The Supreme Court has delivered a historic verdict on a mining-related case that has been pending for more than 25 years. The verdict has empowered the State government to levy taxes on mining companies.
In a landmark judgment on July 25, a nine-judge constitution bench of the Supreme Court upheld the right of States to levy taxes on mining activities, recognizing that ‘royalty’ and ‘taxation’ are different, recognizing both as separate. In the case of Mineral Area Development Authority vs Steel Authority of India, the nine-judge constitution bench of the Supreme Court gave this decision in an 8:1 split. Eight judges including Chief Justice of India D Y Chandrachud voted in favor of this decision while Justice B V Nagarathana disagreed. The decision, pending for more than 25 years, finally clarifies that States can levy additional taxes on mining activities and land used for such purposes.
The decision is a significant development in empowering States to generate more revenue, which can be used to meet local needs and mitigate the adverse effects of mining. The distinction between royalties and taxes was at the centre of the court's decision. Royalties are payments made by mining leaseholders to the lessee on the basis of a specific agreement as stipulated under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDRA). These payments are made in exchange for the right to extract minerals and are thus seen as compensation for the use of land and resources. Taxes, on the other hand, are more commonly imposed by governments and used to fund public services and infrastructure.
The eight judges highlighted that royalties are contractual rather than tax in nature, which does not restrict States from imposing additional fees. Justice Nagarathna, in his dissent, argued that royalties should be considered a form of tax to support mineral development and that allowing States to impose further taxes could hamper this objective. The Seventh Schedule of the Constitution of India was important in this decision. It gives power to States to impose taxes on land and buildings. In contrast, central listing gives the Centre control over mines and mineral development. The eight judges were of the view that MMDRA does not limit the power of States to tax mineral rights, as it does not classify royalty as a tax. This interpretation effectively restores the right of States to tax mining activities under the State list. This decision will significantly increase the ability of States to tax mining activities beyond royalties. This additional revenue can be crucial for States to invest in infrastructure, healthcare, education and environmental protection. Furthermore, it can help reduce negative impacts of mining, such as environmental degradation and displacement of local communities.
By empowering States to impose taxes, the government encourages a more balanced approach to resource management. This could lead to more opportunities for States to enforce stricter environmental regulations and promote sustainable mining practices. Of course, this is possible only if there is no corruption in all this and if the State government has a sincere desire for sustainable development.
In 1963, India Cement Limited was granted a mining lease by the Government of Tamil Nadu and royalties were being paid to the State under Section 9 of the MMDRA. Later, in addition to royalty, the State government imposed a cess on India Cement under Section 115 of the Madras Panchayat Act, 1958. After several hearings and appeals, when the case resumed in the Supreme Court on February 27, 2024, senior counsel Rakesh Dwivedi, representing the Mineral Sector Development Authority - the petitioner, argued that royalty cannot be treated as a tax under the MMDRA, as the tax is levied only by the government. On the other hand, royalties can be paid to private individuals. According to Dwivedi, if royalty is treated as a tax, the Centre would have to tax a private individual for mining, which cannot be allowed. He also argued that states have the right to levy taxes on mines and mineral development based on entries 49 and 50 of the State list.
Referring to the phrase ‘limitations imposed by Parliament’ in entry 50, Dwivedi also argued that it clearly does not allow the Centre to completely usurp the powers of State governments to tax mineral development. Entry 49 gives States the power to levy ‘taxes on land and buildings’, and as per Dwivedi’s argument it includes lands where mining takes place. Senior advocate Harish Salve, representing the Eastern Zone Mining Association - the respondents, argued that consideration of royalties under the MMDRA is ‘like a tax’ and Parliament should be allowed to limit the taxes that can be collected by States. He noted that this limit is important because not all States are rich in minerals to the same extent. Finally, the Supreme Court after hearing all the arguments took its decision. This has paved the way for increased revenue in the State exchequer.