States’ Taxation of Mineral Rights and Land: Supreme Court Expounds the Law

Introduction

A 9-Judge Bench of the Supreme Court of India has recently released its decision in Mineral Area Development Authority v. SAIL¹, expounding the legal position on the rights of the States to tax mineral rights, and tax lands and building, both being distinct taxation powers of the States. The Bench was called upon to examine the correctness of a 1989 decision of a 7-Judge Bench² which had been revisited in 2004 by a 5-Judge Bench³ and doubted in 2011 to be referred for reconsideration.⁴ Thus, this 9-Judge Bench decision addresses a decades-old controversy. The impact of the decision, however, goes much beyond. It delineates the States’ prerogative and limitations on its taxing power in respect of land generally and mineral rights in particular to unshackle the restraints imposed by the 1989 decision⁵ and those chronologically prior to it. In addition, a variety of other constitutionally significant propositions arise from the decision which pivot its significance. This article examines the decision of the 9-Judge Bench and its implications.

Issue before the 9-Judge Bench and its decision

The decision focused on delineation of the constitutional scheme relating to various facets of tax on mineral rights. In perspective was the interpretation of the legislative entries of the Seventh Schedule which provide for the regulatory framework and the tax ambit in relation to minerals and mineral development. The issue arose in view of the following constitutional background under the Seventh Schedule of the Constitution:

(i) Entry 50 of the State List enables the States to levy “taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development”.

(ii) Entry 49 of the State List enables the States to levy of “taxes on lands and buildings”.

(iii) Entry 23 of the State List brings with the regulatory fold of the States the subject of “regulation of mines and mineral development subject to the provisions” of the Union List.

(iv) Entry 54 of the Union List vests with the Union the “regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by the Parliament by law to be expedient in the public interest”.

The dispute arose in view of the enactment of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) by the Parliament which inter alia regulated mineral development and also determined the royalty to be charged by the States for allowing the mining leaseholders to extract minerals. The main question was whether royalty (or any other tax) could be levied and collected by the States in excess of royalty determined under the MMDR Act. There had been various conflicting decisions of the Supreme Court on the subject, including of its larger Benches, and hence the issue was referred for a categorical determination by this 9-Judge Bench of the Supreme Court.

Addressing the issue by 8:1 majority⁶, the Supreme Court concluded that (in view of Entry 54 of the Union List) the Parliament has the right to enact a law limiting (which extend to prohibiting) the rights of the States (under Entry 50 of the State List) to levy and collect taxes on mineral rights. However, the majority also concluded that “royalty” determined under MMDR Act is not a tax on mineral rights and even otherwise there is no limitation under the MMDR Act on the rights of the States to levy such tax. Put differently, it was concluded that in the absence of any actual limitation imposed by the Parliament by law, the States’ taxation of mineral rights are unfettered. Further advancing the taxing rights of the States (under Entry 49 of the State List), the majority also concluded that the States can adopt the mineral value of land as the basis even for levying taxes on land and building, which being an independent taxing power of the States is unconstrained by any limitations unlike their right for levying tax on mineral rights.

The conclusions drawn in the majority decision are set out below:⁷

342. In view of the above discussion, we answer the questions formulated in the reference in terms of the following conclusions:

(a) Royalty is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease. The payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears;

(b) Entry 50 of List II does not constitute an exception to the position of law laid down in M.P.V. Sundararamier⁸ The legislative power to tax mineral rights vests with the State Legislatures. Parliament does not have legislative competence to tax mineral rights under Entry 54 of List I, it being a general entry. Since the power to tax mineral rights is enumerated in Entry 50 of List II, Parliament cannot use its residuary powers with respect to that subject-matter;

(c) Entry 50 of List II envisages that Parliament can impose “any limitations” on the legislative field created by that entry under a law relating to mineral development. The MMDR Act as it stands has not imposed any limitations as envisaged in Entry 50 of List II;

(d) the scope of the expression “any limitations” under Entry 50 of List II is wide enough to include the imposition of restrictions, conditions, principles, as well as a prohibition;

(e) the State Legislatures have legislative competence under Article 246 read with Entry 49 of List II to tax lands which comprise of mines and quarries. Mineral bearing land falls within the description of “lands” under Entry 49 of List II;

(f) the yield of mineral bearing land, in terms of the quantity of mineral produced or the royalty, can be used as a measure to tax the land under Entry 49 of List II. The decision in Goodricke⁹ is clarified to this extent;

(g) Entries 49 and 50 of List II deal with distinct subject-matters and operate in different fields. Mineral value or mineral produce can be used as a measure to impose a tax on lands under Entry 49 of List II;

(h) the “limitations” imposed by Parliament in a law relating to mineral development with respect to Entry 50 of List II do not operate on Entry 49 of List II because there is no specific stipulation under the Constitution to that effect; and

(i) the decisions in India Cement¹⁰, Orissa Cement¹¹, Federation of Mining Assns. of Rajasthan v. State of Rajasthan¹², Mahalaxmi Fabric Mills¹³, Saurashtra Cement¹⁴, Mahanadi Coalfields¹⁵ and P. Kannadasan¹⁶ are overruled to the extent of the observations made in the present case.

By way of this decision, the tumultuous legal position which was on vogue for decades stands resolved. This decision has three major takeaways:

1. The Parliament has the ability to regulate, limit or prohibit the States’ taxes on mineral rights. So far, the Parliament has not limited such right, either under the MMDR Act or otherwise, but that does not inhibit the Parliament from limiting the States’ taxes on mineral rights in future.

2. Qua the mineral bearing States, the only examination now required to be undertaken by them is whether tax on mineral rights is limited by a parliamentary law and in the absence of any such limitation they are exclusively empowered to levy and collect tax on mineral rights as per their own tax policy and design.

3. In respect of all the States, there are no limitations on their right to tax land and building. The value of minerals below the land surface can also be included for the purpose of this levy.

Gauging the significance of the decision

This decision has wide consequences for various aspects of law. It is therefore critical to examine it from various perspective.

Reflections qua status and importance of 9-Judge Bench

There are various reasons for attaching significance to the decision. Many of these arise solely because the decision is of a 9-Judge Bench. Let us recount a few:

(i) First, being decisions by 9-Judge Bench, they moderate, clarify or overrule the earlier decisions of larger Benches of the Supreme Court which have held the field in the past, thereby interjecting the legal position with a significant variance. Thus, these decisions change the tide of governance and even have a vital bearing on national growth.

(ii) Second, the very fact that a 9-Judge Bench is constituted to decide an issue is in itself a testimony that either the legal position was precariously settled or that the issues involved were so complex that they could ordinarily not be resolved in adjudication by regular Benches of the Supreme Court. Thus, the decisions of 9-Judge Bench mark resolution of significant constitutional and governance conflicts. For illustration, the decision of 9-Judge Benche of the Supreme Court in Mafatlal Industries Ltd. v. Union of India¹⁷ and New Delhi Municipal Corpn. v. State of Punjab¹⁸ have substantially contributed to constitutional exposition of tax laws.

(iii) Third, ordinarily a 9-Judge Bench examines constitutional issues and not simpliciter legal questions. Thus, the impact of their decisions is profound; in fact, the foundational premises of many legislations itself comes under scanner owing to such decisions. Thus, assumptions held for generations are revisited and new legislations evolved.

(iv) Fourth, 9-Judge Benche are not frequent and therefore they provide a rare opportunity, even for the Supreme Court, to categorically pronounce upon a legal position, and often course correct, which further adds to the criticality of the decision. If it often that the entire legal understanding on the subject dealt can be literally rewritten by a 9-Judge Bench, such as the abolished of decades old concept of “compensatory taxes”.¹⁹

(v) Fifth, given that the 9-Judge Bench decision addresses an issue comprehensively, as a matter of course it revisits the legal position from a variety of perspectives. This results into the 9-Judge Bench decision being a rich fodder of a wide variety of legal propositions which may be incidentally addressed though not directly in issue before the 9-Judge Bench. Consequently, the decision results into vindication of existing or emergence of new legal propositions given the settled legal position that a well-considered obiter of a larger Bench is also binding.²⁰

Reflections qua implications for States’ taxing rights

In addition to the aforesaid, there are multiple additional reasons for the significance of this particular decision, some of which are enlisted below:

(i) First, as the preface has revealed, this decision addresses a decades old controversy relating to the rights of the States to levy taxes on mineral rights. Furthermore, the decision also expounds upon the right of the States to levy taxes on land and building. Both of these taxing powers are very significant both for the States and the subject-citizens. The first power to tax mineral rights has a bearing upon scarce mineral resources of the country which are located in a few States, and thus has implications for overall national growth and also on account of regional imbalances. The second power to levy taxes on land and building, is virtually exercised by every State and directly affects the citizens. Thus, the scope and manner of computation of this tax liability, which is addressed in this decision, affects virtually the entire citizenry which owns lands or buildings or is otherwise subject to such tax.

(ii) Second, the decision makes significant observations on the need to further the spirit of “fiscal federalism”, which as a facet of federalism, is declared to be a pivotal feature of the Constitution of India. The majority in this decision has declared in clear terms that there are limited taxation rights of the States, and they need to be protected to ensure that the States’ financial autonomy is maintained. This is necessary because the States have vital governance obligations under the Constitution and have the responsibility to carry out the welfare agenda qua their earmarked governance functions.

(iii) Third, this decision furthers the conclusions of another 9-Judge Bench in Jindal Stainless case²¹ which had declared that there cannot by any implied limitations on the right of taxation which is an attribute of sovereignty. Thus, the majority has concluded that barring the limitation carved out in Entry 50 of the State List itself, no additional limitation can be read into or permitted directly or indirectly to impede the States’ taxing rights. For this reason, while Entry 50 is subject to the Parliament’s powers to limit the States’ mineral tax rights, the majority has unequivocally declared Entry 49 has been unimpeded without any constraint (under any parliamentary law) and permitting the States to levy taxes on lands and buildings in a manner of their choosing.

(iv) Fourth, the majority decision spells the scope of Parliament’s regulatory powers on the subject of mines and mineral development to exemplify its contours. It has categorically declared that Parliament is the sole Judge of the manner it determines to regulate the subject and once it exercises its power, the States are denuded of their powers to legislate on the subject. Applying the constitutional doctrines to address the conflict arising from rival regulatory powers, the Supreme Court concluded that the Parliament having enacted the MMDR Act, the regulatory landscape was claimed by the Parliament and the States could not regulate the subject any further. Thus, the Supreme Court gave effect to the delicate balance of legislative power distribution, on the subject as envisaged by the constitution framers. Having said that, the majority decision clearly vivisected the regulatory jurisdiction with the taxation prowess to highlight the different relationship of the Union and the States vis-à-vis the regulatory and taxation powers.

(v) Fifth, the Supreme Court has acknowledged that the power of the States to tax mineral rights is a unique example of a taxing power of the States which is subject to the regulatory powers of the Parliament. Declaring that this limitation is on account of the desire of the constitutional framers to ensure that all-round national growth is not impeded on account of vital minerals being located in the few States, the Supreme Court has declared that the Parliament has been entrusted with the function of limiting the States’ taxing power in respect of minerals such that their taxes do not impede in the national growth.

(vi) Sixth, the majority of the Supreme Court has simultaneously declared that the Parliament can only regulate and limit the States’ tax on mineral rights, but Parliament cannot on its own levy taxes on mineral rights. According to the majority, the Parliament has not been conferred with the right to tax minerals and thus the regulatory power cannot be exercised to impose a tax. Thus, a constitutional balance is achieved vis-à-vis taxation of mineral rights.

(vii) Seventh, expanding the scope of taxes on lands and buildings, this decision explains the wide scope of immovable property which can be subjected to tax by the States. Highlighting the manner of exercise of this power, which permits levy only on basis of land as a unit or building as a unit, the majority has encapsulated the legal position flowing from other decisions on the subject to explain the various ways in which the States can compute the value for levying taxes on land and building. In particular, clarifying that there is no exclusion of the royalty or other mineral value from the value of the land, the Supreme Court has substantially expanded this taxation sphere for the States.

Thus, overall, on a going forward basis, this decision is bound to result into a slugfest between the mineral-rich States’ taxation policy and law vis-à-vis the Union and the other States who would stand impacted on this count. One can imagine amendments to the MMDR Act being introduced to address the impact of this decision whereby there may be limitations ranging either from dilution to complete moratorium imposed by the Parliament on mineral taxes of the States. The extent of these amendments, however, would depend upon the political and economic bargain amongst these key governance functionaries.

Other aspects of the decision

The decision is also significant from a variety of aspects, some of which are listed below:

(i) Besides delineating the scheme of distribution of legislative powers between the Union and the States, as set out in the Seventh Schedule of the Constitution, the decision is also an exposition on the rule of interpretation governing the legislative entries under the Seventh Schedule. The majority decision lucidly explains the legal position flowing from Article 246 of the Constitution qua the respective legislative competence of the Union and the States, including the doctrines such as “pith and substance”, “repugnancy”, “federal supremacy”, to resolve disputes relating to legislative encroachment between the two legislatures.

(ii) The majority decision also explains the difference between two types of legislative subjects envisioned under the Constitution i.e. regulatory subjects and taxing subjects, to explain their intrinsic difference, contrasted scope and the manner in which their contours are to be interpreted.

(iii) The majority decision further explains other significant constitutional concepts, such as “fiscal federalism”, “public trust doctrine”, etc. which are pivotal in various aspects of constitutional and fiscal governance. The decision further enlists the manner in which these doctrines are juxtaposed within the exercise of legislative powers.

(iv) One of the key takeaways from this decision is the exposition of the concept of “tax” therein. For decades there have been varying meanings ascribed to the expression. In the context of its constitutional bearing, the majority decision describes the facets and contours of “tax”. It further distinguishes “royalty” —— as a consideration for “grant” of a “privilege” by the State —— as contrasted from tax, which is a compulsory exaction. The majority decision enlists the distinguishing features of the concepts besides engrafting the application of Article 265 of the Constitution which governs the levy and collection of tax.

(v) The decision is also significant on account of its overbearing impact on various pending matters. The Supreme Court will soon commence hearing on the cases which challenge levy of service tax and goods and services Tax (GST) on immovable property.²² There is no gainsaying that this categorical enunciation of the taxing rights of the States, particularly their right to tax lands and building, will have a vital bearing on these matters.

There is also a highlight likelihood that this decision will impact the evolution of the GST design. Even though purported as “one nation one tax”, so far GST has continued without subsummation of many indirect taxes; mineral taxes and land taxes being prominent exclusions from its scope. However, the Constitution empowers the GST Council to make recommendations for subsuming other taxes.²³ With the huge impact of this decision and the likely change in taxation regimes of the States after this decision, it is possible that discussions will advance on including these taxes within the fold of GST.

Conclusion

By widely interpreting the taxing fields of the States, buoyed by the premise that the States’ fiscal autonomy and flexibility are paramount, the majority decision of the Supreme Court has endorsed wide powers for the States to tax mineral rights and land. Conversely, highlighting the ramifications of unimpeded assertion of such taxing rights by the States on the national growth, the majority decision has urged the need to limit them under parliamentary law. This difference in approach has guided the respective answers with the majority overruling the decisions of the past decades which limited the States’ powers versus the minority urging the need to maintain status quo. In any case, the constitutional exposition in the majority decision is likely to settle for generations the scope and remit of the different legislative subjects and the exercise of their legislative prerogative by the Union and the States.