Limited taxing power of states must not be diluted: Supreme Court to Centre

States have the power to impose tax on mineral rights, not Parliament, the apex court held

Areas of India showing 'obvious geological potential' for mineral extraction, per the Geological Survey of India (photo courtesy @TNGeography/X)
Areas of India showing 'obvious geological potential' for mineral extraction, per the Geological Survey of India (photo courtesy @TNGeography/X)


The Constitution vests the power to impose a tax on mineral rights not in Parliament but in the states, the Supreme Court told the Centre on Thursday, underlining that such authority should not be diluted.

A nine-judge Constitution bench headed by Chief Justice D.Y. Chandrachud, which is considering whether the royalty collected by the Centre on mining leases can be considered as tax, as held by a seven-judge bench in 1989, said Parliament can only impose some limitations to ensure that mineral development is not impeded.

The bench, also comprising justices Hrishikesh Roy, Abhay S. Oka, B.V. Nagarathna, J.B. Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih, said in respect of Entry 50 of list 2 of the 7th Schedule of the Constitution, what Parliament can do is impose restraints, but it cannot say it has the power to impose the tax and states don’t have it.

The 7th schedule of the Constitution specifies allocation of powers and functions between the Union and states.

"Power to impose tax is not given to Parliament at all, it is only given to the states. But, in the interest of mineral development, Parliament can say you cannot tax in this manner, or for instance, tax should not exceed say 20 per cent because if you do impose tax in a certain way, it may impede mineral development," the CJI told attorney-general R. Venkataramani.

The AG contended the Entries in List 1 (union list) and 2 (state list) have to be looked at in a certain way, and all activities related to minerals will form part of mineral rights from birth till completion of the mineral activity.

"Nothing follows from the ownership of the unexploited, embedded land. From minerals, it is expected to be exploited. I don't keep a gold mine without exploiting it. Therefore, unexploited mineral wealth will make no relevance in context of the Entries. So, from birth to completion of mineral activities, it will be a conspectus of mineral rights," he said.

The CJI said the moment Parliament makes a declaration under Entry 54 of List 1, which deals with regulation of mines and mineral development, it is excluded from the power of states.

"But the taxing power always remains with the state in respect of mineral rights. That critical distinction we have to understand. It's not a power given to the Union at all. One more reason to say this is that the areas where the states have taxing power is very limited under our Constitution. Most of the taxes are given to the Union and the states have very few areas of taxation like liquor. Therefore, these areas must not be diluted," the CJI said.

The bench asked the AG to specify in clearer terms whether he is contending that Parliament can impose a tax on mineral rights, saying it has to be a categorical 'yes' or 'no'. Since Venkataramani appeared to prevaricate, CJI Chandrachud asked him again, "If Parliament can impose a tax on mineral rights, then what is the source or legislation?"

Venkataramani said a literal reading of Entry 50 of list 2 says taxes on mineral rights are subject to limitations imposed by Parliament by law relating to mineral development. "By literal reading of Entry 50, there is no power to tax mineral rights but we have to understand why mineral rights formed part of the Entry," he said.

Reading from his written submission, the AG said, "Entry 54 List I enables the Parliament to enact an all comprehensive legislation in relation to mineral development. Mineral development as stated will necessarily include and relate to mineral rights. Matters relating to the grant of mineral rights would thus include a levy, charge, impost, or demand that can be imposed in relation to the exercise of mineral rights."

Entry 54 of List 1 says, "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."

He said the Constitution makers did not contemplate that a law under Entry 54 List 1 will not deal with matters relating to levy, charge, impost or demand in relation to the exercise of mineral rights.

"A law minus these aspects will neither be a regulatory law nor a law in relation to mineral development in all its aspects. Consequently, the Constitution did not envisage the need for a separate Entry in List 1 under which a law relating to levies, charges, imposts, or demands can be enacted," he said.

The hearing remained inconclusive and will resume on 5 March.

On 27 February, the apex court had commenced hearing the vexed issue of whether the royalty payable on minerals extracted, as provided for under the Mines and Minerals (Development and Regulation) Act 1957, is in the nature of tax.

The issue arose after the 1989 verdict in the case of India Cements Ltd vs State of Tamil Nadu by a seven-judge bench of the apex court, which held that royalty was a tax. However, a five-judge bench of the court ruled in 2004 in the State of West Bengal vs Kesoram Industries Ltd that there was a typographical error in the 1989 verdict, and that royalty was not a tax. The dispute was then referred to a larger nine-judge bench.

The top court is hearing a batch of 86 appeals filed by mining companies, public sector undertakings (PSUs) and state governments arising from conflicting verdicts passed by different high courts on the issue.

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