It is not often that fiscal federalism finds a prominent place in judicial discourse. The Supreme Court judgment, holding by an overwhelming majority of 8:1 that the States can tax mineral rights and mineral-bearing lands, is a truly landmark ruling, as it protects their legislative domain from interference by Parliament. For decades, it was believed that the States were denuded of their power to impose any tax on mineral resources extracted from their land because of the prevalence of a central law, the Mines and Minerals (Development and Regulation) Act, 1957. Even though the right to tax mineral rights is conferred on the States through Entry 50 in the State List of the Seventh Schedule, it was made “subject to any limitations imposed by Parliament by law relating to mineral development”. The Union government argued that the very existence of its 1957 law was a limitation on the States’ power to tax mineral rights, but Chief Justice of India, Dr. D.Y. Chandrachud, writing for the Bench, examined the Act’s provisions to conclude that it contained no such limitation. The royalty envisaged by the 1957 Act was held to be not a tax at all. The Union was hoping that once royalty was accepted as a tax, it would wholly occupy the field and thus remove the States’ scope for taxing mineral rights. However, the Court chose to see royalty as a contractual consideration for enjoyment of mineral rights. Also, it ruled that States could tax mineral-bearing lands under Entry 49, a general power to tax lands.
Proponents of fiscal federalism and autonomy will particularly welcome the fact that the judgment opens up a significant new taxation avenue for the States, and the observation that any dilution of the taxation powers of the States would adversely affect their ability to deliver welfare schemes and services to the people. However, Justice B. V. Nagarathna, in her dissent, argues that if the Court did not recognise the central law as a limitation on the State’s taxation powers, it would have undesirable consequences as States would enter into an unhealthy competition to derive additional revenue, resulting in an uneven and uncoordinated spike in the cost of minerals; and purchasers of minerals paying too much, leading to an increase in the price of industrial products. Further, the national market may be exploited for arbitrage. Given these implications, it is possible that the Centre may seek to amend the law to impose explicit limitations on the States’ taxation power or even prohibit them from imposing a tax on mineral rights. However, such a move may result in mining activities being left wholly out of the tax net, as the majority has also held that Parliament lacks the legislative competence to tax mineral rights.
