[By Adwitiya Gupta & Suprava Sahu]
The authors are students of Gujarat National Law University.
Introduction
The Supreme Court in Mineral Area Development Authority v M/s Steel Authority of India, by an 8:1 majority, overturned the 1989 decision, which decreed that royalties paid by miners on minerals are a tax. This decision gives states the power to tax mining activities, through which the states can now collect more revenue through taxes in addition to the existing royalties. One of the central questions put before the bench was whether or not royalty under Section 9 of the Mines and Mineral (Development and Regulation) Act,1957 (MMDR Act) is in the nature of tax.
Before 1990, most precedents held that royalty was not in the nature of a tax. Later, India Cement Ltd v. State of Tamil Nadu & Ors overturned the trajectory of judicial precedents by holding that ‘royalty is a tax.’ Various courts have relied on the decision taken in the case of India Cement Ltd v. State of Tamil Nadu & Ors. until 2004 when the SC pointed out a typographical error in the India Cements Case as a “constitutional, legal, and moral” obligation to correct the mistake, the court held that royalty was not a tax. An inconsistency arose regarding the India Cements case being decided by a nine-judge bench, whereas Kesoram being decided by a five-judge bench. Since a smaller bench does not have the power to overturn the decision, this resulted in a conflict between both judgments. Leaping into 2011 and the present case, the court observed the evident inconsistency between the two cases and opted to refer the matter before a nine-judge bench for a conclusive ruling on the legal stance.
Understanding Royalty and Taxes
Royalty can generally be understood as a payment made by a lessee to the lessor based on the quantity of minerals extracted from the land. The concept of royalty on minerals dates back to ancient times when kings would impose a tax on those extracting minerals from their lands. According to the ancient law, mineral wealth was not vested in the king, but the king was entitled to receive revenue from his subjects. Post-independence, the Mines and Minerals Act of 1948 was passed with the objective of regulating mines and, oil fields and mineral development. Later, the MMDR Act of 1957 was enacted to centralize the regulation of mines and oil fields under the Union Government, replacing the earlier 1948 Act.
Section 9 of MMDR Act 1957 provides for royalty in respect to mining leases. The essential elements of royalty are:
- It is a consideration or payment made to the proprietor of the minerals;
- It flows from a statutory agreement (a mining lease) between the lessor and the lessee;
- It represents compensation to the lessor for granting the lessee the privilege to extract minerals.
- It is usually based on the quantity of minerals extracted.
Whereas Taxes, in general, are monetary charges imposed by the government on individuals or property to generate revenue needed for its functions. In the case of Commissioner, Hindu Religious Endowment, Madras v. Sri Lakshmindra Thirta Swamiar of Sri Shirur Mutt, the court enumerated essential characteristics of taxes as the following:
- Tax is a mandatory exaction of money by a public authority;
- It is imposed under statutory power irrespective of the consent of the taxpayer;
- Demand to pay tax is enforceable by law;
- It is imposed for public purposes to cover state expenses without providing specific benefits to the taxpayer;
- It is a part of the common burden.
The Inconsistency Explained: Tax v/s Royalty.
One of the key questions analyzed in the Mineral Area Development Authority v M/s Steel Authority of India was whether a royalty is a tax. In order to arrive at a conclusion regarding this crucial question, the court analyzed various judgments dealing with this question. In the case of Laddu Mal v. State of Bihar, the division bench held that a royalty is a levy in nature of tax owing to its compulsory nature of exaction. Further, in Laxminarayana Mining Co. v. Taluk Development Board highlighted that the provisions of the MMDR Act pertaining to levy, fixation, and collection of royalty and recovery as arrears of land revenue provides that the expression ‘royalty’ under section 9 connotes the levy of a tax.
However, several High Courts observed a contrary view. In Dr. Shanti Swaroop Sharma v. State of Punjab, the court disagreed with the decision of Laddu Mal and upheld royalty cannot be said to be a ‘compulsory exaction’ based on the rationale that compulsion to pay royalty arises out of the contractual conditions of the mining lease and not through the force of law. It relied on the fact that the State Government can collect royalty in a similar manner as unpaid land revenue, but that does not qualify it as tax. The India Cement case marked a significant change by defining royalty as a tax. Over the next decade, this influenced numerous high court and Supreme Court decisions, altering the judicial perspective on whether royalty and tax are the same or different.
In the case of State of MP v. Mahalaxmi Fabric Mills, the court deliberated on the possibility of a typographical error in the India Cements judgment. However, the bench held that the arguments in the India Cements case concluded that royalty was in the nature of a tax, so there was no possibility of typographical error. In State of WB v. Kesoram Industries Ltd, the court again considered the possibility of an error in the India Cements case. Justice Lahoti felt duty-bound to correct the typographical error and held that the India cement judgment mistakenly conveyed that ‘royalty is a tax’ instead of conveying that ‘cess on royalty is a tax.’ Justice clarified that the intention of India Cement was to hold that “royalty” itself was not considered a tax, but the intended meaning was that “cess on royalty,” which is an additional charge, is viewed as a tax. The case finally held that Para 34 of India Cements case contained a typographical error and expressed dissent with the Mahalaxmi Fabric case.
The nine-judge bench carefully analyzed the judgments. The duty to pay royalty arises out of a lease, which is a consideration paid to the lessor to compensate for the loss of minerals. A failure to pay this consideration amounts to a breach of contract by which the lessor can initiate recovery proceedings. This consideration is regulated by Section 9 of the Act, where royalty rates are provided. Tax is a compulsory extraction made by a public authority in view of public purposes. Royalty cannot be said to come within this definition since the duty arises from a contractual lease between the lessor and lessee, and the demand stems from the lessor, which may not necessarily be a public authority. In addition, royalty payments are not used for any public purpose but are merely a consideration in exchange for lessors parting with minerals. In the case of Indsil Hydropower, the court expressed the distinction between royalty and tax. Royalty is compensation paid for a right granted to someone and is based on an agreement, unlike tax, which is imposed and does not provide any special benefit to the payer. In light of the discussion, the court held that royalty is not similar to tax, and hence, the observations in India Cement were deemed to be incorrect to the extent that royalty is a tax.
Concerns over distinguishing royalty from tax.
- The judgment is aimed to ensure that the state legislature has adequate power to raise revenues by means of taxes so that their ability to deliver welfare schemes and services to people is not impeded. However, this raises several concerns regarding the burden of revenue on the mining units. India is already among one of the highest mining royalty-charging nations in the world. Further, if the states start charging exorbitant taxes on mining activities, it would lead to an unprecedented increase in the rates of minerals.
- If states start imposing taxes on mineral rights under Entry 49 – List II, they could bypass the limitations set by Parliament in Entry 50 – List II. This would necessitate a parliamentary intervention to standardize mineral prices and regulate state levies to ensure uniformity and fair mineral development.
- Justice BV Nagarathna, in her dissent, warned that the verdict could spark unhealthy competition among states for additional revenue, leading to uncoordinated and uneven mineral cost increases. This could adversely affect India’s economy and potentially cause a breakdown in the federal system due to strained politics between the Centre and states.
- Furthermore, the decision doesn’t provide any clarity on whether the decision would be made effective prospectively or retrospectively. If the judgment is applied retrospectively, it would place a significant economic burden on several public sector units (PSUs). Solicitor General Tushar Mehta warned the Supreme Court that the ruling could impose a financial burden of over Rs 70,000 crore on public units.
Conclusion
The decision represents a pivotal shift in the interpretation of royalties and taxes. By differentiating between royalties and taxes, the court has granted the state the power to impose additional levies. The decision opens the door to various new concerns. The extra charges can now be imposed beyond the established limits, which would make the existing laws redundant. In order to mitigate the risks, there is a need to closely monitor the actions of the state to prevent excessive charges and ensure a fair approach to mineral development. Furthermore, it is imperative to take into account the adverse effects the judgment would have if it is applied retrospectively. While it is imperative to ensure that the state can generate adequate revenue, it is equally important to ensure that the Public units generating minerals are not charged exorbitantly.
While the decision is welcomed in order to prevent legal ambiguity, there is a need to exercise caution and take into Justice Nagarathna’s dissenting opinions to prevent a race to the bottom.