Bonanza for states as Supreme Court rules they’re entitled to collect past royalty dues on mineral rights and minerals bearing land

Satya Prakash

New Delhi, August 14

The Supreme Court on Wednesday ruled that states were entitled to collect past dues on royalty on mineral rights and minerals bearing land from the Centre and mining companies from April 1, 2005 onwards on the basis of its July 25 verdict.

Declaring that royalty payable on minerals is not a tax, a nine-judge Constitution Bench-led by CJI DY Chandrachud had on July 25 by 8:1 majority ruled that states had the legislative competence to impose taxes on mineral rights and mineral-bearing land.

However, it held that Parliament has “wide enough” powers to impose restrictions, conditions, principles and prohibition on the legislative field created by that entry under Entry 50 of List II of the Seventh Schedule of the Constitution.

The Centre had contended that the verdict should be given only prospective effect as it will lead to revival of cumulative demands to the tune of approximately Rs 3,000 crores from different states.

Without naming a profit-making stock market listed 'Maharatna' PSU, Mehta had said, if the July 25 verdict was given a retrospective effect, the potential demand of tax was three times the net worth of the company.

Some opposition-ruled mineral-rich states had sought refund of the royalty levied by the Centre and taxes from the mining companies since the 1989 verdict. BJP governments of Madhya Pradesh and Rajasthan had, however, favoured prospective effect to be given to the July 25 verdict.

On Wednesday, the Bench rejected the Centre’s demand for prospective implementation of its July 25 ruling.

However, bearing in mind the consequences that would emanate from the past period, the top court imposed certain conditionalities with regard to retrospective implementation of the verdict.

“While the States may levy or renew demands of tax, if any, pertaining to Entries 49 and 50 of List II of the Seventh Schedule in terms of the law laid down in the decision in MADA (Mineral Area Development Authority & Anr. Versus M/S Steel Authority of India & Anr Etc. --July 25, 2024) the demand of tax shall not operate on transactions made prior to 1 April 2005,” the Bench said.

“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,” the CJI said, pronouncing the verdict

Noting that “The power to levy tax is an incidence of sovereignty,” the Bench said, “If we are to give a prospective application to MADA (July 25 verdict), it would result in a situation where the legislation enacted by the States in pursuance of their plenary powers under Entries 49 and 50 of List II may conceivably be invalidated based on a position of law which has been overruled. This would not be a constitutionally just outcome.”

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 Kesoram (State of West Bengal v. Kesoram Industries Ltd. 2004).”

The Bench – which also included Justices Hrishikesh Roy, Abhay S Oka, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih – passed the order after hearing arguments from the Centre and various states.

By a majority 8:1, the nine-judge Constitution Bench had on July 25 held that legislative power to tax mineral rights vested with states. The verdict overruled a 1989 judgement, which held that only the Centre has the power to impose a royalty on minerals and mineral-bearing land. Justice BV Nagarathna had delivered a dissenting verdict.