“The payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears”. This is the significant judgment of the Supreme Court on July 29, 2024.
How the states need to distribute of legislative powers between the Union and the States on the taxation of mineral rights is an important Constitutional aspect. The Nine Judge Constitution Bench of Dr. DY Chandrachud, CJI, Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih JJ. has held that royalty paid by mining operators to the Central government is not a tax and that States have the power to levy cesses on mining and mineral-use activities. Whereas, Justice BV Nagarathna, gave a dissenting opinion.
This ruling highlighted a point on ‘royalty’ as tax and States’ power to levy cess on mining and mineral-use activities. Except a judge of 9 judges held the following: “Royalty is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for the enjoyment of mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease. The payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears.
Entry 50 of List II: Constitutional Points:
- Entry 50 of List II does not constitute an exception to the position of law laid down in M. P. V. Sundararamier & Co. v. State of Andhra Pradesh, (1958) 9 STC 298. The legislative power to tax mineral rights vests with the State legislatures.
- Parliament does not have legislative competence to tax mineral rights under Entry 54 of List I, it is a general entry. Since the power to tax mineral rights is enumerated in Entry 50 of List II, Parliament cannot use its residuary powers to that subject matter.
Union List (Entry 54): A Constitutional aspect.
- Regulation of mines and mineral development is enumerated under both the Union List (Entry 54 of List I) and the State List (Entry 23 of List II) of the Seventh Schedule to the Constitution.
- The entrustment of the subject to the State legislatures under Entry 23 of List II is made subject to the provisions of Entry 54 of List I.
- Parliament enacted the Mines and Minerals (Development and Regulation) Act, 1957 (‘MMDR Act’) in the exercise of its legislative powers under Article 246 of the Constitution.
- The MMDR Act is a comprehensive code for the regulation of mines and development of minerals. Section 9 provides that the holder of a mining lease shall pay royalty in respect of any mineral removed or consumed from the leased area at the specified rates.
In India Cement, (AIR 1990 SC 85), (https://indiankanoon.org/doc/1907642/) a seven-judge Bench of this Court held that royalty is tax, and the State legislatures lack the competence to levy taxes on mineral rights because the subject matter is covered by the MMDR Act. The Court also held that royalty cannot be used by the State legislature as a measure of tax on mineral-bearing lands under Entry 49 of List II.
Entry 49 of List II: Past judgment
- Later in State of West Bengal v. Kesoram Industries Ltd, 2004) 10 SCC 201 a Constitution Bench of Supreme Court held that the decision in India Cement stemmed from an inadvertent error and clarified that royalty is not a tax. Thereafter, the State legislatures exercised their legislative powers to impose taxes on mineral-bearing land in pursuance of Entry 49 of List II by applying the mineral value or royalty as the measure of the tax.
Is Royalty tax?
Why is this decision? What is the true nature of royalty determined under Section 9 read with Section 15(1) of the MMDR Act? Is royalty in the nature of a tax? Whether Royalty is a tax?
The Supreme Court noted that the MMDR Act was enacted by Parliament in the exercise of its legislative power derived from Article 246 read with Entry 54 of List I. The Act seeks to provide for the regulation of mines and the development of minerals under the control of the Union. The Court said that the declaration indicates that Parliament intends to take the regulation of mines and development of mines under the control of the Union to the extent indicated in the statute.
Lease linked with MMBR Act
The rates of royalty were primarily governed by the terms of the lease before the enactment of the MMDR Act. Once a mining lease was entered into between a lessor and lessee, the rates of royalty would remain static during the subsistence of the lease. Section 9 of the MMDR Act has enabled the Central Government to examine the rates of royalty concerning all minerals and modulate them periodically after taking into consideration various factors, including the uniformity of mineral prices.
The State has no Power
The primary reason for empowering the Central Government to fix the rate of royalty could be traced to the Industrial Policy Resolution. It is linked with the active and predominant role of the State in organizing and utilizing mineral resources. The State Governments were not empowered to determine royalty to maintain a uniform regime of royalty across India.
International market decides
This was intended to promote domestic industry and maintain competitive commodity prices in the international market. Concerning the meaning of ’Royalty’, the apex court said that Royalty is generally understood as compensation paid for rights and privileges enjoyed by the grantee.
Characteristics of Royalty
The essential characteristics of royalty are that
- it is a consideration or payment made to the proprietor of minerals, either the government or a private person;
- it flows from a statutory agreement (a mining lease) between the lessor and the lessee;
- it represents a return for the grant of a privilege (to the lessee) of removing or consuming the minerals; and
- it is generally determined based on the quantity of the minerals removed.
The Court said that, like royalty, dead rent is also a statutory imposition and an integral part of the mining lease, but it generally does not serve as a consideration for the removal or consumption of minerals. The dead rent is determined by the area of land covered by the lease. Imposition of dead rent ensures that the proprietor obtains a fixed rent from the lessee even if the mine remains unworked.
Compulsory exaction
The expression “tax” under Article 265 includes every kind of impost in the form of a compulsory exaction. An impost is a compulsory exaction. The power to levy an impost is an incident of sovereignty. A liability arising out of a contract cannot be termed as an impost or tax, explained the Supreme Court. It is not impost or ‘tax’ under Article 366(28) of the Constitution.
The failure of the lessee to pay royalty is considered to be a breach of the terms of the contract, allowing the lessor to determine the lease and initiate proceedings for recovery against the lessee.
Summary:
The Supreme Court clarifies the distinction between royalty and tax in the context of mineral rights. It also discusses the legislative powers of the Central and State governments regarding mineral rights.
Key points from the decision:
- Royalty vs. Tax: Royalty is a payment made to the owner of mineral rights for the right to extract minerals. It is a consideration for using the property. Tax, on the other hand, is imposed by the government as a revenue source.
- MMDR Act: The MMDR Act empowers the Central Government to specify royalty rates for major minerals. This ensures uniformity in mineral prices.
- Mineral Rights: Mineral rights are the rights to extract and use minerals from a particular area. They are considered property rights.
- Legislative Powers: The State government has the power to impose taxes on mineral rights, while the Central government can regulate the industry, including fixing royalty rates.
- Royalty and Dead Rent: Both royalty and dead rent are not taxes. Dead rent is a payment made to the lessor to ensure that the lessee works the mine.
- Inter-relationship of Entries: The Supreme Court analyzed the relationship between Entry 50 of List II (State List) and Entry 54 of List I (Union List) and concluded that the Central government cannot impose a tax on mineral rights. However, it can regulate the industry through measures like fixing royalty rates.
In simpler terms, the Court’s decision clarifies that royalty is not a tax, and it is the State government that has the power to impose taxes on mineral rights. The Central government can regulate the mineral industry, including setting royalty rates.
Legal points:
In case the minerals vest in the Government, the mining lease is signed between the State Government (as lessor) and the lessee in pursuance of Article 299 of the Constitution.
After referring to Rules 27 and 45, Mineral Concession Rules 1960, the Court said that the principles applicable to ‘royalty’ also apply to ‘dead rent’ because: dead rent is imposed in the exercise of the proprietary right (and not a sovereign right).
The judgment referred to these questions:
- What is the scope of Entry 50 of List II of the Seventh Schedule?
- What is the ambit of the limitations imposable by Parliament in exercise of its legislative powers under Entry 54 of List I?
- Does Section 9, or any other provision of the MMDR Act, contain any limitation with respect to the field in Entry 50 of List II?
The Court analysed the Inter-relationship between Entry 50 of List II and Entry 54 of List I. Taxes on mineral rights The Court noted that the expression “taxes on mineral rights” was originally used in the Government of India Act, 1935.
Though the expression “mineral rights” is used in Entry 50 of List II, it does not find mention in any of the other related legislative entries — Entry 54 of List I and Entry 23 of List II.
Therefore, royalty would not be comprehended within the meaning of the expression “taxes on mineral rights.”
However, the legislature must ensure that the exercise of the taxing powers relatable to the field under Entry 50 of List II does not foray into a duty of excise or a tax on the sale of minerals.
The Court said that the field of tax on mineral rights vests with the State legislature. Parliament cannot impose a tax on mineral rights under Entry 54 of List I. Parliament cannot resort to its residuary powers to tax mineral rights when the subject matter is specifically enumerated in Entry 50 of the State List. The fixation of the rates of royalty under Section 9 can be validly traced to Entry 54 of List I because royalty is not a tax. The fixation of the rates of royalty falls with the regulatory powers of Parliament under Entry 54 of List I.
Referring to earlier decisions, the Supreme Court concluded that: “The decisions in Mahalaxmi Fabric Mills, Saurashtra Cement, and Mahanadi Coalfields do not reflect the correct position of law.
[This article is based on the judgment of Supreme Court Mineral Area Development Authority v. Steel Authority of India, Civil Appeal Nos. 4056-4064 of 1999, decided on 25-07-2024].
Dr M Sridhar Acharyulu, LLD, MCJ, Professor, School of Law, Mahindra University, Hyderabad
