New Delhi: The Constitutional scheme on distribution of legislative powers between states and Centre is to ensure that there is “overall mineral development in the country”, rather than certain states with mineral wealth acting contrary to India’s overall welfare, Justice B.V. Nagarathna said as she dissented in a nine-judge bench ruling on states’ powers to tax mining lands and quarries.
The majority verdict, read out by Chief Justice of India D.Y. Chandrachud, ruled that states have the power to levy tax on mineral rights, asserting that the central law — Mines and Minerals (Development and Regulation) Act 1957 — does not limit this power. It ruled that states have the power to tax mining activities, and that collecting “royalties” from mining leaseholders does not interfere with the power to impose taxes.
The case before the nine-judge bench has a significant bearing on the distribution of legislative powers between the Union and the states on the taxation of mineral rights. The majority verdict has empowered states to now generate additional revenue in the form of taxes on mining activities as well as on the mineral-bearing land.
Among other things, the question before the court was whether royalty — as envisaged under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 — is a tax. Section 9 of this law says that the holder of a mining lease shall pay royalty in respect of any mineral removed or consumed from the leased area at specified rates.
The majority opinion held that there is a “conceptual difference” between royalties and taxes, and that royalties are based on specific contracts or agreements between the mining leaseholder and the lessor (the person who leases the property). Dissenting from the majority verdict, Justice Nagarathna concluded that royalty is in the nature of a tax, and asserted that the 1957 law is a “complete Code on the regulation of mineral development”.
Emphasising on the interest of mineral development in the country, Justice Nagarathna was of the opinion that since the royalty paid by a holder of a mining lease under the 1957 law is in the nature of a tax paid on mineral rights, the State legislature cannot, on the basis of royalty paid, levy any other tax, cess or surcharge on cess. In other words, she asserted that the State cannot impose levies over and above the amount of royalty received by them under the 1957 law.
Justice Nagarathna relied on the Sarkaria Commission report on Centre-State relations as well, which had observed that “exploitation of mineral resources will continue to increase”, and that there is a general agreement that minerals are national resources and they should be exploited and developed for the benefit of the country as a whole. “Only Union legislation can ensure such regulation and development of minerals,” it had said.
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‘Breakdown of federal system’
In her opinion, Justice Nagarathna explained that if royalty is not held to be a tax, taxes on mineral rights could be imposed by the States over and above payment of royalty on a holder of a mining lease.
“This would further imply that despite such a Parliamentary limitation, the States could pass laws imposing taxes, cesses, surcharge on cess, etc. on the basis of royalty which is in addition to payment of royalty,” she asserted. This, she said, would result in “mineral development in the country in an uneven and haphazard manner and increase competition between the States and engage them into what has been termed by Louise Tillin in a ‘race to the bottom’ in a nationally sensitive market”.
“There would be unhealthy competition between the States to derive additional revenue and consequently, the steep, uncoordinated and uneven increase in cost of minerals would result in the purchasers of such minerals coughing up huge monies, or even worse, would subject the national market being exploited for arbitrage,” she further explained.
The steep increase in prices of minerals, she said, would result in a hike in prices of all industrial and other products dependent on minerals as a raw material or for other infrastructural purposes.
She envisages a “breakdown of the federal system” in the context of mineral development and exercise of mineral rights, observing, “As a result, the overall economy of the country would be affected adversely which may result in certain entities or even non-extracting States resorting to importing minerals which would hamper foreign exchange reserves of the country.”
Justice Nagarathna also felt that it could lead to a slump in mining activity in states which have mineral deposits owing to huge levies that have to be met by holders of mining licenses. Another impact of this would be an unhealthy competition to obtain mining leases in States which have the mineral deposits and who do not wish to impose any other levy apart from royalty.
What does the law say
Entry 50 of List II of the Seventh Schedule to the Constitution gives states legislative competence to deal with taxes on mineral rights subject to “any limitations imposed by Parliament by law relating to mineral development”.
Regulation of mines and mineral development is listed under both the Union List (Entry 54 of List I) and the State List (Entry 23 of List II) of the Seventh Schedule.
Entry 54 of list I gives the Parliament the power to deal with “regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest”. Entry 23 of list II allows state legislatures to deal with “regulation of mines and mineral development subject to the provisions of List I with respect to regulation and development under the control of the Union”.
Accordingly, the Parliament enacted the Mines and Minerals (Development and Regulation) Act, 1957.
The majority opinion held that the 1957 law does not restrict states’ powers to tax mineral rights in any way under Entry 50 of the State List, because royalties are not tax and hence, royalties under the 1957 law are not a restriction on the states’ power to tax activities relating to mineral development.
On the other hand, Justice Nagarathna, in her dissenting opinion, observed that payment of royalty to the government is a tax. She explained, “It is not merely a contractual payment but a statutory levy under Section 9 of the Act…The liability to pay royalty does not arise purely out of the contractual conditions of a binding lease.”
She asserted that the states’ powers to impose taxes were “denuded” by the 1957 law, once it provided for collection of royalties, since she held it was a tax.
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How the issue reached SC
In the 1989 India Cement judgment, a seven-judge bench held that royalty is tax and the state legislatures lack competence to levy taxes on mineral rights because the subject matter is covered by the Mines and Minerals (Development and Regulation) Act of 1957.
However, a 2004 Constitution bench judgment of five judges ruled that the decision in the India Cement case stemmed from an inadvertent error and clarified that royalty is not a tax.
After both of these judgments, state legislatures exercised their legislative powers to impose taxes on mineral-bearing land in pursuance of Entry 49 of List II, which allows States to tax “lands and buildings”. States such as Rajasthan and Uttar Pradesh also sought to impose environment and health cess and fees for transporting coal and coal-dust collected from mines.
The constitutional validity of these levies was challenged before the High Courts, and made their way to the Supreme Court, which then referred the issue to a nine-judge bench.
‘Adverse impact on mineral development’
Examining entries in the seventh schedule, Justice Nagarathna observed that if a Parliamentary law such as the 1957 Act is enacted and deals with certain aspects of mineral development, to that extent the state legislature would not have the competence to pass any law on the said aspect.
Justice Nagarathna further opined that lands which comprise of mines and quarries or have mineral deposits do not fall within the purview of lands under Entry 49 of List II. She, therefore, rejected the contention of the States that value of minerals could be used as a measure to tax mineral bearing land under Entry 49 of List II.
This, the judge asserted, would amount to “double taxation” imposed by two different Legislatures: one, by the state legislature on the mineral bearing land under Entry 49 of List II, and again for conducting a mining operation under Section 9 of the 1957 Act, which is a Parliamentary law, but also paid to the State Government.
In her opinion, Justice Nagarathna ruled that the decision in the India Cement case was correct and that the 2004 judgment was incorrect and should be overruled.
Apart from the legal concerns, she also felt that the 2004 judgment “lost sight of the implication and the adverse impact that its view would have on mineral development in the country”.
Referring to the Sarkaria Commission report, Justice Nagarathna observed, “Therefore, the respective Entries in Lists I and II, namely, the Union List and the State List respectively, have been so drafted in order to ensure that there is overall mineral development in the country as a whole, rather than particular States possessing the mineral wealth acting contrary to the overall welfare of the country and against the economic interest of the other States.”
(Edited by Gitanjali Das)
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