Issues and Challenges Pertaining to the Federal Structure, Devolution of Powers and Finances up to Local Levels and Challenges Therein
Federal principles frequently need a guardian to balance it. In this light of statement, examine the centre-state powers on having royalty and imposing tax on mineral resources with recent judicial interpretation for upholding federalism.
In the recent landmark ruling, the Supreme Court affirmed that States have the legislative authority to impose taxes on minerals in addition to the royalty levied by the Centre. Upholding the principles of federalism, the verdict clarified that the power of State legislatures to tax mineral activities within their respective territories is not constrained by Parliament’s Mines and Minerals (Development and Regulation) Act, 1957 (1957 Act).
Origin of the case:
- The case started from the dispute between India Cement Ltd and the Tamil Nadu government which arose after the company secured a mining lease in Tamil Nadu. Although India Cement was already paying royalties, the government imposed a cess — an additional tax on land revenues, including royalties.
- The company challenged this in the Madras High Court contending that the cess on royalties effectively constituted a tax on royalties, the imposition of which exceeded the State’s legislative authority.
- In 1989, a seven-judge Bench of the Supreme Court in India Cement Ltd. v. State of Tamil Nadu decided in favour of India Cement by reasoning that States only have the power to collect royalties and not impose taxes on mining activities.
- Over a decade later, a five-judge Bench in 2004, while hearing a similar dispute between West Bengal and Kesoram Industries Ltd held that there was a typographical error in the India Cement decision and that the phrase “royalty is a tax” should be read as “cess on royalty is a tax”.
What is the difference between royalty and tax?
- It defined royalty as the “contractual consideration” paid by the mining lessee to the lessor (who may also be a private party) for the right to extract minerals.
- In contrast, a tax was characterised as an “imposition by a sovereign authority.” The taxes are determined by law and can only be levied by public authorities to fund welfare schemes and public services.
- Meanwhile, royalties are paid to a lessor in exchange “for parting with their exclusive privileges in the minerals”.
States’ role on taxing mineral resources:
- Entry 50 of the State List under the seventh Schedule of the Constitution gives States the exclusive authority to make laws regarding “taxes on mineral rights”, but this power is limited by any laws Parliament may pass concerning mineral development.
- On the other hand, Entry 54 of the Union List gives the Centre the power to regulate “mines and mineral development,” especially when Parliament decides it is necessary in public interest.
- Since the royalties could not be classified as a tax, they do not fall within the category of “taxes on mineral rights” as defined in Entry 50 of the State List.
- As a result, it was held that the 1957 Act merely provided States with another source of revenue through royalties, without interfering with their authority to levy taxes on mineral rights under Entry 50.
- While the Centre is empowered to regulate mining development under Entry 54 of the Union List, the court clarified that this authority does not include the power to impose taxes, which is exclusively under the jurisdiction of the State legislatures.
- However, this express power, it said, is subject to “any limitations” that may be imposed by Parliament which could even include a “prohibition’” against imposing taxes.
- This implies that if the Centre wanted to modify the existing legislative framework under the 1957 Act to divest States of their power to levy a tax, it could do so.
- From the recent decree, States have the power to tax the land where mines and quarries are located by virtue of Article 246 read with Entry 49 (taxes on lands and buildings) of the State List.
- “In other words, mineral-bearing lands also fall within the description of lands under Entry 49 of List 2,” adding with that the income of the land yield can be adopted as a measure of tax
Concerns regarding state imposing tax:
- The 1957 Act should be considered as tax for developing the country’s mineral resources.
- The act was intended to promote mineral development and this objective could be severely undermined if States were allowed to impose levies and cesses (additional taxes) on top of the royalties they collect.
- The passage of the 1957 Act thus “denuded” States’ powers to levy taxes by entrusting the Centre with complete control over mineral development and limiting States to generating revenue solely through royalties, she underscored.
- This would lead to an “unhealthy competition between the States to derive additional revenue” resulting in a steep, uncoordinated, and uneven increase in the cost of minerals.
- This scenario might exploit the national market for arbitrage, where differences in pricing could be manipulated for profit, disrupting the market’s stability.
If the court applied this retroactively, it could result in significant financial benefits for mineral-rich States such as West Bengal, Odisha, and Jharkhand, which have enacted local laws to impose additional taxes on mining lessees.