SC to set conditions on retrospective mineral tax ruling to provide clarity

The Supreme Court on Wednesday indicated that it would lay down specific conditions regarding the retrospective applicability of its recent ruling, which affirmed the legislative competence of states to levy taxes on minerals and mineral-bearing land in addition to the royalty imposed by the Centre.

The nine-judge bench, which reserved its order on the matter, aims to bring clarity to the potential financial implications for states and industries alike.

“We are conscious of the fact that states do need revenues... we are also aware that a jurisprudential thicket will arise if we were to hold that the judgment will operate prospectively... at the same time, we can’t be oblivious of the fact that there were some state laws struck down two decades ago. Should we countenance the fact that there will be demands made after two or three decades while many of these companies are PSUs? We would lay down broad conditionality,” said the bench led by Chief Justice of India Dhananjaya Y Chandrachud.

The impending decision by the top court is of immense significance, particularly for states like Jharkhand, Odisha, Uttar Pradesh, Chhattisgarh and Rajasthan, which stand to recover substantial sums from mining companies if the ruling is applied retrospectively. The states could potentially enforce back taxes on mineral rights, significantly enriching their coffers. However, this comes with the risk of severe financial implications for industries reliant on minerals, especially those with existing contracts and commitments based on previous legal frameworks.

Read more: Explained: The Supreme Court verdict on states’ right to levy tax on minerals

The court’s deliberation on Wednesday followed its landmark ruling on July 25 when the Constitution bench ruled by 8-1 majority that royalty charged on mining is not a tax, but a form of contractual payment made by the miners to the Centre for the extraction of minerals. This distinction, the court said, allows states to impose an extra levy and surcharge on such mineral rights, providing them with an additional source of revenue.

The majority opinion was supported by justices Hrishikesh Roy, Abhay S Oka, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih, with justice BV Nagarathna dissenting. Justice Nagarathna held that the Centre holds the exclusive right to tax mineral rights across the country.

On that day, the Union government, along with a batch of mining companies, argued that the judgment should be applied prospectively to prevent confusion, legal challenges and associated administrative burdens. Conversely, the Jharkhand government advocated for retrospective application, prompting the bench to schedule a hearing on July 31 to resolve the issue.

During the hearing on Wednesday, solicitor general Tushar Mehta (SG), appearing for the Centre, underscored the potential economic impact of the ruling, noting that mineral development is critical to various industries, including electricity generation, which heavily relies on coal. He expressed concerns that the retrospective application of the ruling could lead to a cascade of price increases across sectors, ultimately burdening consumers. The SG further highlighted that public sector undertakings (PSUs) could face liabilities running into thousands of crores, potentially three times the net worth of some companies.

Read more: Setback to Centre as Supreme Court rules royalty on minerals is not tax

“Multiplicity of litigations may arise under clauses and reasons that we cannot even comprehend today,” Mehta warned, stressing the far-reaching consequences of a retrospective application.

The court also considered the SG’s suggestion that neither the states should pursue retrospective levies, nor should entities that have paid under the old regime seek refunds, as a possible middle ground.

Attorney general R Venkataramani, also representing the Centre, further sounded a word of caution. “The retrospective application will have a multipolar impact. There were several legislations and adjustments made that were not before this court when the matter was being heard because the bench was dealing with the entries under the Seventh Schedule of the Constitution. When mines and minerals are impacted, the entire economy is impacted -- from nanotechnology to health care,” asserted the law officer.

Senior advocates Abhishek Manu Singhvi, Mukul Rohatgi, Harish Salve and Arvind Datar, appearing for a host of mining companies, agreed with Mehta’s suggestion - “no recoveries, no refunds”. The lawyers pressed that certainty in law is paramount and that after the companies and their contracts premised their obligations based on the previous position, altering them three decades later would prove severely counter-productive.

But senior advocate Rakesh Dwivedi, representing Jharkhand, argued against prospective application, asserting that it would undermine the validity of state laws upheld by the court. He emphasised the need to balance the financial burden on industries by staggering or adjusting the interest component while ensuring states can recover what is due.

“It will be travesty of justice if this court were to say that the 1989 judgment in the India Cements will operate until yesterday while the nine-judge bench has affirmed the 2004 ruling in the Kesoram Industries Ltd. Let us not forget that this court has now ruled in favour of fiscal federalism,” argued Dwivedi. He added that instead of making the judgment prospective, the court ought to lighten up the financial burden on the industries by tackling the interest component, which could be more than the principal amount, given that the case remained pending for over two decades.

According to Dwivedi, one way to mitigate the burden on the industries was to keep the cut-off date for states to impose tax on mineral rights as January 15, 2004, when a five-judge bench in the Kesoram case ruled in favour of the states.

The bench agreed to consider whether to set a cut-off date, such as the 2004 Kesoram judgment, to limit the retrospective impact. “We have to bring clarity. We won’t go state-wise,” asserted the court, indicating that a uniform approach would be adopted.

The apex court’s order, once issued, is expected to have far-reaching implications for both state finances and the mining industry. A decision to allow retrospective application could significantly bolster state revenues but might also lead to a wave of litigation and financial strain on industries, potentially impacting the broader economy. On the other hand, limiting the retrospective effect could provide relief to companies but might be seen as a setback for states seeking to assert their fiscal rights over mineral resources.

The July 25 verdict stemmed from two conflicting rulings of the Supreme Court. In 1989, a seven-judge bench ruled in the India Cements case that the Centre held primary regulatory authority under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and that states could collect royalties but not impose additional taxes or cess on mining and mineral development. However, a five-judge bench in 2004, while hearing a similar dispute in the Kesoram case, noted a typographical error in the 1989 judgment, clarifying that “royalty is not a tax” but “cess on royalty is a tax”. Given these conflicting rulings, a nine-judge bench was set up to deliver an authoritative verdict.

Marking a significant shift in the financial autonomy of states regarding mineral resources, the nine-judge bench by 8-1 held that states possess the legislative competence to levy taxes on minerals and mineral-bearing land, in addition to the royalty imposed by the Centre.

Authored by the CJI, the majority judgment highlighted that while parliament and the Centre have the constitutional authority under the Union List to impose limitations on states’ power to tax mineral rights, the MMDR Act does not restrict states’ authority in this regard. Therefore, the states’ power to tax remains unaffected unless explicitly limited by Parliament. The ruling also clarified that the states’ right to tax mineral-bearing land, which falls exclusively under state jurisdiction, remains outside the purview of Parliament’s power to limit states’ taxation authority on mineral rights.

The majority ruling, by affirming states’ rights to levy taxes on mineral resources, empowered state governments to generate significant revenue from their natural resources. For resource-rich states such as Jharkhand, Odisha, Chhattisgarh, West Bengal, Madhya Pradesh, Rajasthan and Andhra Pradesh, this decision presented an opportunity to leverage their mineral wealth more effectively and tailor their taxation policies to their specific needs and priorities.

At the same time, this ruling also opened the door for potential amendments to the MMDR Act by the central government. Given that the current Act does not limit states’ power to tax mineral rights, the Centre may consider revising the legislation to recalibrate the balance between state and central authority. Such amendments could introduce specific limitations or conditions under which states can impose levies on mineral resources, or even complete prohibition, to ensure uniformity across states.