Authored by Souniya Dhuldhoya & Kanan Shivhare, 4th-year students at Gujarat National Law University, Gandhinagar
In the grand tapestry of Indian fiscal federalism, the issue of whether royalty on mineral develo constitutes as a tax has long been a matter of intense debate. This discourse reached its defining moment in the landmark judgment of Mineral Area Development Authority (MADA) v. Steel Authority of India. In this judgment, the Supreme Court has ruled that royalties on mineral mining do not amount to tax. It has upheld that the State indeed has a legislative competency under Entry 50 of the State List to levy taxes on mineral development.
With this, the Apex Court has added a new dimension to fiscal federalism of India, and the ongoing discourse on taxation and royalties. The Court in this judgment tried to bring harmonisation within the fiscs of the Centre and State. Yet, the dissenting opinion of Justice B V Nagarathna warns of the potential for unfair price competition among States. In this blog, we delve into the critical analysis of this landmark ruling, exploring its implications against the broader canvas of fiscal federalism in India.
Brief Juridical History
In 1957, the Union Government enacted the Mines and Minerals (Development and Regulation) Act (‘MMDR Act’), bringing control over mineral development under its ambit. Section 9 of the Act stated that the mining lease holders had to pay a royalty to the Union government for any ‘mineral removed or consumed’ from the leased area. However, the scope of this provision was challenged in India Cement Ltd v. State of Tamil Nadu, in which a seven-judge bench of the Supreme Court ruled that the levy of cess on royalty by the Tamil Nadu government, was in fact, a tax on royalty, and therefore beyond the state’s legislative competence.
The debate resurfaced in 1999 when a writ petition challenged the Bihar Coal Mining Area Development Authority (Amendment) Act, 1992. This eventually led to the recent nine-judge bench decision on the issue. The Court, by an 8:1 majority, upheld the States' authority to levy taxes on mineral rights under Entry 50 of the State List, provided there are no statutory limitations imposed by Parliament. The Court clarified that royalties collected under Section 9 of the Mines and Minerals (Development & Regulation) Act are not taxes, distinguishing royalties as payments made to the owner.
The Challenging Landscape of Fiscal Federalism
Indian federalism, often described as asymmetric, is characterised by a strong Central government. This centripetal bias is a hallmark of India’s federalism, where the Union’s stronger position leads to a dependency of the States on the Centre for financial resources.
In 2014, the Finance Commission recommended the division of the net proceeds of tax between the Union and the States.
In MADA v. Steel Authority of India, the Supreme Court reaffirmed the independence of Indian States within their legislative domains, emphasising that State legislatures should not be subordinated to the Union in areas exclusively reserved for them. The majority judges clarified that laws enacted by Parliament under Entry 54 of List I cannot implicitly strip State legislatures of their powers under Entry 50 of List II, thus, protecting the States' taxing authority from Union encroachment. However, acknowledging that while the Union government can limit the extent of the State’s taxing powers, such a limitation is not currently applicable under the MMDR Act.
The recent judgment builds on the precedent established in State of West Bengal v. Kesoram Industries Ltd., which affirmed states' authority to tax land used for mining. The most immediate and profound effect of this order is the possibility of collecting more revenue for states rich in minerals like Odisha, Jharkhand, and Chhattisgarh to generate significantly more revenue. Despite their abundant mineral reserves, these states have long struggled with inadequate infrastructure and limited access to essential services due to financial constraints. However, the increased revenue could inspire a higher degree of competition among States. This draws similarities with the principles of competitive federalism as articulated by the Supreme Court in State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat, wherein the Court underscored the importance of a state's economic independence. This argument finds a place in Justice B.V. Nagarathna's dissenting opinion indicating the potential risk of "unhealthy competition between the States to derive additional revenue."
This ruling aligns with Article 39(b) of the Constitution, which mandates that the ownership and control of community resources be distributed in a manner that best serves the common good. This competitive strife  reminds one of the Australian High Court's rulings in Commonwealth v. Western Australia which gave powers to the states to claim property rights over mining resources thus leading to competition between states, highlighting the need to balance state autonomy and stability, so as to not foster further competition, and promote growth instead. In the next section,  this blog delves into the analysis of the negative economic implications of unhealthy competition on the country’s fiscal structure.
Adverse Economic Implications
The judgment poses significant challenges for mining corporations, as they now face the imposition of a cess on royalties in addition to existing taxes for acquiring mineral rights. This additional financial burden is substantial, given that the mining industry has some of the highest tax rates globally. As a result, the industrial and consumer products dependent on these minerals will see a sharp rise, whether as raw materials or for infrastructure.
Similar concerns were raised in Monnet Ispat and Energy Ltd. v. Union of India, where the Supreme Court emphasised that investors require a stable and predictable regulatory environment to invest in coal mining. The current regulatory fragmentation further threatens to reduce the efficiency of Indian mining operations and undermine their position in the global market, compounding the already challenging high-tax environment. This issue is reflected in the principles laid down in Jindal Stainless Ltd. v. State of Haryana, where the Supreme Court held that state-imposed taxes on inter-state transactions could obstruct the seamless flow of trade and establish economic barriers, thereby violating the constitutional mandate for a unified national market.
Furthermore, the permissibility of differential tax structures across Indian states poses significant challenges to the mining sector, particularly at a time when its contribution to India's GDP has risen substantially. While these variations exacerbate concerns about investment uncertainty and project viability, they also potentially drive innovation and sustainability. The threat of higher taxation could compel mining companies to invest in cleaner, greener technologies, aligning with the National Mineral Policy 2019. However, striking the right balance is crucial—states must augment revenues while sustaining the sector's dynamism. A coordinated approach would harmonise state-level policies with national objectives to ensure equitable distribution of mineral wealth, foster economic growth, and promote responsible mining practices.
Another layer of legal complexity stems from the retrospective application of this judgment. While the Apex court's pronouncement that fiscal obligations on mineral rights shall not apply to deals conducted prior to the 1st of April in the year 2005, and their permitting of staggered disbursements over a dozen years initiating on the 1st of April 2026, still imposes a sizable monetary burden upon mining enterprises. The repudiation of interest and penalties for demands preceding the 25th of July 2024 provides some alleviation; however, corporations will need to recalibrate their financial planning to adapt to these retroactive liabilities that could hinder their capability to invest in new ventures or advancing technology, potentially stagnating sector progress and competitiveness.
The cumulation of these factors may require a holistic re-evaluation of the mining regulatory regime to achieve an acceptable equilibrium among revenue maximization by the state and pursuance for sustainability in development, together with competitive viability within this industry.
Conclusion
This judgment invites us to reconsider the traditional paradigms of fiscal federalism through a more nuanced lens. At its core, this decision challenges us to reimagine the social contract between states, citizens, and natural resources. It prompts a reevaluation of the concept of ownership in the context of mineral wealth - does it belong to the state, the nation, or humanity as a whole? This philosophical quandary has far-reaching implications for how we conceptualize and implement resource governance in a federal system.
The intersection of fiscal policy and ecological stewardship opens up new avenues for interdisciplinary research, bridging the gap between legal theory, environmental economics, and public policy. The judgment also invites us to contemplate the nature of equity in a federal system characterised by uneven resource distribution. It challenges the traditional notions of horizontal and vertical equity, prompting us to consider more nuanced models of fiscal equalisation that can accommodate both geological realities and developmental aspirations. This ruling also provides a unique lens to examine the tension between localism and nationalism in resource governance. It compels us to grapple with fundamental questions about the scale at which natural resources should be managed and the mechanisms for balancing local interests with national priorities.
Moving forward, the MADA judgment may serve as a catalyst for reimagining federalism not as a rigid structure, but as an adaptive system capable of responding to the complex challenges of resource management. As we navigate these uncharted waters, the legal and policy community must rise to the challenge of crafting innovative solutions that can reconcile the competing demands of local autonomy, national development, and global sustainability.