States can recover tax dues on mineral rights only until April 1, 2005, says Supreme Court

The Supreme Court on August 14 rejected the argument that its July 25 judgment upholding the powers of the states to tax mineral rights should be given prospective effect only. The top court clarified that the levy of tax by the states, based on this judgment, should not operate for a period before April 1, 2005.

The Court also stated that the tax arrears can be paid over a staggered period of 12 years from April 1, 2026, according to legal news platform LiveLaw. The Court also said there should be no levy of interest or penalty for the demand made for the period before July 25, 2024.

A nine-judge constitution bench of the Supreme Court on July 25 ruled, by majority, that states have the power to levy tax on mineral-bearing land. The top court also said that royalty paid by minors to the Centre can't be called a tax but is a contractual payment.

Chief Justice of India DY Chandrachud headed the 9-judge bench which comprises Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih.

The CJI read out the conclusions of the bench on August 14, according to LiveLaw

“The submission that the judgment in Mineral Area Development Authority (MADA) should be given prospective effect is rejected,” he said.

Bearing in mind the consequences that would emanate from the past period, the CJI said, the following conditionalities are directed to prevail.

(a)- While the States may levy tax or revenue for the period pertaining to Entries 49 and 50 of List 2 in terms of the law laid down in MADA, the demand of tax shall not operate on transactions made prior to 1 April, 2005.

(b) The time for payment of demand of tax shall be staggered in instalments over a period of 12 years commencing from April 1, 2026.

(c) The levy of interest and penalty on demand for the period before July 25, 2024 shall stand waived for all assesses.

The CJI also said that the August 14 order will be signed by only 8 judges as Justice Nagarathna had dissented in the original judgment of July 25.

On July 25, the Court, while ruling that the 1989 decision of its seven-judge Constitution bench, which decreed that royalty on minerals constitutes a tax, is incorrect, upheld the power of states to levy tax on mineral-bearing lands by 8:1 majority.

“We are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature because of the Central Act covers the field,” the court said in its order on July 25.

After the judgment was pronounced, the Union government and certain assesses made a demand that the judgment should be given only propsective effect, according to Live Law. The 9-judge bench then held a hearing on this aspect on July 31.

The Centre told the Supreme Court on July 31 that its July 25 ruling could impose a financial burden of ₹70,000-80,000 crore on public sector units (PSUs) if applied retrospectively.

Solicitor General of India Tushar Mehta requested the Court to clarify that the judgment will not enable recoveries for the period before the date of pronouncement. Upon hearing these arguments, the bench reserved its verdict on whether the judgment should be applied prospectively or retrospectively.

The Court was hearing the key questions on whether the royalty payable on minerals is a tax under the Mines and Minerals (Development and Regulation) Act, 1957, and if only the Centre is vested with the power to levy such exaction or states also have the authority to impose levies on mineral bearing land in their territory.

1989 Verdict

This issue dates back to 1989 when a dispute between the Tamil Nadu government and India Cements – the company secured a mining lease from the state and was paying royalty when the state imposed a cess on the royalty.

In 1989, a seven-judge Bench had held that the Centre has primary authority over ‘regulation of mines and mineral development’ in accordance with laws enacted by Parliament, such as the MMDRA.  

The centre had argued that only Parliament has the power to impose taxes on minerals, a report in NDTV said. In March, the Chief Justice had asked Solicitor General Tushar Mehta, appearing for the centre, if this contention affects distribution of power between centre and states as in the Constitution.

States only have the power to collect royalties under the MMDRA and cannot impose any further taxes on mining and mineral development.

(All court observations and quotes have been taken from LiveLaw)