States stare at taxing times with windfall at stake

All eyes now on the apex court as it tries to answer whether states have the power to levy tax on mineral-producing land

A nine-judge bench of the Supreme Court is grappling with a very tricky case, which has seen a batch of over 80 petitions and has divided two big benches earlier — one had five judges while the other was presided over by seven.

All eyes are now on the Constitution bench headed by Chief Justice of India D Y Chandrachud as it is trying to answer the 25-year-old contentious question whether states have the power to levy tax on mineral-producing land. How can the Mines and Mineral (Development and Regulation) Act be interpreted in this matter? And if “royalty” can be considered to be in the nature of a tax. The hearing began on February 27. One of the main questions before the bench is: “Can a state legislature, while levying a tax on land under List II Entry 49 of Seventh Schedule of Constitution, adopt a measure of tax based on value of produce of land? “If yes, then would the constitutional position be any different insofar as the tax on land is imposed on mining land on account of List II Entry 50 and its interrelation with List I Entry 54?” The original case dates back to 1992, when the Bihar government, through an amendment, imposed additional taxes on land revenue coming from mineral bearing lands leased out to mining industries. Something that the mining firms had opposed.

While hearing the case, the apex court last week said that the Constitution vests the power to impose a tax on mineral rights not in Parliament but in states, as it suggested that such authority should not be diluted.

The verdict can have bearing on the mineral rich states which are earning thousands of crores of rupees in revenue, like Jharkhand and Chhattisgarh. It can also affect central oil companies. Assam has told the court that state tax due from crude extraction runs to more than ~4,500 crore till July 31, 2022.

In 1989, in the case of India Cements Limited versus State of Tamil Nadu, a seven-judge bench of the apex court had held that royalty was a tax.

However, a five-judge bench of the apex court ruled in 2004 in the State of West Bengal versus Kesoram Industries Limited case that there was a typographical error in the 1989 verdict, and that royalty was not a tax.

The matter was then referred to the nine-judge bench with eleven questions on whether “royalty” can be considered as being like tax and can the State Legislature while levying a tax on land adopt a measure of tax based on the value of the produce of land.

Analysing the entries under the Seventh Schedule of the Constitution, CJI Chandrachud said in the previous hearing that taxing power always remains with States in relation to minerals and it is never with the Union. “The States have very few areas of taxation, most of the taxing powers under the constitution are given to the Union, we must not dilute those areas,” he said.

The Court's deliberation revolved around Entry 50 List II, which grants states the power to levy taxes on mineral rights, but subjects it to limitations imposed by Parliament through laws related to mineral development.

“THE STATES HAVE VERY FEW AREAS OF TAXATION. MOST OF THE TAXING POWERS UNDER THE CONSTITUTION ARE GIVEN TO THE UNION. WE MUST NOT DILUTE THOSE AREAS”

D Y CHANDRACHUD

Chief Justice of India