SC upholds legislative power of States to impose taxes on mineral rights

 This Tax Alert summarizes a recent ruling of the Supreme Court (SC) on the distribution of legislative powers between Union and States on the taxation of mineral rights.

Nine-judge bench of the SC by a majority (8:1) held that:

• Parliament cannot impose taxes on mineral rights under Entry 54 of List I of the Constitution of India.
• The State legislatures are competent to levy tax on mineral-bearing land under Entry 49 of List II and can adopt the mineral produce or royalty as the measure to tax mineral-bearing lands.
• Royalty is a consideration paid by the lessee to the lessor of mining lease for enjoyment of mineral rights and to compensate for the loss of value of minerals suffered by the owner.
• Parliament cannot resort to its residuary powers to tax mineral rights when the subject matter is specifically enumerated in Entry 50 of the State List.
• Prescription of royalty rates u/s 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) by Central Government does not make it a “compulsory exaction by public authority for public purposes”.
• While MMDR Act regulates the exercise of the proprietary rights in the minerals in the larger public interest, the lease deed is ultimately entered between the State Government (or the private person) and the lessee.
• A consideration paid under a contract to the State Government for acquiring exclusive privileges and rights with respect to a particular activity cannot be termed as an “impost” or “tax” under Article 366(28) of the Constitution of India.

Comments

• The nine-judge bench majority ruling resolves a protracted conflict and enhances the autonomy of the States in matters of taxation concerning mineral rights and lands rich in minerals.
• The ruling is likely to have a potential impact both under Service Tax and GST wherein the businesses challenged the levy on mineral royalty on the ground that royalty is a tax, and accordingly, not susceptible to Service tax/ GST. Whether the judgement will be applied in all cases retrospectively or prospectively, will need to be seen.
• Further, it may likely resolve the dispute regarding taxability of renting of immovable property and other land related rights under Service tax and GST basis the constitutional powers.