Fiscal Federalism: On Taxing Mineral Rights

It is not often that fiscal federalism finds a prominent place in judicial discourse. 

Fiscal Federalism

• The Supreme Court judgment, holding by an overwhelming majority of 8:1 that the States can tax mineral rights and mineral-bearing lands, is a truly landmark ruling, as it protects their legislative domain from interference by Parliament. 
• For decades, it was believed that the States were denuded of their power to impose any tax on mineral resources extracted from their land because of the prevalence of a central law, the Mines and Minerals (Development and Regulation) Act, 1957.
• Even though the right to tax mineral rights is conferred on the States through Entry 50 in the State List of the Seventh Schedule, it was made “subject to any limitations imposed by Parliament by law relating to mineral development”. 
• The Union government argued that the very existence of its 1957 law was a limitation on the States’ power to tax mineral rights, but Chief Justice of India, Dr. D.Y. Chandrachud, writing for the Bench, examined the Act’s provisions to conclude that it contained no such limitation. 
• The royalty envisaged by the 1957 Act was held to be not a tax at all.
• The Union was hoping that once royalty was accepted as a tax, it would wholly occupy the field and thus remove the States’ scope for taxing mineral rights. 
• However, the Court chose to see royalty as a contractual consideration for enjoyment of mineral rights. 
• Also, it ruled that States could tax mineralbearing lands under Entry 49, a general power to tax lands.

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Article 246 in Constitution of India

• 246. Subject-matter of laws made by Parliament and by the Legislatures of States.

1. Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List 1 in the Seventh Schedule (in this Constitution referred to as the “Union List”).
2. Notwithstanding anything in clause (3), Parliament and subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the “Concurrent List”).
3. Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the ‘State List’).
4. Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List.

Article 254 in Constitution of India

• 254. Inconsistency between laws made by Parliament and laws made by the Legislatures of States.

1. If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void.
2. Where a law made by the Legislature of a State with respect to one of the matters enumerated in the Concurrent List contains any provision repugnant to the provisions of an earlier law made by Parliament or an existing law with respect to that matter, then, the law so made by the Legislature of such State shall, if it has been reserved for the consideration of the President and has received his assent, prevail in that State:
   1. Provided that nothing in this clause shall prevent Parliament from enacting at any time any law with respect to the same matter including a law adding to, amending, varying or repealing the law so made by the Legislature of the Stat

• Purpose and Nature

  • Royalty: Payment for the use of resources.
  • Tax: Compulsory contribution to the government.
  • Example:
    • Royalty: Coal India Limited (CIL) pays royalty to state governments for extracting coal from mines.
    • Tax: Every working individual within the income tax bracket pays income tax to the central government.

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• Legal Basis

  • Royalty: Usually based on contracts or agreements.
  • Tax: Imposed by the Constitution and specific laws.
  • Example:
    • Royalty: ONGC pays royalty to states at pre-decided rates for oil extraction, set according to agreements.
    • Tax: GST is a tax imposed through the GST Act, implemented after a constitutional amendment.

• Flexibility in Rates

  • Royalty: Rates can be adjusted relatively easily.
  • Tax: Changing rates requires a legislative process.
  • Example:
    • Royalty: The Mines Ministry can revise royalty rates, as done for coal royalty rates in 2022.
    • Tax: Changing income tax slabs or rates requires passing a Finance Bill, usually done in the annual budget.

• Constitutional Status

  • Royalty: Not explicitly mentioned in the Constitution.
  • Tax: Clearly defined and categorized in the Constitution.
  • Example:
    • Royalty: Mineral royalty isn’t directly mentioned in the Constitution; it’s regulated by laws like the Mines and Minerals Act.
    • Tax: The 7th Schedule of the Constitution clearly mentions different types of taxes and their imposition powers (e.g., Entry 82 in Union List for income tax).

Collecting Information

• Proponents of fiscal federalism and autonomy will particularly welcome the fact that the judgment opens up a significant new taxation avenue for the States, and the observation that any dilution of the taxation powers of the States would adversely affect their ability to deliver welfare schemes and services to the people. 
• However, Justice B. V. Nagarathna, in her dissent, argues that if the Court did not recognise the central law as a limitation on the State’s taxation powers, it would have undesirable consequences as States would enter into an unhealthy competition to derive additional revenue, resulting in an uneven and uncoordinated spike in the cost of minerals; and purchasers of minerals paying too much, leading to an increase in the price of industrial products.
• Further, the national market may be exploited for arbitrage.
• Given these implications, it is possible that the Centre may seek to amend the law to impose explicit limitations on the States’ taxation power or even prohibit them from imposing a tax on mineral rights. 
• However, such a move may result in mining activities being left wholly out of the tax net, as the majority has also held that Parliament lacks the legislative competence to tax mineral rights.

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Conclusion

The Supreme Court’s landmark ruling empowers States to tax mineral rights, enhancing fiscal federalism and state autonomy, but raises concerns about potential economic imbalances and exploitation.

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