On 25 July 2024, the Supreme Court of India delivered a landmark judgment proclaiming that royalty on  mining leases cannot be classified as a tax. This decision addresses the federal fiscal issues related to the  division of taxation powers. Under Article 246 of the Constitution, the Seventh Schedule delineates powers  between the union and the states, providing a threefold classification of legislative subjects—list I (union  list), list II (state list), and list III (concurrent list). Entry 50 of the state list empowers states to levy taxes on  mineral rights but excludes mining royalties from this definition. Against the backdrop of the recent  Supreme Court judgment, this article analyses the existing mining royalty regime in India. 

 

Analysing the States Reorganisation Acts and the Fiscal Responsibility Acts, Chakraborty et al (2016)  revealed that the formation of new states that are rich in minerals, like Jharkhand and Chhattisgarh, has not  created any distinct fiscal agency in the mining sector. The states—both parent and new—have adjusted  their fiscal deficits to conform to the fiscal rules (the Fiscal Responsibility and Budget Management Act, 2016) stipulated by the centre. These states have a revenue surplus—not deficits—ex post the enactment of  fiscal rules. The new states have an insignificant share of mining proceeds in their exchequer, at around  10% of the revenue receipts. 

 

It is indeed striking that India’s resource-rich states are income-poor, warranting an analysis of the fiscal  policy practices in such states. Chakraborty and Garg (2015) analysed the use of the mining fiscal space  against the backdrop of the Mines and Minerals (Development and Regulation) (MMDR) Amendment Bill,  2015 and argued for similar institutional mechanisms like the oil-to-cash policy to resolve the spatial  inequalities in the resource-rich new states. Subsequently, the District Mineral Fund was constituted, aimed  at resolving such spatial inequalities by ploughing back a specific ratio of royalty to the districts from where  the minerals are extracted. All these point towards the existing fiscal policy practices in India’s mining regime. However, whether mining royalties can be treated as taxes and can be levied by the states require deliberations, which is attempted in this article.

 

https://www.epw.in/journal/commentary/mining-royalty-not-tax.html