On July 25, the Supreme Court held that the division of legislative powers between the Union and the States is a fundamental aspect of India’s federal structure. This division, the Court added, also serves as a constitutional limitation on legislative powers. Parliament cannot encroach upon the plenary power of State legislatures under normal circumstances, except where the Constitution specifically allows it. The Court emphasised that the appropriate legislature must possess the competence to enact laws on the subject matter it seeks to legislate.
These observations, part of the majority judgment of the Supreme Court’s nine-judge bench in Mineral Area Development Authority (MADA) v. Steel Authority of India, are likely to set the tone of the debate on fiscal federalism in the days to come.
Indian federalism is defined as asymmetric because it tilts towards the Centre, producing a strong Central government. The majority judges underlined in MADA, however, that it has not necessarily resulted in weak State governments. The Indian States are sovereigns within the legislative competence assigned to them, the majority judges held in order to ensure that State legislatures are not subordinated to the Union in the areas exclusively reserved for them.
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One of the basic features of fiscal federalism is that both the Union government and the State governments ought to have adequate fiscal resources to discharge their constitutional responsibilities. The Constitution has entrusted the Union and the States with the responsibility to regulate mines and mineral development in consonance with the principles of the public trust doctrine and sustainable development of mineral resources. The public trust doctrine is founded on the principle that certain resources are nature’s bounty which ought to be reserved for the whole populace, for the present and for the future. Since these resources are intrinsically important to every person in society, the State acts as a public trustee to safeguard them.
The Mines and Minerals (Development and Regulation) Act (MMDRA), 1957, assigns both the Union government and in the case of minor minerals, the State government, a greater responsibility for development of minerals in India.
Endorsing States’ competence
The case before the Supreme Court sought clarity on who—the Union Government or the State—has the power to tax mines and minerals. The Court had to interpret Entry 54 of List I (Union List) under the Seventh Schedule to the Constitution. Entry 54 of List I deals with the regulation of mines and mineral development. The majority judges held that this is a general entry, and does not include the power of taxation.
The Chief Justice of India, D.Y. Chandrachud, authored the majority judgment on behalf of himself and seven judges, namely Justices Hrishikesh Roy, A.S. Oka, J.B. Pardiwala, Manoj Misra, Ujjal Bhuyan, S.C. Sharma, and A.G. Masih.
Article 246 of the Constitution exclusively empowers the State legislatures to make laws with respect to entries in List II (States List), which includes taxes on mineral rights under Entry 50. This Entry permits States to tax mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.
Article 248 provides that the residuary powers of Parliament shall include the power to make any law imposing a tax not mentioned in either the State List or Concurrent List (List III), under which both Parliament and State can legislate. Under Entry 97 of List I, Parliament can make a law with respect to any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.
“The Mines and Minerals (Development and Regulation) Act, 1957, assigns both the Union government and in the case of minor minerals, the State government, a greater responsibility for development of minerals in India.”
The majority judges held that as the field of tax on mineral rights vests with the State legislature under Entry 50 of List II, Parliament cannot impose a tax on mineral rights under Entry 54 of List I or under its residuary powers.
The question had to be resolved by the nine-judge bench of the Supreme Court, in view of the doubt expressed by a five-judge bench in 2004 in State of West Bengal v. Kesoram Industries about the correctness of the decision laid down by a seven-judge bench in India Cement Ltd v. State of Tamil Nadu in 1990. The case was referred to a nine-judge bench in 2011 by a three-judge bench which noticed the divergence between India Cement and Kesoram.
Royalty distinct from tax
In the India Cement case, the Supreme Court had concluded that the States could not impose taxes on minerals because of the limitation imposed by Section 9 of the MMDRA, in the form of imposition of royalty. In this case, the Supreme Court construed royalty in the nature of a tax or an exaction.
Royalty is compensation paid for rights and privileges enjoyed by the grantee. It is a payment made by the lessee to the lessor or proprietor of the minerals for the removal of minerals. It serves to compensate the lessor for the degradation of the value of the mine because of the extraction of minerals.
In her dissent, Justice B.V. Nagarathna cautioned that the steep increase in prices of minerals would result in a hike in prices of all industrial and other products dependent on minerals as a raw material or for other infrastructural purposes. | Photo Credit: The Hindu Archives
On July 25, the majority judges distinguished royalty from tax, saying the latter is an imposition of a sovereign, and is imposed by the authority of law. Royalty, on the contrary, flows from the lease deed, they held. They, therefore, declared the observation in India Cement to the effect that royalty is a tax as incorrect.
The majority judges then held that unless Parliament imposes a limitation, the plenary power of the State legislature to levy taxes on mineral rights is unaffected. “There is no direct conflict between the taxing powers of the States under Entry 50 of List II and the regulatory powers of the Union. The principle of federal supremacy has no application in the instant case,” they held.
However, the majority judges gave room for Parliament to intervene, if it wanted. The purpose of including the phrase “by law” in Entry 50 of List II is to indicate that Parliament has to specify the extent to which it seeks to limit the taxing powers under Entry 50 of List II. The majority judges held that any law enacted by Parliament under Entry 54 of List I cannot impliedly denude the powers of the State legislature under Entry 50 of List II in order to usurp the taxing powers of the State.
Dissenting opinion
In her dissent, Justice B.V. Nagarathna concluded that the decision in India Cement was correct, and the reference to the nine-judge bench was not called for. In her view, States cannot impose taxes on mineral rights over and above payment of royalty on a holder of a mining lease. This, she warned, would lead to mineral development in an uneven and haphazard manner, increase unhealthy competition between States, and engage them in a race to the bottom in a nationally sensitive market.
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She further cautioned that the steep increase in prices of minerals would result in a hike in prices of all industrial and other products dependent on minerals as a raw material or for other infrastructural purposes. As a result, the overall economy of the country would suffer, with the non-mineral States resorting to importing minerals which would hamper the foreign exchange reserves of the country, she added. A slump in the mining activity in States which have mineral deposits owing to huge levies that have to be met by the holders of mining licences is another grim scenario which she has envisaged in her dissent.
If Parliament does introduce limitations on States’ power to tax minerals through a specific law, as envisaged by majority judges, Justice Nagarathna warns of resulting legal uncertainty which would cause adverse economic consequences. In her view, the mineral-rich States would then resort to levying taxes under Entry 49 of List II (dealing with power to tax land and buildings) in order to bypass Entry 50 of List II, so as not to be bound by any limitation that the Parliament could impose by law.
V. Venkatesan is an independent legal journalist based in New Delhi. Formerly Senior Associate Editor with Frontline, he has been reporting and commenting on legal issues.
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