On 14 March 2024, a nine-judge bench of the Supreme Court reserved judgement in a case determining a state government’s power to tax mines and minerals. At play are three different entries of the Union and State List in the Constitution of India. The subject matter on both the Union and State Lists are exclusive, and neither the Union and state are meant to trespass on each other’s territory. 

Entry 50 of the State List provides that a state government can tax mineral rights. This power is “subject to any limitations imposed by Parliament by law relating to mineral development.” Such a law can be made by the Union by exercising its powers under Entry 54 of the Union List. The Supreme Court has to decide whether Entry 54 substantially dilutes the states’ power to tax minerals. 

On one hand, state governments like the ones of Jharkhand, Andhra Pradesh, Uttar Pradesh, and Odisha contended that the power to collect tax on minerals is exclusive to state governments by virtue of Entry 50. The respondents included the Union government and mining companies, who both argued that the power to collect tax is restricted by the Mines and Minerals (Development and Regulation) Act, 1957. The Act allows the Union to determine the royalty to be paid by a mine leaseholder to the landowner. 

The contentions in court also touched upon the wider issue of the division of powers between the Union and states, with some of the parties calling out the dispute as a “federalism issue.” We briefly discussed this aspect in our weekend newsletter in April.

Now, let’s look at the contentions made in court in some detail.

Is ‘royalty’ determined under the MMDR Act a form of tax?

Section 9 of the MMDR Act specifies the “royalty” which a mine leaseholder pays to the owner of the land. Much of the hearing went into discussing the meaning behind this “royalty.” Respondents relied on India Cements v State of Tamil Nadu (1989), where a nine-judge bench ruled that “royalty is a tax.” India Cements was not challenged until a five-judge bench in Kesoram Industries v State of West Bengal (2006), observed that India Cements made a typographical mistake when it declared “royalty is a tax.” 

Senior Advocate Rakesh Dwivedi, appearing for the state of Jharkhand, contended that royalty has an innate character which is not that of a tax. He argued that equating royalty with tax will lead to an absurd instance where a state government, using private land for mining, will pay tax to a private person. Further, he pointed out that the MMDR Act does not have any provision for collecting tax. The purpose of collecting royalty is for “uniformity.” This kind of uniformity, he explained, is not required when levying taxes. During his rejoinder arguments, he stated that royalty is a contractual obligation arising out of a lease which cannot be in the nature of tax. 

But the mining companies, keen to ensure that they aren’t doubly taxed, argued in favour of royalty being considered a tax. Some of the Odisha-based companies were represented by the Easter Zone Mining Association (EZMA). Senior Advocate Harish Salve, arguing for EZMA for Tatas, suggested that the Union government put a cap on the taxing power of the state governments by determining the royalty under Section 9 of the MMDR. If a state exercised its power under Entry 50 to levy tax, it would effectively be earning a royalty under Section 9 and getting the benefit of a tax under Entry 50. 

Senior Advocate Abhishek Manu Singhvi appeared for the Karnataka Iron and Steel Manufacturers Association. In the past, the Association has accused mining leaseholders of forming cartels to increase the price of iron ore used in steel manufacturing. Currently, the royalty on iron ore is set to 15% of average sale price

The steel companies argued that royalty is in the “nature of tax” as it is a “compulsory levy.” These companies, which make use of extracted minerals such as iron ore, argued against royalty being treated differently to tax because they will presumably have to shell out more money due to increased sale prices. 

Can state governments tax mines and minerals? 

State governments argued the MMDR Act does not limit the state’s power to collect tax. 

Senior Advocate Vijay Hansaria, for Uttar Pradesh, argued that Entry 50 expressly mentions the states power to tax “mines and minerals” under the State List. This means that the Entry was specific to state governments, making them the sole authority to collect tax. Dwivedi referred to Entry 49 of the State List which permits taxation on land and buildings. He argued that the power to collect tax under this entry also extends to mineral land, contending that state governments can tax minerals based on the value of the minerals extracted. 

Senior Advocate S. Niranjan Reddy, appearing for Andhra Pradesh, relied on Kunnathat Thathunni Moopil Nair v State of Kerala (1961) which rejected a fixed tax on forest land as it was not calculated on the basis of its value. 

The Union government, on its part, argued that a holistic reading of the entries pertaining to mines and minerals suggests that the Union exercises control over taxation. They should be read as “one family”, contended Attorney General R. Venkataramani. A narrow interpretation of the Entries favouring the state governments would not be suitable for the “larger public interest,” he said.

Solicitor General Tushar Mehta also argued that the power of collecting tax is restricted under the MMDR Act and “royalty” is the only fiscal obligation a state government can collect—contending that royalty is not a tax. He explained that collecting tax would lead to less demand for minerals in the domestic market, leading to an increase in imports, which will impact the nation’s revenue.

Does the expression “taxes on mineral rights” under Entry 50 of the State List include the value of the minerals extracted?

Entry 50 of the State List says that the state governments are permitted to tax “mineral rights.” The respondents claimed that “mineral rights” are distinct from “minerals.” If the state governments are allowed to tax, it is only restricted to “mineral rights.” What comes under these mineral rights? These are the rights that a lessee has on the mineral land i.e. drilling the land, extracting minerals, and sale of minerals. 

In arguing that states could not tax minerals based on their value, Salve submitted that the tax on “mineral rights” was specifically decoupled from the tax on land, so that mineral land could not be taxed under Entry 49. Singhvi relied on the dissenting opinion of Justice K.N. Wanchoo in Hingir Rampur Coal Company v State of Orissa (1961) which differentiated between “mineral rights” and “minerals.” He argued that Entry 50 deliberately used the phrase “mineral rights.” 

Dwivedi argued that mineral rights are linked with mineral land, as one cannot exist without the other. Therefore, it’s the value of the minerals extracted that should determine the quantum of tax collected by the state governments. The Bench appeared to favour this point—CJI Chandrachud observed that stamp duties in property sale deeds are determined by the value of the property. 

Was there a typographical error in India Cements when it held that “royalty is a tax?”

Counsel spent a significant amount of time discussing the judgement in Kesoram Industries, which observed that the bench in India Cements made a typographical mistake while holding “royalty is a tax.”The five-judge bench in Kesoram couldn’t expressly overrule the seven-judge bench in India Cements so that is why a nine-judge bench was constituted in the present matter to clarify the dispute once and for all. 

Dwivedi submitted that no counsel on either side in India Cements had argued that royalty was the same as a tax. Further, four out of the five precedents the judgement relied on had established that royalty is not a tax. The error was apparent, Dwivedi contended, because the judgement didn’t contain any rationale to support the phrase “royalty is a tax”. CJI Chandrachud seemed to agree with this contention, noting that the error becomes “obvious” when the concerned paragraph is re-read after ignoring the “royalty is a tax” phrase. The paragraph is extracted below: 

“In the aforesaid view of the matter, we are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature because s. 9 of the Central Act covers the field and the State Legislature is denuded of its competence under entry 23 of list II. In any event, we are of the opinion that cess on royalty cannot be sustained under Entry 49 of list II as being a tax on land. Royalty on mineral rights is not a tax on land but a payment for the user of land.”

Salve argued that although the statement was “shorthanded”, the preceding parts of the judgement clarified that the Supreme Court wrote it intentionally. He referred to several parts of India Cements to contextualise the meaning behind the phrase that “royalty is a tax.” The judgement had noted that states’ power to tax under Entry 50 of the State List was an occupied field under Section 9 of the Mines Act. An ‘occupied field’ mandates that one level of government cannot intervene in a subject matter that is within the powers of another level of government. 

Salve also pointed out precedents cited in India Cements—specifically Anant Mills Co Ltd v State of Gujarat (1975) and Laxminarayana Mining Co Bangalire v Taluk Dev. Board (1972). Anant Mills held that Entry 50 expressly deals with mineral rights and cannot be read into Entry 49. Further, Laxminarayana Mining held that the state’s power to regulate and tax mines and minerals can be restricted by a Union declaration made under Entry 54 of the Union List. Salve insisted that it was clear that the Court had indeed meant to hold that “royalty is a tax.”