“Taxes are the price we pay for civilization." That was Oliver Wendell Holmes, Jr. in his dissenting opinion in 1927 in the case of Compañía General de Tabacos de Filipinas v. Collector of Internal Revenue before the Supreme Court of United States.
Tax which is so essential for ‘civilisation’ necessarily requires constitutional legitimacy to levy them. The question, therefore, before the nine-judge bench of the Supreme Court in Mineral Area Development Authority & Anr. v. M/S Steel Authority of India & Anr. was did the States have the power to levy taxes on minerals and mineral bearing land?
In order to determine the power of the State, it was necessary for the Supreme Court to decode two fundamental questions:
(1) Whether royalties on mining leases should be considered as a ‘tax’ and;
(2) Whether the States have the power to levy royalty/tax on mineral rights after the enactment of Mines and Minerals (Development and Regulation) Act, 1957(MMDR Act) by the Parliament?
The first question needed to be answered because there was in existence for a quarter century, the binding judicial pronouncement in India Cement Ltd. v. State of Tamil Nadu (1990) 1 SCC 12 [34] holding royalty to be a tax. The erroneous logic that the payment made to the Government should be deemed to be a ‘tax’ merely because the statute provides for the recovery of the arrears was repelled by the majority in the nine-judge Bench. The judgement, despite its antiquity was clearly wrong and majority have rightly held that royalty is not a ‘tax’ and therefore overruled it.
Seventh Schedule: The battleground
In all taxation matters, the battleground is the Seventh Schedule of the Constitution of India where the powers of the Union Government (enumerated in List I), that of the States (enumerated in List II) and the Residuary powers (enumerated in List III) is debated and deciphered. The fulcrum of the debate was did Entry 54 of List I empower the Government of India to levy tax on mineral rights. The sequitur being that the State did not have that power.
The position of the majority opinion is that the legislative power to tax mineral rights vests with the State Legislatures by virtue of Entry 50 of List II. The court was right in further elaborating that the Parliament could not resort to the device of Residuary powers in view of the specific power given to the States in Entry 50 of List II.
The clinching point
The court did concede that the Parliament had the power to impose limitations on the legislative field of the States under Entry 50 of List II. However, the Parliament was empowered to do so through a law relating to mineral development. The court could not find any specific provision in the MMDR Act imposing limitations on the taxing powers of the State. ‘Royalty’ under section 9 of the MMDR Act could not be interpreted to be in the nature of a ‘tax’. The limitations imposed by section 9 on ‘royalties’ do not amount to limitations on the State's powers to ‘tax’ on mineral rights. Thus, there was nothing in the MMDR Act to curtail the power of States to tax minerals rights.
This closes one of the most contentious debates surrounding the power of the States to levy taxes on mineral rights. The industry obviously is not happy, in view of the tax burden, which would fall on them. This was agitated by the industry before the court. Hence, a specific plea that the judgement be made prospective and not retrospective.
Federalism angle
On the other end of the spectrum are the empirical data of mineral rich states like Chhattisgarh, Jharkhand and Odisha which are plagued with economic difficulties and the tax revenue is so very essential for implementing welfare and support schemes for its populations. The court has stressed the rights of the States to levy these taxes and protect them from Union’s encroachment. In the age of the States losing fiscal autonomy, this is seen as a welcome move for fiscal federalism.
The court, fully aware of maintaining balance between industry interest and the States’ fiscal rights, ruled that the payment of retrospective tax would commence from the cut-off date of 1st April, 2005. And that the retrospective tax liability up till 25th July, 2024 need be paid only in staggered instalments across 12 years. The court yielded a further concession that such payment would commence from 1st April, 2026.
In 1936, Justice Felix Frankfurter published the book ‘Mr. Justice Holmes and the Supreme court’, which included this memorable story about Justice Holmes. A secretary who exclaimed to the Judge, “Don’t you hate to pay taxes!” was rebuked with the hot response, “No, young feller. I like to pay taxes. With them I buy civilization.”
As for now the industry pays for civilisation only from 1st April, 2005 in staggered instalments from 1st April, 2026.
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