Supreme Court: Parliament can’t limit States from taxing mines

NEW DELHI

A significant judgment delivered in an 8:1 ratio by a nine-judge Constitution Bench headed by Chief Justice of India D.Y. Chandrachud on Thursday held that the power of State legislatures to tax mineral-bearing lands and quarries cannot be limited by Parliament.

The judgment frees States from the restrictions of the Centre and is in tune with the federalist principles of governance.

“Any dilution in the taxing powers of the State legislatures will necessarily impact their ability to raise revenues, which in turn will impede their ability to deliver welfare schemes and services to the people.The ability of the State Governments to invest in physical infrastructure, health, education, human capacity, and research and development is directly co-related to the raising of government revenues… Fiscal federalism entails that the power of the States to levy taxes within the legislative domain carved out to them and subject to the limitations laid down by the Constitution must be secured from unconstitutional interference by Parliament,” Chief Justice Chandrachud laid down in the judgment.

The verdict noted how mineral-rich States like Chhattisgarh, Jharkhand and Odisha continue to have per capita income below national averages and trail in economic development.

The court further held that royalty paid to States by mining lease holders is not tax. “Royalty is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights,” Chief Justice Chandrachud noted in his majority judgment.

Protecting States’ right to tax mineral rights, Chief Justice Chandrachud said State legislatures derive their power to tax mines and quarries under Article 246 read with Entry 49 (tax on lands and buildings) in the State List of the Seventh Schedule of the Constitution.

“Mineral bearing lands fall within the description of ‘lands’ in Entry 49,” Chief Justice Chandrachud held.

In the sole dissenting opinion on the Constitution Bench, Justice B.V. Nagarathna said State’s power to tax under Entry 49 of List II did not include “mineral-bearing lands”. However, Justice Nagarathna agreed with the majority on the Bench that royalty was not tax.

The majority judgment said Parliament, through the Mines and Minerals (Development and Regulation) Act of 1957 or MMDR Act, cannot restrict States from legislating on the taxation of mining lands and quarries within their jurisdiction.

The Centre had argued that Entry 50 in the State List had allowed the Parliament to impose “any limitations” on taxes on mineral rights through laws relating to mineral development, in this case, the MMDR Act.

‘Distinct matters’

However, the Chief Justice responded in the judgment to the argument by noting that Entries 50 and 49 of the State List “deal with distinct subject matters and operate in different fields”.

The limitations imposed by the Parliament in a law like the MMDR Act, which related to mineral development, did not operate on or influence State taxation of mining lands under Entry 49 in the State List for the sole reason that “there is no specific stipulation in the Constitution to that effect”.

“Entry 50 of List II does not constitute an exception... The power to tax mineral rights vests in the State Legislatures. The Parliament does not have the legislative competence to tax mineral rights, with Entry 54 of the Union List (Regulation of mines and minerals development declared by parliamentary law to be expedient in the public interest) being only a general entry. Power to tax mineral rights is enumerated in List II. The Parliament cannot use its residuary powers with respect to that subject matter,” Chief Justice Chandrachud held.

Justice Nagarathna, however, agreed with the Union government that the MMDR Act, especially the provision which allows the Centre to take “control of the regulation of mines and the development of minerals” on an expediency in public interest denuded or limited the scope of a State’s right to tax. She termed Entry 50 of the State List a “unique Entry” by which the taxing powers of a State legislature was subjected to limitations imposed by Parliament by law relating to mineral development.

The majority verdict explained that tax payable to a State government depends on the “yield” of the mineral-bearing land.

The yield of such land was based on the royalty payable or the quantity of minerals produced from mining it, the court said.

The judgment came in a batch of 86 appeals filed by different State governments, mining companies and public sector undertakings.

The other judges in the Bench include Justices Hrishikesh Roy, A.S. Oka, J.B. Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih.

‘Overriding powers‘

During the hearing, Attorney General R. Venkataramani, appearing for the Centre, had contended the Union had overriding powers with regard to taxing mines and minerals. Solicitor General Tushar Mehta, also for the Centre, had said the entire architecture of the MMDR Act was meant to limit States’ legislative power to impose tax on minerals, The Centre has the power to fix royalty under the law.

A battery of senior advocates like Harish Salve, Abhishek Singhvi, Arvind Dattar, A.K. Ganguly, Darius Khambata, Additional Solicitor General Aishwarya Bhati and S.K. Bagaria appeared in the case.

The case has its roots in a dispute between India Cements Ltd and the Tamil Nadu government. India Cements had secured a mining lease in Tamil Nadu and was paying royalty to the State government.