Editorial: Diamonds in the rough

In what appears to be a shot in the arm for upholding federalist principles of governance, the Supreme Court said last month that royalty payable on minerals is not a tax, and that states have the legislative competence to impose taxes on mines and minerals-bearing lands. CJI DY Chandrachud remarked that the Mines and Minerals (Development and Regulation) Act (MMDRA), 1957 does not limit the states from imposing taxes on mines and mineral development. The landmark judgement was seen as a win for mineral-rich states like Jharkhand and Odisha which had urged the apex court to decide on recovery of taxes worth thousands of crores of rupees levied by the Centre on mines and minerals, till now.

The case has its origins in a dispute involving India Cements Ltd and the Tamil Nadu government. The company had secured a mining lease in Tamil Nadu and was paying royalty to the state, which later imposed a cess in addition to royalty on the enterprise. The company subsequently moved the Madras High Court against the measure, contending that a cess on royalty meant a tax on royalty which was beyond the remit of the state legislature. A seven-judge bench had decided in favour of India Cements in 1989, ruling that the Centre was the primary authority under the MMDRA. However, in 2004, a five-judge constitution bench, while hearing another dispute over imposition of cess on land and mining activities between the state of West Bengal and Kesoram Industries, held that there was a typographical error in the 1989 verdict and that royalty was not a tax. The apex court now views royalty as a contractual consideration for enjoyment of mineral rights.

The ruling has opened a new taxation avenue for mineral-rich states, augmenting their ability to deliver welfare schemes and services to the people. Many states bemoan that the Centre monopolises most of the tax revenues. States where mining takes place face issues related to water and air pollution, and it is only fair to allow them to levy taxes, such as a green tax, which was never allowed by the Centre. Jharkhand, a state that has faced the brunt of indiscriminate mining, and has witnessed mass displacement of citizens owing to environmental damage from mining activities, has demanded a sum of Rs 1.36 lakh crore, which ‘the mining companies of the Union government owe to the state’.

Interestingly, in June this year, the Centre had announced the winning bidders for mining rights in six blocks of critical minerals, including graphite, phosphorite and lithium, for which India is heavily import-reliant. Under the revamped Mines and Minerals law, these bidders are the first private enterprises to be awarded such rights. The move will undoubtedly stoke the entrepreneurial curiosity of more larger players in this space.

So, it makes sense to consider the counter-argument offered by Justice BV Nagarathna who warned that if the power to levy taxes on mineral resources are given to the states, there would be breakdown of the federal system. Alluding to the potential for unhealthy competition between the States to derive additional revenue, the Justice said the resultant steep, uncoordinated, and uneven increase in cost of minerals, would result in a hike in prices of all industrial and peripheral products dependent on minerals as a raw material or for other infrastructural purposes. This would entail the purchasers coughing up huge monies, or lead to the national market being exploited for arbitrage.