States' Power To Tax Mineral Rights Eclipsed By Union Law On Mineral Development : Harish Salve In Supreme Court [Day 4]

Anmol Kaur Bawa

6 March 2024 4:25 AM GMT

  • States Power To Tax Mineral Rights Eclipsed By Union Law On Mineral Development : Harish Salve In Supreme Court [Day 4]

    The Supreme Court on Tuesday (March 5) resumed its 4th day of hearing the 9-judge constitution bench matter about royalties imposed on mining. The Court deliberated upon how royalty, in light of Entry 50 List II, was a species of the larger spectrum of 'tax'. Senior Advocate Harish Salve explained to the bench that while Entry 50 List II grants states the power to levy taxes on mineral...

    The Supreme Court on Tuesday (March 5) resumed its 4th day of hearing the 9-judge constitution bench matter about royalties imposed on mining. The Court deliberated upon how royalty, in light of Entry 50 List II, was a species of the larger spectrum of 'tax'. Senior Advocate Harish Salve explained to the bench that while Entry 50 List II grants states the power to levy taxes on mineral rights, this authority can be eclipsed by legislation enacted by Parliament on mineral development under Entry 54 List I (Union's Powers on Mineral Development). The respondents suggested that laws governing mineral development, enacted by the Union, may supersede the state's ability to impose taxes on mineral rights, highlighting the primacy of central legislation in this domain.

    During the hearing, the CJI emphasised that once royalty is established for mineral rights, the state cannot demand anything beyond what has been provided, as it is then governed by Section 9.

    As per Section 9 of the MMDR Act of 1957 (Act of 1957), the mining lease holder, whether granted before or after the enactment of the Mines and Minerals (Regulation and Development) Amendment Act, 1972, is obligated to pay royalty for minerals removed or consumed from the leased area.

    The Second Schedule determines the rate of royalty, and this payment applies to both old and new mining leases. The Central Government holds the authority to amend the Second Schedule, adjusting royalty rates for minerals, with limitations on the frequency of such adjustments. As specified in the law, the royalty rate cannot be increased more than once in a three-year period.

    Senior Advocate Harish Salve, representing the Eastern Zone Mining Corporation, contended that Entry 50 is sui-generis, and the limitation on taxing power arises from the law of mineral development, not from legislation passed by Parliament.

    “Entry 50 List II is sui-generis and is not a limitation of your taxing power. The limitation flows from the law of mineral development, not from legislation made per se by the Parliament. And if the architecture of the law on mineral development makes it incompatible to have a tax on mineral rights then your power stands denuded. That's the real point.”

    Mr Salve asserted that if taxing mineral rights becomes incompatible with the law of mineral development, the state's power to impose tax stands denuded. Justice Nagarathna questioned whether the taxing power is entirely denuded,

    “That means the taxing power is not denuded as such”

    To which Mr Salve clarified that it is eclipsed by the law on mineral development. He implied that while the powers of the state remained untouched under Entry 50 List II which gives the state legislature the authority to make tax laws on mineral rights, the same get superseded in a situation where the Union makes laws on mineral development, the later getting a higher impetus of effectiveness.

    “ It is eclipsed by the law on mineral development”

    Justice Nagarathna then remarked, “ The laws on mineral development are not exhaustive yet, it is dynamic.”

    Mr Salve, agreeably submitted, “Yes of course, if tomorrow the law of 57 (MMDR Act 1957) is repealed your powers (state's) spring back in magnitude”

    The discussion dwelled deeper as the CJI posed a hypothetical scenario before Mr Salve: If there was no MMRD and MMDR Act and the state was to enact legislation on royalty, that legislation on royalty would be referrable to what entry?

    Salve promptly responded, pointing to Entry 23 List II (State's power regarding the regulation of mines and mineral development). The CJI then drew a connection, stating that if a state enacts royalty legislation under Entry 23, it would correspondingly be referred to Entry 54 List I.

    “Therefore once royalty legislation is referred to entry 23, then correspondingly legislation on royalty is referrable to entry 54. Once we accept that legislation on Royalty by the state would be referrable to Entry 23, the reason why the state cannot impose royalty is that law is referrable to Entry 54(of list 1).”

    The core argument presented by Mr Salve was the problem arising from Entry 50 in List II, which, according to him, limits the state's taxing power concerning Entry 54(of list 1). Salve emphasized that it's not a matter of conflicting taxing powers but rather that a law under Entry 54 supersedes the state's taxing right under Entry 50

    “The problem is, Entry 50 List II curtails the taxing power wrt to Entry 54. It is not a case of taxing power v. taxing power …the point here is that law under 54 eclipses your taxing right under 50.”

    For reference, Entry 54 of List 1 reads : Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.

    Royalty as a Species of Exaction:

    Justice Nagarathna highlighted the multifaceted nature of imposts, exactions, and taxes on mineral rights, categorizing royalty as only one species within this larger genus.

    “There could be various types of imposts/exactions/taxes on mineral rights if that is considered to be a genus, the royalty is only a species, it is only one aspect.”

    Mr Salve in his submission cautioned against generalizations, emphasizing the need for a detailed examination of each law to discern its placement within the constitutional boundaries. Salve stressed the importance of paying attention to the details, considering the delicate balance between national interests and the significant power of taxation vested in the state. He cautioned against sweeping generalizations, recognizing the complexity of constitutional law in this sensitive area.

    “It is very difficult in these matters to try and enunciate one mantra for all of the problems. Attention to detail in this is very important because on one hand we are balancing national competing equalities and on the other hand, you are dealing with a very vital power, a power of tax conferred on the state. So we have to be very careful and the devil lies in the details. You have to look at exactly what is it that we are talking about.”

    Justice Nagarathna clarified that while royalty is one species of exaction, other forms of exactions are still available. However, she pointed out that royalty cannot substitute for all species of exactions, raising the need for the court to delineate these boundaries.

    On The Evolving Concept Of Mineral Development - Mr Salve Explains Mineral Conversation Part Of Larger Spectrum Of Mineral Development

    While deliberating upon the scope of Entry 50 List II, Justice Nagarathna questioned whether Entry 50 could exclusively relate to Section 18 of the 1957 Act.

    S.18 of the 1957 Act provides that the Central Government is mandated to ensure the conservation and systematic development of minerals in India while safeguarding the environment from pollution caused by mining activities. To achieve this, the government has the authority to formulate rules, as published in the Official Gazette. These rules cover various aspects, including the regulation of mining operations, opening new mines, beneficiation of ores, development of mineral resources, storage of minerals, submission of samples and reports by mine owners, and measures for environmental protection.

    Mr Salve answered that terms like conservation and development are not rigidly defined, and mineral conservation is integral to the broader spectrum of mineral development.

    “Earlier it was considered a private resource. With a change in our thinking, it is now considered a national resource. Now development comes ahead of regulation, development is important. Regulating it (minerals) is an integral part of development. Development is a larger field which means you regulate how it is processed and progressed, sometimes it is necessary not to allow removal in order to make sure that you get the maximum possible benefit of the mineral resource without comprising other factors.”

    The senior advocate delved into the evolving perspective on mineral resources, highlighting the shift from considering them as private resources to acknowledging them as national assets. He underscored the importance of development over-regulation and the need for a comprehensive approach that includes cost-benefit analysis, factoring in considerations like denudation of land, impact on forests, and human displacement.

    “You have to do a cost-benefit analysis. You are taking the mineral out, its value addition, you take coal out the value of coal generating electricity and that electricity is being used to manufacture steel etc. That is the value chain..whats the cost is the denudation of land, of forest…human displacement etc..and it's only when the benefits outweigh the costs. Now that is the new mantra developed. Now when we talk of mineral development, we talk of it very differently than during the times of the Crown where development meant to run away with whatever you could lay your hands on.”

    CJI's Assertion on Parliament's Jurisdiction; Entry 50 To Be Seen From Twin Perspective - Mr Salve

    On the fag end of the day's hearing, the CJI posed to Mr Salve, asserting that Parliament does not govern taxation on mineral rights, marking it outside Parliament's domain. The critical question then emerged: How does state legislation get affected by Parliament's declaration under Entry 54?

    “One thing we are very clear now, the Parliament does not govern the taxation on mineral rights. This is not in the Parliament's domain at all. Now does the legislation by the state get affected by the fact that there is a declaration by the Parliament by Entry 54," CJI asked.

    Mr Salve responded by elucidating that the analysis must focus on two key aspects of Entry 50(of list 2): understanding its legislative intent and evaluating the subject matter of the tax, specifically mineral rights. These parameters, he emphasized, should guide the court in assessing the validity of state laws imposing taxes on royalty.

    “It is on analysis of these two elements of Entry 50 that your lordships will have to consider the validity of a state law imposing a tax on royalty.”


    The key reference question involved in the present matter is to examine the nature and scope of royalty as prescribed under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and whether it could be termed as tax.

    The matter was referred to 9 judge bench in 2011. A three-judge bench headed by Justice SH Kapadia had framed eleven questions to be referred to the nine-judge bench. These include important tax law questions such as whether 'royalty' can be considered as being like tax and can the State Legislature while levying a tax on land adopts a measure of tax based on the value of the produce of land. The three-judge bench clarified in this case that the reason why it was not referred to a five-judge bench and directly referred to a nine-judge bench was because prima facie, there appeared to be some conflict in the decisions of State of West Bengal v. Kesoram Industries Ltd. and Ors which was delivered by a bench of five-Judges and India Cement Ltd. and Ors. v. State of Tamil Nadu and Ors. which were delivered by seven-judge benches

    Case details : Mineral Area Development v. M/S Steel Authority Of India & Ors (CA N0. 4056/1999)

    Can Royalty Collected On Mining Leases Be Considered As Tax? Supreme Court 9-Judge Bench Starts Hearing [DAY1]

    'States Have Few Areas Of Taxation, We Must Not Dilute Those' : Supreme Court Expresses Concerns About Diluting States' Tax Powers On Minerals [Day 3]

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