News Excerpt:

The Supreme Court has clarified that royalties are not considered a tax, affirming that states possess the authority to tax mining activities independently.

More detail about news:

• This historic verdict was delivered by a Constitution Bench of nine judges with a majority of 8-1.
• It enables states to impose taxes on mining operations and the land utilized for such activities.
• The case, Mineral Area Development Authority v M/s Steel Authority of India, had been pending for over 25 years.

About the Controversy

• Section 9 of MMDR Act 1957

• • The controversy originated from Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDRA), which mandates leaseholders to pay royalties for minerals extracted from leased land.
  • The key issue was whether royalties, when paid to state governments leasing the land, constituted a tax.

• India Cement Ltd v State of Tamil Nadu

• • This issue was first addressed by the Supreme Court in the 1989 case, India Cement Ltd v State of Tamil Nadu, where a seven-judge Bench ruled that states could collect royalties but not impose taxes on mining activities, as the Centre had overarching authority under Entry 54 of the Union List.

• State of West Bengal v Kesoram Industries Ltd

• • However, in 2004, in State of West Bengal v Kesoram Industries Ltd, a five-judge Bench suggested a typographical error in the India Cement decision, asserting that the phrase “royalty is a tax” should be “cess on royalty is a tax.”
  • Due to the smaller bench size, it couldn't overrule the previous decision.

• Mineral Area Development Authority case

• By 2011, the Mineral Area Development Authority case, concerning a Bihar law imposing a cess on mineral-bearing land, further highlighted the conflict between the Kesoram Industries and India Cement decisions, prompting a referral to a nine-judge Bench.

Reasons for the Majority Ruling:

• The majority held that royalties are not taxes due to a fundamental conceptual difference.
• Royalties are payments based on contracts between the mining leaseholder and the lessor, often a private party.
• In contrast, taxes fund public welfare and infrastructure.
• The court emphasized that royalties are compensations for exclusive mineral rights, not public revenue.

States' Power to Tax Mineral Development:

• The court also examined whether states could tax mineral development activities or if this was solely under the Centre’s jurisdiction per the MMDRA.
• The Seventh Schedule of the Constitution divides powers between states and the Centre.
• Entry 50 of the State List grants states the authority to legislate on “Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.”
• Meanwhile, Entry 54 of the Union List gives the Centre control over “Regulation of mines and mineral development to the extent to which… is declared by Parliament by law to be expedient in the public interest.”
• The ruling clarified that since royalties are not taxes, the states' power to impose taxes on mineral rights remains intact under Entry 50.
• The MMDRA provides states with a revenue stream through royalties but does not restrict their taxation powers.
• This landmark decision reinforces states’ rights to independently tax mining activities, distinguishing royalties from taxes, and clarifying the Constitutional powers of states and the Centre regarding mineral development.

Why did Justice Nagarathna dissent?

• Justice Nagarathna disagreed from the majority opinion on both key issues in the case.
• Firstly, she argued that royalties under the MMDRA should be regarded as a tax to promote mineral development. Allowing states to impose additional levies and cesses (various types of taxes) on top of the royalties would undermine this objective.
• Secondly, the judge contended that the states’ authority to levy taxes was effectively nullified after the MMDRA was enacted because it permits states to collect taxes in the form of royalties. While the Central Government retains full control over mineral development.
• Finally, she asserted that Entry 49 of the State List does not grant states the authority to tax land containing minerals.