'States Have Few Areas Of Taxation, We Must Not Dilute Those' : Supreme Court Expresses Concerns About Diluting States' Tax Powers On Minerals [Day 3]

The 9-judge Constitution Bench of the Supreme Court, on its third day of hearing on Thursday (February 29) on the issue relating to royalty on minerals, deliberated whether the Parliament can completely denude the States of their power to levy taxes on mineral rights.

A bench headed by Chief Justice of India DY Chandrachud and comprising Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih is hearing the matter.

Analysing the relevant entries under the Seventh Schedule of the Constitution, CJI Chandrachud remarked during the hearing, "Taxing power always remains with States in relation to minerals and it is never with the Union. The States have very few areas of taxation, most of taxing powers under the constitution are given to the Union, we must not dilute those areas.”

The Court's deliberation revolved around Entry 50 List II, which grants states the power to levy taxes on mineral rights, but subjects it to limitations imposed by Parliament through laws related to mineral development. 

Justice Nagarathna analysed that if the State has to impose a tax on minerals, it shall first see whether there is a central law on mineral development. If there happens to be a limitation imposed by the Centre, that has to be looked into. She further placed reliance on the phrase 'subject to limitations imposed by the Parliament' as prescribed under Entry 50 List II.

Entry 50 List II provides States with the authority to levy taxes on mineral rights within their territories, but it is subject to limitations that can be imposed by Parliament through laws related to mineral development. The limitations imposed by Parliament may influence the extent to which states can exercise their taxing powers concerning minerals.

She added. “ In all these Entries, Entry 54 List I ( Union's Powers on regulation of mines and mineral development), Entry 23 List II (State's power regarding the regulation of mines and mineral development ) or Entry 50 List II, mineral development is common. It is actually a subject given to the Parliament in the interest of uniformity and development in the national/ public interest. So that should be the way the State should proceed before imposing any tax on mineral”

 Attorney General (AG) Mr R Venkataramani explained, “If you see Entry 50 alone (referring to the second phrase on limitations in Entry 50), it suggests that Parliament can make a law in the domain of mineral development.”

Entry 50 List II states: 'Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development'

Justice Hrishikesh Roy posed to the AG whether the Union of India (UOI) can enact a law preventing states from taxing mineral rights and about the potential impact it may have on state revenues and obligations.

“We have here a situation where the State under List II has the power to impose taxes on mineral rights subject to what is there in List I Entry 54. Now can Union of India make a law that the State will not tax the minerals rights?”

AG replied in the affirmative, “It can.”

Justice Roy, expressing concern, highlighted the extremity of such a proposition and its impact on states, especially considering the vital role mineral-related revenues play for them. The bench underscored the delicate balance between federal and state powers in matters of taxation and resource management, bringing attention to the potential implications of overarching legislative measures.

Justice Roy reverted, “See it's a very extreme thing…suppose such a law is made then what happens to one of the practical very scarce sources of revenue to be earned by the States. They are also expected to discharge certain obligations in the federal scheme”

Acknowledging the concerns raised by Justice Roy, the AG stressed the importance of giving meaning to Entry 50 as intended by the Constitution makers, asserting that it is a fundamental part of the federal structure.

“Shall we not give Entry 50 that meaning which the constitution makers intended to have? Let's move in point of time regarding mineral development…which is the key to look at 53 (Union's Power Regulating & Developing oilfields and mineral resources), 54 (Union's Power on regulation for Mineral development), 23 (State's Power regulating mineral development) and ultimately 50 List II and the court will keep that in mind.” 

State's Power to Make Tax Laws Cannot Be Diluted - The CJI Distinguishes Different Entries In The 7th Schedule 

 Chief Justice of India, DY Chandrachud delved into the distinctions between Entries 23, 50 of List II  and 54 of List I.

Entry 23 List II : Regulation of mines and mineral development subject to the provisions of List I with respect to regulation and development under the control of the Union.

Entry 54 of List I  : Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.

The CJI clarified that while a declaration by Parliament under Entry 54 of List I could entirely exclude a subject from the State list, this exclusionary mechanism does not extend to the domain of taxing powers, particularly under Entry 23 List II. The Centre has to ensure that in exercising its powers, it does not dilute those bestowed to state legislatures under List II, especially in the Taxing domain. 

The CJI's analysis unfolded as follows:

A.  Exclusion vs. Restraint:

When Parliament makes a declaration under Entry 54 of List I, it is entirely excluded from the state list, but this exclusion does not apply to the taxing field of states under Entry 23. The CJI clarified that Parliament has the power to impose restraint but cannot claim the exclusive power to impose taxes, as taxing power remains with the states concerning minerals.

The CJI emphasized that taxing power in relation to minerals remains vested with the States and is never transferred to the Union. He underscored the need to avoid diluting the taxing powers granted to the states, emphasizing that such powers are limited, and the Constitution predominantly allocates taxing powers to the Union.

“Once Parliament makes a declaration under entry 54 of List 1, it is completely excluded from the State list and is out of the state legislative field but it is not in relation to the taxing field of the states under entry 23 of List 1 because it is a limitation of taxing power. It is not an exclusion of the taxing power of the States. Unlike 23 List II , the moment Parliament makes a declaration by law under Entry 54 List I, to that extent it is excluded from the powers of the State. What Parliament can do is impose restraint but Parliament cannot say that we have the power to impose tax, you do not have the power … That power is not given to Parliament at all, it is only given to States. Taxing power always remains with States in relation to minerals and it is never with the Union. The States have very few areas of taxation, most of taxing powers under the constitution are given to the Union, we must not dilute those areas.”

B. Distinct Language in Entry 50 List II

Entry 50 List II uses the term 'subject to such limitations,' indicating subordination of the State's taxing power to limitations imposed by Parliament. Unlike Entry 23, which subordinates the regulation and development of mines to List I provisions without specifying limitations.

CJI said :

“ Entry 23 is made to the entirety of List I whereas Entry 50 does not subordinate the taxing power of the State relating to mineral rights to the entirety of List I. It subordinates it only to the extent to which there are limitations imposed by the Parliament, whereas the regulation and development of mines is subject to the provisions of List I pertaining to regulations and development. The subordination of the taxing power of the state in which the mineral lies is much less, that subordination arises only when there is a law enacted by the Parliament and the law prescribes that limitation.”

The hearings continued to unfold as Senior Advocate Mr. Harish Salve, representing the Eastern Zone Mining Corporation, brought forth significant points regarding the taxation of minerals.

Distinction Between Taxing and Regulatory Powers

Mr. Salve underscored the foundational understanding of a clear demarcation between taxing and regulating powers. He emphasized that there is no denudation of power under Entry 50; instead, the denudation pertains to regulatory power under Entry 23 due to the declaration under the Mines and Minerals (Development and Regulation) Act (MMDR Act).

Interpretation of Limitations in Entry 50

Drawing attention to Entry 50 as the only entry where Parliament limits the power of the State, Mr. Salve called for a proper interpretation of the limiting phrase, "imposed by the law of the Parliament relating to Mineral Development." He argued against a narrow interpretation that requires a specific section in the MMDR Act explicitly prohibiting states from imposing taxes. Instead, he urged a broader understanding of the phrase in its true spirit.

“ A rather narrow view saying that there must be a section in the MMRD Act saying you will not impose tax is perhaps too narrow a view.”

Uneven Distribution of Mineral Resources

Mr. Salve highlighted the uneven distribution of mineral resources among states, noting that some are more endowed than others. He stressed that economic development in each state necessitates minerals, making the issue of taxation a matter of grave concern. Referring to historical laws dating back to 1935, he pointed out that provincial governments were allowed to impose taxes subject to limitations imposed by the Centre.

He remarked, "This has been a matter of grave concern always. This whole matter has to be viewed in that context. As I said yesterday ultimately, it is to be seen as a balance between Entry 23, 50.”

Public Ownership of Minerals and Royalty

Addressing the ownership of minerals by the state for the public good, Mr. Salve argued that when the state is the owner, royalty itself becomes an exaction. He noted the change in legal character when minor minerals are decontrolled by the state. Mr. Salve suggested that limitations imposed by Parliament freeze the extent of taxation, emphasizing that these limitations should align with the facet of mineral development.

“If parliament says no more than this much tax if public or private that tax is frozen” 

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 adopt 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 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)

Can Royalty Collected On Mining Leases Be Considered As Tax? Supreme Court 9-Judge Bench Starts Hearing [DAY1]

Are States' Powers To Tax Mineral Rights Limited By MMDR Act? Supreme Court 9-Judge Bench Discusses [Day 2]