Implications of the SC Ruling on Royalty and Tax on Minerals in State’s Favour

A nine-judge Constitution Bench of the Supreme Court on Thursday held that royalty paid by mining operators to the Central government is not a tax and that States have the power to levy cesses on mining and mineral-use activities [Mineral Area Development Authority etc vs Steel Authority of India and ors].

The judgment was delivered by the Bench of Chief Justice of India (CJI) DY Chandrachud with Justices Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih with Justice Nagarathna dissenting from the majority.

The Court ruled that the Mines and Minerals (Development & Regulation) Act (Mines Act) will not denude the States of the power to levy tax on mineral rights.

In view of the above conclusions, the Court overruled its 1989 judgment in the case of India Cement Ltd vs. State of Tamil Nadu.

Background: The Dispute Over Royalty and Tax on Minerals

The Constitutional Divide

India’s Constitution grants significant powers to both the central and state governments. When it comes to natural resources, particularly minerals, this division of power has often led to conflicts.

• Central Government’s Role: The Union government has the power to regulate mines and mineral development under the Mines and Minerals (Regulation and Development) Act, 1957. It also levies a royalty on the production of minerals.
• State Government’s Role: States, on the other hand, own the mineral resources within their territories. They have the authority to grant mining leases and collect taxes on mineral-bearing areas.

The Core Issue

The primary dispute centered around the following:

• Who has the primary right over mineral resources: The states argued that as owners of the mineral wealth, they should have a larger share of the revenue generated.
• Nature of royalty: The central government claimed that royalty was a tax levied by it, while the states contended that it was a payment for the right to extract minerals and should primarily benefit them.
• Taxation powers: There were disagreements over the extent of taxation powers of the states on mineral-bearing areas and the minerals themselves.

This complex interplay of constitutional provisions and financial interests led to a prolonged legal battle between the central and state governments.

5 Reasons for SC Ruling in Favor of States in Royalty, Tax on Minerals Case

The Supreme Court’s ruling in favor of states on the issue of royalty and tax on minerals was a landmark decision. Here are the 5 key reasons cited by the court:

1. Royalty is not a tax: The court categorically stated that royalty paid by mining operators to the central government is not in the nature of a tax. It emphasized that royalty is a contractual payment for the right to extract minerals, similar to rent paid for land.
2. Distinction between royalty and tax: The court clearly distinguished between royalty and tax, highlighting that they serve different purposes. Royalty is a payment for a specific privilege, while tax is a compulsory contribution to the state for public purposes.
3. States’ power to levy tax on mineral-bearing land: The court upheld the states’ power to levy tax on mineral-bearing land within their territories. This decision recognizes the states’ rights over natural resources and their authority to generate revenue from them.
4. Royalty flows from mining lease: The court emphasized that royalty is determined based on the quantity of minerals extracted and is linked to the mining lease agreement. It is not a compulsory payment imposed by the state for general public purposes.
5. Royalty is not for public purposes: The court clarified that royalty payments are for the exclusive use of the lessor (the state) and are not intended to fund public services or infrastructure.

Implications of the SC Ruling on Royalty and Tax on Minerals

The Supreme Court’s ruling on royalty and tax on minerals has significant implications for both the central and state governments, as well as the mining industry.

Implications for States

• Increased Revenue: States will have a larger share of the revenue generated from mineral extraction, boosting their financial resources for development and welfare schemes.
• Enhanced Fiscal Autonomy: The ruling strengthens the states’ financial autonomy by granting them more control over their natural resources and the revenue derived from them.
• Incentive for Mineral Exploration: With increased revenue, states may be incentivized to invest in exploration and development of mineral resources, leading to potential economic growth.

Implications for the Central Government

• Reduced Revenue: The central government will experience a decrease in revenue from royalty on minerals, which may impact its overall fiscal position.
• Need for Alternative Revenue Sources: The government may need to explore alternative revenue sources or reallocate funds to compensate for the loss.
• Potential for Interstate Disputes: The ruling could potentially lead to disputes between states and the center over the sharing of mineral resources and revenue.

Implications for the Mining Industry

• Increased Cost of Production: Mining companies may face higher costs due to increased royalty and tax burdens imposed by the states.
• Regulatory Complexity: The varying tax regimes across different states can create complexities for mining operations and increase compliance costs.
• Investment Climate: The overall investment climate in the mining sector may be affected by these changes, with potential implications for attracting new investments and promoting growth.

Other Considerations

• Need for Clear Guidelines: Both the central and state governments need to establish clear guidelines and regulations to implement the ruling effectively and avoid potential disputes.
• Impact on Mineral-Rich States: States with abundant mineral resources are likely to benefit significantly from the ruling, while those with limited mineral reserves may see a smaller impact.
• Environmental Concerns: While the ruling focuses on financial aspects, it is essential to consider the environmental implications of mining and ensure sustainable practices.