SC's mining tax timeline: From 1989 royalty ruling to 2024 retroactive dues

The Supreme Court delivered a crucial judgment earlier this week on tax on mining companies, ruling that states can collect previous dues on royalty and tax on mineral-bearing land, retrospectively.

According to industry experts, it is likely that every state would go ahead and enforce this ruling to augment tax revenue.

The dispute over taxing mineral rights and royalties stems from the 1957 Mines and Minerals (Development and Regulation) Act, which centralised mining control under the Union government and mandated royalty payments.

Over the years, more than 80 petitions have been filed challenging the interpretation of royalties under the MMDR Act.

Here's a timeline of the case:

1989: In India Cement Ltd vs State of Tamil Nadu & Ors. case, a seven-judge bench of the Supreme Court ruled that royalty paid for mineral extraction is not a tax.

The decision affirmed that only the Central Government could impose taxes under the Mines and Minerals (Development and Regulation) Act (MMDR Act), while states could only levy royalties.

2004: The five-judge bench in The State of West Bengal vs Kesoram Industries Ltd. & Ors. case identified a typographical error in the 1989 India Cement ruling. The bench clarified that while royalty is not a tax, a cess on royalty can be considered a tax. This decision allowed states to impose additional levies on mineral rights.

July 25, 2024: In a majority 8:1 verdict, a nine-judge bench of the Supreme Court, led by Chief Justice of India Dhananjaya Y Chandrachud, upheld the Kesoram decision , affirming that states can levy taxes on minerals in addition to the central royalty. The verdict overruled the 1989 judgement.

July 31, 2024: During the hearings, the Centre and mining companies argued for a prospective application of the July 25 judgment to prevent financial chaos, while states like Jharkhand supported retrospective implementation.

Note that Jharkhand was the first state to levy taxes after the July 2024 order that provided power to states to levy cess. Jharkhand proposed a cess of Rs 100 per tonne for Coal and Iron ore, Rs 70 for bauxite, and Rs 50 for manganese ore and other minerals.

August 14, 2024: The Supreme Court ruled that states can impose taxes on minerals and mineral-bearing land effective from April 1, 2005. The dues can be paid in instalments by mining companies and the Centre to mineral-rich states, spread over 12 years, starting April 1, 2026. However, interest and penalty on the past dues have been nullified in the ruling.

This decision represents a significant windfall for mineral-rich states but imposes substantial financial liabilities on mining companies, which could cost the industry Rs 1.5 lakh crore to Rs 2 lakh crore.

The Union government reported that public sector undertakings (PSUs) could face a Rs 70,000 crore hit. The court’s verdict, rendered by a nine-judge bench, included specific conditions regarding the applicability of its previous rulings.

Other states could follow Jharkhand in levying taxes. "However, this increase in cess (if levied) could be recovered through higher pricing and may not have material impact on financials," said Motilal Oswal in its report.