Blow to ease of doing business

The Supreme Court’s (SC) judgment granting states the power to tax mineral rights and mineral-bearing lands was one thing, but giving this taxation retrospective applicability is quite another, and altogether unwelcome. The first instance — the apex court’s July 25 judgment — was in keeping with the principle of fiscal federalism with a well-reasoned distinction drawn between mining royalties and taxation. But Wednesday’s ruling rejecting a “prospective-levying-only” tether on the taxation powers, which the Centre and tax assesses sought, deals a body blow to the ease of doing business in India.

Mature tax jurisdictions avoid retrospective action when there is no intent to penalise for past wrongdoings, given how policy certainty remains a key consideration for businesses and their investment decisions. Indeed, grandfathering principles apply even in case of prospective policy changes, in order to protect those who had made investment decisions on the basis of past policy. This makes India’s case a double whammy for mining companies.

The chaos that could result is foreseeable since there is no route for companies to pass on the tax liability likely to arise to the end users. There are enough examples in India’s taxation history to demonstrate the perils of retrospective taxation, the most prominent one in recent times being the Vodafone case. The SC has sought to limit the damage by setting April 1, 2005, as the cut-off date, barring states from charging penalties and interests on these demands and allowing a 12-year payment period starting FY27. But these measures are hardly any reprieve.

The allure of windfall gains will be hard for states to resist, but they would do well to weigh this against the signalling value it would have for potential investors. Hurting investor confidence won’t impart mineral-rich but economically backward states the fiscal strength they need. The Centre can, of course, amend the Mines and Minerals (Development and Regulation) Act to circumscribe the states’ powers here, but that would be opening another Pandora’s box, and challenge the principles of federalism. States must keep their competitive edge in mind as they go about implementing the SC decision.

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