‘Royalty not a tax,’ says Supreme Court on states’ power on mineral rights

A nine-judge constitution bench of the Supreme Court on July 25 ruled, by majority, that states have the power to levy tax on mineral-bearing land. The top court also said that royalty paid by minors to the Centre can't be called a tax but is a contractual payment.

The Court, while ruling that the 1989 decision of its seven-judge Constitution bench, which decreed that royalty on minerals constitutes a tax, is incorrect, upheld the power of states to levy tax on mineral-bearing lands by 8:1 majority.

“We are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature because of the Central Act covers the field,” the court said.

CJI DY Chandrachud headed the 9-judge bench which delivered the judgement and comprises Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih.

The Court was hearing the key questions on whether the royalty payable on minerals is a tax under the Mines and Minerals (Development and Regulation) Act, 1957, and if only the Centre is vested with the power to levy such exaction or states also have the authority to impose levies on mineral bearing land in their territory.

This issue dates back to 1989 when a dispute between the Tamil Nadu government and India Cements – the company secured a mining lease from the state and was paying royalty when the state imposed a cess on the royalty.

In 1989, a seven-judge Bench had held that the Centre has primary authority over ‘regulation of mines and mineral development’ in accordance with laws enacted by Parliament, such as the MMDRA. 

The centre had argued that only Parliament has the power to impose taxes on minerals, a report in NDTV said. In March, the Chief Justice had asked Solicitor General Tushar Mehta, appearing for the centre, if this contention affects distribution of power between centre and states as in the Constitution.

States only have the power to collect royalties under the MMDRA and cannot impose any further taxes on mining and mineral development.

(With inputs from agencies)