Why mining companies are at loggerheads with states on minerals tax?

The hearing began in the last week of February wherein the mining companies question the nature and scope of royalty.

The Supreme Court is currently hearing a series of over 80 appeals  filed by private mining companies challenging state governments’ right to levy taxes on mining within their territory. A nine-judge bench in the Supreme Court is in the process of determining the legality of states  imposing taxes in connection with mineral rights.

The hearing began in the last week of February. Mining companies questioned the nature and scope of royalty as prescribed under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and whether it could be termed as tax.

Moneycontrol explains why mining firms are adamant on revoking tax charged by state governments, and its impact:

What are mining royalties and how do they work?

A royalty is a fee that is imposed by local, state or federal governments on either the amount of minerals produced at a mine or the revenue or profit generated by the minerals sold from a mine. A royalty can be imposed as either a “net” or “gross” royalty.

Why are the mining companies opposing the state's imposition of royalties?

The representatives of the mining companies are debating the states' authority to impose taxes on mineral rights, arguing that such taxation falls under the purview of the Central Government. The companies argued that imposition of such taxes causes an additional burden to private miners and would hinder mineral development.

According to reports, Harish Salve, who represented the companies, argued that the Mines Act, 1957 gives Parliament power over all aspects of “mineral development.” This includes imposition of royalty, which is not a tax in its “general sense” but a statutory “exaction” which cannot be modified by a state government.

Since the miners pay royalty to the Centre, they say levying of taxes by states puts an extra burden on them. According to mining body, FIMI (Federation of Indian Mineral Industries), the mining industry in India is still the highest taxed in the world.

Where did the case originate ?

In 1963, India Cements took the Tamil Nadu government to court for levying a cess on the royalty paid for extracting limestone and kankar. A single judge bench held that the cess levied under the Madras Act was a tax on land but the company appealed the decision in Supreme Court.

Later, in 1989, the SC decision found that “royalty is a tax” under the Mines Act. A cess on royalty being a tax on royalty was beyond the State’s legislative competence since the Union’s Mines Act “covers the field.”

Remarkably, the assertion that "royalty is a tax" set off a chain of events culminating in the ongoing case before a nine-judge bench, 25 years later.

What are the states saying?

During the second day of the hearing, states argued that a state government is  empowered to collect tax from mineral land under Entry 49 of the state list, which lets states levy taxes on lands and buildings.

The states debated that  taxing mineral land is permissible because minerals are attached to the land, not simply adjacent or associated with it, according to media outlet, Supreme Court Observer, which closely tracked the hearings.

Why mining revenues are important for states?

In 2022-23,  total revenue from royalty, DMF (District Mineral Foundations), NMET (National Mineral Exploration Trust) by key coal mining states amounted to Rs 28,058.27 crore, according to data published by the Ministry of Coal.  The data reflects that the coal mining sector is a very significant contributor to the revenue of states including Jharkhand, Chhattisgarh, Odisha, Madhya Pradesh, West Bengal and Telangana.

Any decision against the royalties or state's authority over minerals may impact their revenue-generation capacity and the right over minerals extricated from land under their jurisdiction.