Royalty Is Tax, States Have No Right To Tax Mineral Rights : Justice Nagarathna's Dissent

The Supreme Court nine-judge bench headed by Chief Justice of India, Dr D.Y. Chandrachud and comprising Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih, by 8:1, held that royalty charged by the Union Government under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) is not tax.The majority has held: “There are major conceptual differences between royalty and a tax: (i) the proprietor charges royalty as a consideration for parting with the right to win minerals, while a tax is an imposition of a sovereign; (ii) royalty is paid in consideration of doing a particular action, that is, extracting minerals from the soil, while tax is generally levied with respect to a taxable event determined by law; 178 and (iii) royalty generally flows from the lease deed as compared to tax which is imposed by authority of law.”Justice Nagarathna alone dissented. Justice Nagarathna's dissent Justice Nagarathna has held that royalty charged under Section 9 of the MMDR is in the nature of a tax.In the present case, a batch of petitions was filed in regard to the divergent views adopted by the Supreme Court in India Cement Ltd. vs State of Tamil Nadu (1990) and State of West Bengal vs. Kesoram Industries Ltd (2004). It concerned the legislative competence of the States on mineral rights under the MMDR Act. The MMDR Act gives the Union legislative power relatable to Entry 54 of the Union List under Schedule VII on regulating mines and developing minerals. Section 9 of the MMDR Act allows the Union Government to regulate royalty to be paid on mining leases for any mineral removed or consumed from the leased areas at specific rates. In India Cement judgment, a seven-judge Bench of the Supreme Court held that “royalty is tax” and State legislatures lack the competence to levy taxes on mineral rights as it is vested with the Union under the MMDR Act. In this case, Tamil Nadu government granted a lease to India Cement for limestone and Kankar under the MMDR Act. While the royalty was fixed under the MMDR Act, the Madras Panchayat Act, 1958 (which was replaced by the Tamil Nadu Panchayats (Amendment and Miscellaneous Provisions) Act, 1964 allowed the State to levy a local cess at the rate of 45 paise charged on royalty on land revenue paid to the government. The legislation was challenged by India Cement before the Madras High Court and its division bench. Both held that it was within the State's competence to levy cess on royalty as it was a tax on land, which was relatable to Entry 49 (taxes on land and buildings)of List II. The Supreme Court in India Cement judgment however rejected this reasoning and held that cess was essentially on the royalty and not on land revenue. It therefore held that since royalty is a tax, the cess on royalty being a tax on royalty is beyond the State's competence. The reasoning of this decision was followed in numerous cases. In State of MP vs Mahalaxmi Fabric Mills Ltd (1995), the court examined whether the India Cement judgment incurred a “typographical error” by saying “royalty is a tax” while it meant “cess on royalty is a tax”. However, the court upheld the correctness of India Cement's judgment. This issue ultimately came before the Supreme Court five-judge bench in Kesoram Industries. The majority in Kesoram Industries judgment held that India Cement judgment committed an “inadvertent error” because they considered “royalty as tax” while they meant “cess on royalty is tax”. However, the court concurred with India Cement judgment's reasoning. The minority held that States are denuded of their power to levy tax in terms of Entry 50 of State List which says: “taxes on minerals rights subject to any limitations imposed by Parliament by law relating to mineral development”.In the aftermath of both judgments, many States started imposing tax under Entry 49, State List. One such was Bihar, where Bihar Coal Mining Area Development Authority (Amendment) Act, 1992 and the Bihar Mineral Area Development Authority (Land Use Tax) Rules, 1994 levied tax on land being used for mining. The High Court of Patna held the two laws unconstitutional, relying on the India Cement judgment. The correctness of the high court's judgment was heard in the present case based on the following issue.Conundrum between different entries List IList IIConstitutional scheme as held by Justice Nagarathna Entry 54 (regulation of mines and development under the control of Union)Entry 23 (regulation of mines and development)Entry 50 (empowers State legislatures to impose tax on mineral rights)Entry 23, List II expressly states that any regulation of mines and mineral development is subject to Entry 54, List IEntry 50, List II is juxtaposed to Entry 54, List II. However, former is “subject to any limitation imposed by Parliament by law relating to mineral development”. Entry 49 (taxes on land) vs. Entry 50Cess on royalty cannot be sustained in Entry ...

Royalty Is Tax, States Have No Right To Tax Mineral Rights : Justice Nagarathna's Dissent

Gursimran Kaur Bakshi

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Royalty Is Tax, States Have No Right To Tax Mineral Rights : Justice Nagarathna's Dissent

Gursimran Kaur Bakshi

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