A new avenue for state revenue

“Royalty is not in the nature of tax,” Chief Justice D.Y. Chandrachud declared on Thursday morning. He was pronouncing the judgement in one of the oldest nine-judge bench cases in the Supreme Court—Mineral Area Development Authority v Steel Authority of India. The Chief wrote on behalf of himself and seven of his brother judges. Justice B.V. Nagarathna authored a dissenting opinion. 

The majority also held that states have the sole authority to tax mineral-bearing land. The judgement is being celebrated as a “big win” for state governments, because it effectively opens up another window of revenue for them. For mineral-rich states like Jharkhand, Odisha and West Bengal, this legal battle had assumed greater significance in a post-GST world. 

The case turned on three entries in the Seventh Schedule: Entries 49 and 50 of the State List and Entry 54 of the Union List. Entry 49 of the State List allows states to tax “land and buildings” and Entry 50 permits them to tax “mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.” Entry 54 of the Union List gives the Centre the power to regulate mines and minerals. (For a breakdown of the case’s complicated legal history and what transpired in Court, I urge you to read my colleague Advay’s detailed coverage.)

In a far-reaching finding, the majority held that Entry 54 only gives the Union the power to “regulate” mines and minerals and not tax it—the power of taxation lies exclusively with state governments under the “general” Entry 49 and the “specific “ Entry 50. The Union had claimed that states’ authority to tax minerals has been limited by the MMDR Act, 1957, which prescribes the royalty that states can charge mine lease-holders. Here, the Union was on the same side as a coalition of mining companies, who were resisting a double whammy of royalty and a tax. But the majority held that the MMDR Act, as it stands, was not a limitation imposed by Parliament within the meaning of Entry 50. 

While finding that royalty is not a tax, the Chief’s judgement stressed on the “conceptual difference” between the two: royalty is a contractual payment while tax is an “essential and inherent attribute of sovereignty” through which revenue is raised for public expenditure. Justice Nagarathna was not on the same page. In line with the mining coalition’s arguments, she opined that royalty was a “compulsory exaction” under the MMDR Act and was therefore a form of tax. 

The majority relied on the “fiscal federalism” of the Seventh Schedule to rationalise its stance—the idea that there is a strategic allocation of powers to ensure that each tier of government has the means to fulfil its role. They also brought up the “resource curse” of states like Jharkhand, Chhattisgarh and Odisha, which have some of the lowest per capita incomes in the country despite being mineral-rich. 

Interestingly, even Justice Nagarathna adopted an equity-based approach in her dissent. She cautioned that permitting states to tax under Entry 49 could engage them in a “race to the bottom” in a “nationally sensitive market.” It could pit mineral-rich states against others which aren’t as blessed. Additionally, she predicted a steep increase in prices of minerals and industrial products. 

There are already reports of the decision causing alarm in the power sector—for instance, the downstream effect of an additional levy on coal would be increased electricity tariffs. 

It’s likely that the Union will take action soon, backed by the fact that all judges agree on one point: Parliament can impose limitations—even prohibitions—on the power to tax under Entry 50. The more immediate battle is the one on Wednesday next week, when the bench will reassemble to decide whether the judgement will apply prospectively or retrospectively. Retrospective application could lead to a hefty income for state governments. 

States will also be watching closely to see if Parliament will amend the MMDR Act or create fresh legislation to clamp down on their power of taxation. For now, though, the royalty-tax riddle has finally been solved after 25 years of uncertainty.