Royalty not tax: SC grants states power to levy taxes on mineral rights

The Supreme Court has affirmed that states have the authority to levy taxes on mineral rights and would not be limited by the Mines and Minerals (Development and Regulation) Act 1957 (MMDR Act). A nine-judge bench concluded that royalties and dead rent did not fulfil the characteristics of a tax, therefore did not come under the MMDR Act.

The matter was referred to a nine-judge bench in 2011 due to perceived conflicts in previous judgments by five-judge and seven-judge benches in related cases.

What was the SC ruling?

This ruling came from a nine-judge constitution bench, with an 8:1 majority, clarifying the extent of state powers in the realm of mineral taxation, according to a report by Live Law. Chief Justice of India DY Chandrachud authored the majority judgment, which was supported by seven other justices. Justice BV Nagarathna provided the lone dissenting opinion.

 

The nine-judge bench examined the following questions:

1. Whether royalties on mining leases can be considered a tax?
2. Whether states have the power to levy royalty/tax on mineral rights post-enactment of the MMDR Act?

This landmark ruling clarified that states can levy taxes on mineral rights, which could potentially lead to varied tax regimes across India.

Speaking to reporters, Rakesh Diwedi, lawyer of Jharkhand, Odisha and Assam, explained, "If royalty is a tax then it has an impact on the states' taxing power under list two of the seventh schedule of the Constitution but if it is not a tax then the state tax is not adverse impacted. So, the results will be that the state who have already enacted various tax laws imposing taxes on mineral bearing land...they will be entitled valid and the states will be entitled to collect the tax." 

Arguments made by states in court

Senior Advocate Rakesh Dwivedi, representing Jharkhand, argued that the term "limitation" in Entry 50 List II (states' taxing powers on mineral rights) should not imply a transfer of taxing power to the Parliament. Meanwhile, Senior Advocate Vijay Hansaria, for the Mineral Development Authority of Uttar Pradesh, emphasised that Entry 50 List II limits states' authority without enabling Parliament to levy taxes on mineral rights.

Arguments by the central government

The Union, represented by Attorney General R Venkataramani and Solicitor General Tushar Mehta, contended that Entry 50 List II inherently limits state powers and should be interpreted broadly to align with the holistic management of national minerals. They argued that the MMDR Act, by its existence, limits state taxing powers.

Conclusions made by SC on mineral taxation

The Supreme Court concluded that royalties and dead rent do not fulfil the characteristics of a tax. A previous judgment in the India Cements case, which held royalty as a tax, was overruled. The bench also observed that the MMDR Act does not impose limitations on states' taxing powers. Royalty under Section 9 of the MMDR Act is not considered a tax.

The court also found that:

• Entry 54 of List I, pertaining to the Union's power over minerals, is regulatory and does not include taxing authority. States retain the legislative power to levy taxes on mineral rights.
• The term "land" in Entry 49 of List II (State List) includes mineral-bearing lands, granting states the competence to tax such lands.
   

Ultimately, the bench ruled that state legislatures have the competence to tax lands containing minerals and can use the yield of mineral-bearing land as a measure for taxation.

The Supreme Court has directed the relevant authorities to proceed with implementing this judgment, ensuring compliance with the new legal framework established by this decision.

On July 31, the top court will consider the issue of recovery of taxes levied by the central government till date on minerals and mines.