Supreme Court upheld states’ right to tax mining operations, affirming fiscal autonomy over natural resources
Bhaskar Parichha
On July 25, a nine-judge bench of the Supreme Court of India delivered a landmark judgment affirming the rights of Indian states to levy taxes on mining operations. This ruling clarified that the collection of “royalties” from mining leaseholders is constitutionally permissible, thereby reinforcing the fiscal autonomy of state governments in managing their natural resources.
The decision is pivotal as it not only impacts the financial landscape of the mining sector but also has broader implications for the federal structure of India, which is characterized by a division of powers between the central and state governments.
The court’s ruling underscores the importance of state revenues derived from natural resources, which are crucial for funding local development projects and public services. By affirming the states’ authority to impose taxes on mining activities, the Supreme Court has empowered them to better regulate and benefit from the extraction of minerals within their jurisdictions.
This decision is expected to enhance the financial resources available to state governments, enabling them to invest in infrastructure, education, and healthcare, among other critical areas. In the wake of this ruling, mining companies have expressed concerns regarding the potential financial implications of the decision.
Applying Prospectively
Many of these corporations have approached the Supreme Court, seeking to persuade the justices to apply the ruling on a prospective basis only. This means that they are requesting that the court’s decision not be applied retroactively, which could expose them to significant financial liabilities for past operations. The mining companies argue that such an application could disrupt their business models and lead to unforeseen economic challenges.
The outcome of this appeal could have far-reaching consequences for the mining industry in India. If the court agrees to limit the application of its ruling to future operations, it may provide a degree of relief to mining corporations, allowing them to adjust to the new regulatory landscape without facing the burden of retroactive taxation.
Conversely, if the court decides against this request, mining companies may need to brace themselves for substantial financial repercussions, which could affect their profitability and investment strategies. The SC ruled that the ruling will be applicable from 2004.
This has raised concerns about the spectre of retrospective taxation, but a close reading of the latest verdict suggests that this is not the case. Retrospective taxation essentially implies raising a new tax demand for a time in the past when such a tax did not exist. But the facts of the current case are substantially different.
Kesoram Case
In 1989, in the India Cements case, a seven-judge SC bench ruled that royalty is a tax and the states can’t raise any such revenue demands. In 2004, in the Kesoram case, a five-judge bench revisited this issue and concluded that there was a “typographical error” in the India Cements judgment. While this judgment by a smaller bench could not overturn the 1989 ruling, it set the precedent for different states to raise demands for royalty payments from companies.
In 2011, the SC took notice of the continuing confusion on the matter and sent it to a bigger nine-judge bench, the Mineral Area Development Authority or MADA case. The MADA ruling in July conclusively overturned the 1989 India Cements judgment. In its ruling last week, the same nine-judge bench chose to start the application of its ruling from 2004 — the date of the Kesoram case verdict.
The court explained that it applies prospective overruling when a law is found to be ultra vires to the Constitution. But, in the case of taxing statutes, such a declaration would make the State liable to refund all amounts collected under the invalid legislation. While the SC has softened the financial setback for companies — they are required to pay only the principal amount, not the interest, and the payment can be staggered over 12 years — it is undeniable that this protracted judicial process and reversal of verdicts can undermine business confidence.
The establishment of a stable policy environment is a critical responsibility that lies predominantly with policymakers operating at both the national and state levels. This responsibility is essential for ensuring that the frameworks governing various sectors, including mineral development, are coherent, consistent, and conducive to sustainable growth.
Policymakers’ Role
Unlike the judiciary, which primarily interprets and applies the law, it is the role of these policymakers to create and implement policies that reflect the needs and aspirations of the populace while also considering the broader implications for governance and federalism. By heeding the warnings of dissenting voices like Justice B V Nagarathna, they can work to ensure that their decisions do not undermine the federal system, but rather strengthen it, paving the way for sustainable and equitable mineral development that benefits all stakeholders involved.
Overall, the Supreme Court’s decision represents a critical juncture in the relationship between state governments and the mining sector in India. It highlights the ongoing tension between the need for state revenue and the operational realities faced by mining companies, setting the stage for further legal and regulatory developments in the future. As the situation unfolds, stakeholders from both the public and private sectors will be closely monitoring the implications of this ruling and its potential impact on the mining industry and the broader economy.
(The author is a senior journalist and columnist. Views expressed are personal.)
