New Delhi: Prospective application of its nine-judge bench ruling that affirmed states’ power to levy taxes on mining may invalidate various state legislations, requiring them to refund the cess so far collected to the assesses, the Supreme Court said Wednesday as it ordered retrospective of its 26 July judgement.
“It would not be a constitutionally just outcome,” observed the bench led by Chief Justice of India D.Y. Chandrachud, in a decision that will potentially bring windfall gain to mineral-rich states such as Jharkhand, Odisha, Rajasthan, and Chhattisgarh.
“If we are to give a prospective application to the Mineral Area Development Authority (the July verdict), it would result in a situation where the legislation enacted by the States in pursuance of their plenary powers under Entries 49 and 50 of List II (states constitutional power to tax minerals) may conceivably be invalidated based on a position of law which has been overruled.”
It rejected the Centre and mining companies’ request to order prospective application of the judgment that marked a significant shift in the financial autonomy of states, providing them an additional source for revenue.
The July verdict, it added, answered a reference and resolved the conflict that arose due to a 2004 verdict, overruling a 1989 seven-judge bench decision that declared the Centre, not states, held primary regulatory authority under the Mines and Minerals (Development Regulation) Act, or MMDR Act, to collect taxes on mining activities.
Therefore, the bench felt, it would be “iniquitous” to apply the July judgement prospectively, while accepting the states’ request to order retrospective application of the law.
It, however, fixed stipulations about the application of its July order. While the states could impose the tax with effect from 1 April, 2005, the financial year following the 2004 judgement, the mining firms were permitted to make payments over the next 12 years. Payments by mining companies will begin on 1 April, 2026, the order specified.
The retrospective application of the judgement, as was demanded by the states, will heavily benefit the mineral-rich states.
The court, however, restrained the states from imposing penalties or additional interest on mining companies for past demands. This means entities involved in mining activities before 1 April, 2005 will not be liable for any tax payments.
The bench left it to the state’s discretion to determine whether it wants to forego the dues for the period before 25 July.
Providing clarity on the long-standing issue related to the legal framework governing mining royalties, the nine-judge bench by 8:1 majority had ruled in favour of the states. It said tax would be in addition to the royalty, which a lessee pays to the lessor as a contractual obligation.
Royalty is not a tax — as envisaged under the MMDR Act — and does not limit a state’s power to tax mineral rights, the court ruled. While the Centre is empowered to regulate mining development, the enumeration of taxes on mineral rights is an entrustment to the states, opined the majority decision.
Justice B. Nagarathna dissented from the majority view, warning against giving states the plenary rights to tax mining activities.
The July verdict came on a reference made to the nine-judge bench in 2011 on the issue of whether states have legislative competence to impose taxes on mining firms operating within their jurisdictions.
The reference was made owing to two conflicting judgements on the issue. In 1989, the SC, while deciding Tamil Nadu’s dispute with India Cement, held that states could collect royalties, but not impose additional taxes on mining and mineral development.
Deciding a case between West Bengal and Kesoram Industries Ltd, the SC in 2004 noted there was a typographical error in the 1989 judgement and held that “royalty is not a tax,” but “cess on royalty is a tax”.
In 2011, while hearing 85 cross-petitions on whether royalties constitute a tax under the MMDR Act, a three-judges bench referred the matter to a nine-judge bench for an authoritative pronouncement.
On the day when the judgement was delivered, a request was made by the Centre and mining firms to order prospective application of the judgement. This was opposed by the states following which both sides were heard 31 July.
In its arguments, the Centre underscored the impact of the judgement, saying retrospective application would lead to a cascade of price increases across sectors, ultimately burdening the consumers. PSUs could face liabilities running into thousands of crores, it said, warning about far-reaching consequences.
The states argued a prospective application would undermine the validity of state laws upheld by the court as a result of its judgement. They emphasised the need to balance the financial burden on industries by staggering or adjusting the interest component while ensuring dues were recovered.
In its Wednesday decision, the SC noted that after the 1989 judgement, the Centre enacted a central law — The Cess and Other Taxes on Minerals (Validation) Act, 1992 — to validate the imposition and collection of taxes made under the State legislations before 1991.
Also, the Centre increased royalty to compensate the States for the revenue losses, protecting them after the abolition of cess on minerals and rights post India Cement judgement.
Moreover, it observed that Kesoram is an operative fact based on which many States have already enacted tax statutes. “A pragmatic solution to reconcile the financial interests of the States and the assesses can be achieved by proscribing the States from demanding taxes pertaining to Entries 49, 50 of List II of the Seventh Schedule for the period before Kesoram,” the court said, striking a balance between the interest of states and mining companies.
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‘Delay shouldn’t be detrimental’
Taking into consideration the lapse of more than three decades since the 1989 India Cement judgement and more than a decade since the matter was referred to a larger bench in 2011, the SC said delay in hearings should “not be to the detriment of the assesses.”
“….equities will be balanced if the States waive the outstanding interest accrued on the principal due from the assesses,” it ordered, making its direction application to all companies, regardless of whether they approached the court or not.
It also observed that during the pendency of the reference, the states were refrained in an interim measure from taking coercive steps in recovery of any demands of tax.
“The payment or non-payment of the dues was thus made subject to the outcome of the appeals or petitions,” the SC said, reinforcing the settled legal position that a beneficiary of an interim stay order has to pay interest on the amount withheld or not paid under the interim order in the event the outcome goes against it.
(Edited by Tony Rai)