Royalty is not tax: Supreme Court allows states to levy minerals cess

New Delhi/Mumbai, July 26, 2024 

Cites fiscal federalism to highlight power of states to tax 

States have the power to levy cess on mining and mineral-use activities, a nine-judge Constitution Bench of the Supreme Court ruled on Thursday. It also upheld that the royalty paid by mining operators to the Central government is not a tax.

The court in the 8:1 judgment also stated that states’ power to tax is not limited by Parliament’s Mines and Minerals (Development and Regulation) Act of 1957.

This verdict can help boost revenues of mineral-bearing states, mostly in eastern India. Industry, on the other hand, is seeking more clarity on the effective date of cess calculation, and if there will be any double taxation by states and the Centre.

The judgment that resolved an over three-decade old issue was delivered by the Bench comprising Chief Justice of India (CJI) D Y Chandrachud, Justices Hrishikesh Roy, Abhay S Oka, B V Nagarathna, J B Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma, and Augustine George Masih. Justice Nagarathna, in her dissenting verdict, said royalty is in the nature of a tax or an exaction.

The Supreme Court’s judgment has also provided clarity on the blurred lines of division of power between states and the Centre over taxing minerals. “Taxation is among the important sources of revenue for these states, impacting on their ability to deliver welfare schemes and services to the people. Fiscal federalism entails that the power of the states to levy taxes within the legislative domain carved out to them and subject to the limitations laid down by the Constitution must be secured from unconstitutional interference by Parliament,” CJI Chandrachud in the majority judgment.

S R Patnaik, partner (head-taxation) at Cyril Amarchand Mangaldas, said this verdict has provided crucial clarity that states are not violating their power by levying royalty as it is not a tax, rather it is a fee.

“States have the fiscal powers in managing natural resources. States have full autonomy to levy taxes on minerals and mineral-bearing lands, which can generate significant revenue. This ruling is particularly important for mineral-rich states that rely on these resources for economic development. The judgment has significant implications for both state and central governments in terms of fiscal federalism and resource management,” Patnaik said.

The apex court has thus overruled its 1989 judgment in the case of India Cement Ltd vs State of Tamil Nadu. However, Justice Nagarathna dissented on all the conclusions drawn by the majority judges, and said states do not have the legislative competence to levy taxes on mines and minerals-bearing lands.

Challenge ahead

While the judgement has cleared the confusion over the taxation of minerals in the country, sector experts and industry executives expressed concerns that it now posed new challenges for the already tax-burdened mining sector.

According to sector experts, the order will not only make mining non-viable for domestic players, but will also deter international mining companies from investing in India’s critical mineral mining sector. “With the new judgment, states are at liberty to impose additional taxes, making the sector less attractive for the industry. This will impede growth of the mining sector, particularly the critical minerals sector, which the central government is actively promoting,” said B K Bhatia, additional secretary general, Federation of Indian Mineral Industries (FIMI).

Retrospective or prospective?

During the pronouncement of the judgment, lawyers present in the courtroom asked the Constitution Bench if the verdict is retrospective or prospective, as a huge amount of recoveries will be done. The CJI then said that the Bench will look into this on Wednesday and told the lawyers to file a short note on this.

Patnaik said the judgment helps prevent potential double taxation, but leaves room for overlapping financial obligations.

“This distinction ensures that taxes and royalties are seen as separate financial obligations. As the court held that no provision limits individual state’s powers to levy taxes, it has not proposed amendment to the existing MMDR Act. There could still be instances of overlapping financial obligations, leading to double taxation scenarios that can burden mining companies and deter investments,” he said.

He added that the ruling may not only increase the cost for miners, but will also have a domino’s effect. “Mineral resources are used by industries like gas, oil, and construction which may pass on these costs to their products, thereby increasing the cost of such products/services,” he said.

Some industry executives from the cement sector noted it is early to comment on the order and that they will wait for finer details and study it. Cement, steel and other metal firms depend on mining leases for their raw materials sourced from multiple mineral-rich states of the country.

After over three decades

The Bench was grappling with a very tricky case, which has seen a batch of over 80 petitions and has divided two big benches earlier — one had five judges while the other was presided over by seven. The 35-year-old contentious question was whether states have the power to levy tax on mineral-producing land. How can the Mines and Mineral (Development and Regulation) Act be interpreted in this matter? And if “royalty” can be considered to be in the nature of a tax.

The original case dates back to 1992, when the Bihar government, through an amendment, imposed additional taxes on land revenue coming from mineral-bearing lands leased out to mining industries. Mining firms had opposed it.

In 1989, in the case of India Cements Limited versus State of Tamil Nadu, a seven-judge bench of the apex court had held that royalty was a tax.

However, a five-judge bench of the apex court ruled in 2004 in the State of West Bengal versus Kesoram Industries Limited case that there was a typographical error in the 1989 verdict, and that royalty was not a tax.

The matter was then referred to the nine-judge bench with eleven questions on whether “royalty” can be considered as being like tax and can the State Legislature while levying a tax on land adopt a measure of tax based on the value of the produce of land.

Analysing the entries under the Seventh Schedule of the Constitution, CJI Chandrachud said in the previous hearing that taxing power always remains with States in relation to minerals and it is never with the Union. “The States have very few areas of taxation, most of the taxing powers under the constitution are given to the Union, we must not dilute those areas,” he said.

The Court's deliberation revolved around Entry 50 List II, which grants states the power to levy taxes on mineral rights, but subjects it to limitations imposed by Parliament through laws related to mineral development.

Critical judgment

> SC resolves over three decades old case by citing tenets of fiscal federalism

> States have the power to tax mineral-bearing lands, quarries

> Royalty paid to the Centre by mining leaseholders is not tax

> Limitation or restriction on legislative power of states will be against the grain of the Constitution

> Whether the taxation by states will be retrospective or prospective to be decided on Wednesday

> Legal community cautions against potential double taxation on minerals by states and the Centre

[The Business Standard]