‘Royalty not same as tax’: Supreme Court upheld rights of states to impose royalty on mining, mineral use

The Supreme Court on Thursday revoked its earlier order and upheld the rights of states to impose royalty on mining and mineral-use activities. In an 8:1 verdict, the bench led by Chief Justice of India DY Chandrachud ruled that 'royalty' is not the same as 'tax' and said that states have the competence and power to impose royalty. Justice BV Nagarathna delivered the dissenting verdict, which is a big win for mineral-rich states such as Odisha, Bengal, Jharkhand and Chhattisgarh.

"Royalty is not in the nature of tax...We conclude that the observation in India Cements judgment stating that royalty is tax is incorrect. Payments made to the government cannot be deemed to be a tax merely because a statute provides for its recovery in arrears," Chief Justice said.

"We hold that the state legislature is competent while designing a levy under entry 49 of list 2 to tax lands which comprises mines and quarries," he added.

The majority of the judges on the bench ruled that states retain the power to impose cesses on mining and related activities. They stated that the legislative power to tax mineral rights lies with the State legislature, and the Parliament does not have the legislative competence to tax these rights. 

They explained that since it is a general entry, Parliament cannot use its residuary power on this subject matter. The State legislature has the legislative competence under Article 246 read with Entry 49 of List 2 to tax mineral-bearing lands. Justice Nagarathna, however, disagreed on both aspects.

During the hearing, the central government argued that states cannot impose taxes on mineral-bearing lands and that royalties levied by the Centre eventually benefit the states. Solicitor General Tushar Mehta argued that a uniform national policy is essential for the development of the mineral industry, as fragmented state-wise levies would negatively impact the sector and the systemic utilisation of minerals in the public interest. 

The case, the oldest pending nine-judge bench matter before the Supreme Court, had its judgment reserved on March 14.

The Supreme Court is currently examining whether state governments have lost the power to tax and regulate activities related to mines and minerals due to the Mines and Minerals (Development & Regulation) Act (MMDRA). In 1989, the court ruled in the India Cements vs Tamil Nadu case that royalty is a form of 'tax' under the MMDRA and that states cannot impose cesses on such royalty.

After today's hearing, several petitioners requested the court to clarify that the ruling would be prospective and not affect past transactions. The bench agreed to address this on July 31. Recently, former Odisha Chief Minister Naveen Patnaik stated that the Centre's rejection of the demand to revise coal royalty would result in states losing thousands of crores of revenue annually.