Context: A 9-Judge Constitution Bench of the Supreme Court in the Mineral Area Development Authority (MADA) vs SAIL declared that royalty imposed on mining is not a tax. Thus, the court overruled the its own seven judge bench judgment in the India Cements vs State of Tamil Nadu judgement (1989), which ruled that royalty are a tax.
Distribution of legislative power over mines and minerals under the Seventh Schedule
- Entry 54 of Union List: Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.
- Entry 23 of State List: Regulation of mines and mineral development subject to the provisions of Union List with respect to regulation and development under the control of the Union.
- Entry 50 of State List: Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.
Statutes relating to Taxation of Minerals: MMRD Act
- Parliament enacted the Mines & Minerals (Development & Regulation) Act, 1957 (MMDR Act) under the Entry 54 of the Union List of Seventh Schedule. MMDR Act is a comprehensive code for regulation of mines and development of minerals.
- MMDR Act provides that holder of a mining lease shall pay royalty in respect of any mineral removed or consumed from the leased area at the specified rates.
- Dispute over the nature of Royalty: There has been a dispute over the nature of royalty i.e., whether it is a tax or not. A Seven Judgement Constitution Bench of Supreme Court in the India Cements vs State of Tamil Nadu (1989) ruled that royalty imposed on mining are a tax in nature. However, a 5 judge constitution bench in State of West Bengal vs Kesoram Industries ruled that royalty is a not a tax. However, since India Cements judgement was given by a larger 9 judge bench, it continued to hold.
Nature of a Tax
- Tax is a compulsory exaction of money by a public authority.
- Tax is imposed under statutory power without consent of tax payer.
- Tax demand is enforceable by law
- Tax is an imposition made for public purpose to meet general expenses of the state without reference to any special benefit to be conferred on the payer of the tax.
- Tax is a part of common burden.
Salient Observation in MADA Judgement
- Royalty is not a tax but a contractual consideration paid by the mining lessee for enjoyment of mineral rights.
- Legislative power to tax mineral rights vests with the State legislatures. Parliament does not have legislative competence to tax mineral rights under Entry 54 of Union List, since this is a general entry. Power to tax mineral rights is expressly enumerated in Entry 50 of State List, therefore, Parliament cannot use its residuary powers in this matter.
- Entry of 50 of State List envisages that Parliament can impose 'any limitations' on mineral taxation by states. However, the MMDR Act has not imposed any limitations.