Supreme Court: In a matter concerning the distribution of legislative powers between the Union and the States on the taxation of mineral rights, the Nine Judge Constitution Bench of Dr. DY Chandrachud, CJI, Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih JJ. has held that royalty paid by mining operators to the Central government is not a tax and that States have the power to levy cesses on mining and mineral-use activities. Whereas, Justice BV Nagarathna, gave a dissenting opinion.
The Majority held the following:
- Entry 50 of List II envisages that Parliament can impose “any limitations” on the legislative field created by that entry under a law relating to mineral development. The MMDR Act as it stands has not imposed any limitations as envisaged in Entry 50 of List II;
- The scope of the expression “any limitations” under Entry 50 of List II is wide enough to include the imposition of restrictions, conditions, principles, as well as a prohibition;
- The State legislatures have legislative competence under Article 246 read with Entry 49 of List II to tax lands which comprise of mines and quarries. Mineral bearing land falls within the description of “lands” under Entry 49 of List II;
- The yield of mineral bearing land, in terms of the quantity of mineral produced or the royalty, can be used as a measure to tax the land under Entry 49 of List II. The decision in Goodricke Group Ltd. v. State of W.B., 1995 Supp (1) SCC 707 is clarified to this extent;
- Entries 49 and 50 of List II deal with distinct subject matters and operate in different fields. Mineral value or mineral produce can be used as a measure to impose a tax on lands under Entry 49 of List II;
- The “limitations” imposed by Parliament in a law relating to mineral development with respect to Entry 50 of List II do not operate on Entry 49 of List II because there is no specific stipulation under the Constitution to that effect; and
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The decisions in India Cement Ltd. v. State of T.N., (1990) 1 SCC 12; Orissa Cement Ltd. v. State of Orissa, 1991 Supp (1) SCC 430; Federation of Mining Assns. of Rajasthan v. State of Rajasthan, 1992 Supp (2) SCC 239; State of M.P. v. Mahalaxmi Fabric Mills Ltd., 1995 Supp (1) SCC 642; Saurashtra Cement & Chemical Industries Ltd. v. Union of India, (2001) 1 SCC 91; State of Orissa v. Mahanadi Coalfields Ltd., 1995 Supp (2) SCC 686 and P. Kannadasan v. State of T.N., (1996) 5 SCC 670 are overruled to the extent of the observations made in the present case.
Also Read:
Whether the expression “subject to any limitations imposed by Parliament by law relating to mineral development” in Entry 50 of List II pro tanto subjects the entry to Entry 54 of List I, which is a non-taxing general entry? Consequently, is there any departure from the general scheme of distribution of legislative powers as enunciated in M P V Sundararamier v. State of Andhra Pradesh, (1958) 1 SCR 1422?
The Court noted that the MMDR Act largely denudes the states of their legislative powers with respect to regulation of mines and mineral development under Entry 23 of List II. However, the expression in Entry 50 of List II demonstrates that: (i) Parliament can limit the legislative power of the States to tax minerals; and (ii) the limitation has to be imposed “by law” relating to mineral development.
The Court said that authorizing the Central Government to lay down the terms of mining leases and grant approval to concessions, the MMDR Act seeks to ensure that there is uniformity in the terms for working of mines and extraction of minerals. The fact that the State Government cannot alter the clauses in the mining lease cannot be understood to mean that all the powers of the State with respect to regulation of mines and mineral development as well as the power to tax mineral rights have been extinguished.
The Court said that Entry 50 of List II provides that the legislative power of States to tax mineral rights is subject to any limitations imposed by Parliament by law relating to mineral development. The taxing power is subject to “any limitations” and not a “law relating to mineral development”. If the Constitution intended to restrict the taxing powers under Entry 50 of List II with respect to a parliamentary law, it would not have used the expression “any limitations”. It could have used phraseology such as for example, “Taxes on mineral rights subject to any law relating to mineral development made by Parliament.” Parliament has to ‘impose’ the limitations. That is, Parliament has to expressly specify the limitations by the authority of law. Thus, under Entry 50 of List II the taxing power of the State is subject to the extent that Parliament imposes any limitations “by law” relating to mineral development.
Thus, the Court said that the Parliament can impose limitations under Entry 50 of List II by means of statutory provisions. There is no specific provision in the MMDR Act which imposes limitations on the power of the States to tax mineral rights. The scheme of the MMDR Act cannot by a process of stretched construction be read to limit the taxing powers of States under Entry 50 of List II.
While examining whether the statute contains any provision imposing “any limitations”, the Court said that since royalty payable under Section 9 is not a tax on mineral rights, any limitation on the enhancement of the rates of royalty is not the imposition of a tax under Entry 50 of List II. Section 9 does not expressly impose any limitations on the powers of the State to tax mineral rights. Section 9(3) limits the power of the Central Government to enhance royalty more than once in three years. This limitation does not govern taxes on mineral rights.
Further, the Court said that the payments under Sections 9B and 9C do not amount to a tax on mineral rights. Thus, Sections 9, 9A, 9B, and 9C do not impose any limitations on the taxation powers of the state legislatures under Entry 50 of List II.
3. What is the scope of Entry 49 of List II and whether it covers a tax which involves a measure based on the value of the produce of land? Would the constitutional position be any different qua mining land on account of Entry 50 of List II read with Entry 54 of List I?
The Court summarised the following principles for tax under Entry 49 of List II:
- The expression “lands” means all kinds of lands irrespective of the use to which the land is put;
- The expression “lands” includes not only the surface but everything under and over the surface;
- A tax on lands and buildings is a tax on lands and buildings as units;
- The expression ‘tax on lands and buildings as a unit’ is used to distinguish composite taxes which involve imposition of tax cumulatively on all assets such as under Entry 86 of List I;
- The tax is not a tax on totality, that is, it is not a composite tax on the value of all lands and buildings;
- The tax is not concerned with the division of interest in the building or land;
- A tax levied on the activity or service rendered on or in connection with lands and buildings does not fall within the description of taxes on lands and buildings under Entry 49 of List II;
- The use to which the land is put does not affect the competence of the State legislature to tax it; and
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The legislature may take into account the use of land for determining the measure of taxation under Entry 49 of List II.
The Court further laid down the following principles:
- the incidence of a tax on lands and buildings will likely be on the owner or occupier, as the case may be;
- the legislature may adopt a suitable measure for levying the tax on lands and buildings under Entry 49 of List II;
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the measure adopted by the legislature does not determine the nature of the tax.
After taking note of Goodricke (supra) the Court said that this decision indicates that the field reserved to the States under Entry 49 of List II is to impose a tax on land as a unit, without seeking to control the activity or use taking place on the land which is taxed. Similarly, a tax on mineral-bearing land is a tax on the land as a unit; it does not seek to control the mining activity which takes place on the land. Therefore, the Court said there is no conflict between the taxing field of the States under Entry 49 of List II to levy a on tax mineral-bearing land and the power of Union to regulate mines and mineral development under the legislative head of Entry 54 of List I.
Concerning the issue of whether a mining lease also comprises a lease of land along with the mineral rights, the Court said that the transfer of interest in the minerals is distinct from the exercise of the mineral rights. Thus, the minerals are “decoupled” from land only upon the exercise of mineral rights by the lessee.
Moreover, while clarifying the decision in Goodricke (supra), the Court said that in case the minerals are vested in the State, the royalty is paid to the State Government, and hence assumes the form of non-tax revenues. Therefore, royalty is relatable to the yield of the mineral-bearing land and the income in case the minerals vest in a private person.
The Court noted that India Cement (supra) and Orissa Cement (supra) held that since royalty is not an income derived from land and said that this holding is not correct since royalty is directly relatable to the yield of the mineral bearing land. These decisions have followed a narrow approach to the concept of royalty.
Thus, the Court held that the yield of a mineral bearing land, either in terms of the quantity of mineral produced, or in terms of the rates of royalty, can be used as a measure to tax the mineral bearing land under Entry 49 of List II.
4. Whether Entry 50 of List II is a specific entry in relation to Entry 49 of List II, and would consequently subtract mining land from the scope of Entry 49 of List II?
The Court said that the mineral value or mineral produce could be used as a measure of the tax on land under Entry 49 of List II. The fact that Entry 50 of List II pertains to taxes on mineral rights would not preclude the State legislature from using the measure of mineral value or mineral produce under Entry 49 of List II.
Further, the Court said that the State legislature has legislative discretion to determine the appropriate measure for the purposes of quantifying taxes, so long as there is a reasonable nexus between the measure and the nature of the tax. The measure does not determine the nature of the tax.
Interpreting the words “lands” under Entry 49 of List II, the Court said that it includes mineral bearing land. The mineral produce is the yield from a mineral bearing land. Since royalty is determined based on the mineral produce, royalty can also be used as a measure to determine the tax on royalty. The fact that the State legislature uses mineral produce or royalty as a measure does not overlap with Entry 50 of List II.
[Mineral Area Development Authority v. Steel Authority of India, 2024 SCC OnLine SC 1796, decided on 25-07-2024]
*Judgment Authored by: CJI Dr. DY Chandrachud