Centre fights back in minerals case: Seeks SC review on state powers to tax minerals, warns of 'big economic fallout'

The Narendra Modi-led central government has moved the Supreme Court, seeking a review of its July 25 judgment, which upheld the authority of states to impose royalties on the extraction of minerals and levy taxes on land containing mines and quarries. The ruling, which was passed with an 8:1 majority, had reaffirmed state powers at the cost of the centre, and even countered earlier legal interpretations which had given primacy to the Centre over the states.

In addition, the Centre has requested a review of the Supreme Court’s August 14, 2024 decision, which allowed states to collect tax arrears from April 1, 2005, without interest or penalty. The government expressed concerns about the economic impact, stating that retrospective taxation could burden ordinary citizens and harm the nation’s fiscal health. 

“The common man may end up shouldering the burden of these extraordinary dues, which would have severe consequences for the economy,” the government stated in its petition.

The July 25 judgment was authored by Chief Justice of India D Y Chandrachud, with Justices Hrishikesh Roy, A S Oka, J B Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma, and Augustine George Masih concurring. The ruling overturned a 1989 seven-judge bench decision in India Cement Ltd vs State of Tamil Nadu, which held that royalty constituted a tax and that state legislatures lacked the authority to tax mineral rights, as this was governed by the Mines and Minerals (Development and Regulation) Act, 1957.

In a dissenting opinion, Justice B V Nagarathna warned of the potential dangers of overturning the India Cement decision, cautioning that it could disrupt the federal balance and spark competition between states.

The India Cement Ltd vs State of Tamil Nadu (1989) was a landmark judgment by the SC that dealt with the issue of whether royalty on minerals constitutes a tax and whether state governments have the authority to levy such charges. The case arose when the state of Tamil Nadu imposed a levy of royalty on the extraction of minerals. The India Cements Ltd, a major cement company operating in the state, challenged the levy, arguing that it amounted to a tax on minerals, which the state did not have the authority to impose under the Constitution of India.

The central question was whether royalty on minerals should be treated as a tax, which states are generally prohibited from imposing on matters covered under the Union List of the Constitution, specifically Entry 54 of List I, which grants the central government the authority to legislate on matters related to minerals.

The SC, in its seven-judge bench decision, ruled that royalty is a form of tax. It concluded that states lacked the authority to impose taxes on minerals since the subject was regulated by the Mines and Minerals (Development and Regulation) Act, 1957 (MMDRA), a central law enacted by Parliament. This decision restricted the powers of state legislatures in taxing mineral rights.

The Centre’s petition has argued that the July 25 ruling overlooked the significant economic role minerals play in the core sectors of the economy. It also contested the Supreme Court's interpretation of the term "land" in Entry 49 of the State List, which the court ruled included mineral-bearing land. The Centre warned that this interpretation could unravel the constitutional framework regulating mineral resources.

The government contended that Entry 49 applies only to surface land and cannot be used to justify taxing minerals beneath the surface. It stressed the potential fallout from allowing states to levy taxes on mineral-bearing land, which could disrupt industrial growth and hinder national economic integration.

"Industries critical to infrastructure, such as power, steel, and cement, rely heavily on minerals like coal, iron ore, and bauxite. The imposition of state taxes on mineral-bearing land could devastate these sectors, leading to non-operation of mines," the petition said.

The Centre further warned that states rich in minerals might impose varying tax rates, potentially destabilising industries across the country. For example, heavy taxation of coal by certain states could jeopardise the power supply nationwide. Similarly, taxes on iron ore production could disrupt the steel industry.

The government’s plea emphasised that the constitutional framework outlined in the judgment failed to consider the broader economic implications. It argued that state-imposed taxes on minerals could lead to price hikes, distorting markets and affecting allied industries. "A uniform system of levies is crucial for the development of minerals, which are key to national economic growth," the Centre asserted.

Highlighting the national importance of mineral resources, the Centre said the regulation and management of minerals should be guided by national objectives, ensuring sustained economic development across the country. The Mines and Minerals (Development and Regulation) Act was enacted by Parliament to centralise control over major minerals in the public interest.

“A uniform regime of royalties, as outlined in Section 9 of the MMDRA, is essential for maintaining harmony in mineral prices and promoting national development,” the government said, adding that varying state taxes would undermine the objectives of the National Mineral Policy of 2019.

In conclusion, the Centre warned that disparate fiscal regimes across states would drive up mineral prices, increase dependence on exports, and lead to unequal economic advantages for states with abundant mineral resources, ultimately harming national interests.