State Control Over Mineral Taxation Rights
Why in the News?
- The Supreme Court of India has recently delivered a pivotal judgment concerning the taxation of mineral rights. This ruling overturns the 1989 verdict and affirms the authority of states to levy taxes on mineral rights, reshaping the legal landscape of mineral taxation in India.
Introduction:
- In a landmark decision, the Supreme Court has clarified the distribution of powers between Parliament and the states regarding the taxation and regulation of mineral resources. This verdict, delivered by a nine-judge Bench, overturns a previous 1989 judgment and provides a definitive stance on the scope of authority held by both central and state governments in the mineral sector.
What Did the Supreme Court Decide?
Background of the Case:
- 1989 Verdict: A seven-judge Bench previously held that the central government had primary authority over mining regulations under the Mines and Minerals (Development and Regulation) Act, 1957, and Entry 54 of the Union List. States were restricted to collecting royalties and were prohibited from imposing additional taxes. The court classified royalties as taxes, thus barring states from levying any cess beyond their authority.
- 2004 Review: A five-judge Bench later suggested that the 1989 ruling contained a typographical error, indicating that royalties were not a tax, which prompted the current nine-judge review.
Overturning the 1989 Verdict:
- The Supreme Court’s nine-judge Bench has deemed the 1989 decision incorrect, stating that royalties on minerals should not be classified as taxes under the Mines and Minerals (Development and Regulation) Act, 1957.
State vs. Central Authority:
- Taxation Power: The Court ruled that the power to tax mineral rights resides exclusively with the states. Parliament’s role is limited to imposing restrictions to avoid obstructing mineral development.
- Parliamentary Constraints: Parliament can set constraints to regulate state taxation on mineral rights but cannot impose taxes directly. This is intended to prevent any hindrance to mineral development.
- Dissenting Opinion: There were concerns that granting states the power to levy taxes might disrupt the federal system and result in inconsistencies in mineral pricing and development. There is a fear that such state-level taxation could lead to legal uncertainties and adverse economic impacts on metal development in India.
Difference Between Royalty and Tax:
Royalty:
- Definition: A royalty is a payment made for the rights and privileges associated with mineral exploitation. It is a contractual obligation linked to the specific benefits or privileges granted by the grantor.
- Characteristics: Royalties are derived from agreements and have a direct relationship with the benefits conferred upon the grantee. The Supreme Court’s rulings, such as in Hingir-Rampur Coal Co. Ltd. vs. State of Orissa (1961) and State of West Bengal vs. Kesoram Industries Ltd. (2004), establish royalties as compensation with direct benefits.
Tax:
- Definition: A tax is imposed by statutory authority for public purposes and does not require the taxpayer’s consent. It is a compulsory financial charge not linked to any specific benefit.
- Characteristics: Taxes are enforced by law and represent a general financial obligation of citizens. They are not tied to any particular privilege or benefit, as highlighted in the cases of State of Himachal Pradesh vs. Gujarat Ambuja Cement Ltd. (2005) and Jindal Stainless Ltd. vs. the State of Haryana (2017).
Mines and Minerals (Development and Regulation) Act, 1957:
Overview:
- Purpose: The Act governs the mining sector in India, focusing on development, conservation, and transparency in mineral exploitation.
- 2015 Amendment: Introduced reforms such as mandatory auctions for mineral concessions, establishment of the District Mineral Foundation (DMF), and the National Mineral Exploration Trust (NMET) to promote exploration and curb illegal mining.
Subsequent Amendments:
- 2016 and 2020: Addressed minor sectoral issues to ensure smooth operations.
- 2021 Amendment: Unified the regulation of captive and merchant mines, mandating auctions for private sector concessions.
2023 Amendment:
- Objectives: The 2023 amendment aims to enhance exploration and extraction of critical minerals, such as lithium and graphite, essential for India’s economic and security needs. It includes provisions to attract foreign investment and facilitate private sector participation in exploring critical minerals.
Scenario of the Mining Sector in India:
- Steel Production: India is the second-largest producer of steel globally, with a significant increase in both production and consumption. FY 2023-24 figures show crude steel production at 144.04 million tonnes and finished steel production at 138.83 million tonnes.
- Coal Production: India has substantial coal reserves and is the second-largest producer of coal. Production in June 2024 was 84.63 million tonnes, reflecting a growth of 14.49% from the previous year.
- Manganese Ore: Manganese Ore (India) Limited achieved a record production of 17.56 lakh tonnes in FY 2023-24, marking a 35% growth over the previous year.
- FDI Policy: India’s Foreign Direct Investment (FDI) policy allows 100% FDI in the steel and mining sectors, including coal and lignite.
- Mining Sector Dynamics: In 2021-22, India had 1,319 operational mines, with Madhya Pradesh, Gujarat, and Karnataka leading in the number of mines. The sector shows a healthy growth trajectory with a significant value of mineral production.
Conclusion and Way Forward:
- The Supreme Court’s recent ruling represents a critical shift in the governance of mineral resources in India. By upholding the states’ rights to tax mineral resources, the decision underscores the need for a balanced approach to federal and state powers. Moving forward, it will be crucial for both Parliament and state governments to collaborate in ensuring that mineral development is conducted efficiently and equitably, minimizing legal and economic uncertainties. Enhanced transparency, uniformity in pricing, and careful regulation will be key to maintaining the sector’s growth and sustainability.
