Both Houses of Parliament recently passed the Mines and Minerals Development and Regulation Amendment Act, 2026. It seeks to reverse the Supreme Court’s nine-judge bench ruling in Mineral Area Development Authority v. Steel Authority of India, decided in 2024.
The 2024 judgment held that royalty paid by mining companies is not a tax, overturning a previous 1989 judgment. It held that state legislatures have absolute and exclusive authority to levy tax on mineral rights, subject only to a law enacted by Parliament. The ruling’s implications for state demand were made retrospectively applicable from 1 April 2005, with payments due starting in April 2026. This was seen as characteristic of an extractive state, given the Union had steeply increased royalty rates on mining companies since 1992 to compensate states in light of the 1989 judgment. Additionally, the 2024 judgment ruled that mineral-bearing land falls into the category of land, and that it is within the domain of states to tax it without any encroachment by Parliament.
The Mines and Minerals Development and Regulation Amendment Act (MMDR), 2026 has several provisions aimed at easing the regulatory burden and streamlining operations for mining companies in India. Removing the cap on the sale of minerals by captive miners, allowing miners to add additional minerals to an existing lease, and especially incentivising critical mineral exploration and production are all welcome changes.
Concerning the 2024 MADA judgment, however, two features of the MMDR Act merit discussion. First, it requires any tax, cess, or other such levy by states to be stipulated under conditions guided by the Union government. It invalidates retrospectively any uncollected state taxation on mining companies since the 2024 judgment. Further, the Act states that any collection by states so far remains with them and is not due for a refund to mining companies. Second, it empowers the Union government to regulate the land underlying the minerals, squarely reversing the Supreme Court judgment. Both these amendments are likely to be challenged in court, further dampening investment potential and business certainty in the sector.
Tax burden, lack of investment
The way forward requires both the Union and states to compromise on their current positions, build a framework rooted in cooperative federalism, and achieve sector-wide consensus. A way out could be a Minerals Council, in the style of the GST Council, that enables negotiation between the Union and states in a harmonised manner.
Mining in India resembles India’s pre-GST indirect tax architecture. It features multiple production-stage levies—royalty, District Mineral Fund (DMF) contribution, NMEDT contribution, state cess, auction premium, dead rent, transit fee, and GST—each with its own base, administering authority, and compliance process. This creates a cascading effect, raising the effective tax rate to 60-65 per cent for major minerals. It has adversely affected exploration and mining activity in the sector, as well as foreign investment, especially since the 2015 MMDR amendment shifted mineral block allocation from first-come, first-served (FCFS) to auctions, making India among the handful of countries in the world to shift away from the FCFS method.
In economics, the Laffer Curve shows that maximum government revenue from a tax can be achieved at a specific tax rate, called the optimum tax rate. Any rate higher or lower than this reduces revenue. The current tax rates in India’s mining sector may be beyond the revenue-maximising range. If there was a scope of increasing revenue further, we would expect more exploration and investment. However, exploration remains minimal, and output is flat. The mining sector’s share of India’s GDP has hovered around the 2 per cent mark over the last decade. The country imports 100 per cent of its lithium, cobalt, and nickel, and 60 per cent of graphite. As demand surges, this import dependence is only expected to grow.
Many of India’s major minerals are internationally price-linked commodities (iron ore, bauxite, and base metals). Given elastic demand and inelastic supply (miners cannot simply shift their investments elsewhere), domestic consumers of these minerals can switch to cheaper imports rather than buy from high-cost Indian miners. Thus, the heavy tax burden falls disproportionately on the domestic mining companies. This explains the lack of investment in the sector. The MMDR amendment attempts to reduce the scope for levying additional taxes and shift the sector to the revenue-maximising side.
However, the sector’s growth depends on factors beyond tax rates. Given the market failures associated with mining (environmental externalities, information asymmetry), governments typically intervene through regulation. But these regulations can themselves be a source of government failure. The set of individually justified interventions—such as forest clearance, tribal consent, clearances from state mining departments, and explosive-use clearance—can compound into extremely high transaction costs. These permissions can take anywhere between four and five years in India, compared to six months in leading mining economies. Parallel, time-bound clearance can solve this problem while addressing externalities.
Also read: The CNG hike nobody questioned is hiding India’s most expensive untold secret
A new mining regime
Reducing states’ scope to raise revenue from minerals in their jurisdiction is a genuine source of concern for them. A stable, predictable tax architecture, enabled by the Minerals Council, would reduce uncertainty, increase investment, and raise revenue for the states as well as generate corporate tax revenue for the Union.
By reducing the scope for taxing the land underlying minerals, the MMDR 2026 reduces states’ fiscal capacity to mitigate mining externalities. However, a relevant mechanism already exists: DMF contribution from mining companies is meant to mitigate the negative effects of mining, improve the welfare of communities affected by mining, and ensure mining regions benefit from mineral extraction.
However, recent CAG reports point to instances where DMF money was spent on villages not affected by mining, while no projects were implemented in some villages affected by mining. CAG audits in Chhattisgarh found poor planning, unfruitful expenditure, and money diversion. Ringfencing the money geographically, ensuring greater control over fund utilisation by the affected communities, outcome-based spending, and a mining community transition fund that helps mitigate the long-term intergenerational impact of mining closure could be the way forward.
Ultimately, the objective should be to create a mining regime that:
- Encourages investment and production
- Ensures that states have a predictable source of growing revenue
- Ensures that mining communities benefit from mineral extraction
- Allows governments to manage the externalities effectively
The proposed Minerals Council could provide a platform to negotiate a reasonable ceiling on cesses and structured revenue-sharing mechanisms between the Union and states. At the same time, it could ensure that unpredictable tax burdens and aggressive retrospective demands on mining companies do not dissuade capital in a sector where India is already a laggard. Less than 20 per cent of India’s geological potential has been explored. Since moving to the auction system for block allocations, much of the burden of early exploration has fallen on the government, especially the Geological Survey of India (GSI). Capacity challenges and a lack of exploration data to justify risk investment for the industry have further stymied the sector.
A stable and predictable tax regime, better-targeted DMF spending, and greater provision of public goods such as infrastructure and geoscience data can help achieve India’s mineral resilience while expanding the revenue base for both states and the Union. Aligning state revenue interests with the Union’s strategic goals would help attract global capital and private-sector participation, secure critical minerals, and allow both the mining industry and its many commercial downstream sectors to thrive.
Sarthak Pradhan and Shobhankita Reddy are researchers with the Takshashila Institution, Bengaluru. Their X handles are @PSarthak19 and @shobhankita, respectively. Views are personal.
(Edited by Prasanna Bachchhav)