Supreme Court allows states to collect mining tax dues from April 1, 2005

It said that “the time for payment of the demand of tax shall be staggered in instalments over a period of twelve years commencing from 1 April 2026” and “the levy of interest and penalty on demands made for the period before 25 July 2024 shall stand waived for all the assesses”.

While Entry 49 of List II concerns “taxes on lands and buildings”, Entry 50 of List II concerns “taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development”. The July 25 judgment overruled the 1989 decision of a 7-judge Bench in India Cement Ltd vs State of Tamil Nadu which said royalty is tax and state legislatures lack competence to levy taxes on mineral rights because the subject matter is covered by the Minerals and Mines and Minerals (Development and Regulation) Act, 1957, enacted by Parliament in exercise of powers under Entry 54 of List I (Union List) of the Constitution.

Following this, there were demands that the judgment be applied only prospectively, as it can create financial burden for PSU mining companies. Solicitor General Tushar Mehta said that “a preliminary estimate of the potential financial impact of the judgment due to past state levies which may become due (in the form of additional state levies of taxes, interest and penalties) on only the public sector units engaged in mining, and in production activities dependent on minerals (like electricity production), is to the tune of Rs 70,000 crore”.

Rejecting this prayer, the Bench also comprising Justices Hrishikesh Roy, A S Oka, J B Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih said that if the July 25 judgment “is given a prospective application, the validity of all relevant legislation enacted before the date of the decision…will have to be tested on the touchstone of the previous law”. It added, that “if” the judgment is “applied prospectively, the relevant taxing legislations may conceivably be invalidated, requiring the states to refund the amount collected to the assesses” and “it would be iniquitous…” to do so.

The court, however, took note of the concerns of mining companies. It referred to an affidavit filed by the Steel Authority of India which said that retrospective application of the judgment “will lead to revival of cumulative demands to the tune of approximately Rupees three thousand crore from different states”.

It said, “a pragmatic solution to reconcile the financial interests of the states and the assesses can be achieved by proscribing the states from demanding taxes pertaining to Entries 49 and 50 of List II of the Seventh Schedule for the period before” April 1, 2005.

The April 1, 2005, cut off was fixed keeping in mind the ruling of an SC Constitution Bench in January 2004 which said that royalty is not a tax and that the power to levy tax on mineral rights vests with the state legislatures and is subject to any limitations laid down by Parliament by law.

The matter was referred to the 9-judge Constitution Bench on March 30, 2011, following the divergence between the decisions in India Cements and Kesoram.

Taking note of the passage of time since the reference, the SC said “the delay in the court proceedings should not be to the detriment of the assesses. Taking into consideration the lapse of more than three decades since India Cement…and more than a decade since the matter was referred to a larger Bench, equities will be balanced if the state governments waive the outstanding interest accrued on the principal due from the assesses. This direction applies to all assesses, regardless of whether they have approached this Court or the high courts challenging the validity of the relevant statutes”.

Disagreeing with the majority ruling, Justice B V Nagarathna, in her dissenting judgment on July 25, cautioned against the likely consequences of overruling the India Cement verdict including a “breakdown of the federal system” and “unhealthy competition” between states.