Can States Tax Mining Activities?
- July 30, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Can States Tax Mining Activities?
Sub: Eco
Sec: Fiscal Policy
Recent Supreme Court Ruling:
- On July 25, the Supreme Court affirmed that States have the legislative authority to impose taxes on minerals in addition to the royalty levied by the Centre.
- This ruling, delivered in an 8:1 decision, emphasized the principles of federalism.
- It clarified that the power of State legislatures to tax mineral activities is not constrained by Parliament’s Mines and Minerals (Development and Regulation) Act, 1957 (1957 Act).
- Chief Justice of India (CJI) D.Y. Chandrachud authored the majority opinion, with Justice B.V. Nagarathna dissenting, concerned about potential negative impacts on mineral resource development.
Case Background:
- Section 9 of the 1957 Act requires mining leaseholders to pay royalty for extracted minerals.
- The key issue was whether royalties are classified as “tax” and which entity (Centre or States) has the authority to impose such charges.
- The dispute began with India Cement Ltd challenging a cess imposed by Tamil Nadu, arguing it effectively taxed royalties, which they contended was beyond the State’s legislative power.
Historical Precedents:
- A seven-judge Bench in 1989 ruled that States could collect royalties but not impose additional taxes on mining activities.
- The ruling was based on the Union’s overriding authority under Entry 54 of the Union List to regulate mines.
- A five-judge Bench in 2004 questioned the 1989 ruling but could not amend it due to the smaller bench size.
- The issue was referred to a nine-judge Bench in 2011 due to conflicting judgments.
Royalty vs. Tax:
- The Supreme Court distinguished royalty as a “contractual consideration” paid by the mining lessee to the lessor for mineral extraction rights.
- In contrast, a tax is an “imposition by a sovereign authority” and can only be levied by public authorities for public funding.
- Royalties are not classified as taxes, hence they do not fall under the category of “taxes on mineral rights” in Entry 50 of the State List.
Legal Provisions and State Authority:
- Entry 50 of the State List grants States the authority to legislate on “taxes on mineral rights”, subject to any laws Parliament enacts on mineral development.
- Entry 54 of the Union List provides the Centre with the power to regulate mines and mineral development.
- The 1957 Act does not prevent States from imposing taxes on mineral rights, although Parliament can set limitations or prohibitions.
Dissenting Opinion:
- Justice Nagarathna argued that royalties under the 1957 Act should be considered a tax, emphasizing the Act’s intention to promote mineral development.
- She warned that allowing States to impose additional levies could lead to uncoordinated and uneven increases in mineral costs, potentially disrupting market stability.
Next Steps:
- The court will decide on July 31 whether the ruling should apply retroactively or prospectively, impacting potential financial benefits for mineral-rich States such as West Bengal, Odisha, and Jharkhand.
Background:
- Royalties and Their Nature:
- Royalties are payments made to the owner of a product for the right to use that product. In mining, royalties are fees paid by entities holding mining leases to the landowner, which can be the state government.
- The debate over whether royalties constitute a tax has been ongoing, with previous legal interpretations causing confusion.
- Historical Context:
- In the India Cement case, the Supreme Court mistakenly labeled royalties as taxes, leading to legal debates that were later revisited in the 2004 State of West Bengal v. Kesoram Industries Ltd. case, which attempted to correct the error but could not overrule the earlier decision due to the smaller size of the bench.
- Recent Clarification:
- The recent ruling in the Mineral Area Development Authority case clarified the nature of royalties, resolving ambiguities and affirming that royalties are not taxes.
About MMDRA 1957:
The Mines and Minerals (Development and Regulation) Act, 1957 regulates the mining sector in India. It outlines procedures for granting mining rights, classifies minerals, and aims for sustainable development and management of mineral resources.