NINAD LAUD decodes the latest judgment of the Supreme Court on legislative competence over mineral rights
Our Constitution has an elaborate division of legislative powers between the Centre and the States in the VIIth Schedule, which sets out in three lists their respective legislative domains, including a Concurrent List. For the most part, these Lists have served to clearly delineate the powers of the Union and the States. However, when it comes to mining, there exists a peculiar position, with both the Centre (under Entry 54 of List I) and the States (under Entry 23 of List II) having regulatory powers over mines and mineral development, with a qualification that the Centre may take over control of the same, by making a declaration in public interest. Even more peculiar, is the power to levy taxes on mineral rights, which vests exclusively with the States under Entry 50 of List II, but, with a caveat, that this is subject to any limitation that Parliament may impose by a law relating to mineral development.
Parliament first declared its intention to take over regulation of mining and mineral development in the MMDR Act of 1948, and, thereafter, by the MMDR Act of 1957. However, the declaration was qualified, inasmuch as it stated that the control is to the extent contemplated in the legislation itself. This has meant that courts have had to interpret the extent to which the Centre has taken over regulation of mines and mineral development, and whether such control meant that the States’ also stood denuded of their taxing powers over mineral rights.
In 1990, a 7-judge bench of the Supreme Court in India Cement, held that the declaration made by Parliament meant that the Centre had taken over all aspects of mining i.e., regulation, mineral development, and so also the power to tax mineral rights.
In an unusual turn of events, in 2004, a bench of lesser strength, i.e., of 5 judges, in Kesoram Industries held to the contrary. It held that the denudation of the States’ powers was not total, and, that the States’ taxing powers over mineral rights remained untouched, since the MMDR Act did not contemplate the imposition of any levies that qualified as a ‘tax’. The underlying reasoning turned on whether or not royalties collected by States under the MMDR Act were in the nature of a tax. While India Cement had held that royalty is a tax, Kesoram went on to hold that this finding in India Cement was “attributable to stenographer’s devil or sheer inadvertence.”
Eventually, in 2011, the matter was referred to a larger bench to resolve this conflict. This reference came to be answered by a bench of nine judges on 25th July, 2024, which held that:
i. States have the exclusive power to tax mineral rights under Entry 50 of List II.
ii. Though presently there is no provision in the MMDR Act which limits or prohibits such taxing power of the States, Parliament can indeed limit or even prohibit the same.
iii. Under Entry 49 of List II, under which States can levy taxes on land, they can also tax mineral-bearing lands. At the pronouncement of this judgment, the Centre and mining-lessees/associations urged that since this judgment has overhauled the law on this aspect, nearly 35 years after the judgment in India Cement, it ought to be given prospective effect. The argument was that people have arranged their affairs over the last few decades, based on a particular understanding of the law.
The Court, though, declined such a request. However, it directed that any interest that had accrued on pending demands would not be enforced, and that payments towards past demands be made in a staggered manner over twelve years, beginning 1st April, 2026.
The implications flowing from this judgment are manifold. For one, the judgment leaves the door wide-open for Parliament to amend the MMDR Act to limit, or even prohibit, the States’ power to tax mineral rights. Likewise, States are bound to introduce or amend existing legislation, to demand higher land revenues from mineral-bearing lands. States are also bound to seek to justify existing levies as being taxes either on mineral rights, or on land. For the former, the levy would have to be shown to be mineral-centric, and, for the latter, that the levies on land are agnostic to any particular use the land is put to. Finally, mining-lessees who are already paying royalties to the States, and also contributing to the District Mineral Foundations will have to pay further taxes to the States. It remains to be seen whether Parliament softens the blow by either amending the MMDR Act or reducing the rates of royalty.
