State’s power to tax mines and minerals: Judgement Summary
Judges: D.Y. Chandrachud CJI, Hrishikesh Roy J, A.S. Oka J, B.V. Nagarathna J, J.B. Pardiwala J, Manoj Misra J, Ujjal Bhuyan J, S.C. Sharma J, A.G. Masih J
On 26 July, in a 8:1 majority, a nine-judge Constitution Bench of the Supreme Court held that states have the power to levy tax on mines and minerals. The Bench held that the “royalty” collected by state governments under Section 9 of the Mines and Minerals (Development & Regulation) Act, 1957 (MMDRA) is not a tax. The judgement overruled a 35 year old decision, India Cements v State of Tamil Nadu (1989), which had declared that royalty is a tax.
The nine-judge decision now opens avenues for the state legislatures to collect royalty, along with tax on major minerals, and on mineral bearing land based on the value of the minerals extracted there.
The majority judgement was authored by Chief Justice D.Y. Chandrachud. Justice B.V. Nagarathna authored the dissenting judgement.
Background
On 28 December 1957, the Union Government enacted the Mines and Minerals (Development and Regulation) Act, 1957 (‘the Mines Act’). Under this, the control of mines and minerals was brought under the ambit of the Union. Section 9 of the Act stated that mining lease holders have to pay royalty to the Union government for any “mineral removed or consumed” from the leased area.
On 19 July 1963, the Tamil Nadu government granted a mining lease to India Cement Ltd., a public limited company for extracting limestone and kankar. The royalty was fixed under the Mines Act. Meanwhile, under Section 115(1) of the Madras Panchayat Act, 1958 (‘Madras Act’), imposed a cess on the land revenue paid to the Union Government.
India Cement challenged this provision in the Madras High Court, claiming that the Tamil Nadu government lacked the legislative competence to levy cess on royalty. The Madras High Court upheld the law.
India Cements appealed against the decision in the Supreme Court. On 25 October 1989, in India Cement Ltd v State of Tamil Nadu, a seven-judge bench of the Supreme Court held that the royalty was indirectly related to the minerals extracted. The decision found that “royalty is a tax” under the Mines Act. A cess on royalty being a tax on royalty was beyond the State’s legislative competence since the Union’s Mines Act “covers the field.”
On 15 January 2004, a five-judge bench of the Supreme Court, in State of West Bengal v Kesoram Industries Ltd (‘Kesoram Industries’), by 3:2 majority, held that there had been a grave, “inadvertent” clerical error in the text of India Cements. The majority judgement held the Bench had mistakenly written that “royalty is a tax” while meaning that “cess on royalty is a tax.” They noted that India Cement had relied on case laws which had clearly stated that royalty was not a tax.
The Court recorded that this “typographical error” had thrown jurisprudence in disarray. They clarified that royalty was not a tax since even a private owner of the property, who is not entitled to charge tax, could charge royalty.
Meanwhile, in May 1999, a writ petition was filed challenging the Bihar Coal Mining Area Development Authority (Amendment) Act, 1992. It imposed additional cess and taxes on land revenue from mineral bearing lands. This would be the genesis of a case called Mineral Area Development Authority v Steel Authority of India, which would eventually lead to the creation of the current nine-judge Constitution Bench. On 7 April 2004, the Court referred Mineral Development Area Authority, to a three-judge bench given the “far reaching implications” of the constitutionality assessment.
On 30 March 2011, a three-judge Bench consisting of Justices S.H. Kapadia, K.S. Panicker Radhakrishnan and Swatanter Kumar stated that there was a “prima facie” conflict between the decisions in India Cements and Kesoram Industries. They referred the matter to a nine-judge bench.
This is the second-oldest pending Constitution Bench decision in the Supreme Court and would have been pending for 9044 days by the first day of hearing on 27 February 2024.
Is royalty a tax?
Majority: Royalty is conceptually different from tax. Royalty under Section 9 of the MMDRA is “in respect of mining leases.” It is paid to the landowner out of a contractual obligation between a landowner and the lessee. The landowner may be the state government or a private person. “Royalty” was prescribed by the Union government under Section 9 to “ensure a certain level of uniformity in mineral prices.” The fact that the royalty is prescribed does not make it a “compulsory exaction.” Royalty “is not for public purposes, but a consideration paid to the lessor for parting with their exclusive privileges in the minerals.” In contrast, tax is a compulsory payment statutorily due to be paid to the government. The judgement explained three fundamental differences between royalty and tax:
- Royalty is charged by a proprietor; tax “is an imposition of a sovereign”
- Royalty is a consideration; tax is levied in a “taxable event” determined by law
- Royalty arises from a lease deed; tax is imposed by an authority of law
Dead rent under Section 9A is paid instead of royalty in instances where minerals are not extracted from the land. The same principle extends to dead rent, which is also not a tax. Mining companies had argued that “royalty” and “dead rent” were pre-decided by Parliament, and thus are in the nature of tax. Accordingly, India Cements incorrectly held that royalty was a tax and was overruled.
Dissent: Royalty under Section 9 is not a contractual payment, it is in the “nature of tax.” It is a statutory levy under the MMDRA to be paid to the state government. Payment of royalty being compulsory “makes it a tax as the rate of royalty is fixed by the Central Government as per Section 9 of the MMDRA.” Royalty does not arise out of a lease deed, it is a “compulsory exaction” to be paid to the State government who owns the land. The construction of the MMDRA read in conjunction with other entries in the Union and state list “met all the parameters of a tax.” Similarly, dead rent under Section 9A being in the nature of a compulsory levy will also be in the nature of tax.
Can state governments tax mines and minerals under Entry 50?
Majority: Entry 50 says that the state legislature can collect tax on “mineral rights” subject to “any limitation” by Parliamentary law on “mineral development.” The MMDRA is one such law. “Mineral rights” are rights of any person who has an interest in the “mineral land.” This can be the owner of the land or the lessor. The law on “mineral development” is passed by Parliament as per Entry 54 of the Union List. The state’s taxing power can be controlled “by a non-fiscal enactment by Parliament relating to the development of minerals.” This is to ensure that “exercise of the taxing power by the states does not adversely affect the development of minerals.”
The Union had argued that the taxing power of the state is diluted by the MMDRA, passed in the exercise of Entry 54. The majority held that there is “no direct conflict between the taxing powers of the States under Entry 50” and the regulatory powers of the Union. Entry 50 is only limited to the extent that the law on mineral development limits it to. If Parliament makes a limitation, the state’s are bound to abide by them. The state’s power to levy taxes on “mineral rights” is “unaffected” in the absence of such limitations Such limitations should be “expressed and specified.” “The scheme of the MMDRA cannot by a process of stretched construction be read to limit the taxing powers of States” under Entry 50. Section 9 of the Act which prescribes the “royalty” is not a limitation.
The observation does not stop Parliament from creating new limitations on this taxing power, stating that “any limitation” is expansive enough to include “all” or “every” limitation. The expression “any limitations” is wide enough to include all limitations and restrictions, including prohibiting the taxing power entirely.
Dissent: The limitation on taxing power is on the basis of laws for “mineral development” which Parliament is empowered to enact under Entry 54 of the Union List. Entry 54 is a general entry which does not expressly provide taxing authority to Parliament. However, when juxtaposed with the MMDRA, a limitation on states’ taxing power is evident. “Mineral development” has to be traced to the “entire architecture of the MMDRA which serves as limitation of the taxing power.” The provisions for collecting royalty and dead rent under Sections 9 and 9A are such limitations. “The Act itself has to be construed as a limitation on the power of the States to demand or impose levies.” Entry 50 of the State List “is a recognition of parliamentary superiority.”
Parliament can impose “any limitations” up to the extent that a state can be prohibited from collecting tax. States can tax mineral bearing lands under Entry 50 only for those minerals that are not covered under the MMDRA. These are “minor minerals.” Parliament determines the “royalty” only for major minerals under the MMDRA.
Can State Governments levy tax on mineral land based on the value of the minerals under Entry 49?
Majority: Entry 49 of the State List includes tax on lands and buildings. The word “land” in this Entry includes “land of every description.” Entry 49 of the State List contemplates taxation of land “as a unit, irrespective of the use to which it is put.” This allows state legislatures to levy tax on mineral bearing land. In simpler words, mineral bearing land is included within Entry 49, even though it expressly does not mention it. Lands include everything below and above the surface. “Therefore, constitutionally speaking sub-soil minerals also form part of land.” There is a fundamental difference between Entry 49 and 50. Entry 49 has to do with taxation of land, whereas, Entry 50 has to do with taxation of mineral rights. Thus, it cannot be said that taxation of mineral land under Entry 49 is impermissible because it is covered under Entry 50. Further, the MMDRA cannot limit the power to tax under Entry 49 because it is not subject to any Parliamentary law.
Taxes on land and buildings are decided based on the “income derived” from it. Similarly, state legislatures have the discretion to determine the tax based on the value of the mineral. This is permissible as long as there is a relationship between the “measure” and “nature of tax.” Here, the nature of tax means the kind of tax that is sought to be levied. Entry 49 is in the nature of tax on land whereas Entry 50 is the tax on mineral rights.
The Union government and mining companies had urged that Entry 49 cannot be used to tax mineral land as it is covered by Entry 50. “The Constitution envisages the imposition of limitations by Parliament on the legislative field of the state of taxes on mineral rights, and not taxes on lands,” the judgement stated.
Dissent: There is no limitation on the state legislature’s power to tax land and buildings. However, the power to tax mineral rights is subject to limitations imposed by a law relating to mineral development designed under Entry 54 of the Union List. Entry 49 and 50 operate on distinct legislative fields. Entry 49 cannot be used to tax mineral bearing land, as they are already being taxed through royalty and dead rent. The value of the mineral produced cannot be used as a reference to impose tax on mineral bearing land under Entry 49. “If so, Entry 50 – List II would be rendered redundant.”
On the other hand, royalty, which is in the nature of tax, is determined on the basis of the value of the minerals extracted. Such mineral bearing land cannot be taxed within the scope of Entry 49, where the quantum of tax is calculated on a similar basis. There cannot be tax on mineral bearing land “twice over” as it will lead to “double taxation.” This is “impermissible having regard to the constitutional intent and scheme of Entries in the Lists.”
Dissenting opinion: Kesoram Industries “liable to be overruled”
In Kesoram Industries, a five-judge Constitution Bench doubted the correctness of the statement “royalty is a tax” as quoted in India Cements. It attributed the statement to a “typographical error.” In doing so, the five-judge bench failed to “appreciate the entire reasoning” of India Cements. The concurring opinion authored by Justice Oza in India Cements also concluded that royalty was in the nature of tax. Further, it relied on the dictionary meaning of “royalty” to conclude that it was not in the nature of tax. It did not take into account Entries 50 and 54 of the State and Union list respectively. A dictionary meaning can only be referred to if there is no other statutory definition or interpretation.
India Cements, a seven-judge bench decision, was doubted in Kesoram Industries, a smaller bench of five-judges. Though there is no strict rule that prohibits smaller benches from doubting decisions of a larger bench, there must be a “flagrant violation of law, a patent error or a blatantly erroneous approach” for a smaller bench to overturn a larger bench decision. This was not the case in India Cements.
Lastly, Kesoram Industries failed to consider the “adverse economic consequences” on mineral development in India.
Dissenting opinion: Judgement has potential to have an adverse impact
Despite limitations imposed by Entry 54 of the Union List, the MMDRA; and Section 9, states can now collect tax “over and above payment of royalty.” Despite Parliamentary legislation, states could now impose taxes, cess, surcharges, etc. Further, as tax can now be collected under Entry 49 and 50 of the State List, there are more avenues to collect tax. This will lead to mineral development being carried out in a “haphazard manner and increase competition between States.”
This will facilitate “unhealthy competition” resulting in an “uneven and uncoordinated increase” in the cost of minerals. Consequently, there will be a steep increase in prices of industrial and other products that rely on minerals as a raw material. The overall economy of the country will be affected adversely. Non-extracting mineral states will prefer importing minerals hampering the foreign exchange reserves.
“This would lead to a breakdown of the federal system envisaged under the Constitution in the context of mineral development and exercise of mineral rights.” A lasting impact would be an overall slump in mining activities.