Source: Supreme Court 

Why in News? 

The Supreme Court recently in Mineral Area Development v. M/S Steel Authority of India & Ors ruled that States have the authority to levy taxes on mineral rights under Entry 50 of List II of the Constitution of India, 1950 (COI), despite the regulatory powers of the Union under Entry 54 of List I. The Court emphasized that taxing powers must be explicitly granted and cannot be inferred from general regulatory entries.  

• It also confirmed that the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) does not restrict States' taxation powers on mineral rights or lands, maintaining the constitutional distribution of legislative competencies. 
• The Judgment is pronounced by 9 Judges Constitution Bench which consists of Hon’ble Dr Justice Dhananjaya Y Chandrachud, Chief Justice of India pronounced the judgment on behalf of himself, Hon’ble Mr Justice Hrishikesh Roy, Hon’ble Mr Justice Abhay S Oka, Hon’ble Mr Justice J B Pardiwala, Hon’ble Mr Justice Manoj Misra, Hon’ble Mr Justice Ujjal Bhuyan, Hon’ble Mr Justice Satish Chandra Sharma and Hon’ble Mr Justice Augustine George Masih.   

What was the Background of Mineral Area Development v. M/S Steel Authority of India & Ors. Case? 

• The appeals concern the distribution of legislative powers between the Union and States regarding taxation of mineral rights. 
• The core legislative entry in question is Entry 50 of List II of the Seventh Schedule to the Constitution, which deals with taxes on mineral rights. 
• Parliament enacted the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) under Article 246 of the COI. 
• In India Cement Ltd. v. State of Tamil Nadu (1990), the Supreme Court held that royalty is a tax and state legislatures lack competence to levy taxes on mineral rights. 
• In State of West Bengal v. Kesoram Industries Ltd. (2004), the Supreme Court clarified that royalty is not a tax, contradicting the earlier India Cement judgment. 
• After these judgments, some state legislatures-imposed taxes on mineral-bearing land under Entry 49 of List II, using mineral value or royalty as the measure of tax. 
• The constitutional validity of these state levies was challenged in various High Courts. 
• In Civil Appeal ,the Patna High Court struck down a Bihar state law imposing tax on land used for mining, citing the India Cement judgment. 
• On appeal, a three-judge bench of the Supreme Court noticed the divergence between the India Cement and Kesoram judgments and referred several questions to a nine-judge bench. 
• The nine-judge bench is now considering these referred questions, which have been reframed into following main issues: 
  • Concerning the nature of royalty. 
  • Scope of legislative entries. 
  • Distribution of powers between the Union and States regarding mineral taxation. 

What were the Court’s Observations? 

• Court observed that the regular entries under List I and II of the 7th Schedule cannot be given a wider interpretation to include taxation powers covered under specific tax entries. 
• The court also expanding the scope of regular entries to include taxation power would grant arbitrary and unconstitutional authority to both Union and States. 
• The court states entry 54 in List I, being general, doesn't include taxation power.  
• Parliament can't use residuary powers to gain legislative competence for taxing mineral rights. 
  • The power to tax must be expressly present in an Entry and cannot be implied from regulatory powers. 
  • Entry 50 List II is not an exception to the Sundararamier Principle, which states that taxing entries are listed separately from general entries in the 7th Schedule. 
• The court holds that States have the power to levy tax on mineral rights under Entry 50 List II. 
• Entry 50 List II and Entry 54 List I are regulatory entries and do not expressly come under 'taxing entries'. 
• The Mines and Minerals (Development and Regulation) Act 1957 (MMDR Act) does not limit the States' power to tax mineral rights under Section 9. 
• States have the power to tax mineral-bearing lands under Entry 49 List II, which covers taxes on lands and buildings. 
• The term "lands" in Entry 49 List II includes all types of land, regardless of their use, including mineral-bearing lands. 
• State legislatures have broad discretion in classifying lands for taxation purposes under Entry 49 List II. 
• Minerals in their natural state are part of the land and include everything above and below the surface for taxation purposes under Entry 49 List II. 
  • The MMDR Act does not limit the state's power to tax lands under Entry 49 List II. 
  • Sections 9, 9A, and 25 of the MMDR Act, 1957 denude or limit the scope of Entry 50 - List II. 
  • The majority decision in Kesoram is overruled to the extent of holding that royalty is not a tax. 
  • Entry 50 List II is not an exception to the Sundararamier Principle, which states that taxing entries are listed separately from general entries in the Constitution. 

What is Seventh Schedule of COI? 

About: 

• The Seventh Schedule is read with Article 246 of the COI, which empowers the Parliament and State legislature to make laws regarding any matter that falls within their field of legislation. 
• The Seventh Schedule specifies the distribution of powers and responsibilities between the Union and the states. It contains three lists: 
  • Union List: Subjects under the exclusive jurisdiction of the Union government. At present there are 100 subjects in the Union list. 
  • State List: Subjects under the exclusive jurisdiction of the state government. At present there are 61 subjects in the State list. 
  • Concurrent List: Subjects under the joint jurisdiction of the Union and state governments. At present there are 52 subjects in the concurrent list. 

What Major Changes Have Occurred in the 7th Schedule Since Its Inception? 

• Parliament has exclusive power to make laws on 100 subjects in the Union List. 
• State legislatures have exclusive power to make laws on 61 subjects in the State List. 
• Both Parliament and State legislatures can make laws on 52 subjects in the Concurrent List. 
• The 42nd Amendment Act (1976) transferred five subjects from State List to Concurrent List. 
• Parliament can make laws for Union Territories on State List subjects. 
• The 101st Amendment Act (2018) gave shared power to Parliament and states on GST, with Parliament having exclusive power on interstate GST. 
• Parliament has power over residuary subjects not in any list. 
• The Constitution ensures Union List predominance over State and Concurrent Lists, and Concurrent List over State List. 
• Central laws generally prevail over state laws in case of conflict, with some exceptions. 
• The Sarkaria Commission (1983) and Venkatachaliah Commission (2002) largely maintained the existing distribution of powers. 
• There's no mandatory consultation structure between Union and states for legislation under the Concurrent List. 

Why Was There a Need to Amend The 7th Schedule? 

• Constitutional amendments have generally led to centralization by moving items from State to Concurrent List or Concurrent to Union List. 
• The 1976 amendment significantly increased centralization. 
• The Rajamannar Committee (1971) recommended a high-power commission to review and redistribute entries in Lists I and III of the Seventh Schedule. 
• There's a general consensus that India needs greater decentralization in governance. 
• The Seventh Schedule requires a comprehensive re-examination. 
• Factor market reforms (land, labor, natural resources) may benefit from state-level control due to regional differences in development. 
• Labor laws could potentially be moved from the Concurrent to the State List to account for state-specific conditions. 
• Previous commissions on Union-state relations have not given adequate attention to the Seventh Schedule. 
• An independent scrutiny of the Seventh Schedule is needed, based on first principles. 

What are the Related Provisions in Constitution of India? 

Whether Royalty is a Tax or Not? 

• The Mines and Minerals (Development and Regulation) Act, 1957.(MMDR Act) regulates mines and mineral development under Union control. 
• Section 9 deals with royalties for mining leases, payable on minerals removed or consumed. 
• Royalty rates are specified in the Second Schedule, which can be amended by the Central Government. 
• Royalty is charged on processed minerals if processing is done within the leased area, otherwise on unprocessed minerals. 
• Dead rent is payable under Section 9A, with the higher of dead rent or royalty being charged. 
• Additional payments are required for the District Mineral Foundation and National Mineral Exploration Trust. 
• The Act authorizes recovery of dues as land revenue arrears. 
• Mining lease agreements are executed between state governments and lessees. 
• The MMDR Act aimed to revise old mining agreements and encourage private sector development. 
• Section 9 allows the Central Government to periodically review and adjust royalty rates, which was not possible under previous legislation. 
• Centralizing royalty rate-setting aims to maintain uniformity across India and promote domestic industry competitiveness.