The Mineral Area Development Authority v. Steel Authority of India case decided by the Supreme Court in July 2024 involves resolution of a significant constitutional dispute regarding the legislative competence of State legislatures in the context of taxing and regulating mineral resources. 

As per Bihar Coal Mining Area Development Authority (Amendment) Act, 1992 and the Bihar Mineral Area Development Authority (Land Use Tax) Rules, 1994, Steel Authority of India Limited (“SAIL”) was levied tax by the state government for using lands for mining. The validity of the taxes on these state legislations was contested by SAIL. The High Court of Bihar relied on an earlier precedent and held that the tax was not within the scope of Entry 49 - List II of the Seventh Schedule of the Constitution and therefore, the state governments had no right to levy any taxes for lands used for mining. Further to this judgement, the High Court's decision was challenged before the Supreme Court.

The matter was referred to a nine-judge bench of the Supreme Court: 

The main issues that were listed for determination pertained to interpretation of royalty vis a vis tax, whether royalty is a form of a tax and powers of the state and central government to exercise rights on the subject matter being disputed. The relevant powers to legislate under the Constitution of India are as follows: 

Entry 54 - List I (Union List) of the Seventh Schedule - 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.

Entry 49 - List II (State List) of the Seventh Schedule - Taxes on lands and buildings.

Entry 50 - List II (State List) of the Seventh Schedule - Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.

The Supreme Court heard all parties and concluded on the following issues with an 8:1 majority: 

Is royalty in the nature of a tax? 

In a landmark observation, the Supreme Court concluded that Royalty is not a tax. The Supreme Court held that Royalty is a contractual consideration paid by the mining lessee to the lessor for 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; so, Parliament can continue to levy royalties.

Can States levy taxes on minerals?

In another landmark observation, the Supreme Court observed that Entry 50 of List II does not constitute an exception to the position of law. 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 being a general entry. Since the power to tax mineral rights is enumerated in Entry 50 of List II, Parliament cannot use its residuary powers with respect to that subject-matter.

Entry 50 of List II envisages that Parliament can impose “any limitations” on the legislative field created by that entry under a law relating to mineral development. The MMDR Act as it stands has not imposed any limitations as envisaged in Entry 50 of List II and hence, the Supreme Court concluded that – till such limitations are introduced, the States can continue to levy “taxes” on minerals and mineral rights. The scope of the expression “any limitations” under Entry 50 of List II is wide enough to include the imposition of restrictions, conditions, principles, as well as a prohibition.

What is the extent of power of State legislatures?

The State legislatures have legislative competence under Article 246 read with Entry 49 of List II to tax lands which comprise of mines and quarries. Mineral bearing land falls within the description of “lands” under Entry 49 of List II.

The yield of mineral bearing land, in terms of the quantity of mineral produced or the royalty, can be used as a measure to tax the land under Entry 49 of List II.

Entries 49 and 50 of List II deal with distinct subject matters and operate in different fields. Mineral value or mineral produce can be used as a measure to impose a tax on lands under Entry 49 of List II.

Earlier landmark decisions that were overruled - 

The decisions in India Cement (1990 SC), Orissa Cement (1991 SC), Federation of Mining Associations of Rajasthan (2017 SC), Mahalaxmi Fabric Mills (1995 SC), Saurashtra Cement (2001 SC), Mahanadi Coalfields (1995 SC), and P Kannadasan (1996 SC) were overruled to the extent of the observations made in the present case.

Basis the submissions made, and arguments heard, the Supreme Court ruled in favour of the states having the power to levy tax on lands used for mining minerals.

Conclusion:

This landmark judgment means that now states can offer various incentives – fiscal and otherwise to attract a range of mining activities in their states. It also means that states have a direct source of revenue from mining activities and reduces their dependence on the Centre. From a federal structure, this allows for more autonomy with states as they are not dependent on the center for monetary resources. On the other hand, it would also mean that tax law and other fiscal incentives may not be uniform and will vary from state to state. So, since there are a very few mineral rich states, miners will have no choice but to undertake mining activities in these states and hence, miners could end up paying a substantial amount of taxes, if they want to undertake mining activities in these specific states and this could end up with a few states monopolizing the entire mining economy. It also means that states can levy taxes in addition to other levies that the miner may be subject to already and this may increase mining costs substantially. This could also mean that Parliament may adopt a wait and watch approach and bring in amendments to the MMDR Act, seeking to restore its primacy to levy taxes on minerals or may impose limitations in the future on the states’ power to do so. So, giving these various potential consequences, mining companies are advised to seek specific legal advice on these incentives and positions that are available before making investments in the mining sector.