By Gopal Mundhra 

The nine-judge Constitution Bench of the Supreme Court of India, with a decisive 8:1 majority, has ruled on the contentious issue of mineral taxation, overturning previous judgments and clarifying the balance of power between the Union and the States.

The majority verdict declared that royalty on minerals is not a tax but a contractual consideration, and consequently States have the legislative power to tax mineral rights and mineral-bearing lands over and above the collection of royalty under Mines and Minerals (Development and Regulation) Act 1957 (MMDR Act).

States get a say on mineral taxation

The judgment significantly bolsters the States' authority in mineral taxation. It affirms that States can use mineral yield or value as a measure to tax mineral rights and mineral-bearing lands, and that the MMDR Act does not impose limitations on the States' taxing powers. The only dissenting judge, Justice Nagarathna, held that royalty is indeed a tax and warned that allowing States to levy additional taxes on minerals could lead to a lack of uniformity and unhealthy competition.

This judgment overrules the previous India Cements judgment of 1990 which had held royalty to be a tax. The Court also clarified that Entry 54 of Union List is a regulatory entry and does not vest the power of taxation with the Union.

Till now the Central Government was undertaking a periodical exercise for the determination of the rates of royalty after taking into consideration the fiscal requirement of the States based on the assumption that the States have no right to levy tax on minerals over and above import of royalty. The Central Government may have to revisit the formulae for royalty rate determination for the future.

Judgement can alter fiscal landscape

This judgment is expected to have far-reaching implications for mineral resource management and revenue distribution in India, potentially altering the fiscal relationship between the Union and mineral-rich States.

After the judgment was pronounced, the advocates requested the bench to clarify if the judgement would apply only prospectively. On this aspect, the bench agreed to hear the parties next Wednesday. In case, the judgment is made operative prospectively, it would be a sigh of relief for the mining community.

On the other hand, if the judgment is made operative retroactively, it is likely to have a significant financial impact on industry stakeholders in the mining sector as all the pending demands that were previously stayed will now get revived.

Judgement impacts pending writs 

Furthermore, this judgment carries substantial weight for the pending writ petitions in various High Courts across India wherein the validity and legality of Service tax and GST levied on mineral royalties under the reverse charge mechanism, has been challenged, inter alia, on the ground that mineral royalty is a tax and there cannot be tax on tax.

The judgment clarifying the nature of royalty as a contractual consideration, would have an adverse effect on these pending petitions and the only relief the mining community may hope is that the Government, considering the industry practice and the uniformly adopted tax position, issues an exemption notification under the recently introduced Section 11A of Central Goods and Service Tax Act, 2017.

After the earlier decision of the Supreme Court in case of India Cements in the year 1990, the States were quite cautious while introducing any legislation to tax mineral rights. This judgement, which has come out as a blessing of the Apex Court for the States, will grant the latter a free hand to levy taxes on mineral rights over and above the charge of royalty imposed under MMDR Act. It is important to note that the right to levy tax on mineral rights under entry 50 of the State list is independent of Article 246A under which GST is being levied.

Potential downside

There's also a risk of tax competition between states, where some might introduce more favourable tax regimes to attract mining investments, while others might impose higher taxes to maximize revenue. This situation could lead to uneven development of the mining sector across different states and potentially influence companies' decisions on where to focus their operations.

(The author is Partner, Economic Laws Practice.)

Views are personal and do not represent the stand of this publication.