The Supreme Court of India has recently addressed a crucial issue regarding the taxation of mineral rights, overturning its 1989 verdict
- The 8:1 judgment affirmed that State Legislatures have the power to tax mining lands and quarries, independent of the Parliament’s Mines and Minerals (Development and Regulation) Act of 1957 .
Background of the Case
- India Cement Ltd v State of Tamil Nadu (1989): A seven-judge Bench heard a challenge by the company to a Tamil Nadu law imposing a cess on land revenues, including royalties.
- Cess: A tax levied in addition to the normally taxable amount
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Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDRA)
- It requires those who obtain leases to conduct mining activities to “pay royalty in respect of any mineral removed” to the individual or corporation who leased the land to them.
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- SC Ruling: Court held that states only have the power to collect royalties, not to impose taxes on mining activities.
- It said that the Centre has overriding authority over “regulation of mines and mineral development” under Entry 54 of the Union List to the extent provided by law (MMDRA in this case)
- States do not have the power to impose further taxes on the subject.
- Royalty is a tax: The royalty is a tax being a tax on royalty, is beyond the competence of the State Legislature
- State of West Bengal v Kesoram Industries Ltd 2004: In a similar case dealing with cesses on land and mining activities, five-judge Constitution Bench held that there was a typographical error in the India Cement decision — and that the phrase “royalty is a tax” should be read as “cess on royalty is a tax”.
- Court could not overrule: Bench in Kesoram Industries was smaller than the one in India Cement, the court could not overrule and rectify the position.
- In 2011: court took note of the apparent conflict between Kesoram Industries and India Cement — which had direct ramifications on the case before it.
- Nine Judge Bench: It decided to refer the matter to a nine-judge Bench to finally settle the legal position
- Statement “royalty is a tax”: This statement triggered events that led to the formation of a nine-judge Bench at the Supreme Court.
What’s Royalty?
- Royalty is the consideration paid by the proprietor of minerals either to the government or a private person
- It flows from a statutory agreement – a mining lease between a lessor and the lessee
- It represents a return of the grant of a privilege of the lessee of removing or consuming the minerals
- It is generally determined based on the quantity of the minerals removed
Key difference between royalty and taxes as separate concepts:
- Nature of Payment: A royalty is a payment to a property owner (lessor) in return of the lessee’s right to use the resources on the lessor’s property. While tax is a mandatory payment imposed by the Government
- Reason for Payment: Royalty is paid for the specific act of mineral extraction from the land, while tax is imposed as per various events or activities outlined by a law
- Legal genesis: Royalty arises out of an established lease agreement between two parties, while a tax is a creation of legislation.
Major conceptual differences between a royalty and a tax :
- Imposition: The proprietor charges royalty as consideration for parting its right to the minerals; while a tax is an imposition by the Sovereign
- Particular Action: Royalty is a due for a particular action that is extraction of minerals from the soil while tax is generally levied on a taxable event determined by law
- Imposed by Law: Royalty is foreclosed by a lease deed as compared to a tax that is imposed by law.
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About The Verdict Given By SC:
- Nine-judge bench examined the following questions:
- Whether royalties on mining leases can be considered a tax?
- Whether states have the power to levy royalty/tax on mineral rights post-enactment of the MMDR Act?
- Implication of the statement “royalty is a tax”:
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Seventh Schedule
- The seventh schedule under Article 246 of the constitution deals with the division of powers between the union and the states.
- It contains three lists- Union List, State List and Concurrent List.
- Entry 50 List II: Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.
- Entry 54 List I: Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.
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- If royalty is a tax then it has an impact on the states’ taxing power under list two of the seventh schedule of the Constitution
- But if it is not a tax then the state tax is not adversely impacted.
- So, the results will be that the states who have already enacted various tax laws imposing taxes on mineral bearing land…they will be entitled valid and the states will be entitled to collect the tax.
- Arguments made by states in court: The term “limitation” in Entry 50 List II (states’ taxing powers on mineral rights) should not imply a transfer of taxing power to the Parliament.
- Entry 50 List II limits states’ authority without enabling Parliament to levy taxes on mineral rights.
- Arguments by the central government: Entry 50 List II inherently limits state powers and should be interpreted broadly to align with the holistic management of national minerals. MMDR Act, by its existence, limits state taxing powers.
- Conclusions made by SC on mineral taxation:
- Royalties and dead rent do not fulfil the characteristics of a tax: A previous judgment in the India Cements case, which held royalty as a tax, was overruled.
- MMDR Act does not impose limitations: The bench also observed that the MMDR Act does not impose limitations on states’ taxing powers.
- Royalty is Not Tax: Royalty under Section 9 of the MMDR Act is not considered a tax.
- Entry 54 of List I: This list pertaining to the Union’s power over minerals, is regulatory and does not include taxing authority. States retain the legislative power to levy taxes on mineral rights.
- Term “land” in Entry 49 of List II (State List): It includes mineral-bearing lands, granting states the competence to tax such lands.
- Conclusion: State legislatures have the competence to tax lands containing minerals and can use the yield of mineral-bearing land as a measure for taxation.
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Arguments against the Judgment:
Justice Nagarathna disagreed with the majority on both these counts.
- Undermining interest of mineral development: Royalties under the MMDRA must be considered a tax in the interest of mineral development in the country.
- Purpose of the MMDRA: It was to spur mineral development and mining activities, and this aim would be defeated if states were given the power to impose additional levies and cesses (different types of taxes) on top of the royalties they collect.
- Balance was already made through MMDRA: States’ powers to impose taxes were “denuded ” after the MMDRA was passed as it gives states the power to collect taxes in the form of royalties, and otherwise gives Parliament and the Centre complete control over mineral development.
July 26, 2024
