States' Power To Tax Minerals Not Traceable To Power To Tax Land: Harish Salve Before Supreme Court 9-Judge Bench [DAY 5]
The Supreme Court on Wednesday (March 6) continued hearing the 9- Judge Constitution Bench matter on Royalties imposed on mining. On its 5th day of hearing, the Court deliberated upon the significant questions regarding the taxation of land and mineral rights, challenging the distinction between Entry 49 and Entry 50 in List II of the Indian Constitution. Senior Advocate Harish Salve,...
The Supreme Court on Wednesday (March 6) continued hearing the 9- Judge Constitution Bench matter on Royalties imposed on mining. On its 5th day of hearing, the Court deliberated upon the significant questions regarding the taxation of land and mineral rights, challenging the distinction between Entry 49 and Entry 50 in List II of the Indian Constitution.
Senior Advocate Harish Salve, appearing for Eastern Zone Mining Corporation, shed light on the unique nature of mineral rights and their separation from land for taxation purposes. He questioned the validity of considering something legally removed from the land, like mineral rights, as a measure for taxing the land. The respondent's argument centered on the impracticality of linking the value of legally distinct entities, such as mineral rights or machinery, to the value of the land for taxation.
Senior Advocate Harish Salve posed a crucial question, challenging the distinction between taxes on land and mineral rights. He pointed out the divergence between Entry 49 List II, which deals with taxes on land and buildings, and Entry 50 List II, specifically addressing taxes on mineral rights. Salve emphasized the need to recognize the unique nature of mineral rights and questioned their separation from the broader category of land for taxation purposes.
The point of discussion was whether the State's power to tax minerals can be traced to Entry 49, List II(taxes on land and buildings) instead of Entry 50 List II (Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.)
“ If something is not a part of land how can it be a measure on tax on land? Tax on machines (used on land), the value on machines, can you add to the value of the land for exaction? You cannot.”
Salve delved into the intricacies of taxation, arguing that if something is legally removed from the land, such as mineral rights, it cannot serve as a measure for taxing the land. CJI DY Chandrachud taking note of the same, asserted that the challenge to the validity of a measure in taxation is less strict than challenging the validity of the levy itself.
It was remarked by the CJI that, “Challenge to the validity of a measure as opposed to challenge to validity of a levy , the test is not as strict so long as the measure so long as the measure has some broad nexus to the character of the levy it is sustained”
Mr Salve agreeably explained, “ Correct, here I am saying the character on levy is on the land, anything which has a nexus with land but something which has been removed from the land (legally in concept), how can it provide you a measure? Your Lordships has dealt with it - machinary fixed on land”
The Chief Justice weighed in, explaining that Entry 49 allows for a wide legislative discretion in choosing measures as long as there is a broad nexus to the character of the levy.
“Entry 49, when it speaks on tax on land, it refers to levy, so long as the levy is on the land as a unit. The legislature has a wide discretion to choose amongst the various alternatives for determining the measure for which the levy can be put, in so far as the measure, that measure may not be in a constitutional sense, so far it has a nexus.”
Salve countered, arguing that mineral rights, as a separate legal class, lack a natural nexus to the value of the land. Drawing parallels, he highlighted the impracticality of adding the value of machinery, legally distinct from the land, to the land's value for taxation purposes.
“ When mineral rights are legally a class apart, they are no part of the land, how do they then have a nexus to the value of the land? That's the point. If I use land for parking aircrafts, can you say that the cost of the aircraft will be my measure for taxing the land? You cannot. You can say that the rate you are getting for parking the aircraft, that you can take..but can you say I'll add the value of the aircraft to the value of the land? You cannot.”
The Missing Nexus Between Entry 49 & 50 Of List II : Mr Salve Asserts 'Decoupling' Land And Mineral Tax
During the hearing, Mr Salve raised a crucial argument, asserting the absence of a necessary legal nexus between taxation and mineral ownership. He highlighted the disconnect between being the landowner with no rights to the minerals beneath and vice versa. According to Mr Salve, if the state owns the minerals and individuals own the land, the imposition of taxes solely on the land lacks a justifiable basis.
“The necessary legal nexus is missing. If I am right in the first part of my argument that there is a decouple (between Entry 49 and 50) .. I am the owner of the land and I have zero right to the mineral and the owner of the mineral has zero right to my land. The state owns the mineral, I own the land …you are telling I'll tax you on the land, on what basis?”
The Chief Justice responded, suggesting that Entry 49 and Entry 50 grant complete and exclusive jurisdiction to the state for taxing land and mineral rights, respectively. The separation of these entries, according to the Chief Justice, was intended to subject taxes on minerals to the limitations imposed by Parliament under Entry 54 List I. He clarified that without Entry 50, taxes on minerals would naturally fall under Entry 49. This legislative intent aims to regulate the taxation of minerals through the limiting powers vested in Parliament.
“Now the reason why they decoupled entries 49 and 50 was that they wanted to subject the tax on minerals to the limitation imposing power of the Parliament under Entry 5 4List I , otherwise it's not like the power to impose those two taxes is given to two different legislatures. The legislature is one and the same.”
Mr Salve however countered this by asserting that as per his interpretation, taxation on minerals should not be automatically subsumed under taxes on land. Salve pointed out that individuals might own land without having rights to the valuable minerals beneath. He questioned the legitimacy of taxing land based on the worth of minerals that individuals don't possess rights to exploit.
“Today we all own homes, and beneath them there are minerals which are now considered very valuable, do any of us own them (minerals) no! We only have right to the land on surface purposes…Some of the rights which I do not have in the land, how can that be a measure for taxing me on the land?”
The senior advocate also focused on the aspect that full land ownership doesn't imply the right to exploit minerals since minerals are a separate entity vested in the State. He contended that this separation disrupts the measure for taxation on land, breaking the nexus and connection between the value of the land and the vested minerals, highlighting the complexities arising from distinct property rights.
“My full title to the land doesn't mean I have a right to exploit the mineral, because minerals as a separate head have vested in the State. How can that be a measure of a tax on land where the minerals are vested in the state. And that is where the measure breaks because it has lost nexus with the land, it has lost connection.”
The Key Elements of Entry 50 List II & Brainstorming Alternative Interpretations
Mr Salve highlighted three crucial elements underpinning Entry 50.
Entry 50 List II states: 'Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development'. The senior counsel dissected the Entry into 3 parts; (1) emphasizing that the taxation pertains to mineral rights, (2) subject to any limitations imposed ; and (3) these are impositions imposed by the Parliament by law relating to mineral development.
Mr Salve further contended that the language of Entry 50 implies taxes on mineral rights, not minerals themselves, subject to limitations imposed by Parliament through laws related to mineral development. Salve highlighted that the state's perspective, advocating for reading the entry as taxes on mineral rights subject to the law imposed by Parliament, deviates from the actual language used in the entry. This led to a crucial question: where does Parliament explicitly state that the imposition of mineral taxes is prohibited?
“ There are alternative formulations by which our founding fathers could have written this entry - it should be read as taxes on mineral rights subject to the law imposed by the Parliament, as the state would want to persuade you to read, but that is not the language. Then one would say where does Parliament say you should not impose mineral tax?”
He emphasized the potential ramifications if the interpretation of Entry 50 allows states to tax mineral rights without constraint. Drawing attention to contemporary concerns, he cautioned that an unrestricted interpretation could pave the way for excessive taxation on minerals like uranium.
“ If the entry is construed in its plenitude that the MMDR Act (Mines and Minerals (Development and Regulation) Act) as it stands today, in no way constrains the state from taxing mineral rights, then tomorrow uranium produce can be taxed to death.”
The CJI however countered this by asserting that Parliament can still delineate limitations, especially concerning minerals of national security. However, Salve argued that such limitations must flow naturally from a law relating to mineral development, not merely a law related to the taxing power of the state.
He explained, “I am sorry my lord, that will again not then fit into Entry 50, because then it must be a law relating to mineral development not a law relating to the taxing power of the state. The limitation must flow naturally from a law relating to mineral development”
The Chief Justice injected, stating that Salve's alternate formulation, where limitations are imposed by law, would give Parliament a broader scope, potentially conflicting with the narrower domain specified in Entry 50 List II.
The CJI opined, “But that goes against you Mr Salve, if you see your alternate formulation which the Parliament has not made - taxes on mineral rights subject to limitations imposed by law by Parliament. If this was the formulation, then the domain of the Parliament would have been much larger because all that they have to do is impose a limitation by law. The power of Parliament is much narrower because it has to be by law and it is a law in the interest of mineral development”
Justice A.S Oka also weighed in to add that Parliament could still contribute to mineral development by enacting laws that constrain the imposition of taxes on specific minerals, like uranium.
“You have given the example of Uranium. Now suppose a law is made by the Parliament putting constraints on imposing tax on Uranium, that will also be a step towards mineral development”
The senior counsel delved into the historical context of Entry 50, originally drafted in 1935 and still pertinent today. Salve asserted that the framers intended for Parliament's laws on mineral development to inherently include limitations on taxing mineral rights. He argued that the architecture of such laws should naturally restrict the extent of taxation on mineral rights. According to Salve, the essence of Entry 50 lies in the idea that Parliament's legislation forms the basis for limiting the imposition of taxes on mineral rights, ensuring compatibility with the broader objectives of mineral development as envisioned by the relevant laws.
“So the test is, by the kind of law which Parliament has made, a tax on mineral rights becomes incompatible with mineral development as contemplated by law relating to mineral development. That right gets limited.”
The CJI interjected Salve's argument, reminding him that any limitations amounting to a prohibition must be clearly evident in the laws enacted by Parliament, particularly emphasizing the need for scrutiny of the Mines and Minerals (Development and Regulation) Act provisions.
“ Assuming that a limitation can amount to a prohibition, that limitation must appear clearly from a law that parliament has enacted not just that this contrary to the structure of the law or something like that.”
Unpacking The Three Key Elements - Mr Salve Explains
Mr Salve's submissions addressed the 3 forked legal analysis on Entry 50 List II :
- Royalty as a Form of Taxation:
Salve explained that a tax on mineral rights, constitutionally meant a tax which gives the state a share on the mineral produced. If that is so, and Royalty answers the description of a share of what is produced, then in that sense a freeze on royalty by S.9 of the MMDR Act operates as a limitation on taxing mineral rights.
“So in that sense, Royalty is akin to a tax” , He stated.
- Federalization and Unraveling Limitations Under Entry 50 List II:
Mr Salve clarified the intricate nature of Entry 50, asserting that it fundamentally results in the federalization of mineral resources by Parliament. He highlighted a critical point – while Parliament takes charge of federalizing these resources, it refrains from direct involvement in Entry 50 List II. Instead, the states are given unbridled authority in this realm. Salve emphasized that a state's imposition of limitations on mineral development is insufficient to meet the criteria set by Entry 50.
To underscore this, he presented a hypothetical scenario: if Entry 54 List I, which deals with Union's Power on Regulation of Mines and Mineral Development did not exist, arguing under Entry 23 List II (relating to regulation and development of mines by the State ) would not suffice. Salve contended that Entry 50 specifically ties the legislation to Entry 54 List I, underscoring the importance of these subtle details. He reasoned that these nuances are crucial because they collectively ensure that ownership of mineral resources remains with the state.
“ On the construction of entry 50, first of all Parliament has federalised these (resources). Parliament does nothing under Entry 50 List II, it is left to the states untrammelled. A State may itself impose limitations on mineral development but thats not good enough for 50. Suppose Entry 54 List I was not there, could I argue under 23 List II this is done therefore no limitation- no! Imposed by parliament by law. So it limits it to a legislation referrable to Entry 54 List I. All these little pointers in the Entry are very important, why? Because the ownership must remain with the state.”
Mr Salve's argument sheds light on the meticulous drafting of Entry 50, clarifying that while states can set limitations themselves, true authority lies in legislation connected to Entry 54 List I. This careful delineation, according to Salve, safeguards the state's ownership of mineral resources
- MMDR Act's Defining Role:
Salve delved into the Mines and Minerals (Development and Regulation) Act (MMDR), illustrating how it plays a pivotal role in defining the minerals it applies to, creating exhaustive rights, and outlining fiscal exactions for mineral rights. He pointed out that the Act meticulously defines the mechanism for levy, collection, recovery, and penal sanctions. Salve clarified that a tax on mineral rights constitutionally involves the state receiving a share of the mineral produced. In this context, Salve argued that the freeze on royalty by Section 9 of the MMDR Act serves as a limitation on taxing mineral rights, portraying royalty as akin to a tax.
“ It (MMDR Act) defines exhaustively the terms and conditions by which those rights can be created and subjected to. The state or the owner, it cannot add one more condition or remove one condition. It defines the fiscal exactions for the grant or creation of mineral rights. It lays down the levy- S.9 says if I remove mineral I shall pay - it is almost like a charging section in taxing law. It creates a complete mechanism for the levy, collection, the recovery and the penal sanction.”
As per Section 9 of the MMDR Act of 1957 (Act of 1957), the mining lease holder, whether granted before or after the enactment of the Mines and Minerals (Regulation and Development) Amendment Act, 1972, is obligated to pay royalty for minerals removed or consumed from the leased area.
S.9 of MMDR Act: Balancing Competing State Interests
During the discussion, Justice Pardiwala raised a pertinent question regarding Section 9 of the MMDR Act . He questioned how royalty collection, as outlined in S.9, would function if the state's role is limited to executing lease deeds without further involvement.
“ Keep section 9 in mind, it provides for the collection royalty, if the state is to only execute lease deed and do nothing, who will collect the royalty? And if somebody has to collect the royalty, the amount will go to whom?”
Mr Salve responded, shedding light on the nuanced intricacies. Salve clarified that when the state acts in executing lease deeds, it does so not merely as a state or owner but as a delegate under parliamentary legislation. According to Salve, the current legal framework, as established by Parliament, extensively covers the operational aspects of mineral rights, including the associated fiscal responsibilities.
“The state acts not qua state, not qua owner, the state is acting as a delegate under parliamentary legislation. Parliament has stitched up as the law stands today, pretty much the entire area of the operation of mineral rights including the fiscal burden”
The senior advocate in further clarification, pointed to the purpose behind Section 9(3) of the MMDR Act. He highlighted that this provision was crafted to address the need for balancing the competing interests of different states, each possessing diverse mineral resources.
In his closing argument, Mr Salve urged the court to consider the pressing needs of mineral development in contemporary India. He emphasized the potential distortion caused by non-uniform fiscal impositions on minerals, particularly those outlined in Schedule 1. Salve contended that Parliament's imposition ensures uniformity in revenue distribution across states, avoiding discrepancies. He cautioned against an overreliance on Entry 49, advocating for a broader interpretation of measures and a narrow reading of limitations under Entry 50. Salve asserted that such an approach aligns with both the legislative intent of the MMDR Act and the vision of the founding fathers, who recognized the paramount importance of central control over minerals compared to land.
Background
The key reference question involved in the present matter is to examine the nature and scope of royalty as prescribed under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and whether it could be termed as tax.
The matter was referred to 9 judge bench in 2011. A three-judge bench headed by Justice SH Kapadia had framed eleven questions to be referred to the nine-judge bench. These include important tax law questions such as whether 'royalty' can be considered as being like tax and can the State Legislature while levying a tax on land adopts a measure of tax based on the value of the produce of land. The three-judge bench clarified in this case that the reason why it was not referred to a five-judge bench and directly referred to a nine-judge bench was because prima facie, there appeared to be some conflict in the decisions of State of West Bengal v. Kesoram Industries Ltd. and Ors which was delivered by a bench of five-Judges and India Cement Ltd. and Ors. v. State of Tamil Nadu and Ors. which were delivered by seven-judge benches.
Case details : Mineral Area Development v. M/S Steel Authority Of India & Ors (CA N0. 4056/1999)