SC empowers states to tax mineral rights, rules royalty paid not a tax

SC, by a majority of 8:1, holds states have legislative power to tax mineral rights

In a landmark judgement on Thursday, the Supreme Court ruled that the legislative power to tax mineral rights resides with the states and clarified that royalty paid on minerals is not a tax. This decision is expected to significantly boost the revenues of mineral-rich states.

A nine-judge Constitution bench, led by Chief Justice D Y Chandrachud, delivered an 8:1 majority verdict stating that Parliament lacks the legislative competence to tax mineral rights under Entry 54 of List I of the Constitution, which pertains to the regulation of mines and mineral development by the Centre.

This ruling marks a setback for the Centre but also clarifies that Parliament retains the authority to impose “any limitations” on states’ power to tax mineral rights. The court referred to the term “any limitations” under Entry 50 of List II, noting its broad scope to include “restrictions, conditions, principles, as well as a prohibition.” Entry 50 of List II relates to taxes on mineral rights, subject to any limitations imposed by Parliament by law concerning mineral development.

Justice B V Nagarathna, in her dissenting opinion, argued that royalty is akin to a tax or exaction, asserting that the Centre does possess the power to levy it.

Following the bench’s pronouncement, counsel for various states requested the court to decide on the recovery of taxes amounting to thousands of crores of rupees the Centre had levied on mines and minerals until now. They urged the court to apply the verdict retroactively to facilitate tax refunds from the Centre.