New timeline: 2005 set as start date for retroactive tax; States to begin mining tax collection from 2026 | Photo Credit: PTI

On July 25, the Supreme Court of India (SC) rendered an 8:1 majority ruling in Mineral Area Development Authority vs SAIL whereby the powers of State governments to levy taxes on mines and minerals were upheld. The apex court clarified that royalty collected by State governments under the Mines and Minerals (Development & Regulation) Act, 1957 (MMDRA), could not be construed as a “tax”. The decision overturned an earlier 7-judge bench decision of the SC in India Cements vs State of Tamil Nadu wherein royalties paid for mining operations were deemed to be a tax, and thus, the States could not impose further taxes on mine leaseholders.

The Supreme Court, in its 9-judge ruling, opined that the royalty and taxes paid in relation to mines and minerals were distinguishable on multiple counts. The primary differentiating factor was that royalties were in the nature of consideration price or contractual payment paid to the mining lessor by a mining lessee in terms of the mining lease.

Taxing from the past

With the 9-judge ruling in place, the gateways for State governments to not only charge the royalty but also collect taxes on mines and minerals stood open. However, after the ruling, a significant question emerged: should the judgment be applied only to future transactions, or should it also be applied retroactively to all transactions dating back to 1989, when the India Cements decision was pronounced?

The Union government, along with mining companies, advocated for the judgement to be applied only to future cases, arguing that it introduced new constitutional principles. They stressed that this shift would disrupt existing agreements and contracts that had been established following the India Cements decision. The government also warned that retroactive application could lead to companies terminating their agreements in response, resulting in a surge of legal disputes. Additionally, the government highlighted that consumers would ultimately bear the cost, as mining lessees would inevitably pass on increased expenses to end-consumers. Lastly, it argued that applying the ruling retroactively would place a significant financial strain on mining companies, States would likely demand interest on unpaid taxes as well.

On the other hand, State governments argued in favour of retroactive tax collection. They maintained that the 9-judge ruling did not introduce any new constitutional principles but merely affirmed the validity of the provisions in the existing State legislations regarding taxation on mines and minerals. As such, the States argued that many of the laws were enacted following the Supreme Court’s decision in the State of West Bengal vs Kesoram Industries Ltd, which doubted India Cements ruling by asserting that royalties were not taxes.

In a supplementing order passed on August 14, the apex court rejected the idea of applying its latest ruling in Mineral Area Development Authority case only to future transactions. Using its powers under Article 142 of the Constitution, the Supreme Court devised what it described as a “pragmatic solution”. It ruled that taxes could be levied on all transactions by mining companies and leaseholders from April 1, 2005. This date was chosen because the Kesoram Industries decision in 2004 had already indicated that India Cements erred in classifying royalty as a tax. Although the Kesoram judgment came in 2004, the apex court held that taxes could only be collected for the financial year beginning April 1, 2005.

Additionally, SC allowed States to begin collecting these taxes from April 1, 2026, on all relevant transactions since April 1, 2005. It also mandated that the taxes would be paid in instalments over 12 years and that no interest or penalties would be applied to these taxes.

Double taxation?

The apex court’s decision upholding States’ authority to levy taxes on mines and minerals while also applying these taxes retroactively could be seen by businesses as a form of double taxation.

Mining lessees that have already paid royalties, believing these payments to be sufficient, may now face the additional burden of new taxes, which could lead some to terminate their leases or agreements. This could create instability within the industry, just as past instances of retrospective taxation have often eroded investor confidence.

In this regard, the perspective of the lone dissenting judge, Justice Nagarathna, is important as it highlights several challenges associated with retrospective taxation — a phenomenon India has encountered before. Justice Nagarathna noted that such taxation could have severe economic consequences and might lead to “unhealthy competition” among States, resulting in an “uneven and uncoordinated rise” in mineral prices.

Nonetheless, SC’s arrangement for instalment-based tax payments provides a practical solution to ease the immediate financial pressure and offers a structured way for companies to manage this new obligation.

The bedrock of any successful tax system is offering businesses the predictability they need to plan their investments and operations with confidence. When tax regulations are clear and consistent, companies can accurately project their financial responsibilities, which is vital for long-term strategic planning and maintaining a favourable business climate. However, when uncertainty arises from retrospective changes over perceived double taxation, it can disrupt the stability in economic activity. A predictable tax system not only promotes compliance but also builds trust between businesses and the government, which is essential for encouraging sustained investment and fostering economic growth. The apex court appears to have trodden very carefully in coming up with a solution that balances the interests of all the parties involved.

(The writers are advocates at Trinity Chambers, Delhi)

Published on August 25, 2024