Supreme Court upholds right of states to levy royalty on mineral tax

The Supreme Court on Thursday upheld the right of states to impose royalty on mineral-producing land, in a judgement that should prove beneficial to states such as Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, Rajasthan and West Bengal that are rich in ore.

The landmark verdict was delivered by a nine-member Supreme Court Bench comprising Chief Justice of India DY Chandrachud along with Justices Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih. The judgement was passed by 8:1 majority, with Justice Nagarathna opposing the move.

The verdict said the Mines and Minerals (Development and Regulation) Act (MMRDA) does not have a provision to impose “limitations on state to tax minerals”, adding that Parliament does not have the legislative competence to tax mineral rights.

“The legislative power to tax mineral rights lies with the State legislature and the Parliament does not have the legislative competence to tax mineral rights under Entry 50 of List 1 since it is a general entry and Parliament cannot use its residuary power regarding this subject matter... State legislature has the legislative competence under Article 246 read with Entry 49 of List 2 to tax mineral bearing lands,” the verdict stated.

On the other hand, Justice Nagarathna was of the opinion that giving states the permission to tax mineral rights could lead to “unhealthy competition between states to derive revenue”. He added that the “national market could be exploited” and this could lead to “a breakdown of the federal system, in the context of mineral development”.

The government, in its argument in the case, had contended that Parliament has the sole authority to tax minerals.

By passing the verdict, the nine-member Supreme Court Bench overruled a 1989 judgment in the case of India Cement limited versus State of Tamil Nadu.

“Royalty is not in the nature of tax... We conclude that the observation in India Cements judgment stating that royalty is tax is incorrect... Payments made to the government cannot be deemed to be a tax merely because a statute provides for its recovery in arrears,” Chief Justice Chandrachud said, while delivering the verdict.

Justice Nagarathna, however, had disagreed. “I hold royalty is in nature of the tax. States have no legislative competence to impose any tax or fee on mineral rights. Entry 49 is not related to mineral-bearing lands. I hold India Cement decision was correctly decided,” he said.