The Supreme Court's nine-judge bench, in an 8:1 majority decision, clarified that royalties are not considered a tax but are instead a contractual payment made by mining lessees to states for the rights to extract minerals. This decision resolves decades of legal uncertainty and confirms that states are entitled to claim royalties as compensation for the depletion of their natural resources.
The ruling overturns a 1990 verdict by a seven-judge bench, which had granted the central government exclusive control over mineral taxation. However, this position was called into question by a 2004 judgment, which allowed states some leeway in imposing royalties on mineral extraction. The current ruling reaffirms and expands this latter perspective, reinforcing the fiscal autonomy of states concerning their mineral wealth.
Chief Justice D.Y. Chandrachud, who authored the majority opinion, emphasized that the liability to pay royalties stems from the contractual terms of the mining lease, and the payments cannot be classified as taxes simply because they are recoverable as arrears under statutory provisions. This nuanced distinction between royalty and tax was central to the court's reasoning, effectively limiting the central government's jurisdiction over state-imposed royalties.
The decision also opens the door for states to collect past dues on royalties that have been in dispute, potentially leading to significant financial windfalls for states with substantial mineral resources. Legal experts note that this could also have broader implications for other forms of state-imposed levies, such as environmental and health cesses related to mining activities, which have similarly been challenged in various courts.
Justice V. Nagarathna, the sole dissenting judge, argued that royalties should be considered a form of tax, thus falling under the central government's legislative domain. Despite her dissent, the majority ruling now sets a clear precedent that empowers states to exercise greater control over their mineral resources and associated revenues.
This ruling is expected to have a considerable impact on the mining industry, with potential increases in royalty rates as states seek to maximize their earnings from natural resources. Industry stakeholders are concerned about the implications for ongoing litigation related to the imposition of GST and service tax on mineral royalties, as the judgment could influence these matters as well.
As the ruling takes effect, states like Rajasthan, Chhattisgarh, and Jharkhand, known for their rich mineral deposits, are poised to benefit significantly from this newfound fiscal autonomy. The decision is also likely to prompt further legislative actions by the central government, as it seeks to navigate the altered legal landscape concerning mineral taxation and royalty collections.