Supreme Court Dismisses Review Pleas on States' Power to Levy Tax on Minerals

Supreme Court Dismisses Review Pleas on States' Power to 

Levy Tax on Minerals

In a significant ruling, the Supreme Court of India has dismissed review petitions challenging its earlier judgment, which allowed states to levy taxes on mineral-bearing lands. The judgment also upheld that royalty on extracted minerals is not a tax. The petitions were aimed at revisiting the decision of the nine-judge bench but were rejected by a majority verdict.

Background of the Case

The core issue in the case revolved around whether state governments have the power to levy taxes on mines and minerals, a matter of critical importance for natural resource management and fiscal federalism. The nine-judge bench of the Supreme Court had ruled in July 2024 that states hold the legislative power to tax mineral rights and that royalty payments made to the government are contractual considerations, not taxes.

The decision was appealed by the Central Government, pointing out what it termed as "errors apparent" in the judgment. However, the review petitions were dismissed by a bench led by Chief Justice DY Chandrachud, along with Justices Hrishikesh Roy, Abhay S Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma, and Augustine George Masih.

Key Points from the Judgment

1. Royalty is Not a Tax: The Supreme Court reiterated that royalty payable on extracted minerals is not considered a tax but rather a contractual payment made by a mining lessee to the lessor. This liability arises from the contractual terms of the mining lease.

   

2. State Power to Tax: The Court upheld the earlier decision that states have the legislative power to tax mineral rights under Entry 50 of List 2 (State List) of the Seventh Schedule of the Constitution. This power cannot be encroached upon by the Union Parliament, which lacks the legislative competence to tax mineral rights under Entry 54 of List 1 (Union List).

3. Dismissal of Review Pleas: The bench found no error on the face of the record, stating, “No case for review under Order XLVII Rule 1 of the Supreme Court Rules 2013 has been established.” The review petitions, therefore, failed to meet the threshold required for reconsideration.

4. Dissent by Justice Nagarathna: Justice BV Nagarathna, however, dissented from the majority view, as she had in the original ruling. She believed a case for review was made out and that notice should have been issued. Justice Nagarathna had earlier held that royalty should be considered a tax, asserting that the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) undermined the states' ability to tax minerals.

Impact of the Ruling

The Supreme Court's ruling allows state governments to continue levying taxes on mines and mineral-bearing lands, including the collection of past dues. In a subsequent August 14 order, the Court clarified that past dues on royalty and taxes, dating back to April 1, 2005, could be collected by the states from the Central Government and mining leaseholders. This decision will have a significant impact on the financial landscape of states, especially those rich in natural resources.

However, the collection of these dues will be staggered over 12 years, starting from April 1, 2026, with no interest or penalties on payments due before July 25, 2024.

Concerns Over Federalism

In her dissenting opinion, Justice Nagarathna warned that allowing states to independently levy taxes on minerals could lead to a lack of uniformity in managing a national resource, potentially resulting in unhealthy competition among states. She expressed concerns that such discrepancies could undermine the federal structure of governance in India, highlighting the need for national-level consistency in mineral resource regulation.

Conclusion

The Supreme Court's dismissal of the review pleas reaffirms the states' power to tax mineral resources and brings clarity to the long-standing debate on royalty payments and mineral taxation. This judgment has profound implications for natural resource governance and state revenues, with the potential to impact the balance between state autonomy and national interest.