The heart of the matter before the court was whether royalty is a tax or not.
Last week, a nine-judge Constitution Bench of the Supreme Court ruled on a matter that has been pending in the courts for a quarter of a century, one that will have wide-ranging ramifications on the running of a federal polity. On Thursday, the apex court ruled that states in India have the power to tax mining activities, and that their collecting “royalties” from mining leaseholders is entirely separate from, and does not interfere with, the power to impose taxes. As a direct consequence of this judgment (Mineral Area Development Authority v M/s Steel Authority of India), state governments in India can now generate additional revenues from mining activities as well as the land used to conduct these activities. The latest judgment upends the 1989 judgment (India Cement Ltd v State of Tamil Nadu) by a seven-judge Bench of the Supreme Court that had ruled that “royalty is a tax” and that states only have the power to collect royalties, not to impose taxes on mining activities.
The heart of the matter before the court was whether royalty is a tax or not. This distinction matters because of the division of legislative powers between the Centre and state governments in the Seventh Schedule of the Constitution. On the one hand, Entry 50 of the State List of the Seventh Schedule gives the states the exclusive power to make laws relating to “Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development”, and on the other hand, Entry 54 of the Union List gives the Centre the power over “Regulation of mines and mineral development to the extent to which… is declared by Parliament by law to be expedient in the public interest”. There is a central law — the Mines and Minerals (Development and Regulation) Act, 1957 (MMDRA) — and it 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 question is: If a state government is the entity leasing the land to a leaseholder, do such royalties come under the MMDRA as a form of tax? The apex court has ruled that royalty, as envisaged under Section 9 of the 1957 MMDR Act, “is not in the nature of tax”.
However, the ruling was not unanimous — it was an 8-1 split — and the judicial ruling is unlikely to be the end of the matter when it comes to actual implementation. For instance, Justice BV Nagarathna, the sole dissenting voice, pointed out that the verdict could lead to an “unhealthy competition” between states to derive additional revenue and consequently lead to an uncoordinated and uneven increase in cost of minerals that will ultimately have an adverse impact on India’s economy. Given the fractious nature of politics between the Centre and states, and among states, it is not hard to see why she cautioned that this verdict may lead to the “breakdown of the federal system” in the context of mineral development. What is needed now is for certain policy guardrails to obviate potentially adverse consequences of this verdict.
