The Supreme Court affirmed that States have the legislative authority to impose taxes on minerals in addition to the royalty levied by the Centre
Historical perspective
Genesis in a dispute between India Cement Ltd and the Tamil Nadu government which arose after the company secured a mining lease in Tamil Nadu.
Although India Cement was already paying royalties, the government imposed a cess — an additional tax on land revenues, including royalties.
In 1989, a seven-judge Bench of the Supreme Court in India Cement Ltd. v. State of Tamil Nadu decided in favour of India Cement
reasoning that States only have the power to collect royalties and not impose taxes on mining activities.
It pointed out that the Union government exercises overriding authority over the “regulation of mines and mineral development” under Entry 54 of the Union List, as specified by law (in this case, MMDR 1957 Act).
Thus, States are not empowered to levy additional taxes on this subject.
Five-judge Bench in 2004, while hearing a similar dispute between West Bengal and Kesoram Industries Ltd held that there error in the India Cement decision that
The phrase “royalty is a tax” should be read as “cess on royalty is a tax”
Conflicting precedents set by Kesoram Industries and India Cement
It accordingly referred the issue to a nine-judge Bench to definitively settle the legal position.
Royalty and tax
Royalty is the “contractual consideration” paid by the mining lessee to the lessor (who may also be a private party) for the right to extract minerals.
In contrast, a tax was characterised as an “imposition by a sovereign authority.”
The judges underscored that taxes are determined by law and can only be levied by public authorities to fund welfare schemes and public services.
Meanwhile, royalties are paid to a lessor in exchange “for parting with their exclusive privileges in the minerals”.
The powers
Entry 50 of the State List under the seventh Schedule of the Constitution gives States the exclusive authority to make laws regarding “taxes on mineral rights”
but this power is limited by any laws Parliament may pass concerning mineral development - here the 1957 Act.
Entry 54 of the Union List : Centre the power to regulate “mines and mineral development”
Observations
Since royalties could not be classified as a tax, they do not fall within the category of “taxes on mineral rights” as defined in Entry 50 of the State List
It was held that the 1957 Act merely provided States with another source of revenue through royalties,
without interfering with their authority to levy taxes on mineral rights under Entry 50
If the Centre wanted to modify the existing legislative framework under the 1957 Act to divest States of their power to levy a tax, it could do so
It also held that States have the power to tax the land where mines and quarries are located by virtue of Article 246 read with Entry 49 (taxes on lands and buildings) of the State List.
Against
This would lead to an “unhealthy competition between the States to derive additional revenue”
Resulting in a steep, uncoordinated, and uneven increase in the cost of minerals
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