India: SC allows States to collect mineral tax with retrospective effect from April 2005

The Supreme Court on Wednesday, 14 August 2024, allowed states to collect past dues on royalty on mineral-bearing land from the Centre and mining companies from 1 April, 2005 onwards.

A nine-judge SC bench held that the tax on mineral rights and mineral lands will apply from 1 April 2005. The apex court has clarified that the levy of tax by the States, based on the judgment, should not operate for a period before 1 April 2005.

The court also held that the tax arrears can be paid over a staggered period of 12 years from 1 April 2026 and that there should not be levy of interest or penalty for the demand made for the period before 25 July 2024.

In an earlier judgment on 25 July the bench had ruled that royalty was not a tax. A nine-judge bench led by Chief Justice DY Chandrachud passed the judgment nearly unanimously barring one dissenting view.

In an order that would have significant financial repercussions on mining within a federal setup, the SC in an 8:1 majority held that the Mines and Minerals (Development and Regulation) Act 1957 (MMDR Act) did not limit states' powers to levy a tax above the royalty miners paid, overruling an earlier SC order in favour of India Cements.

Royalty, as well as dead rent, have been interpreted as "a contractual consideration paid by the lessee under the mining lease". The majority, led by the CJI, held that entry 54 of List 1 is an entry distinct from taxing entries and thus does not include the power of taxation, vesting the power to levy taxes on mineral rights with the states.

Further, the bench believes mining leases count as "land" which is entered as item 49 in List 2 of the Constitution, or the list of areas left for the states to manage. The majority held there is no specific provision in the MMDR Act imposing limitations on such powers, and further royalty under Section 9 of the MMDR Act was not in the nature of a tax.

However, in discussion with industry sources, BigMint learnt that market players are yet to gain clarity as this may not help in creating a level playing field for all the states in India. Additionally, any new tax imposition will increase the cost of production of ore and lift overall prices.

India's iron ore production increased by 10% y-o-y to 280 mnt in FY'24 and, as per BigMint data.