Supreme Court Constitution Bench Rules Royalty as Tax, Clarifies Legislative Powers on Mineral Rights and Land Taxation

Nine-Judge Bench overrules Kesoram majority on royalty, affirms royalty as tax under Entry 50 List II; distinguishes powers to tax mineral rights and mineral-bearing lands; Parliament’s law on mineral development limits States’ taxing powers on mineral rights but not on lands

In a landmark judgment dated July 25, 2024, the Supreme Court of India’s Constitution Bench comprising nine judges, led by Chief Justice Dhananjaya Y. Chandrachud, delivered a comprehensive verdict on the contentious issues involving the nature of royalty under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), and the distribution of legislative powers between the Union and States regarding taxation of mineral rights and mineral-bearing lands.

The case arose from multiple appeals and writ petitions challenging the validity of taxes and cess levied by various State legislatures on mineral rights and mineral-bearing lands, often measured by royalty or mineral produce. The key legal questions were referred by a three-judge Bench to a larger Bench due to conflicting precedents, especially the seven-judge bench decision in India Cement Ltd. v. State of Tamil Nadu (1990) which held royalty to be a tax, and the later Constitution Bench decision in State of West Bengal v. Kesoram Industries Ltd. (2004) which held royalty not to be a tax.

The Constitution Bench addressed critical issues including:

1. Whether royalty payable under Section 9 of the MMDR Act is in the nature of a tax or a contractual consideration.

2. The scope and ambit of Entry 50 of List II of the Seventh Schedule of the Constitution, which empowers States to levy "taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development" under Entry 54 of List I.

3. The legislative competence of States to impose taxes on mineral-bearing lands under Entry 49 of List II and whether royalty or mineral produce can be used as a measure of such tax.

4. The inter-relationship between the taxing powers of States and the regulatory powers of Parliament under the MMDR Act.

The Court held that:

- Royalty is indeed a tax or exaction, not merely a contractual payment. It is a compulsory statutory levy payable by the holder of a mining lease to the lessor (State or private person) for exercising mineral rights. The rates of royalty are fixed by the Central Government under the MMDR Act, which is a Parliamentary legislation enacted under Entry 54 of List I.

- Entry 50 of List II is a unique taxing entry that grants States the power to tax mineral rights but explicitly subjects this power to "any limitations imposed by Parliament by law relating to mineral development." Such limitations include Sections 9 and 9A of the MMDR Act, which regulate royalty and dead rent, thus limiting State taxing powers on mineral rights.

- The expression "any limitations" is wide enough to include restrictions, conditions, principles, and even prohibition on State taxing powers. Parliament’s law relating to mineral development (MMDR Act) acts as a constitutional limitation on States’ power to impose taxes on mineral rights.

- States have exclusive legislative competence under Entry 49 of List II to impose taxes on lands and buildings, which includes mineral-bearing land, but this does not extend to taxing mineral rights or royalty. Mineral-bearing lands are distinct from mineral rights, and royalty or mineral produce can be used as a measure to calculate tax on mineral-bearing lands.

- The measure of a tax is a legislative policy choice and does not determine the nature of tax. Thus, even if mineral produce or royalty is used as a measure, it does not convert tax on land into a tax on mineral rights.

- Entries 49 and 50 of List II operate in distinct fields with different subjects. The limitations imposed by Parliament by law relating to mineral development under Entry 50 do not extend to Entry 49. Therefore, States can tax mineral-bearing lands separately from mineral rights.

- The earlier decision in India Cement holding royalty to be a tax is affirmed, and the contrary majority opinion in Kesoram that royalty is not a tax is overruled.

- The MMDR Act is a complete code regulating mines and mineral development, including taxing mineral rights by way of royalty. States are denuded of legislative competence to impose taxes on mineral rights beyond what is provided in the MMDR Act.

- The doctrine of federal supremacy applies where there is an irreconcilable conflict between Union and State laws. However, there is no such conflict here as Entry 50 is subject to limitations by Union law and Entry 49 is an independent field for States.

- The Court emphasized the constitutional balance and fiscal federalism requiring that States retain adequate fiscal powers, including taxing lands, while Parliament regulates mineral development to ensure national uniformity and sustainable development.

The judgment extensively analyzed the constitutional scheme under Articles 245 and 246, the Seventh Schedule entries, the legislative history, the MMDR Act provisions, and numerous precedents including Hingir-Rampur Coal Co. Ltd., M A Tulloch, Baijnath Kedia, HRS Murthy, India Cement, Orissa Cement, Mahalaxmi Fabric Mills, Mahanadi Coalfields, Saurashtra Cement, Goodricke, Kesoram, Kannadasan, and Tata Iron & Steel.

This verdict settles the long-standing ambiguity on the nature of royalty and the respective taxing powers of Union and States over mineral rights and mineral-bearing lands. It delineates that royalty is a tax regulated by Parliament under Entry 54 of List I and the MMDR Act, limiting States’ powers under Entry 50 of List II, but States retain power to tax mineral-bearing lands under Entry 49 of List II using mineral produce as a measure.

The Court directed the Registry to take administrative directions for listing further matters related to mineral development before an appropriate Bench.

This judgment reinforces the federal balance by upholding State powers to tax lands while affirming Parliament’s supremacy in regulating and imposing statutory levies on mineral rights, thereby promoting coordinated and sustainable mineral development.

Statutory provisions

Mines and Minerals (Development and Regulation) Act, 1957 - Sections 2, 4, 5, 6, 7, 8, 9, 9A, 9B, 9C, 10, 13, 15, 16, 17, 18, 21, 25; Mineral Concession Rules, 1960 - Rules 22 to 40; Constitution of India - Articles 245, 246, 265, 297; Seventh Schedule - Entries 23, 49, 50 List II; Entry 54 List I

Mineral Area Development Authority v. M/s Steel Authority of India (SC)(Constitution Bench) : Law Finder Doc Id # 2620643