"Royalty is not Tax": Supreme Court says no Limitation on States to Levy Taxes on Mineral and Mining Rights [Read Judgement]

In a landmark decision, the Supreme Court's nine-judge constitution bench has ruled today by an 8:1 majority that states possess the authority to levy taxes on mineral rights. This ruling clarifies that the Union law, specifically the Mines and Minerals (Development and Regulation) Act of 1957 (MMDR Act), does not constrain the power of states to levy taxes on mineral rights and noted that Royalty is not a Tax in the matter of Mineral Area Development v. M/S Steel Authority Of India & Ors.

The court delved into two primary questions, one being whether royalties on mining leases can be classified as a tax and the latter as to whether states retain the power to levy royalties or taxes on mineral rights post the enactment of the MMDR Act.

In the detailed discussion of law, the following observations were noted by the Supreme Court of India —

1. Royalties and Taxes: The court determined that royalties are not akin to taxes. They are contractual considerations paid by lessees under mineral leases. Both royalties and dead rent lack the characteristics of taxes, overturning the India Cements judgement that previously classified royalties as a tax.

2. Legislative Power: Entry 54 of the Union List is identified as a regulatory entry, not a taxing one. Therefore, the Union does not hold the power to tax mineral rights; this authority rests with the states.

3. MMDR Act Provisions: The MMDR Act does not impose limitations on the states' power to tax. Royalties under Section 9 of the MMDR Act are not considered a tax.

4. Land Definition: The term "land" in Entry 49 of the State List includes mineral-bearing lands, empowering states to tax them.

5. Legislative Competence: State legislatures can tax land containing minerals.

6. Tax Measures: The yield of mineral-bearing land can be utilised as a measure for taxation.

The matter was referred to the nine-judge bench in 2011, following conflicting judgments from earlier cases. Senior Advocate Rakesh Dwivedi, representing the State of Jharkhand, argued that the term "limitation" in Entry 50 List II implies a cap on taxing power rather than transferring this power to Parliament. The Union, represented by Attorney General R Venkataramani and Solicitor General Tushar Mehta, contended that the MMDR Act itself limits state powers under Entry 50 List II and stressed the importance of uniform taxation for national and global mineral management.

Chief Justice of India DY Chandrachud authored the majority judgement, supported by seven other justices, while Justice BV Nagarathna provided a dissenting opinion.

In the Dissenting Opinion, Justice Nagarathna contended that royalties should be classified as a tax. Consequently, she argued that the MMDR Act's provisions on royalties undermine the states' authority to levy taxes on minerals. She further opined that "land" under Entry 49 should not encompass mineral-bearing lands to avoid double taxation on mineral rights.

This ruling provides clarity on the scope of state and union powers concerning mineral taxation, reinforcing the legislative competence of states in this domain. The decision is significant for the governance of mineral resources as the Supreme Court verdict upheld the states' rights to levy taxes on mineral rights, marking a pivotal moment in the interpretation of mineral-related taxation laws in India.

To Read the full text of the Judgement CLICK HERE

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