₹1 trn at stake in mineral tax tussle

As Centre and states contest the issue of taxation rights in court, CAGR of revenue from coal stands at 13.8% during 2014-23

The contentious issue of taxation rights on minerals has brought the Centre and mineral-rich states at loggerheads. The Supreme Court is currently hearing a case to ascertain whether states can impose taxes on mineral-bearing land, a proposition vehemently contested by the central government.

At stake is revenue from mining, and data on royalties garnered by states for major minerals during a five-year period crossed ₹ 1 trillion (see chart).

The Centre has argued that the royalty fixed under the Mines and Minerals (Development and Regulation) (MMDR) Act, 1957, gives uniformity in taxes for all states, and granting states unrestricted taxing authority over mineral-rich land could harm the mining sector. It warned of an “economic disaster” if states impose unlimited taxes, as it would deter investments and impede the development of the critical minerals sector in India.

However, the states have argued that tax on mining is a state subject that the Centre cannot dictate. Acknowledging that Parliament doesn’t have power to impose tax on mineral rights, the Supreme Court on Wednesday asked mineral-rich states like Jharkhand and Odisha whether the lawmakers can prescribe any limitation on the taxes they impose on mineral-rich land.

Behind the tussle

At present, under the MMDR Act, state governments have the power to grant mining concessions and collect revenue from mining activities. This revenue encompasses royalties, contributions to the District Mineral Foundation (DMF), and auction premiums. The sole contribution to the central government is directed to the National Mineral Exploration Trust (NMET).

From 2014 to 2023, coal-producing states in India, which include Jharkhand, Chhattisgarh, Odisha, Madhya Pradesh, West Bengal, and Telangana, garnered total revenues of ₹ 1.52 trillion from royalties, DMF, and the NMET through the mining sector, according to Ministry of Coal data. State governments receive 14 per cent of the sale price as royalty while DMF receives 30 per cent and 2 per cent goes to NMET from coal produced by both coal companies and the private sector.

The compound annual growth rate (CAGR) of the revenue from coal mining during 2014-2023 stood at 13.80 per cent.

According to data from the Ministry of Mines, the states received ₹ 1 trillion in royalties from the mining of other minerals during 2018-2022.

Royalty fees are rent paid by mining companies to the state government for the privilege of extracting minerals. DMFS are funded by a portion of those royalties, specifically earmarked to address the development needs of areas impacted by mining. And auction premiums are onetime payments made by winning bidders when mineral leases are awarded through an auction system, providing additional revenue for the state.

In an affidavit submitted before a nine-judge Bench, the Ministry of Mines expressed concerns about potential inflationary impacts resulting from increased prices of essential minerals like coal, which are vital for industries such as power, steel, cement, and aluminium. The ministry emphasised that any additional cess on minerals could exacerbate inflation nationwide.

The ministry argued that a uniform levy of royalty would create a level playing field. For instance, if a major coal-producing state (where 78 per cent of coal resources are concentrated, namely Odisha, Jharkhand, Chhattisgarh, and Bengal) imposed an additional cess, all states purchasing coal from it would be compelled to raise power tariffs. This increase in power tariffs, given that 55 per cent of India’s commercial energy production relies on coal and 68 per cent of coal produced is used for electricity generation, would directly impact inflation.

The ministry also provided a detailed overview of important mineral reserves across states: Chhattisgarh, Jharkhand, Odisha, and Karnataka hold significant iron ore reserves, accounting for over 50 cent of annual production. Karnataka, Odisha, Madhya Pradesh, and Maharashtra collectively possess 82 per cent of manganese ore reserves. Andhra Pradesh, Odisha, and Chhattisgarh hold 73 per cent of bauxite reserves. Odisha dominates with 96 per cent of chromite resources. Karnataka, Rajasthan, and Andhra Pradesh collectively hold 84 per cent of tungsten reserves.

“A uniform levy of royalty prescribed by the Union under MMRDA levels the playing field, thereby promoting domestic industry across the nation in a manner which is equitable, while at the same time ensuring revenue generation for the states,” the ministry said. It said the royalty is fixed keeping in view the international price of minerals so as to keep their cost and that of the finished product using such minerals competitive in order to boost exports and shrink trade deficit.

SC intervention

Several state governments have proposed to impose tax on mineral-rich land above the royalty based on a 1989 verdict. In the India Cements Limited vs State of Tamil Nadu case, a seven-judge Bench of the apex court held that royalty was a tax.

However, a five-judge Bench of the Supreme Court held in 2004 in the State of West Bengal vs Kesoram Industries Limited case that there was a typographical error in the 1989 verdict and that royalty was not a tax.

The dispute was then referred to a nine-judge Bench.

Following the 2004 judgment, mining companies, public sector undertakings and state governments have filed 86 appeals arising from conflicting verdicts passed by different high courts on the issue.