How SC verdict on states' rights to tax mineral mining will help boost their revenues

In a blow to the Centre, the Supreme Court on Thursday (July 25) held that states have the legislative competence to impose taxes on mines and minerals-bearing lands under the Constitution.

The legal wrangle brought to the fore a decades-long debate on who holds exclusive rights over taxing mineral-baring lands – the Union government or the state governments.

What are the key points of the debate?

On key aspect of the debate is the revenue. Allowing states to tax mineral mining activities would help fill their coffers substantially. In the light of the fact that India’s mineral production doubled to Rs 1.4 lakh-crore in 2023-24 (FY24) from five years ago, the ability to levy a tax on mining could help states' revenues considerably.

India has auctioned 385 mines since FY16; Rajasthan, Odisha and Madhya Pradesh accounted for nearly half of these. With the latest Supreme Court ruling, states are looking at a viable new revenue stream, particularly since they can auction minerals that will help India Inc expand in nascent industries such as electric vehicles (EVs) and green energy.

The other aspect of the debate is how it will impact mineral mining companies. There is a fear that allowing states to tax them at will would increase mineral prices, which will have a ripple effect on the entire economy.

What did the SC say?

In a majority verdict of 8:1, a nine-judge Constitution bench held that the legislative power to tax mineral rights vests with the states, and the royalty paid on minerals is not a tax. The dissenting verdict was given by Justice BV Nagarathna.

Chief Justice DY Chandrachud, who read out the verdict for himself and seven judges of the bench, held that Parliament does not have the power to tax mineral rights under Entry 50 of the List II of the Constitution. However, it can still legislate to impose "any limitations" on states' power to levy tax on mineral rights.

The SC said it will consider on July 31 issue of recovery of taxes levied by Centre till date on mines and minerals. The Centre urged the SC to make prospective its verdict that held states power to levy tax on mines and minerals. Were it made retrospective, the states will gain access to the taxes collected by the Centre down the decades.

How much revenue do states earn from mining of minerals?

A MoneyControl analysis of data from the Ministry of Mines shows that the states have already recorded a surge in revenues from mining, as royalty revenues expanded at a compounded annual growth rate (CAGR) of 32 per cent between FY17 and FY22. Among the top five states on the list were Odisha, Chhattisgarh and Jharkhand.

All the states with substantial mineral resources are likely to see a jump in revenues following the Supreme Court ruling.

Odisha: In the case of Odisha, royalty payments from mines jumped seven times between FY17 and FY22 to Rs 17,983 crore. Mineral production earnings in the state were twice as much in two years after the pandemic than what was garnered in the six years between FY16 and FY21.

In December 2024, Odisha Chief Secretary PK Jena said that the state had earned Rs 50,000 crore revenue from the mining sector in FY22.

Chhattisgarh: Chhattisgarh’s royalty payments increased eight-fold during FY17 to FY22 to Rs 8,839 crore. In FY23, it earned record revenues of Rs 12,941 crore from minerals.

West Bengal: West Bengal received Rs 119.05 crore in 2022-23 from the Centre’s consolidated mineral funds, sources told The Federal.

Maharashtra: According to Maharashtra government figures released last year, minerals worth Rs 16,036 crore were extracted from 172 functional mines in the state in one-and-half years. The total value of minerals extracted in FY22 was Rs 11,620 crore while the total value of minerals extracted in FY23 up to September was Rs 4,416 crore. The production of coal was the highest among all the minerals followed by limestone.

How much will the mineral-rich states raise, going forward?

The verdict has certainly provided the states with an avenue to raise revenue from minerals. But how much they will raise cannot be determined at present, as it will depend on the volume of production and rate of tax they levy on minerals found in their respective areas.

Moreover, the Supreme Court has reserved till Wednesday (July 31) the verdict on the fate of the royalty the Centre has already earned. Whether the states will regain the monies with retrospective or prospective effect will be decided that day.

Since the court had scrapped the rights of the states to levy tax/cess on minerals in 1989, the royalties have been enhanced by the Centre, keeping in mind the revenue loss the states incurred.

Now that the SC overturned its earlier order, the royalty calculation might be revised so as not to overtax the mining companies keeping in mind international competition.

How and when did the case originate?

The issue first came up in a dispute between India Cement Ltd and the Tamil Nadu government way back in the 1980s.

Holding a mining lease in Tamil Nadu, India Cement paid royalties to the state, which later imposed a cess in addition to the royalty, prompting India Cement to challenge the move in the Madras High Court.

India Cements argued that a cess on royalty equated to a tax on royalty, exceeding the state’s legislative powers. However, the Tamil Nadu government contended that the cess was a form of land revenue on mineral rights, within its authority to impose.

What happened later?

In 1989, the Supreme Court ruled in favour of India Cement, asserting that the Centre held primary regulatory authority under the Mines and Minerals (Development and Regulation) Act (MMDRA) and that states could collect royalties but not impose additional taxes on mining and mineral development.

However, hearing a similar dispute between West Bengal and Kesoram Industries Ltd in 2004, a five-judge bench noted a typographical error in the 1989 verdict, clarifying that “royalty is not a tax,” but “cess on royalty is a tax.”

In view of these contradictory rulings, the Supreme Court began hearings on February 27, 2023, to resolve whether royalties are a type of tax or if there was an error in the India Cement case judgment.

What did the Centre say in the Supreme Court?

The apex court noted during the hearings that the Constitution grants both the Union government and the states the power to tax mineral rights, emphasising that such authority should remain intact.

However, Attorney General R Venkataramani, representing the Centre, contended that the Union holds overriding powers to tax mines and minerals. Solicitor general Tushar Mehta backed him, asserting that the MMDRA limits the states’ legislative power to impose taxes on minerals, granting the Union government the authority to fix royalties.

The Centre also underlined the uneven distribution of major minerals across states, with some states possessing significant quantities of resources like coal, iron ore, bauxite, and manganese, while others have little to none. The Centre argued that mineral-rich states may impose heavy taxes, leading to increased mineral prices, higher imports, and adverse economic effects. Uniformity in this field, the Centre emphasised, is essential

Under Entry 54 of the Union List, the Centre claimed exclusive control over mines and minerals, enabling Parliament to enact the MMDRA and, consequently, fix royalties. Though these royalties go to state coffers, the Centre maintained that minerals are vital for national development, necessitating federal regulation to ensure uniform pricing and rational resource use.

What did the states say in the Supreme Court?

Representing Jharkhand, senior advocate Rakesh Dwivedi argued that royalties are not taxes, and states have the power to levy taxes on mines and minerals based on Entries 49 and 50 of the State List.

Entry 49 allows states to tax lands and buildings, while Entry 50 permits states to impose taxes on mineral rights, subject to any limitations imposed by Parliament concerning mineral development.

Some other states, including Odisha, also put forth the same arguments.

What did the lone dissenting judge say?

Justice Nagarathna said that if the power to levy taxes on mineral resources are given to the states, there would be "breakdown of the federal system" as they would compete among themselves and jeopardise mineral development.

In her 193-page verdict, she said royalty payable on minerals is in the nature of tax and not merely a contractual payment. "If royalty is not held to be a tax and the same being covered under the provisions of the MMDR Act, 1957, it would imply that despite Entry 54-List I and the declaration made in section 2 of the MMDR Act, 1957…taxes on mineral rights could be imposed by the States over and above payment of royalty on a holder of a mining lease," she said.

"There would be unhealthy competition between the states to derive additional revenue and consequently, the steep, uncoordinated and uneven increase in cost of minerals would result in the purchasers of such minerals coughing up huge monies, or even worse, would subject the national market being exploited for arbitrage," Justice Nagarathna said.

What was Justice Nagarathna's worry?

She said the steep increase in prices of minerals would result in a hike in prices of all industrial and other products dependent on minerals as a raw material or for other infrastructural purposes. As a result, the overall economy of India would be affected adversely which may result in certain entities or even non-extracting states importing minerals which would hamper foreign exchange reserves of the country, she added.

Referring to future separate policy decisions to be taken by mineral-rich states, she said there might then be legal uncertainty which would cause adverse economic consequences including on mineral development in India.

Justice Nagarathna, however, concurred with the CJI that the scope of the expression "any limitations" under Entry 50 of List II is wide enough to include imposition of restriction, conditions, principles as well as a prohibition by Parliament by law.

This gives the Union government the leeway to rein in any increase in taxes by the states with legislation to impose curbs on states' power to levy tax on mineral rights. It forms a constitutional guarantee ensure a fair sharing of power under the federal system.

(With inputs from Samir K Purkayastha in Kolkata.)