9 member judgment on Minerals Area Development Authority Vs. Steel Authority of India
Summary: On July 25, 2024, the Supreme Court of India delivered a landmark judgment in Minerals Area Development Authority Vs. Steel Authority of India, affirming with an 8:1 majority that royalty on mining leases cannot be classified as a tax. This decision, led by Chief Justice D.Y. Chandrachud, addresses a long-standing issue regarding the division of taxation powers between the central and state governments. Under Article 246 of the Constitution, the Seventh Schedule delineates powers between the Union and State Lists, with Entry 50 of the State List empowering states to levy taxes on mineral rights, but excluding royalties from this definition. The case revisited historical judgments, including the 1989 decision in India Cements Ltd. v. State of Tamil Nadu, which erroneously classified royalties as taxes, and the 2004 correction in State of West Bengal v. Kesoram Industries. The recent ruling overturns previous precedents, clarifying that while states can impose local taxes, royalty fees for mineral extraction are not considered a tax under constitutional provisions. This ruling resolves the discord over tax authority between the Centre and states, impacting how mining activities are regulated and taxed in India.
On July 25,2024 SC gave a landmark ruling on State’s Power to tax mining activities with 8:1 majority with Chief Justice of India (CJI) D.Y. Chandrachud that royalty on mining leases cannot be considered as a tax.
Constitutional Grounds:
Seventh Schedule under Article 246 – Subject -matter of laws made by parliament and by legislature of States specifies the division of powers between Centre and States i.e.
List I – Union List
List II- State List
List III- Concurrent List
Entry 50 of State List Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development empowers the state government to impose tax on minerals.
What is Royalty?
A mineral royalty is a fee paid to the government by a lessee for the extraction of minerals from land to land.
Let’s have a look over the long running issue and timelines.
1957 – Mines and Minerals (Development and Regulation) Act was passed by the Union Government which empowered the Central Government to control over the regulation and development of minerals and mines. Section 9 of the act stated that Union government will determine the royalty that has to be paid by a mine leaseholder to the owner of the land.
1958 – Madras Panchayat Act, 1958 came in Tamil Nadu which included sections on townships, the constitution of certain town panchayat areas as municipalities, and the strength of a panchayat. It levied a local tax on land revenue in each panchayat development block.
Over the period of time, power of levitation and collection of tax became apple of discord between Centre and State.
1963 – Tamil Nadu government granted a mining lease to India Cements Limited. India Cements challenged the local tax imposed under the Madras Panchayat Act in the Madras High Court. Madras HC upheld the state law. India Cements Limited appealed in SC they argued that imposing an added local cess essentially was like levying a tax on royalty that they were already paying to the state government.
1989 – 7 judge bench in India Cements Ltd. v state of Tamil Nadu held that “royalty is a tax.” By this, the Supreme Court held that state governments were not competent to collect tax on royalty. This would become one of the key contentions of the nine judge case, especially the part where the bench held that “royalty is a tax.”
2004- A five judge bench of the Supreme Court in State of West Bengal v Kesoram Industries by a 3:2 majority held that there had been a grave inadvertent clerical error in the text of India Cement. The clerical error was an unfortunate typo. Instead of writing “cess on royalty is a tax,” the judgement said that “royalty is a tax.”
2024- In case of Minerals Area Development Authority v Steel Authority of India SC gave a landmark ruling on State’s Power to tax mining activities with 8:1 majority with Chief Justice of India (CJI) D.Y. Chandrachud that royalty on mining leases cannot be considered as a tax.