In today’s Finshots, we dive into a recent Supreme Court decision that finally put an end to a long-running tussle over mining taxes between the Centre and the states.

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The Story

A few days ago, the Supreme Court handed down a landmark ruling on who gets to tax minerals. And that marks the end of a three-decade-long tussle between the Centre and state governments over this right.

The verdict is obviously a big win for the states, as they can now rake in more revenue from taxing mineral resources within their borders. But there’s a catch. It could spell trouble for the economy.

Before we dive into that, let's rewind and see how this whole saga began and what led to this game-changing decision.

The story kicks off with a dispute between India Cements and the Tamil Nadu government, way back in the 1960s. India Cements had leased a mine from the state and was paying royalties for it. For the uninitiated, a royalty is like a fee you pay to use someone else’s property. Like say, an author earns royalties when a publisher uses their content in a book.

So, India Cements was happily paying these royalties, until the Tamil Nadu government decided to impose an extra tax on top of the royalties. Naturally, India Cements wasn’t thrilled and took the matter to court.

Fast forward to 1989, and the case landed in the Supreme Court. The court ruled that while states could collect royalties, they couldn’t slap additional taxes on mining and mineral development, as per the Mines and Minerals Act.

But here’s where things get a little funny. The Supreme Court’s decision in the India Cements case had a little hiccup — a typographical error! This blip came to light during a similar dispute between Kesoram Industries and West Bengal in 2004. The court noticed that, oddly enough, the earlier ruling mentioned that royalty is a tax. It probably meant to say that a cess on royalty counts as a tax, but instead, it made it sound like the royalty itself was a tax. If you read between the lines in the other paragraphs though, it was pretty clear that the Court actually agreed that ‘royalty’ wasn’t a tax. So, a tiny typo led to a big confusion!

This confusion sparked a debate. The big question was that if a state government leases the land to a leaseholder, does that make royalties under the Mines and Minerals Act a form of tax? The question popped up again in 2011 in another similar case between the Mineral Area Development Authority (MADA) and the Steel Authority of India (SAIL). SAIL was challenging a Bihar law that imposed a cess on land revenue from mineral-bearing lands.

That’s why the Supreme Court finally decided it was time to settle the whole ‘who gets to tax minerals’ debate once and for all.

Another main cause of the confusion is how our Constitution outlines the rights of the Central and state governments. While states do have the authority to derive income from mining activities, the Centre also has the power to intervene or set limits on them. That’s why, even though royalties for leasing mines go to the states, the rates for these royalties are actually decided by the Central government.

But now, the Supreme Court has stepped in, listened to both sides, and clarified that royalties are not a tax. Plus, it has confirmed that states do have the authority to tax mineral-bearing lands.

And this ruling could be a game changer for states like Jharkhand and Chhattisgarh, which are rich in minerals but not necessarily in cash. It gives them a shiny new way to boost their coffers and make the most of their natural resources.

It’s a big deal because mining, especially coal mining, is a major moneymaker for these mineral-rich states.

Just look at how India’s mineral production has grown over the years. In the last five years leading up to FY24, it has doubled to ₹1.4 lakh crores! So, the ability to levy a tax on mining could really boost state revenues.

Also, according to data from the Ministry of Mines analysed by Moneycontrol, states have already seen a surge in mining revenues, with royalty income growing at a whopping 32% compounded annual growth rate between FY17 and FY22. The top five states, including Odisha, Chhattisgarh and Jharkhand, have raked in substantial royalty revenues during this period.

So, adding additional taxes on top of these rising revenues could be a fantastic way for these states to bolster their budgets even further.

Another reason why this really matters is because states have fewer revenue sources compared to the Central government. While governments collect the bulk of the country’s revenue through income and corporate taxes, most of that money goes straight to the Central coffers.

Plus, when GST (Goods and Services Tax) kicked off in 2017, states lost their share of the revenue from the old Value Added Tax (VAT), which had been entirely theirs. With GST, they now have to share their revenue with the Centre. Sure, the GST compensation cess or a special tax on things like aerated drinks, tobacco and cars, was supposed to make up for the initial revenue loss. But even with its extension until 2026, this extra cushion will eventually disappear.

So, states need to get creative and find new ways to fill their coffers. And with this new opportunity to capitalise on their mineral wealth, states can finally start to balance the scales a bit.

But there’s a catch.

These cases ended up in courts because companies using state land for mining weren’t happy about states slapping extra taxes on top of the royalties they were already paying. So, you can imagine that this ruling isn’t exactly music to their ears.

Not just that. One of the nine judges on the bench (the only one to differ in opinion) pointed out that giving states the power to impose additional taxes could spell trouble for India’s mining sector.

And she might have a point. You see, even though corporate tax rates have been lowered in India, the mining industry still faces close to a whopping 50% tax rate, the highest in the world! For context, in other mineral-rich countries, mining companies pay around 30% in taxes.

So, if states now add another cess on royalties, it could potentially lead to a slowdown in mining activity. It could also cause a significant spike in mineral prices. This would ripple through the economy, hiking up the cost of all industrial and consumer products that rely on these minerals, either as raw materials or for infrastructure.

Take coal, for example. 78% of India’s coal resources are concentrated in Odisha and Jharkhand. If either of these states decides to levy an additional cess on coal, it could force other states that rely on this coal to raise power tariffs.

Plus, there’s the issue of uneven revenue distribution. Some states are wealthier than others, and this could tilt the balance even further. Wealthier states might opt to import cheaper minerals instead of buying from mineral-rich states, which would mean more foreign currency going out of India. This could widen the current account deficit, something the Central government is already working hard to narrow.

Then there’s the export angle. India exports low-value ores like iron ore, bauxite and zinc. Higher taxes could make our exports more expensive and less competitive in the global market. So, we’re looking at potentially higher imports and lower exports, which could widen the current account deficit even more.

In the end, this Supreme Court decision may have just opened another can of worms for the mining industry. So, while the ruling might have settled a long-standing dispute between the Centre and the states, the story is far from over.

And we’ll just have to wait and see how this all plays out.

Until then...

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