INTRODUCTION
The case of, Mineral Area Development Authority v. Steel Authority of India (2024), involves the interpretation of the Mines and Minerals (Development and Regulation) Act [MMDR Act] and its levy on the subject matter of mines and minerals (mineral rights). On one hand, the validity of the royalty was questioned for the fact that it is not a tax but rather a regulatory fee for mineral extraction. Therein, overall the dispute concerns the royalty and its categorization as a tax or regulation, it also looked into States and their power or legislative competence to levy tax on mining lands.
FACTS
This particular case originates from various appeals regarding the state legislature’s power to levy taxes on land used for mining and related purposes. The appeals centered on interpreting Entry 50 of List II (State List) under the Seventh Schedule of the Indian Constitution. This above-mentioned entry allows states to impose taxes on “mineral rights”, but is subject to the restrictions provided under the laws on mineral development by the Parliament.
The MMDR Act was enacted by the parliament under Entry 54 of List I (Union List). Wherein, this act regulates and has set the framework for developing mines and minerals, it also specifies royalty payments on those extracted minerals under Section 9.
The concern relating to the interpretation was addressed in landmark cases. In the year 1990, the Supreme Court, in the case of India Cement Ltd. v. State of Tamil Nadu, clarified the stance regarding the royalty on mines. It held that royalty is a tax and therefore, states are restricted from employing that as a basis for imposing taxes under Entry 49 of List II (taxes on land).
The Supreme Court in India Cement Ltd. v. State of Tamil Nadu (1990) held that royalty is a tax and barred States from using royalty as a basis for imposing taxes, as it is covered in the MMDR act. Also, States cannot levy tax on mining lands based on Entry 49 of List II, relating to taxes on land. In another case, State of West Bengal v. Kesoram Industries Ltd. (2004), the verdict of India Cement was overruled. Wherein, here, in this case, it was held that “royalty is not a tax”.
Therefore, these contradictory judgements created a level of uncertainty, questioning the State’s scope concerning the powers to impose tax relating to the subject matter of mining lands, under Entries 49 and 50 of the state list.
Following these verdicts, various States introduced laws imposing taxes, cesses, and fees on mining lands, basing the estimation of tax on the royalty or value of the minerals. States like Bihar, Rajasthan, and Uttar Pradesh amended and introduced taxation on mining lands. These impositions of tax on mining lands in these states was challenged in various high courts concerning its constitutional validity. Therein, in Bihar, the amendment was struck down by the Patna HC, stating that the state had exceeded its legislative competence and violated principles established in the India Cement case.
ISSUES
- Whether, royalty stated under Section 9 of the MMDR act, is a tax or not, and what is its scope and nature concerning the legislative powers under the Indian Constitution?
- What are the scope and limitations of Entry 50 of List II and Entry 54 of List I, respectively concerning mining lands?
- Whether Entry 50 of List II, restricts or excludes the scope of Entry 49 of List II regarding the taxation of mining lands?
ARGUMENTS
Petitioner’s Arguments
The Petitioners asserted that a royalty here was considered to be a statutory consideration for the granting of rights to mine and extract minerals and not a tax under Section 9 of the Mines and Minerals (Development and Regulation) Act (MMDR Act). They argued that a royalty is merely a regulatory fee but not an impost under Article 366(28) of the Constitution. Further, the Petitioners argued that Entry 49 of List II, which pertains to taxes on lands and buildings, should be broadly interpreted to include mineral lands in the sense that minerals form part of the land until they are extracted. They also argued that Entry 50 of List II, which deals with taxation on mineral rights, gives the states the sole right to tax mineral rights and that this taxing power cannot be restricted by the MMDR Act unless limited by the Parliament through law.
In addition, the Petitioners argued that the competence of Parliament to legislate concerning mines does not extend into the area of taxation on mineral rights, being a matter that falls under Entry 50 of List II and thus within the exclusive jurisdiction of the states. They pointed out that Entry 54 of List I (Union) and Entry 23 of List II (State) relate to regulation and do not thus clash with Entry 50.
The Petitioners concluded that royalty should not be confused with taxes, since they are charges for the extraction of minerals. Both measures may include products and productivity of land, including minerals, under Entry 49, citing the link between the regulatory function of royalty and tax on mineral rights.
Respondent’s Arguments
The Respondents contended that royalties paid as per the MMDR Act is a tax because it is charged by the state for the abstraction of minerals and is more in conformity with the features of a tax under the definition of “tax” as in clause (28) in the Article 366 of the Constitution. Respondents also held that the royalty is not just a regulatory fee but is instead a liability resembling a tax on mineral resources being extracted from the land. The Respondents contended that the term “tax on mineral rights” under Entry 50 of List II should be understood to extend also to royalties as they are charged for the rights of mining and extracting minerals. So, according to the Respondents, the royalty can be equated with tax on mineral rights, subject to the constitutional framework.
In addition, Respondents upheld the argument that the levy of royalty by the central government did not violate upon state’s competence to tax mineral rights under Entry 50 of List II, since the central government has the authority to regulate mining through laws such as the MMDR, which by itself made such royalty a regulatory measure to ensure just compensation for extraction of national resources.
The Respondents argued that such royalty must be within the definition of taxation as it was imposed by the state as consideration for the extracting minerals from land and this levy found constitutional validity under the powers conferred Entry 49 of List II that enables imposition of taxes on land including any minerals thereunder.
JUDGEMENT
The Supreme Court held that the royalties paid are not a tax but are contractual considerations for the enjoyment of the mineral rights under a mining lease, between the lessor and lessee. It observed that Entry 50 List II does not give powers to Parliament to levy taxes on mineral rights as it is a matter solely within the competence of the State legislatures. The scope Entry 49 List II applied mining lands comes within the ambit of states which means that for such lands, the state legislatures may impose a tax, and the value of extracted minerals or royalty will be used as an estimating measure for taxation. The Court also overturned a large number of earlier judgments stressing that limitations imposed by Parliament on mineral development under Entry 50 do not extend Entry 49.
