The burning topic of tax on royalty related to the mining royalties under the Mines and Minerals (Development and Regulation) Act, 1957 i.e. MMDRA is being debated in a 9 judge bench headed by the Chief Justice DY Chandrachud of the Supreme Court of India. Constitutional benches that comprise of five, seven or nine judges have often resolved issues regarding long-debated substantial questions of law related to the interpretation of the Constitution. The issue at hand is primarily a two-fold question that is royalty a tax and whether a state can levy tax on royalty. Let us now understand the issue, need for a 9 judge bench and the arguments from both sides.
Mining Royalties – MMDRA
The mining royalties have been specified as the amount by the holder of the mining lease granted before, on or after the commencement of the MMDRA shall pay royalty in respect of any mineral removed or consumed by him or by his agent, manager, employee, contractor or sub-lessee from the leased area after such commencement, at the rate for the time being specified in the Second Schedule in respect of that mineral. This was acknowledged by both sides as to be paid under law and was paid by the holders as required.
Case Study – India Cements Ltd.
India Cements Ltd. was granted a mining lease by the Tamil Nadu government and the company was paying the mining royalties as defined under the MMDRA. However, later on the state government imposed a cess on the royalty which was argued by the company that the cess was in the nature of a tax on royalty for which the Tamil Nadu legislature did not have the power to impose under the subjects of the State List as per the Constitution.
The Tamil Nadu government contended that the levy pertained to land revenue and mineral rights, falling within the ambit of Entries 23, 45, and 50 of the State List (List II), thereby falling under the jurisdiction of the states for taxation. However, a precedent set by a 7 judge bench in 1989, favouring India Cement, established that the primary authority over regulation of mines and mineral development lies with the Centre under Entry 54 of the Union List (List I), as governed by laws like the MMDRA. The ruling clarified that states are empowered solely to collect mining royalties under the MMDRA, without the authority to impose additional tax on royalty.
The court elaborated by stating that royalty constitutes a form of taxation, thus implying that any cess imposed on royalty exceeds the legislative competence of the State Legislature, given that Section 9 of the Central Act comprehensively governs this domain.
Case Study – Kesoram Industries Ltd.
In 2004, in the case between Kesoram Industries Ltd. And the State of West Bengal, regarding cess on land and mining royalties, a 5 judge constitution bench held that there was a typographical error in the 1989 verdict and the phrase ‘royalty is a tax’ should be read as ‘cess on royalty is a tax’ and thus the verdict essentially meant that royalty is not a tax.
Now since the India Cements verdict in 1989 was made by a 7 judge bench, and over the years more than 86 petitions on this issue have been filed filed by different state governments, mining companies and public sector undertakings. The issue at hand of whether royalty is a tax and whether a state can levy tax on royalty was directed to a 9 judge bench headed by Chief Justice DY Chandrachud in the Supreme Court.
Mining Royalties – Tax on Royalty – Arguments by Mineral Area Development Authority
The contention of Mineral Area Development Authority is that mining royalties cannot be considered as a tax since taxes can only be imposed by the government whereas can be paid to a private person as well.
Moreover, it is argues that states have the power to levy taxes on mines and mineral development on the basis of Entries 49 and 50 of the State List. Entry 49 comprises taxes on lands and buildings and Entry 50 comprises of taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development. Therefore, the phrase “limitations imposed by Parliament” within Entry 50 does not explicitly grant the Centre full authority to suppress the states’ power to impose taxes on mineral development. Similarly, Entry 54 of the Union List also does not explicitly confer such extensive powers to the Centre.
Mining Royalties – Tax on Royalty – Arguments by Easterzone Mining Association
The Easterzone mining association underscored the significance of recognizing royalties under the MMDRA as analogous to taxes. There is a necessity for Parliament to have the prerogative to establish boundaries on the taxation capabilities of states. The rationale behind this position was pointed out emphasizing the inherent disparities in mineral resources distribution across states. By acknowledging these discrepancies, it becomes imperative to empower Parliament to enact measures that ensure a fair and equitable distribution of revenue derived from mineral development activities.
In essence, it was contended that viewing royalties as a form of taxation necessitates a regulatory framework that strikes a balance between state autonomy and the overarching national interest in mineral resource management.
Latest Update
On Thursday, 14th March, 2024, the Supreme Court deliberated and withheld its verdict on the highly contentious matter concerning the classification of royalties on minerals. The central question at hand is whether such royalties constitute a form of taxation, thereby determining whether only the central government possesses the jurisdiction to impose such charges, or if states retain the authority to levy similar exactions on mineral-rich land within their respective territories.
The latest updates on the revamped e-invoicing portal are available here.