Decentralising Mineral Rights: A Step Towards Federalism or Regulatory Chaos?

Introduction

The Supreme Court’s decision in Mineral Area Development Authority v. SAIL¹ (hereinafter referred to as “MADA”) has clarified a long-standing constitutional question over regulatory and taxation powers over minerals. The Court has reinforced fiscal federalism by affirming the States’ right to tax mineral resources under the Seventh Schedule of the Indian Constitution.² The Court further has categorically rejected the idea of a broader interpretation of central laws to include taxation authority over mineral rights to preserve the autonomy of States to levy taxes on minerals. While this may seem like a progressive step that enhances India’s federal structure, it raises potential concerns about the potential regulatory chaos and economic distortions. Could this ruling unintentionally open the Pandora’s box, or will it strengthen federal governance over natural resources in India? This question however until this day continues to be unanswered.

Historical context: The royalty versus tax debate

The legal battle over mineral taxation dates back to 1989, when royalties on extracted minerals were ruled as a form of tax itself. This led to a conundrum concerning the State Government’s competency to levy additional taxes. The Supreme Court through its decision in State of W.B. v. Kesoram Industries Ltd. has clarified the difference between royalties and taxes, while reaffirming the right of States as enshrined under List II Entry 50 of the Constitution.³ Despite this decision, there has been a wave of debates in this regard. Soon after this decision, a petition challenging Bihar’s additional tax laws was filed, wherein it was observed that royalties are not taxes, thereby allowing the States to continue levying taxes on mineral rights. The dissent by Justice Nagarathna about undermining uniformity and arbitrage continues to raise eyebrows,⁴ thereby hinting at the lingering of the long-drawn conflict between that of regulatory stability and federalism.

Constitutional and economic concerns: A fragmented regulatory landscape

The autonomy granted to States under MADA judgment could have significant constitutional and economic ramifications. This judgment creates a situation for extremely diverse taxation regimes to exist across different States in India by the far-reaching autonomy that are granted to the States by the interpretation of royalty to be separate from tax in the current scenario. Minerals are essential resources, and they tend to lack a uniform regulatory framework in our country and this can in turn have far-reaching ramifications on the national economy.⁵

Furthermore, while the fundamental freedom to practice any profession, trade, or business is guaranteed under Article 19(1)(g) of the Indian Constitution,⁶ it is still correct to say that despite this provision, the State enjoys the power to regulate and order the economy in a manner that it deems fit, provided it can show that the measure so adopted is one of a reasonable nature.⁷

The Court has also held that a “level playing field” is embodied in Article 19(1)(g).⁸ The Court’s acknowledgement of this idea highlights the importance of fair competition in a globalised economy like India, where it has done away with restrictive trade practices like the licence raj. This doctrine ensures that the competitors at an equal footing can operate without any unfair advantages, which fosters an open and competitive market that aligns with the public interest.⁹ When the right to conduct business is threatened by disparities like the varying mineral tax regimes across States it risks the creation of significant differences in mineral tax regimes across States. Therefore, the judgment creates a scenario antithetical to the very spirit of Article 19(1)(g) of the Indian Constitution. This puts mineral-dependent industries in higher taxing States at an inherent disadvantage by creating a significantly uneven playing field. The possibility of States imposing varying taxes could lead to a “race to the bottom”, with industries migrating to States with lower tax rates, distorting market dynamics and regional economies. Furthermore, the principle of “legal certainty” is essential for maintaining a level playing field as envisaged above. Legal certainty is an element of rule of law that mandates that Government policies, including tenders and contracts, must be transparent and consistent.¹⁰ Unclear terms and conditions or policies lacking objectivity, like the varying mineral taxation regimes, do not allow businesses to rely on fair treatment and predictable regulations, which have also been held to be foundational to the constitutional rights under Article 19(1)(g).

Economic impact: Mineral dependency and national concerns

The mining industry contributes around 10-11% of the industrial sector’s gross domestic product (GDP)¹¹ and contributes around 2.2-2.5% of the nation’s GDP.¹² It is also a massive raw material provider to multiple other industries nationwide.¹³ Furthermore, India aims to attain $500 billion worth of contribution from the mining sector by 2047.¹⁴ This scenario underscores the vital nature of the mineral industry, which exacerbates the previously highlighted concern of how it runs antithetical to Article 19(1)(g) of the Indian Constitution. Furthermore, Article 39(b) of the Indian Constitution stipulates that it is the duty of the State to make sure that material resources are distributed in a way that serves the common good.¹⁵ Minerals like coal have been categorically held to be vital national resources for the purpose of policy under Article 39(b).¹⁶ Certain scarce minerals like copper have been identified as essential commodities, for which special measures can be taken in the public interest of the Government, like eliminating middlemen, which were warranted by the Court.¹⁷ Therefore, the essential nature of minerals and mining activity in the country calls for an even greater consideration by the Court before interpreting provisions in a manner that grants greater regulatory autonomy to States, which in turn leads to greater regulatory heterogeneity in the regulation of minerals.

Justice Nagarathna’s dissent: Arbitrage and short-termism

Justice Nagarathna’s dissent on regulatory arbitrage is a critical warning.¹⁸ This verdict in its present form can also give rise to a situation where the State Governments legislate in a manifestly arbitrary manner. The lack of regulatory standardisation can create a scenario wherein States can regulate with an aim for short-term revenue prioritisation by imposing heavier taxation on mineral extraction, directly impacting other industries like construction, mining, steel, etc. Inconsistency in tax regimes with a lack of adequate central oversight can also lead to certain businesses being at an inherent disadvantage simply owing to their geographical location. Even tax laws can be discriminatory and violative of Article 14.¹⁹ A catena of cases such as that of Kunnathat Thatehunni Moopil Nair v. State of Kerala²⁰ and Suraj Mall Mohta v. A.V. Visvanatha Sastri²¹ have been cited time and again in later cases. In the celebrated case of Kunnathat Thathunni Moopil Nair case²², the Kerela Land Tax Act, 1961²³ was struck down for violating Article 14, affirming that tax laws, if discriminatory or arbitrary, can indeed infringe constitutional guarantees of equality. Similarly, in Suraj Mall Mohta case²⁴, the tax laws, despite being legislatively competent, were barred from operating unfairly. Thus, a dearth of regulatory uniformity in mineral taxation, which results in State-imposed fiscal burdens that unequally impact specific regions or industries, risks violating Article 14 by creating arbitrary disadvantages based solely on geography. This underscores the need for balanced and standardised taxation policies to prevent discriminatory fiscal practices. The present situation is that of a prisoner’s dilemma,²⁵ there is a real possibility of States prioritising short-term gains, trying to compete amongst each other, or even competing to become tax havens. Therefore, it is essential to value the constitutional and stability concerns raised by this judgment.

Balancing federalism and economic stability: Way forward

Balancing federalism with economic stability is crucial in preventing the negative outcomes of this verdict. The foremost concern regarding the unlevelled playing field can be addressed if we look at the model followed by the European Union. The EU, while not a country, has a greater scope for irregularities and tax havens as it is a union of different countries. A similar situation arose about soaring electricity rates and limited players benefitting from disproportionately high prices.²⁶ This situation can arise concerning royalty rates by the States in India. However, the EU States politically agreed to cap the Revenue of such players. Minerals are raw materials for many other sectors, and an increase in costs due to higher State royalties will directly impact the entire economy.²⁷ While Revenue caps and royalty caps are different, the problem that India might face is essentially the same: soaring prices eventually due to multiple reasons, including but not limited to regulatory instability, uneven playing field, and unchecked authority to every State. We must not forget that India is a holding-together federation, where federalism can be asymmetrical to a limited extent.²⁸ Thus, a similar approach can be adopted by the States in India by capping royalties to avoid drastic cost increases, ensuring economic stability while respecting State autonomy. This ensures a level playing field and equitable distribution of resources about the concerns raised under Articles 14, 19(1)(g) and 39(b) of the Constitution.

A national framework for mineral taxation

Some central oversight is essential to materialise such an inter-State collaboration for the greater public welfare. A reference can be made to the model adopted by the Goods and Services Tax (GST) Council, formed under Article 279-A of the Indian Constitution.²⁹ The GST Council has been successful in accomplishing multiple objectives, such as the creation of a unified framework for various taxes and cesses, minimising any cascading effects of taxes, and creating a unified economic market, amongst others.³⁰ The success of the GST Council can inspire the creation of a National Mineral Taxation Council. The tax policies across the States have been well harmonised by the GST Council, ensuring the avoidance of any complexities and irregularities that lead to regulatory chaos. Standardised taxation benchmarks could be established with special considerations for local nuances of every State being discussed transparently amongst all States with central oversight within such a Council’s purview. Such a Council would effectively prevent imposing excessive or arbitrary taxes, thus promoting a more equitable resource distribution and creating a level playing field. Any policies which could deter investments in the mineral sector can also be avoided. Such a Council should, however, function in the capacity to simply recommend, facilitate inter-State dialogue, and arrive at solutions for any sort of issues that the States might face while regulating mineral taxation. This ensures the proper balance between federalism and stability.

Conclusion: Charting the way forward for mineral governance

While the Supreme Court’s ruling highlights a significant milestone reached in the debate for federalism and resource management in India, the concerns regarding a regulatory conundrum and economic instability in and around the mineral sector still continues to persist. Building upon the dissenting opinion of Justice Nagarathna, several constitutional concerns have also continued to exist. The recommended inter-State and Central Government collaborations thus aim for the ultimate creation of a well-planned national strategy, thereby ensuring that our actions at present align with our long-term goals. The suggested approaches balance State autonomy with the need for a broader outlook beyond the narrow domestic walls of each State’s local interests, as minerals are of immense national concern. The way forward thus, should in our opinion be to prioritise efficiency and equity, which will thereby ensure to deter chaos and arbitrage in and around the mineral industry.