New Delhi: In a setback to the Centre, the Supreme Court in an 8:1 landmark ruling on Thursday held that royalty envisaged under the Mines and Minerals (Development and Regulation) or MMDR Act 1957 “is not in the nature of tax” and there is no specific provision in the Act that imposes limitations on the power of the states to tax mineral rights.
The apex court also ruled that the verdict passed by its Constitution Bench in 1989 was incorrect. In 1989, the seven-judge bench held that the primary authority over “regulation of mines and mineral development” lies with the Centre in accordance with laws enacted by Parliament, such as the MMDR Act, under Entry 54 of the Union list (List I). The bench said states only have the power to collect royalties under the MMDR Act and cannot impose any further taxes on mining and mineral development.
The top court’s verdict is set to give a boost to mineral-rich states like Jharkhand and Odisha, which can expect to ramp up revenue generation through royalties on minerals. Royalties are payments that the user party makes to the owner of an intellectual property or real property asset.
The case has its genesis in a dispute between India Cement Ltd and the Tamil Nadu government. India Cement secured a mining lease in Tamil Nadu and was paying royalties to the state government. The state government then imposed a cess in addition to royalty on India Cement, which moved the Madras high court against the measure, contending that a cess on royalty meant a tax on royalty, which was beyond the remit of the state legislature. The Tamil Nadu government, however, argued that the cess was by way of land revenue and on mineral rights, which it was empowered to impose.
The apex court will now hear the matter on July 27 to decide whether the ruling will apply prospectively or retrospectively. While majority judgment was delivered by Chief Justice D.Y. Chandrachud writing for himself and Justices Hrishikesh Roy, A.S. Oka, J.B. Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and
Augustine George Masih, Justice B.V. Nagarathna wrote a dissenting verdict cautioning about the adverse consequences of giving the right to states.
The majority ruling said: “The enumeration of taxes on mineral rights in List II is an entrustment to the states. This court is bound to be applied by the constitutional distribution of legislative powers”.
Entry 50 of List II deals with the subject, “taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development”.
“Entry 50 of List II is subordinated only to the extent of any limitations that may be imposed by Parliament by law relating to mineral development,” the ruling said, adding, “Unless Parliament imposes a limitation, the plenary powers of the state legislature to impose taxes on mineral rights are unaffected.”
“Parliament can impose limitations under Entry 50 of List II by means of statutory provisions” but pointed out that “there is no specific provision in the MMDR Act, which imposes limitations on the power of the states to tax mineral rights,” it held. “The scheme of the MMDR Act cannot buy a process of stretched construction, be read to limit the taxing powers of the state under Entry 50 of List II.”
Warning about the consequences of allowing states to levy the taxes, Justice Nagarathna, in her dissenting view, said states may then also try to levy taxes under Entry 49 of List II, which deals with “taxes on lands and buildings”.
She wrote: “This in turn will lead to a breakdown of the Federal system and under the Constitution in the context of mineral development and the exercise of mineral rights. It Will also lead to a slump in mining activity…”
Justice Nagrathna said: “Consequently, all states will again start levying taxes under Entry 49, List II… The circle will come around. Parliament will have to again step in to bring about uniformity in the price of minerals and the interest in mineral development so as to curb the states from imposing taxes, levy, et cetera, on mineral rights… There will then be legal uncertainty. It will cause adverse economic consequences, including on metal development in India.”
