Who Has Power to Impose Tax on Mining Activities: Centre or State?

The battle between the Centre and the States over who controls what has been ongoing for years. This tug-of-war is not just about who makes the rules on things like industrial liquor or administration; it also extends to the question of who gets to impose taxes.

One of the longest-running cases in India's legal history has just been decided by the Supreme Court. Filed back in 1999, this case has been waiting for over 9,000 days to be resolved. The big question? Who really has the power to tax mining & mineral activities: the central government or the states?

How did this case end up in front of a nine-judge Constitutional Bench? What were the key issues that the judges had to consider? Let’s break it down and understand how this significant decision came about.

Background of Case

Before understanding this case, first know what are royalties. Royalties are fees paid to the owner of a product for the right to use that product. For example, if a movie studio wants to use an existing piece of music by a specific artist in their new film, they will have to pay a royalty fee that goes to the artist.

In the context of mining, Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDRA) requires those who obtain mining leases to pay royalties for any mineral removed to the individual or entity that leased the land.

1. The India Cement Case

Background: In 1963, India Cement Ltd was granted a mining lease by the Tamil Nadu government and paid royalties under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDRA).

In addition to royalties, Tamil Nadu imposed a cess (an additional tax) on land revenue, including royalties.

Legal Challenge: India Cement argued that the cess on royalty was effectively a tax on royalty, which the state legislature did not have the authority to impose under the State List of the Constitution.

Supreme Court Ruling in India Cement Ltd v State of Tamil Nadu (1989)

• A 7-judge bench ruled in favour of India Cement, stating that royalty is a tax, and states could not impose a cess on royalty as it would amount to double taxation. 

• States have only the power to collect royalties, not to impose taxes on mining activities. 

• Centre has overriding authority over the "regulation of mines and mineral development" under Entry 54 of the Union List, and states do not have the power to impose further taxes on this subject. 

• The court's statement, "Royalty is a tax," was a critical point that led to confusion and legal challenges.

2. The Kesoram Industries Case: Review and Typographical Error

In 2004, in the State of West Bengal v. Kesoram Industries Ltd, a 5-judge bench noted that the phrase "royalty is a tax" in the India Cement case was a typographical error. The correct interpretation should be "cess on royalty is a tax."

The court clarified that royalty is not a tax, but the states' power to impose additional taxes on royalties was limited.

3. Current Case: Mineral Area Development Authority Case

Background:

• In 1992, Bihar passed an amendment imposing additional cess and taxes on land revenue from mineral-bearing lands.

• In 1999, the amendment was challenged in the Supreme Court, and over 80 related matters were tagged with this case.

Supreme Court Referral (2011):

• A 3-judge bench noted the conflict between the India Cement and Kesoram Industries decisions due to the typographical error.

• The case was referred to a 9-judge bench to resolve whether a royalty is a tax and to clarify the states' taxing powers.

Supreme Court's Judgement in Mineral Area Development v. M/S Steel Authority Of India & Ors

1. Royalties Are Not Taxes:

• The 9-judge bench concluded that royalties are not taxes. This is because royalties are payments made based on contracts or agreements between the leaseholder (the company) and the lessor (the landowner or government).
• Taxes, however, are levied by the government for public purposes like infrastructure and welfare. The payment of royalties compensates the lessor for the right to use the land rather than contributing to general government revenue.

2. States' Power to Tax Mining Activities:

• The Court confirmed that while states can collect royalties under the MMDRA, this does not preclude them from imposing additional taxes on mining activities and the land used for these activities.

• According to the Constitution’s Seventh Schedule, states have the power to impose taxes on mineral rights (Entry 50 of the State List). The central government, on the other hand, has the power to regulate mines and mineral development (Entry 54 of the Union List).

• The Court ruled that the MMDRA provides states with a revenue stream through royalties but does not limit their authority to impose other taxes related to mineral development.

Justice Nagarathna's Dissent

Reasons for Disagreement:

1. Royalties as Taxes: Royalties under the MMDRA should be considered a form of tax. She believed that the primary goal of the MMDRA was to promote mineral development, and allowing additional state-imposed taxes would undermine this goal.

2. Limitation on States’ Taxing Powers: She contended that the enactment of the MMDRA effectively reduced states' powers to impose additional taxes on mineral activities. She felt that the central government should have more control over these matters.

3. State List Entry 49: The powers granted to states under Entry 49 of the State List did not include the authority to tax mineral-bearing land beyond the scope of the MMDRA.

Implications of the Ruling

1. For States: States can continue to collect royalties from mining companies. Additionally, they can impose taxes on mining activities and land used for these purposes, which provides them with more avenues for revenue generation.

2. For Mining Companies: Mining companies will pay royalties as per their agreements but should also be prepared for additional state taxes related to their operations and the land they use.

3. Legal and Policy Impact: This ruling resolves the longstanding confusion about the nature of royalties and taxes, ensuring a clear legal framework for both state governments and businesses involved in mining.

Benefits of the Judgment

1. More Money for States: States with lots of minerals, especially poorer ones like Jharkhand and Chhattisgarh, can earn more money from mining. This helps them fund public services and infrastructure projects.

2. Fair Resource Use: Different states have different resources. Coastal states benefit from the sea, hilly states earn from tourism, and now mineral-rich states can benefit from their minerals. This makes it fairer for everyone.

3. Empowering States: States often don't have many ways to collect taxes, with the central government collecting most of them. This ruling gives states another way to generate revenue, making them more financially independent.

Concerns of the Judgment

1. Economic Inequality: States without mineral resources might feel left out. The central government can help by providing support to these states to ensure fairness.

2. Risk of High Taxes: There's a risk that states might impose very high taxes on mining, which could scare away investors and lead to less mining activity and fewer jobs.

3. Different Rules in Different States: Each state might have different tax rates and rules, creating complexity for companies operating in multiple states.

Conclusion

In short, this Supreme Court's decision clarifies that royalties paid for mining are different from taxes. States have the authority to collect these royalties and can also impose additional taxes on mining activities and land. This ruling clears up past confusion and provides a clear framework for regulating minerals and collecting revenue.