Syllabus
GS Paper 3 – Industrial policy
Context
On July 25, the Supreme Court issued an order confirming that States have the authority to levy taxes on minerals, alongside the royalties levied by the Centre.
Source
The Hindu| Editorial dated 30th July 2024
Can States tax mining activities
On July 25, the Supreme Court delivered a landmark ruling affirming the authority of States to impose taxes on minerals, in addition to the royalty levied by the Centre. This decision, rendered by an 8:1 majority, reinforces the principles of federalism and clarifies the legislative powers of State legislatures under the Mines and Minerals (Development and Regulation) Act, 1957 (1957 Act).
Significance of Mining Sector in India
- Economic Contribution:
- The mining sector accounts for approximately 2.2-2.5% of India’s GDP and is a key driver of economic growth.
- It supports the growth of industries such as infrastructure and automobiles, leading to increased demand for power and steel.
- Job Creation:
- Mining generates more employment compared to other sectors. According to the 12th Five Year Plan, the mining sector creates 13 times more jobs than agriculture and six times more than manufacturing per percentage point of economic growth.
- Economic Diversification and Strategic Global Positioning:
- Investment in the mining sector helps diversify India’s economy, reducing reliance on traditional sectors like agriculture.
- By participating in the global mining industry, India can establish itself as a significant player in the critical minerals market.
- Support for Electric Vehicle Industries:
- Mining essential minerals such as lithium supports the growing electric vehicle industry, which is crucial for the transition from oil to electric mobility.
- Increase in FDI and FPI Inflows:
- Allocating mines to private players increases the potential for substantial FDI and FPI investments in the Indian economy.
- Additionally, boosting mining activities in India can reduce the country’s import bill and decrease the Current Account Deficit.
- Development of Renewable Energy Sector:
- Minerals like aluminum and copper are essential for the development of solar and wind power equipment. These minerals will help India achieve its Panchamrit goals.
Government Initiatives to Boost Mining Sector
- Post-Liberalization Policy Shift:
- The National Mineral Policy of 1993 paved the way for private investment in mineral exploration.
- However, the First Come First Serve (FCFS) system faced objections from the Supreme Court due to its susceptibility to manipulation and misuse.
- The 2015 Amendment to the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) replaced the FCFS system with an auction-based allocation.
- MMDR Amendment Act of 2015:
- Introduced mineral concessions grants through auctions to enhance transparency and remove discretion.
- Established the District Mineral Foundation (DMF) to address grievances of people affected by mining.
- Created the National Mineral Exploration Trust (NMET) to incentivize exploration.
- National Mineral Exploration Policy 2019:
- Encourages private sector exploration through revenue sharing, transfer of mining leases, and dedicated mineral corridors.
- Aims to develop a long-term import-export policy for minerals and harmonize taxes, levies, and royalties with global standards.
- FDI Up to 100% Under the Automatic Route:
- Allows 100% FDI in mining and exploration of metal and non-metal ores, including diamonds, gold, silver, and precious ores, as well as coal and lignite mining for captive consumption by power projects, iron, steel, and cement units.
- Minerals Security Partnership (MSP):
- India joined the Minerals Security Partnership (MSP) as its 14th member.
- Critical Minerals Mission:
- The Government has announced a Critical Minerals Mission to develop the country’s critical minerals capabilities.
Taxing Mining Activities
Existing Tax Framework
While the specific tax structure varies across states, some common taxes levied on mining activities include:
- Mineral Royalty: This is a fee paid to the state government for extracting minerals.
- Sales Tax/GST: Applicable on the sale of minerals.
- Other State-Specific Taxes: Some states impose additional levies like mining development cess, etc.
States’ Authority to Tax Mining Activities – Constitutional Provisions
- State List (Entry 50): States can make laws regarding “taxes on mineral rights,” but this power is limited by Parliamentary laws on mineral development.
- Union List (Entry 54): The Centre can regulate “mines and mineral development” in public interest.
- Land Taxation: States can tax the land where mines and quarries are located under Article 246 read with Entry 49 (taxes on lands and buildings) of the State List.
Case Background
- Royalty vs. Tax: For decades, there was a legal debate on whether the royalties collected by state governments from mining leaseholders were taxes.
- This distinction held significant implications for the tax structure in the mining sector.
- Dispute: The case originated from a dispute between India Cement Ltd and the Tamil Nadu government, where the State imposed a cess on royalties, which India Cement challenged.
- Legal Precedents:
- 1989 Ruling: India Cement Ltd. v. State of Tamil Nadu: The Supreme Court ruled that States can only collect royalties and not impose additional taxes on mining activities.
- 2004 Ruling: West Bengal v. Kesoram Industries Ltd: Recognized a typographical error in the 1989 decision and stated that “cess on royalty is a tax.”
- 2011 Reference: Nine-Judge Bench: Referred to resolve the conflicting precedents between the India Cement and Kesoram Industries rulings.
Recent Supreme Court Ruling
Distinction Between Royalty and Tax
| Aspect | Royalty | Tax |
| Definition | Contractual consideration paid by the mining lessee to the lessor. | Imposition by a sovereign authority. |
| Purpose | For the right to extract minerals. | To fund welfare schemes and public services. |
Majority Reasoning
- Royalties Not a Tax: Royalties cannot be classified as a tax, hence do not fall under “taxes on mineral rights” in Entry 50.
- 1957 Act: Provides States with revenue through royalties without interfering with their authority to levy taxes on mineral rights.
- Centre’s Regulation: Under Entry 54, does not include the power to impose taxes, which is under State jurisdiction.
Dissenting Opinion by Justice Nagarathna
- Royalties as Tax: Royalties paid under the 1957 Act should be considered a tax for developing mineral resources.
- Impact on Mineral Development: Allowing States to impose additional levies could hinder development.
- Unhealthy Competition: States might exploit the national market for arbitrage, disrupting market stability.
Implications of the Judgement
- Benefits:
- Increased Revenue for States: States can now benefit directly from taxing minerals, leading to improved local economic conditions and infrastructure development.
- Enhanced State Autonomy: The decision reinforces federal principles by granting States greater control over their mineral resources.
- Drawbacks:
- Economic Disparity: Mineral-rich States may gain disproportionately, leading to economic imbalances between regions.
- Increased Mining Costs: Additional taxes may increase the cost of mining operations, potentially making Indian mining less competitive on a global scale.
- Regulatory Conflicts: There may be conflicts between State and Central regulations, complicating the mining sector’s regulatory environment.
Conclusion
The Supreme Court’s ruling marks a significant moment in the ongoing discourse on federalism and the distribution of legislative powers between the Centre and the States. By clarifying the distinction between royalties and taxes and affirming the States’ authority to impose taxes on mineral rights, the verdict has set a precedent that could have substantial economic and legal implications.
References
Related PYQ
Despite India being one of the countries of Gondwanaland, its mining industry contributes much less to its Gross Domestic Product (GDP) in percentage. Discuss. [ UPSC Civil Services Exam – Mains 2021]
Practice Question
Discuss the significance of the recent Supreme Court ruling on the authority of States to impose taxes on minerals? [150 words]