A landmark 8 : 1 ruling by a Nine-Judge Constitution Bench of the Supreme Court (SC), led by the then Chief Justice of India (CJI) D.Y. Chandrachud, affirmed, on July 25, 2024, that state legislatures have the unrestricted authority to tax mining lands and quarries, regardless of the Mines and Minerals (Development and Regulation) Act (MMDRA) of 1957. The other judges in the bench included Justices Hrishikesh Roy, Abhay S. Oka, J.B. Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma, B.V. Nagarathna, and Augustine George Masih.
The judgment liberates states from central restrictions, reflecting the core principles of federal governance. The judgment was delivered in response to a batch of 86 appeals filed by various state governments, mining companies, and public sector undertakings. The case pending for over 25 years was resolved with an 8 : 1 ruling with Justice Chandrachud authoring the majority opinion while Justice B.V. Nagarathna issuing a dissenting opinion.
Background
Section 9 of the MMDRA 1957 mandates that those holding mining leases must “pay royalty in respect of any mineral removed” to the individual or corporation that leased the land to them. The central issue in the case was whether the royalties paid by mine leaseholders to state governments under the 1957 Act should be classified as a ‘tax’. Furthermore, the court had to decide whether the Centre had the authority to impose such charges or if the states held exclusive power to levy them within their jurisdictions.
The case originated from a dispute between India Cement Limited and the Tamil Nadu government after the company obtained a mining lease in the state. Although India Cement was already paying royalties, the government imposed a cess—an additional tax on land revenues, including royalties. The company challenged this in the Madras High Court, arguing that the cess on royalties essentially amounted to a tax on royalties, which exceeded the state’s legislative authority. In 1989, a seven-judge bench of the SC, in the India Cement Ltd. vs State of Tamil Nadu case, ruled in favour of India Cement, reasoning that states could only collect royalties and not impose taxes on mining activities. The court emphasised that the Union government held overriding authority over the “regulation of mines and mineral development” under Entry 54 of the Union List, as outlined in the 1957 Act, and therefore, states do not have the power to levy additional taxes on this matter.
In 2004, a five-judge bench hearing a similar dispute between West Bengal and Kesoram Industries Limited concluded that there was a typographical error in the India Cement case decision. The bench stated that the phrase “royalty is a tax” should have been read as “cess on royalty is a tax”. Nevertheless, since the bench was smaller than the one in the India Cement case, it did not have the authority to overrule or amend the earlier ruling.
In 2011, a three-judge bench led by former Chief Justice S.H. Kapadia, while examining a challenge to a Bihar law imposing a cess on land revenue from mineral-bearing lands acknowledged the conflicting precedents set by Kesoram Industries and India Cement. To resolve the legal uncertainty, the bench referred the issue to a nine-judge bench for definitive ruling.
Some Highlights of the Judgment
Difference between Royalty and Tax In the 200-page judgment, the majority ruling clarified the difference between royalty and tax. It described royalty as a “contractual payment” made by the mining lessee to the lessor (who may be a private entity) in return for the right to extract minerals. In contrast, a tax was defined as an “imposition by a sovereign authority”. The judges emphasised that taxes are established by law and could only be imposed by public authorities to finance welfare programmes and public services. On the other hand, royalties are paid to the lessor in exchange for relinquishing their exclusive rights to the minerals.
Taxes on Mineral Rights Entry 50 of the State List under the Seventh Schedule of the Constitution grants states exclusive authority to legislate on “taxes on mineral rights”; however, this power is subject to limitations imposed by any laws Parliament enacts regarding mineral development. In contrast, Entry 54 of the Union List empowers the Centre to regulate “mines and mineral development”, particularly when Parliament deems it necessary for public interest. During the proceedings, the Centre argued that Entry 50 in the State List allows Parliament to impose “any limitations” on taxes on mineral rights through laws related to mineral development, such as the 1957 Act.
The majority, however, thought it was logical that since royalties could not be classified as a tax, they do not fall under the category of “taxes on mineral rights” as outlined in Entry 50 of the State List. As a result, the court ruled that the 1957 Act only provided states with an additional revenue stream through royalties, without limiting their power to levy taxes on mineral rights under Entry 50.
Although the Centre has the authority to regulate mining development under Entry 54 of the Union List, the court clarified that this power does not extend to imposing taxes, which falls solely within the jurisdiction of the state legislature. However, the court noted that this authority is subject to “any limitations” that Parliament may impose, which could include a “prohibition” on levying taxes. This means that if the Centre wishes to alter the existing legislative framework under the 1957 Act to remove states’ power to impose taxes, it has the ability to do so.
The majority further ruled that states have the authority to tax the land where mines and quarries are situated, based on Article 246 in conjunction with Entry 49 (taxes on lands and buildings) of the State List. “In other words, mineral-bearing lands also fall within the description of lands under Entry 49 of List 2”, the CJI stated, noting that the income derived from the land’s yield could be used as a basis for taxation.
Majority Opinion by the CJI “Indian federalism is defined as asymmetric because it tilts towards the Centre, producing a strong central government. Yet, it has not necessarily resulted in weak state governments. The Indian states are sovereigns within the legislative competence assigned to them. In a federal form of government, each federal unit should be able to perform its core constitutional functions with a certain degree of independence. The Constitution has to be interpreted in a manner which does not dilute the federal character of our constitutional scheme. The effort of the constitutional court should be to ensure that state legislatures are not subordinated to the Union in the areas exclusively reserved for them.”
Justice Nagarathna’s Dissent In dissent, Justice Nagarathna argued that royalties paid under 1957 Act should be regarded as a tax aimed at developing the country’s mineral resources. She further noted that the central legislation, such as the 1957 Act, was designed to promote mineral development and allowing states to impose additional levies and cesses on top of the royalties could significantly undermine this objective. She emphasised that the passage of the 1957 Act effectively “denuded” states of their power to levy taxes by giving the Centre full control over mineral development, limiting states to generating revenue exclusively through royalties.
Explaining the potential consequences of allowing states to tax mineral rights, the judge emphasised that it could lead to “unhealthy competition” between states in an effort to generate additional revenue. She warned that this would result in a sharp, uncoordinated and uneven rise in mineral costs. She cautioned that such a situation could create opportunities for arbitrage in the national market, where pricing discrepancies might be exploited for profit, ultimately destabilising the market.
On Judgment to be Applied Retroactively or Prospectively The union government, supported by a group of mining companies, argued that the judgment should be applied prospectively to avoid confusion, legal challenges, and the administrative complications that could arise. In contrast, the Jharkhand government pushed for the retrospective application of the ruling. As a result, on July 31, 2024, a hearing was held to decide whether the verdict of July 25, 2024, should be applied retroactively or prospectively.
During the hearing on July 31, 2024, Solicitor General Tushar Mehta, representing the Centre, emphasised the potential economic consequences of the ruling, stressing that mineral development is crucial for industries like electricity generation, which is heavily dependent on coal. He raised concerns that applying the ruling retrospectively could trigger a chain reaction of price hikes across various sectors, ultimately burdening consumers.
The bench considered Solicitor General’s suggestion as a potential middle ground: that neither States should pursue retrospective levies, nor should entities that have already paid under the old regime seek refunds.
Senior advocate Rakesh Dwivedi, representing Jharkhand, argued against the prospective application of the ruling, contending that it would undermine the validity of the state laws upheld by the court. He emphasised the importance of balancing the financial burden on industries by staggering or adjusting the interest component, while ensuring the states could cover what is rightfully due to them.
After the hearings, the SC, on August 14, 2024, pronounced its final verdict which allowed states to collect past dues on royalty on minerals bearing land from Centre, mining companies from April 1, 2005, onwards. The SC rejected the Centre’s request for prospective effect of its July 25, 2024 verdict, which affirmed the power of states to levy taxes on mineral rights and mineral bearing land. The court ruled that states could seek refunds of royalty payments from April 1, 2005, onwards. The bench, however, stated that there would be conditionality on payment of past dues.
The Bench stated that the payment of dues by the Centre and mining companies could be made to mineral-rich states in a staggered manner over the next 12 years. However, it directed the states not to impose any penalties on the payment of dues. This decision is a bonanza for mineral-rich states like Jharkhand, Odisha, Chhattisgarh, and Rajasthan.
In a significant clarification, the SC stated that its ruling would not apply to oilfields, mineral oil resources, petroleum, and petroleum products. The union government argued that these petitions did not challenge the Centre’s exclusive jurisdiction over these assets, as outlined in Entry 53 of List I in Seventh Schedule.
Conclusion
The Supreme Court’s decision reinforces the federal structure of India by reaffirming the rights of the states to tax mining-bearing lands. The judgment not only clarifies the constitutional distribution of taxing powers between the Union and the states but also enhances the fiscal autonomy of states endowed with mineral resources.
Furthermore, the retroactive nature of the ruling, which applies from 2005 onwards, offers a substantial opportunity for states to recover lost revenues, potentially correcting decades of financial imbalance.
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