Can States Tax Mining Activities? (GS Paper 2, Governance)
Context
- The Supreme Court recently addressed whether states have the authority to impose additional taxes on mining activities beyond the royalties stipulated under the Mines and Minerals (Development and Regulation) Act, 1957 (1957 Act).
- The case in question involved a dispute between India Cement Ltd and the Tamil Nadu government, centering around the legality of imposing a cess on top of existing royalties.
Background of the Case
- Key Issue: The core issue was whether royalties paid by mining leaseholders to state governments should be classified as a “tax” and whether states have the authority to levy additional taxes or cesses on these royalties.
- Case Origin: The dispute arose when India Cement Ltd, after securing a mining lease in Tamil Nadu, was subjected to a cess imposed by the state government. The company challenged this cess in the Madras High Court, arguing that it constituted an additional tax on top of royalties, which exceeded the state’s legislative authority.
- Historical Ruling: In 1989, a seven-judge Bench of the Supreme Court ruled in favor of India Cement Ltd, determining that states could only collect royalties and not impose additional taxes on mining activities. This was based on the premise that the Union government holds overriding authority over mining regulations under Entry 54 of the Union List in the Constitution.
Distinction Between Royalty and Tax
- Royalty: Defined as a “contractual consideration” paid by the mining lessee to the lessor for the right to extract minerals. It is a payment made for parting with exclusive rights to minerals.
- Tax: Characterized as an “imposition by a sovereign authority,” taxes are set by law and used to fund public services and welfare schemes. Unlike royalties, taxes are a compulsory financial charge imposed by the government.
Can States Tax Mining Activities?
Constitutional Provisions:
- Entry 50 of the State List: Grants states the authority to make laws regarding “taxes on mineral rights.” However, this power is constrained by any central laws on mineral development.
- Entry 54 of the Union List: Confers upon the Centre the power to regulate “mines and mineral development,” especially if deemed necessary in public interest.
Supreme Court's Ruling:
- The court clarified that royalties do not fall under the category of “taxes on mineral rights” as defined in Entry 50 of the State List. Therefore, royalties are considered a separate category of revenue collection.
- The 1957 Act provides states with a source of revenue through royalties but does not affect their power to levy taxes on mineral rights.
- The court emphasized that while the Centre regulates mining development, it does not possess the power to impose taxes, which remains the jurisdiction of the state legislatures.
- States retain the authority to tax the land where mines and quarries are located, as defined under Article 246 read with Entry 49 (taxes on lands and buildings) of the State List.
Judicial Concerns:
- Justice Nagarathna's Concern: She argued that treating royalties as taxes might undermine the central legislation aimed at promoting mineral development. Allowing states to impose additional levies could lead to unhealthy competition among states, resulting in increased mineral costs and market instability.
Conclusion
- The Supreme Court’s decision highlights the balance between state and central powers concerning taxation and regulation of mining activities.
- States can tax land used for mining under Entry 49 but cannot impose additional taxes on mining royalties as these are distinct from taxes.
- The ruling preserves the central government’s regulatory authority while allowing states to levy taxes on land.
- If retroactively applied, this ruling could benefit states like West Bengal, Odisha, and Jharkhand, which have imposed additional taxes on mining lessees.
