Regular Entries In 7th Schedule Of Constitution Can't Be Given Wider Interpretation To Include Taxation Powers : Supreme Court

The Supreme Court has recently held that regular entries under List I and II of the 7th Schedule of the Constitution cannot be given a wider interpretation to include taxation powers which are covered under the domain of specific tax entries under the 7th Schedule. 

The 9 Judge Constitution Bench led by CJI DY Chandrachud observed this while holding that States have the power to levy tax on mineral rights under Entry 50 List II and that the Union law - Mines and Minerals (Development and Regulation) Act 1957 (enacted under Entry 54 List I) - do not limit such power of the States. The relevant entries state as follows: 

Entry 50 List II: States' powers on taxing mineral rights. The State Governments have the authority to impose taxes on the extraction and subsequent use of minerals within their territories. However, such a power is subject to 'any limitations imposed by Parliament by law relating to mineral development' 

Entry 54 List I: Power of the Parliament to regulate mines and mineral development to the extent to which such regulation and development is deemed as per a Parliamentary Law to be necessary in the public interest.

The Court held that Entry 50 List II and Entry 54 List I are regulatory entries and do not expressly come under 'taxing entries' which are listed separately under the respective Union and State Lists.

The Court observed that enlisting tax on mineral rights in List II is a constitutional entrustment to the states. Thus expanding the scope of regular entries such as Entry 54 List I to include taxation power would grant arbitrary and unconstitutional authority to both Union and States.

“Giving an extended interpretation to regular entries to include the power of taxation will grant arbitrary and unconstitutional authority to the Union and the States.”

It further explained that Entry 54 in List I, being general, doesn't include taxation power. Parliament can't use residuary powers to gain legislative competence for taxing mineral rights if it's not in Entry 54 List I. The Court is required to respect the constitutional distribution of federal powers.

“The enumeration of tax on mineral rights in List II is a constitutional entrustment to the states. This Court is bound to abide by the Constitutional distribution of the legislative powers.”

Entry 50 List II Not An Exception To The Sundararamier Principle

The Court analysed that Entry 50 List II is not a carved exception to the well-accepted 'Sundararamier Principle'. This principle states that taxing entries are listed separately from general entries in Lists I and II of the 7th Schedule and taxation powers can't be derived from regulatory legislative entries. Such power can only be invoked from specific taxing entries.

It was recognised that legislatures may have incidental and subsidiary powers for legislative entries, but taxation power could be considered incidental or subsidiary to powers granted under regular entries.

“Entry 50 List II is not an exception to the Sundararamier Principle which is that taxing entries are enumerated separately from the general entries in List I and II of the 7th Schedule. The field of taxation cannot be derived from regulatory legislative entries, it has to be derived from specific taxing entries. This principle has now been well entrenched in our Constitutional jurisprudence.”

The Court emphasized that the ambit of Entry 50 List II is only limited to the laws made by the Parliament in relation to 'mineral development'. Thus the power to tax has to be expressly present in an Entry and cannot be implied from regulatory powers.

“The legislature had incidental and subsidiary powers with respect to a legislative entry, however the power to tax is neither incidental nor subsidiary to the power to legislate in a particular matter in the nature of a regulatory entry. Entry 50 List II is subordinated only to the extent that any limitation that may be imposed by the Parliament by law relating to mineral development.”

The Court clarified that as per the limitation under Entry 50 List II, the state has full power to tax miner rights unless a Parliamentary Law on mineral development curtails it. However MMDR Act being legislation enacted by the Union on the subject of mineral development is absent of any express provision which curtails such powers of the States.

“Unless Parliament imposes limitations, the plenary powers of the state to levy taxes on mineral rights are unaffected. Parliament can impose legislation under Entry 50 List II by means of statutory provisions, there is no specific provision in the MMDR Act which imposes limitations on the power of the state to tax mineral rights.”

MMDR Act Does Not Restrict The State's Power To Tax Mineral Rights

The Court conclusively held that the scheme of the MMDR Act does not limit the state's mineral taxation powers under Entry 50 List II. Since the Court established that royalty under S.9 is not a tax on mineral rights, any limitations on increasing the rates of royalty by the Centre as per the provision cannot be interpreted to mean the imposition of limitation to taxes imposed on mineral rights by States under Entry 50 List II.

As per S. 9 the holders of of mining leases, whether granted before or after the commencement of the MMDR Act, must pay royalties on minerals removed or consumed from the leased area at rates specified in the Second Schedule. The Central Government has the power to amend the royalty rates through notification, but such changes cannot occur more than once every three years.

The scheme of the MMDR Act cannot by process of stretched construction be read to limit the taxing power of the States under Entry 50 List II since royalty payable under S.9 is not a tax on mineral rights, any limitations on the enhancement of the rates of the royalty is not the imposition of tax under Entry 50 List II.

S.9 does not expressly impose any limitations on the power of the state to impose tax on mineral rights . S.9 limits the power of the central government to enhance royalty more than once in 3 years. This limitation does not govern taxes on mineral rights.

States Have A Power To Tax Mineral Bearing Lands Under Entry 49 List II 

The court held that the term "lands" in Entry 49 List II includes all types of land, regardless of their use. This means that states can tax lands used for growing crops, extracting minerals, or any other purpose. The court emphasized that Entry 49 list II allows taxation of land as a unit, without considering its specific use. It may be noted that Entry 49 List II deals with States' powers to levy taxes on lands and buildings. 

A land may be put to use for growing tea leaves or extracting minerals. But what Entry 49 of List II contemplates is the levy of tax on land as a unit, irrespective of the use to which it is put. Therefore, the State legislature is competent while designing the levy under Entry 49 of List II to tax lands which comprise of mines and quarries. In other words, mineral-bearing land also falls within the description of “lands” under Entry 49 of List II.

Referring to the decision in Spencer & Co. v. State of Mysore, the bench observed that state legislatures have broad discretion in classifying lands for taxation purposes. This flexibility allows states to create different categories of land which aid in imposing varied tax rates. In the said case, excess land around a building was treated as a separate class for taxation, which the court upheld as a valid exercise of state power.

The Court further established that minerals in their natural state are part of the land and include everything above and below the surface. Drawing upon this, it observed that subsoil minerals would be considered part of the land for taxation purposes under Entry 49 of List II.

 In their natural state, minerals or ores are part of the earth and remain embedded there unless extracted. It is also established that “lands” include everything over and below the surface. Therefore, constitutionally speaking sub-soil minerals also form part of land. The subject of taxation in Entry 49 of List II is land as a unit.

It was additionally clarified that the MMDR Act does not limit the state's power to tax lands under Entry 49 of List II. While the MMDR Act may affect state powers related to Entry 23 of List II (regulation of mines and mineral development), it does not impact the state's authority to tax lands and buildings. In holding so it relied on the decision of Western Coalfields Ltd. v. Special Area Development Authority which held that 'the tax on lands and buildings had nothing to do with the development of mines'. 

The principle which emanates from Western Coalfield Ltd (supra) is that the legislative declaration under the MMDR Act will only affect the legislative power of the State with respect to Entry 23 of List II to the extent the Parliamentary legislation covers the subject matter. The legislative powers of the State with respect to other subjects under List II, including taxes on lands and buildings, will not be affected or controlled by the MMDR Act. Therefore, the legislative powers of the States to levy a tax falling under Entry 49 of List II remain unaffected.

Other reports about the judgment can be read here.