States have power to levy tax on mines, mineral bearing lands; royalty not tax: SC

New Delhi: A nine-judge Constitution bench of the Supreme Court on Thursday held that states have the constitutional authority to levy taxes on mines and mineral-bearing lands.

The 8:1 majority judgement, authored by Chief Justice DY Chandrachud and agreed to by Justices Hrishikesh Roy, Abhay S Oka, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih, also ruled that royalty payable on extracted minerals is not a tax.

CJI Chandrachud, along with seven other judges, delivered a majority judgement, while Justice BV Nagarathna delivered a dissenting judgement.

The majority judgement stated, “Royalty is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease. The payments made to the government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears.”

It said that the legislative power to tax mineral rights vests with the state legislatures and Parliament does not have the legislative competence to tax mineral rights under Entry 54 of List 1, as it being a general entry.

“Since the power to tax mineral rights is enumerated in Entry 50 of List 2, Parliament cannot use its residuary power with respect to that subject matter,” it added.

Justice Nagarathna, disagreeing with the majority verdict, held that royalty is in the nature of a tax. Hence, the provisions of the Union Law—Mines and Minerals (Development and Regulation) Act 1957 (MMDR Act) regarding levy of royalty denude the States of their power to levy taxes on minerals.

The minority judgement stated that allowing states to levy taxes on minerals would lead to a lack of uniformity on a national resource. This could also lead to unhealthy competition among the states, and this may result in the breakdown of the federal system, Justice Nagarathna said.

After the judgement was pronounced, Solicitor General Tushar Mehta, senior advocates Arvind Datar, and Abhishek Manu Singhvi requested the bench to clarify that the judgement would operate only prospectively.

The bench said it would hear the parties on this point next Wednesday.

The case involved the issue of whether state governments are denuded of powers to tax and regulate activities concerning mines and minerals in view of the enactment of the Mines and Minerals (Development & Regulation) Act (Mines Act), 1957. (ANI)

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