In a landmark decision, a nine-judge Constitution Bench of the Supreme Court ruled on Thursday that the royalty paid by mining operators to the Central government is not a tax. The court also affirmed that states have the authority to impose cesses on mining and mineral-use activities, as per the case of Mineral Area Development Authority vs. Steel Authority of India and others.
Chief Justice of India (CJI) DY Chandrachud, delivering the majority judgment with Justices Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma, and Augustine George Masih, clarified that the Mines and Minerals (Development & Regulation) Act (Mines Act) does not strip states of their power to tax mineral rights. This judgment overruled the Supreme Court’s 1989 decision in India Cement Ltd vs. State of Tamil Nadu.
Justice BV Nagarathna dissented, arguing that royalty is in the nature of a tax and states lack the legislative competence to impose taxes or fees on mineral rights.
CJI Chandrachud emphasized, “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.” The majority ruled that states retain the authority to levy cesses on mining activities under Article 246, read with Entry 49 of List 2, which empowers state legislatures to tax mineral-bearing lands.
Justice Nagarathna, however, maintained, “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.”
Following the judgment, petitioners requested the court to clarify whether the ruling would have a prospective effect on transactions. The bench agreed to address this on July 31.
The case, one of the oldest pending nine-judge Bench cases before the Supreme Court, centered on whether state governments are empowered to tax and regulate mining activities in light of the Mines Act. The 1989 judgment in India Cement Ltd had classified royalty as a tax, a decision partially upheld in subsequent cases, leading to the current clarification.
The majority’s findings underscored that royalty payments, determined by the quantity of minerals extracted, are contractual and not for public purposes. This differentiates them from taxes, which are sovereign impositions for public purposes.
Justice Nagarathna’s dissent held that royalty under the MMDR Act is a statutory exaction, akin to a tax, and that allowing states to impose additional levies would result in double taxation, detrimental to mineral development.
The court’s decision marks a significant clarification in the legislative powers of states versus the central government concerning mineral rights and taxation.
