States’ Power to Tax Minerals

Source-This post on States’ Power to Tax Minerals has been created based on the article “Can States tax mining activities?” published in “The Hindu” on 30 July 2024.

UPSC Syllabus- Issues and Challenges Pertaining to the Federal Structure

Context- The Supreme Court has delivered a landmark decision allowing states to tax minerals in addition to the royalties set by the central government. This long-standing case, unresolved for over 25 years, was decided with an 8:1 vote.

What is the background?

1) Key Legal Questions– Section 9 of the 1957 Act requires mining leaseholders to pay royalties to landowners for any minerals removed. The key questions were whether these royalties are considered a “tax” and whether the Centre or only the States can impose such charges.

2) Previous Supreme Court Ruling– In the India Cement Ltd. v. State of Tamil Nadu case, the Supreme Court ruled that states can only collect royalties and cannot impose extra taxes on mining. The Court held that the Union government has overriding authority over mining regulation under Entry 54 of the Union List, so states cannot impose extra taxes on this matter.

What is the difference between royalty and tax?

1) Royalties are payments made by a mining company to a landowner for the right to extract minerals, while taxes are imposed by the government to fund public services.

2) The Court emphasized that taxes are set by law and can only be collected by public authorities, whereas royalties are paid directly to the landowner for giving up their rights to the minerals.

What authority do states have to tax mining activities as per the recent judgement?

1) State Authority to Tax Mineral Rights -Entry 50 of the State List gives States the authority to tax mineral rights, but this is limited by any laws Parliament may pass on mineral development.

2) Interpretations of Entry 50 and the 1957 Act -The Centre argued that Entry 50 of the State List allowed Parliament to limit state taxes on mineral rights through laws like the 1957 Act. However, the Court found that royalties are not considered taxes and thus do not fall under Entry 50’s definition of “taxes on mineral rights.” So, the 1957 Act only gave states extra revenue from royalties and did not change their ability to tax mineral rights.

3) Union and State Powers under Entry 54 -The Centre can regulate mining under Entry 54, but it cannot impose taxes, which is solely a state power. However, Parliament can impose limitations, including prohibitions, on State taxes and amend the 1957 Act to restrict State taxation.

4) Taxation under Article 246 and Entry 49– States can tax land with mines under Article 246 and Entry 49 of the State List. This means they can include mineral-bearing lands in their land taxes.

A detailed article on SC verdict on state’s power to tax mining activities can be read here.

What may be the issues with this judgement?

1) Mineral Development Goals -Royalties under the 1957 Act are designed to fund mineral development. The Act limits states to collecting only these royalties. Allowing states to add extra taxes could hinder the Act’s goal of boosting mineral development.

2) Foster Unhealthy Competition-If states could tax mineral rights, it might lead to unhealthy competition, causing chaotic and uneven increases in mineral prices. This could disrupt the national market and create chances for price manipulation.

Question for practice

What powers do states have to tax mining activities according to the recent ruling? What potential problems might arise from this decision?