Supreme Court upholds states’ power to tax minerals

In a landmark judgment, the Supreme Court has upheld the rights of state governments to levy taxes on land bearing minerals, resolving a longstanding jurisdictional conflict between the Union government and states.

Chief Justice D.Y. Chandrachud and seven other judges, out of a nine-judge constitution bench, on Thursday affirmed states' power to tax minerals, clarifying that royalties paid to the Central government by mining operators do not qualify as taxes. The bench noted that royalties and dead rent do not meet the criteria for taxation under current laws.

“Royalty stems from the mining lease and is typically calculated based on the quantity of minerals extracted. The obligation to pay royalty arises from contractual agreements between the lessor and lessee and is not intended for public purposes; rather, it serves as compensation for the exclusive use of mineral resources,” Chief Justice Chandrachud said.

“Contractual payments made to the government cannot be equated to taxes. The lessor charges royalty for relinquishing minerals under the terms of the lease deed, whereas taxes are government-imposed levies,” he added.

The dissenting voice

Justice B.V. Nagarathna dissented, however, stating that royalty is in the nature of tax and states have no right to levy it, endorsing a 1989 verdict by a seven-judge bench in the India Cements vs Tamil Nadu case which had held royalty to be a tax under the Mines and Minerals (Development and Regulation) Act, also known as MMDR Act.

Justice Nagarathna said non-extracting states starting to import minerals could affect foreign exchange reserves, potentially leading to a breakdown of the federal system envisaged under the constitution in the context of mineral development. This will lead to unhealthy competition to obtain mining licenses in states that are mineral rich and do not want to impose any other levy than royalty.

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Chief Justice Chandrachud explained that royalties are contractual payments for the exclusive use of mineral resources, distinct from taxes intended for public purposes. He noted that such payments are governed by lease agreements between parties and cannot be equated with government-imposed taxes.

More than 80 petitions have been filed over the years challenging the interpretation of royalties under the MMDR Act. The Supreme Court commenced hearings in February to decide upon these conflicting interpretations and determine the rightful authority—the Union government or the states—to impose taxes on mineral rights.

The dispute’s origin

The dispute originated from the enactment of MMDR Act by the Union Government in 1957, which brought the control of mines and minerals under the Union government's jurisdiction. Section 9 of this Act mandated that mining lease holders should pay royalties for minerals extracted.

In 1963, the Tamil Nadu government granted a mining lease to India Cements Ltd for extracting limestone and kankar. Under the Mines Act, royalty payments were fixed. Concurrently, under Section 115(1) of the Madras Panchayat Act, a local cess was levied on land revenue paid to the government in each panchayat development block.

India Cements contested the imposition of this cess in the Madras High Court, arguing that the Tamil Nadu government lacked the legislative competence to levy cess on royalty. The High Court ruled in favour of the state, stating that the cess was a charge on land under its legislative authority.

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India Cements appealed to the Supreme Court, which in 1989 ruled that royalty payments were indirectly related to minerals extracted and classified them as taxable under the MMDR Act. The Supreme Court had held that royalty was a tax, and any cess on royalty exceeded the state's legislative competence, as the Mines Act covered the domain comprehensively.

Over the years, subsequent cases and interpretations challenged the ruling in the India Cements case. In the 2004 case of the State of West Bengal vs Kesoram Industries Ltd, the Supreme Court acknowledged a clerical error in the India Cements judgment, clarifying that royalties were not taxes but contractual payments between lessors and lessees.

Conflicting interpretations and subsequent litigations resulted in over 80 related cases being consolidated and referred to the Supreme Court.