SC refuses to restrict States’ power to tax mines only prospectively

The Supreme Court on Wednesday declined pleas by assessees, including public sector undertakings, to restrict its July 25 majority judgment, which upheld States’ power to tax mines and minerals rights, to have only prospective effect.

The majority on the nine-judge Bench, with the exception of Justice BV Nagarathna, who had originally given a dissenting opinion, held that prospective application of the July 25, 2024 judgment would run the risk of invalidating many State legislations.

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

“The power to levy tax is an incidence of sovereignty. If we are to give a prospective application to the judgment, it would result in a situation where the legislation enacted by the States in pursuance of their plenary powers may conceivably be invalidated… This would not be a constitutionally just outcome,” the Supreme Court reasoned in a 22-page order.

However, the Bench introduced conditionalities for the retrospective levy of tax by the States.

The court declared that States could levy tax on mines and mineral rights from April 1, 2005. Demands of tax would not operate for transactions prior to this cut-off date.

The Bench clarified that there would be no interest or penalty imposed on the assessees for tax due from the cut-off date of April 1, 2005 and the date of the judgment, July 25, 2024.

“The total amount, that is the principal plus the interest, due by the assesses in the pending matters may be substantial in comparison to their total net worth. Steel Authority of India has stated on affidavit that retrospective application of the July 25 judgment will lead to revival of cumulative demands to the tune of approximately Rs. 3000 crore from different States,” the court observed.

Again, the payment of retrospective tax for the period between April 2005-July 2024 need to be paid only in instalments staggered across 12 years, commencing from April 1, 2026.

The court noted that a few States have decided against collecting tax dues accrued before the July 25 judgment. “It is the prerogative of the State legislatures to determine whether to forego the dues for the period before July 25, 2024,” it observed.

The authoritative pronouncement of the nine-judge Bench on July 25 had cleared the confusion caused by two conflicting judgments about the States’ power to tax. In 1989, India Cements versus State of Tamil Nadu saw a Constitution Bench hold that “royalty is tax” and State legislatures had no legislative competence to impose cess on royalty. But, in January 2004, another Constitution Bench, in State of West Bengal versus Kesoram Industries, held that “royalty is not a tax” and “the power to levy tax on mineral rights vests with the State legislatures”.

States like Chhattisgarh, Madhya Pradesh, and Rajasthan had followed West Bengal’s example in the aftermath of the Kesoram judgment and enacted legislations taxing their mines and mineral rights. Kesoram had won the day on July 25, 2024 with the nine-judge Bench setting aside the India Cements verdict.

On Wednesday, the Chief Justice explained that the cut-off date of April 1, 2005 was finalised keeping in mind the changes and State legislations which followed the Kesoram judgment.

Wednesday’s order was in response to queries raised in court as to whether the July 25, 2024 judgment of the nine-judge Bench would have a retrospective effect.

Assessees had argued that allowing States to demand retrospective taxes on mines and minerals rights would have a “cascading effect” whose impact would ultimately impact the common man.