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A recent ruling of a nine-judge Supreme Court bench on mineral rights turned out to be a double-edged sword. While it settled a 35-year-old dispute by giving states the right to impose taxes on minerals within their respective geographies, it also punched an estimated Rs 1.5-2 lakh crore hole in the Centre and the mining industry’s wallets. For, it allowed states to demand retrospective tax on all transactions made after April 1, 2005. Just for comparison, the total financial impact of the Seventh Central Pay Commission that strained the exchequer was estimated at a little over Rs 1 lakh crore.
When the bench ruled on July 25 that states have taxation rights, it was celebrated for its wisdom to strengthen fiscal federalism.
But the second part of the verdict on August 14 to apply it retrospectively was panned because of the wider impact on the economy as it threatened to fuel inflation further.
Though the retrospective tax will kick in on the All Fools Day after two years, and the payment has been staggered over the subsequent 12 years, it can be expected to raise the cost of mining so as to mop up additional revenue. When coal gets pricey, it raises the cost of electricity and has a cascading effect on the value chain of manufacturing. Expensive steel adversely impacts the infrastructure and real estate sectors. Ditto for other minerals.
Look inward
Let’s remember, the whole controversy stems from conflicting verdicts of two Constitution benches of the Supreme Court, necessitating a third larger bench to settle the divergence. In other words, it is a judicial mess for which more that the mining sector will bleed.
On October 25, 1989, a seven-judge bench led by Sabyasachi Mukharji ruled that mineral royalty is tax, in the India Cement v. State of Tamil Nadu case. The bench said state legislatures lack the competence to impose taxes on mineral rights because the matter is covered by the Mines and Minerals (Development and Regulation) Act, 1957 or MMDR Act.
But on January 15, 2004, a five-judge bench led by R C Lahoti arrived at the opposite conclusion that royalty is not tax, in the State of West Bengal v. Kesoram Industries, and attributed the India Cement ruling by the larger bench to an inadvertent error. It went on to say that the power to levy tax on mineral rights vests with the state legislatures but is subject to any limitations laid down by Parliament.
Ever since, various states exercised their legislative powers to impose taxes on mineral bearing land by applying their mineral value or royalty as the yardstick. They spawned a series of legal challenges. One such plea began in the Patna high court in 1999 and travelled to a three-judge Supreme Court bench, which on March 30, 2011, referred the dissonance between India Cement and Kesoram to a nine-judge bench.
The matter became more acute after the Goods and Services Tax regime kicked in from 2016. For, if royalty is not tax, mine operators would have to pay GST on all mineral extractions.
More than a decade later, the nine-judge bench was set up by Chief Justice of India D Y Chandrachud last year to take up four cases, the oldest one pending for more than two decades. The Supreme Court ought to introspect as to why it took such a long time to set up the bench. The bench, after hearings on mineral rights from February 27 this year, overruled the India Cement judgment by a majority of 8:1. The 200-page judgment was authored by the Chief Justice of India for himself and on behalf of justices Hrishikesh Roy, Abhay S Oka, J B Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih.
But on whether the ruling will apply retrospectively, the bench said it generally does not prefer the prospective doctrine while upholding the legislative competence of legislatures. Prospective application, it reasoned, would result in a peculiar situation where legislations enacted by various states on mineral levy would be invalidated though the India Cement verdict had been overruled. It would also force states to refund the amount collected as tax through an enabling legislation. Though the Centre sought to assure it would not demand any recoveries or seek refunds from states, the court did not consider it.
However, taking into consideration the lapse of more than three decades since the India Cement ruling and more than a decade since the matter was referred to a larger bench, the court decided that state governments will waive the interest accrued on the principal due till July 25 this year.
The nub on the matter
Interpreting a few entries in the Seventh Schedule of the Constitution, which deals with the powers of the Centre and the states and matters on the concurrent list, was at the heart of the dispute. While Entry 50 of List II says, states can levy “Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development,” Entry 49, List II puts “Taxes on lands and buildings” in the state basket. And Entry 54 of List 1 gives the Centre the right to “Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.”
The bench ruled that royalty is not a tax but a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. The payments made to the government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears.
As for the legislative power to tax mineral rights, the majority verdict said it vests with the state legislatures. Parliament, it pointed out, does not have legislative competence to tax mineral rights under Entry 54 of List I, since it is a general entry. Since the power to tax mineral rights is specified in Entry 50 of List II, Parliament cannot use its residuary powers in that matter, the bench ruled.
However, 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. But as of now, the MMDR Act has not imposed any such limitations. On balance, the scope of the expression “any limitations” is wide enough to include the imposition of restrictions, conditions, principles as well as prohibition, it ruled.
The bench went on to establish that 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.
Justice B V Nagarathna was the lone dissenter. In her dissenting verdict, she said royalty is in the nature of a tax or an exaction and the Centre does have the power to levy it. She, 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 prohibition by Parliament by law.
“The State legislatures have legislative competence under Article 246 read with Entry 49-List II to tax lands and buildings but not lands which comprise mines and quarries or have mineral deposits as mineral bearing lands do not fall within the description of lands (under Entry 49-List II),” she said in her 193-page verdict.
With complete unanimity on the powers of Parliament to legislatively impose restrictions, including prohibition, on mining rights of states, it remains to be seen if an innovative solution can be found out, as some experts suggest, to stop the hemorrhaging of the national exchequer.
Ironically, it would mean enacting a law that would apply retrospectively to kill a retrospective order.
Scope of ‘limitations’
“The use of the expression “any” before “limitations” under Entry 50 of List II indicates that the scope of the limitations is expansive and includes “all” or “every” limitation that could be imposed by Parliament by law relating to mineral development. The expression “any” has to be construed in its context, taking into consideration the scheme, purpose, and subject matter of the enactment, or in this case, the scheme of distribution of legislative powers under the Constitution,” the majority judgment said
Over the years
Mining of minerals like coal, iron ore, copper, lead and zinc has been going on in the country from time immemorial
However, the first recorded history of mining in India dates back to 1774 when the English
Company was granted permission by the East India Company for mining coal in Raniganj
M/s John Taylor & Sons started gold mining in Kolar Gold Fields in 1880
The first oil well was drilled in Digboi in 1866 - seven years after the first ever oil well was drilled anywhere in the world, viz. in Pennsylvania State, US in 1859
Mining activities, however, remained primitive and modest in scale till the beginning of the 21st century
In 1895, the Government of India initiated steps to frame legislative measures for the safety of workmen
In 1897, the first major disaster in mining hit the Kolar Goldfields, killing 52 people
Shortly thereafter, the Khost Coal Mine disaster in Baluchistan (now in Pakistan) killed 47 people
Both disasters hastened the formulation of safety laws and the first Mines Act was enacted in 1901
The Act was superseded by the Indian Mines Act, 1923, which was again replaced by the present Mines Act, 1952. This Act came into force on July 1, 1952
The Mines Act, 1952 applies to mines of all minerals within the country, including the offshore mines within territorial water limits. Major changes were incorporated in this Act in 1959 and 1983
Source: DGMS