whether the Centre could impose such charges or if the States possessed the sole authority to levy them within their jurisdictions.

The case has its genesis in a dispute between India Cement Ltd and the Tamil Nadu government which arose after the company secured a mining lease in Tamil Nadu. Although India Cement was already paying royalties, the government imposed a cess — an additional tax on land revenues, including royalties. The company challenged this in the Madras High Court contending that the cess on royalties effectively constituted a tax on royalties, the imposition of which exceeded the State’s legislative authority. In 1989, a seven-judge Bench of the Supreme Court inIndia Cement Ltd. vs. State of Tamil Nadu decided in favour of India Cement by reasoning that States only have the power to collect royalties and not impose taxes on mining activities. It pointed out that the Union government exercises overriding authority over the “regulation of mines and mineral development” under Entry 54 of the Union List, as specified by law (in this case, the 1957 Act). Thus, States are not empowered to levy additional taxes on this subject.

Over a decade later, a five-judge Bench in 2004, while hearing a similar dispute between West Bengal and Kesoram Industries Ltd held that there was a typographical error in the India Cement decision and that the phrase “royalty is a tax” should be read as “cess on royalty is a tax”. However, since the Bench was smaller than the one in the India Cement case, it was unable to overrule or amend the previous ruling.

In 2011, a three-judge Bench led by former Chief Justice S.H. Kapadia, while examining a challenge to a Bihar law imposing a cess on land revenue from mineral-bearing lands, recognised the conflicting precedents set by Kesoram Industries and India Cement. It accordingly referred the issue to a nine-judge Bench to definitively settle the legal position.

The majority ruling clarified the distinction between royalty and tax. It defined royalty as the “contractual consideration” paid by the mining lessee to the lessor (who may also be a private party) for the right to extract minerals. In contrast, a tax was characterised as an “imposition by a sovereign authority.” The judges underscored that taxes are determined by law and can only be levied by public authorities to fund welfare schemes and public services. Meanwhile, royalties are paid to a lessor in exchange “for parting with their exclusive privileges in the minerals”.