The judgment of the Supreme Court dated 25 July 2024 in Mineral Area Development Authority and Anr. v. Steel Authority of India and Anr.[1] is a constitutional landmark that has significant consequences on the taxation of mineral rights, the interpretation of legislative entries in the Constitution and indeed the edifice of Indian federalism. The 9- Judge bench has by a majority of 8:1 (the majority opinion has been penned by Chief Justice Chandrachud, with Justice Nagarathna dissenting) clarified that royalty paid to mine owners under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) is not a tax, that the power of state legislatures to tax mineral rights has not been whittled away by the regulatory regime of the MMDR Act, that the power of states to tax mineral lands is not impacted by the MMDR Act and that mineral value can be a measure used by states to tax mining lands. These findings considerably alter the previous understanding of the relevant Constitutional provisions overruling the judgment in India Cement which long held the field. In terms of Union -State relations, along with the judgment in Mohit Minerals (also authored by then Justice Chandrachud), the judgment represents a significant change to the traditional judicial paradigm on how Union and State powers are interpreted.
FACTUAL BACKGROUND |
The Seventh Schedule of the Constitution of India allows the State Legislature to impose taxes on mineral rights (Entry 23, State List). However, this power is limited by and subject to the Parliament’s authority to regulate mineral development (Entry 54, Union List).
The MMDR Act was enacted by the Parliament to regulate mining and development of mineral resources in India. It grants significant regulatory powers to the Central Government, including the powers to grant mining leases, impose conditions on mining operations and levy royalties on extracted minerals.
The Supreme Court, sitting in a Constitution Bench, had previously held that royalty as provided for under Section 9 of the MMDR Act was a tax thereby restricting the taxation powers of the State Government[2]. However, this judgment was later doubted by the Court sitting in another Constitution Bench.[3] Following the ruling in Kesoram Industries, several States began levying taxes on mineral-bearing lands and mining activities.
The appellants in Mineral Area Development Authority and Anr. v. Steel Authority of India and Anr. challenged the constitutional validity of these State levies, raising questions on the appropriate division of taxation powers between the Union and the States with respect to mining of mineral resources.
RIVAL SUBMISSIONS MADE BEFORE THE SUPREME COURT |
The primary contentions raised by the Petitioners were:
Royalty paid under section 9 of the MMDR Act does not meet the criteria of ‘tax’ under Article 366(28) of the Constitution of India. It is the consideration paid for the right to mine and harvest minerals, not a tax imposed by the government.
The term “taxes on lands and buildings” specified in Entry 49, State List, has been interpreted to include mineral bearing lands. Minerals are a part of the land until they are extracted hence, the value of minerals can be used as a measure to tax mineral bearing land.
When States exercise their powers in pursuance of Entry 50, State List, the Parliament can only impose limitations. The Parliament does not have the power to levy taxes on the mineral rights.
The State being the proprietor of minerals, can receive royalty as payment and also impose taxes in its capacity as the sovereign.
The expression “any limitations” appearing in Entry 50, State List cannot be construed to mean prohibition. The Parliament can only limit the exclusive legislative powers of the State Legislature to levy tax on minerals but cannot prohibit them.
2. The primary contentions raised by the Respondents were:
Permission for mineral related activities is regulated by the MMDR Act, which prescribes royalties as consideration. This consideration is a requirement for accessing mineral resources. Any levy related to mineral rights is subject to limitations on the state taxation powers under Entry 50, State List.
The MMDR Act is a complete code and occupies the entire field relating to regulation of mines and mineral development, leaving nothing for the state legislature under Entry 23, State List.
It is immaterial whether royalty is designated as a tax. Any levy relating to mineral development, in so far as it is in relation to mineral rights, will serve as a limitation on the taxing power of the States under Entry 54, State List.
The MMDR Act contemplates all manner of levies, charges, imposts, or demands that can be legitimately provided for having a nexus with mineral rights. Therefore, the provisions of the MMDR Act will be treated as a limitation on the power of the States to demand or impose similar levies, imposts or demands of the same nature.
The State legislature's competence to tax mineral rights under Entry 50 does not extend to taxing other aspects such as mining activities and minerals produced.
The MMDR Act occupies the entire field of legislation covered by both Entries 23 and 50, State List.
Any levy imposed by the States based on the value of minerals produced fundamentally constitutes a tax on mineral rights under Entry 50 of List II. Given that the subject of mineral rights under Entry 50 of List II is restricted by a parliamentary law, broadly interpreting Entry 49 of List II to include mineral deposits within the definition of lands would result in an overlap between these two entries.
MAJORITY VERDICT |
Royalty is not a tax. It is compensation paid by Mining Lessee to the Mining Lessor (whether a private person or the Government) flowing from a statutory agreement between the lessor and the lessee representing a return for grant of privilege for consuming minerals. The compensation is determined on the basis of the quantity of minerals extracted. The court opined that dead rent, on the other hand is an alternative to royalty. Dead rent which is determined by the area of land covered by the lease, serves as a guarantee of income for the proprietor even if no mining occurs.
The Union lacks legislative competence to tax mineral rights under Entry 54 of List I. It has the power to impose a restriction (including a prohibition) on the right of states under Entry 50 of List II to tax mineral rights. States can thus impose taxes on mineral rights subject to any regulation of the same by union law. As a matter of fact, no existing provision of the MMDR Act imposes such a restriction.
States can also impose a tax on mineral lands under Entry 49 of List II based on mineral value or mineral produce. This power is not impaired by Entry 54 of List I or the MMDR Act.
DISSENTING VERDICT |
Disagreeing with the majority verdict, Justice Nagarathna upheld the pervious ruling that royalty is essentially a tax. She opined that the Parliament through the MMDR Act, has exclusive authority to regulate mineral development, and royalty falls under this purview. She emphasized that states cannot impose additional taxes on mineral bearing land. She further added that this would lead to uneven and unhealthy competition among states, potentially hindering the nations mineral development. The States might compete for mineral extraction by offering lower tax rates, leading to exploitation of resources and economic disparity.
C&M COMMENTS |
The modern age with its standardisation and uniformity has not really been kind to federalism. Even in the United States with its robust constitutional federal structure, post 1938, the inter-state commerce clause has been liberally interpreted to empower the Federal Government in ways that would have been unprecedented when the Constitution was adopted. The framers of the Indian Constitution were clear that Indian federalism would have a slant towards the Union government[4]. The early judgment s dealing with Union and state relations, such as State of West Bengal v. Union of India[5], have followed the same principle, interpreting constitutional ambiguities in favour of the Union and against the States. In recent years, the judgment in Mohit Minerals represented a significant change in its approach towards financial federalism where the Court, while holding that the recommendations of the GST council to have persuasive value rather than be binding:
“It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation[1]” |
In the present case it was argued by the Union, and reflected in the minority opinion, that different states imposing differing rates of taxation on mineral rights would impact the economic growth of the country. However, this argument was rejected in the majority opinion which held:
“248. … The legislative powers granted to the State legislatures cannot be whittled down impliedly based on the presumption that all taxes on mineral rights imposed by the State will have adverse economic consequences on mineral development. The Constitution has with foresight visualized this and empowered Parliament to impose “any limitations” on the subject of taxing mineral rights under Entry 50 of List II. |
249. It was contended by the respondents that States already have multiple revenue streams arising from the mining and minerals sector… The above levies are statutorily collected and the revenue flows to the State as part of the regime for mineral development in place under the MMDR Act. All of these levies, which are statutory in nature, cannot impliedly limit the legislative power of the state legislature to levy a tax on mineral rights. The States have a constitutional and sovereign authority to exercise their taxing powers, within the bounds of the Constitution, to raise adequate revenues for the welfare of the people.” |
The forthright approach of the majority opinion, which rejects the propensity to reduce the powers of the state on a potential “parade of horribles” is a welcome approach to interpret terms of our Constitution, of which federalism is part of the basic structure. The judgment confirms the existence of an important component of the revenue available to states to fulfil their obligations to their residents.
In its decision dated August 14, 2024, the Court has held that the judgment would operate retrospectively with effect from April 1, 2005, but with no penalty or penal interest payable between 2005 and the date of the judgment. The principle along with interest payable would be paid in installments over 12 years. States can choose not to collect past dues should they decide to do so.
It is not surprising that the judgment has led to some gloom in the stock market. What is important to remember is that the rights of the States to tax mineral rights remains subject to the regulation of the Union Parliament. Nothing stops Parliament from amending the MMDR Act to ensure that the powers of the States to tax mineral rights are whittled away. Should the union government do this, the power of the states to tax mining rights would not be impacted, as the judgment makes clear.
After the mess of retrospective dues is resolved one way or the other, the existing regulatory framework need not have a negative impact on the economy in the long run. States are aware that their power to tax mineral rights is subject to any law passed by Parliament to regulate the same. As such, they have every incentive to be cautious while imposing new taxes and encouraging union exemption- excessive taxation could result in killing the goose that lays the golden eggs.
****
[1] 2024 SCC OnLine SC 1796
[2] India Cement Ltd. v. State of Tamil Nadu [ (1990) 1 SCC 12]
[3] State of West Bengal v. Kesoram Industries Ltd [(2004) 10 SCC 201]
[4] See for example, the speech of Dr Ambedkar dated 4 November 1948 introducing the draft Constitution in Volume VII of the Constituent Assembly Debates.
[5] AIR 1963 SC 1241
Should you have any queries or comments on this alert please visit our LinkedIn page. You may also contact the authors below.
Comments