Mineral taxes: Mining companies in trouble as Supreme Court allows states to recover dues retrospectively

In a setback for mining companies, the Supreme Court asserted that its  recent judgement granting states the power to tax mineral rights and mineral-bearing land will apply retrospectively. 

A constitutional bench on Wednesday rejected the Union government’s plea for the court’s 25 July judgement to be applicable prospectively to avoid a significant financial burden on mining companies.

In some relief to mining companies, though, the Supreme Court clarified that while states can recover past tax dues on mineral rights, they cannot for periods before 1 April, 2005. Additionally, any interest and penalties levied on or before 25 July, 2024 shall be waived, it said.

On 25 July, a Supreme Court bench led by Chief Justice of India D.Y. Chandrachud had upheld the power of states to tax mining lands and quarries independently of the Mines and Minerals (Development and Regulation) Act of 1957.

Mint previously reported that this judgement could increase the financial burden on mining companies, potentially disrupting cash flow and leading to overlapping financial obligations. 

Litigations and potential bankruptcies

Tata Steel Ltd had said it would explore legal options if the court’s 25 July judgement is applied retrospectively and imposes excessive demands.

Tata Steel has noted contingent liabilities of ₹17,347 crore in its financial statements pending clarity on the matter, as disclosed in a regulatory filing on Friday. 

“There’s no demand (raised against us), so it’s not necessary that we have to pay that amount. But we have to fight that now. So, there’ll be a lot of litigation,” T.V. Narendran, Tata Steel’s managing director, told Mint during a post-earnings call. 

The company had previously challenged state levies on its mines in Odisha, amounting to ₹129 crore, in the High Court of Odisha, which had ruled against the state’s authority to levy such taxes.

Industry experts indicated that if the Supreme Court’s ruling is applied retrospectively, it could be challenging for companies to pass on the liability to end users. Also, in some instances, these state taxes could potentially exceed the net worth of some companies, possibly leading to bankruptcy.

The Union government had argued that a retrospective application of the judgement could impose a financial burden of ₹70,000-80,000 crore on public sector undertakings. 

Tata Steel shares were down nearly 2% at ₹145.91 each in afternoon trading on NSE.

On royalties and fiscal federalism

The Supreme Court, while addressing the conflict between the Union government and state administrations over taxing minerals, concluded in its 25 July judgement that royalties were not taxes, citing three main reasons: 

• Royalties arise from mining lease agreements rather than legal requirements, 
• Payments are made to lessors (either state governments or private parties) rather than public authorities, 
• And royalties compensate for access to mineral reserves rather than serving public purposes.

States rich in mineral resources such as Chhattisgarh, Jharkhand, and Odisha often face economic difficulties, and tax revenue from minerals is essential for these states to support welfare and services, the court said. 

The court had also stressed that states’ rights to levy taxes should be protected from interference from the Union government to maintain proper fiscal federalism.

While the court had not clarified then if its decision would apply retrospectively or prospectively, Wednesday’s ruling addressed this issue.

Apart from CJI Chandrachud, the Supreme Court bench comprised Justices Hrishikesh Roy, Abhay Oka, B.V. Nagarathna, J.B. Pardiwala, Manoj Misra, Ujjal Bhuyan, S.C. Sharma, and A.G. Masih.

Justice B.V. Nagarathna was the lone dissenter. Justice Nagarathna held that royalty is a tax and that states had no right to levy it, endorsing a 1989 verdict by a seven-judge bench in the India Cements vs. Tamil Nadu case.

Justice Nagarathna stated that non-extracting states starting to import minerals could affect foreign exchange reserves, potentially leading to a breakdown of the federal system envisaged under the Constitution in the context of mineral development. 

This could lead to unhealthy competition for mining licences in mineral-rich states that do not want to impose any levy, she said.

Long-standing issue

More than 80 petitions have been filed over the years challenging the interpretation of royalties under the MMDR Act. In February, the Supreme Court commenced hearings to decide upon the conflicting interpretations and determine the rightful authority—the Union or states—for imposing taxes on mineral rights.

The dispute over taxing mineral rights and royalties stems from the 1957 Mines and Minerals (Development and Regulation) Act, which centralised mining control under the Union government and mandated royalty payments. 

The conflict began when India Cements challenged Tamil Nadu’s imposition of a cess on royalties. The Supreme Court ruled in 1989 that royalties were taxable under the MMDR Act, but subsequent cases clarified that royalties are contractual payments, not taxes. 

Eventually, the more than 80 cases were consolidated and referred to the Supreme Court for resolution.