In a federal system, there are two levels of authority, each with its autonomy. A federal system splits power between these two levels as outlined by the constitution, enabling each to operate independently in specific situations. India is also a federal system, but due to power being tilted more towards the centre, it is also called as a quasi-federal system.

On 25th July 2024, the Supreme Court dealt with critical questions regarding fiscal federalism. The case 'Mineral Area Development Authority (MADA) v. Steel Authority of India' finally reached a conclusion after decades of debate and uncertainty. The case attended inquiries concerning the power of state governments to impose royalties on mineral mining and the verdict was pronounced with an 8:1 split.

Before the judgement, royalty on mineral mining was used to be uniformly mandated by the central government for all the states. However, states had concerns regarding this approach. They argued that the authority to set royalty rates on mineral mining, which is vested in state territories, should rest with the state governments. In a legal sense, it all comes down to whether royalty is interpreted as a tax or not as per relevant provisions of law. If royalty is not a tax, then states have the authority and flexibility to decide royalty rates. If it is the contrary, then states do not have the power and competence to do so.

This judgement will set a landmark judicial precedent that clarified a legal deliberation going on since 2004. This article will examine the judgment by outlining the facts, verdict, and its historical background. It will analyse the sole dissenting opinion on the case, and furthermore, will explore the implications and subsequent discussions surrounding the judgment.

Historical Background
Whether royalty should be construed as a tax or not was declared in the 1989 judgement of 'India Cement Ltd v. State of Tamil Nadu & Ors.' where it was explicitly held that royalty is a tax. The dispute arose when the state of Tamil Nadu decided to levy cess on the royalty. The petitioner, India Cement, argued that a cess on royalty is nothing but a tax on royalty, and hence, it is not within the purview of state legislatures.

The paragraph from the judgement given below is of immense significance due to its contentious nature.

"In the aforesaid view of the matter, we are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature because Section 9 of the Central Act covers the field and the State Legislature is denuded of its competence under entry 23 of list II. In any event, we are of the opinion that a cess on royalty cannot be sustained under entry 49 of List II as being a tax on land. Royalty on mineral rights is not a tax on land but a payment for the user of land."

Why is the paragraph contentious? It's because in 2004, a 5-judge bench in 'The State of West Bengal v. Kesoram Industries Ltd. and Ors.' claimed a typographical error in the same. The judgement asserted that the line 'royalty is a tax' is actually an error, and it wanted to say 'cess on royalty is a tax'. The judgement noted how there was no doubt regarding whether a royalty is a tax or not before the 1989 precedent, and even subsequent to the judgement, courts did not take notice of the same.

This rhetoric of a typographical error was also questioned in State of MP vs Mahalaxmi Fabric Mills Ltd, 1995, but the judgement upheld the India Cement and claimed no errors.

The Kesoram judgement held that royalty payments are received by the owner of the property, who may or may not be a private individual. A private individual holding the land has the authority to impose a royalty but not a tax. Royalties are paid to the lessor as revenue and represent an expense for the lessee. Hence, a royalty is not considered taxable.

The bench, arguing that royalty is not a tax, further stated that 'we are fully convinced in that regard and feel ourselves obliged constitutionally, legally and morally to do so'. However, the judgement could not overturn the 1989 pronouncement by virtue of being a smaller bench.

Since then, there has been deliberations about whether royalties are taxes or not.

The Clarification
The legal status of royalty as a tax was finally confirmed, after decades, by the recent ruling on July 25. The authority of state governments to impose royalties on their mineral-bearing territories was upheld by the Supreme Court.

The 9-judge bench constituted Chief Justice D.Y. Chandrachud CJI, Justice Hrishikesh Roy, Justice A.S. Oka J, Justice B.V. Nagarathna, Justice J.B. Pardiwala, Justice Manoj Misra J, Justice Ujjal Bhuyan, Justice S.C. Sharma, and Justice A.G. Masih J.

According to Section 9 of the Mines and Minerals Development and Regulation (MMDR) Act of 1957, anyone with a mining lease must pay royalties on minerals they take or use from the leased land, at rates listed in the Second Schedule. The Court decided that royalty rates under Section 9 are not a tax for several reasons. Firstly, the requirement to pay royalties stems from the mining lease agreement rather than a legal mandate. Additionally, the royalty payment is demanded by the lessor, who could be either the state government or a private party, rather than a public authority. Lastly, the royalties serve as a consideration to the lessor for allowing access to the mineral reserves and are not used for public purposes.

The judgement further stated major differences between royalty and taxes:
There are major conceptual differences between royalty and a tax:

1. the proprietor charges a royalty as a consideration for parting with the right to win minerals, while a tax is an imposition of a sovereign;
2. royalty is paid in consideration of doing a particular action, that is, extracting minerals from the soil, while tax is generally levied with respect to a taxable event determined by law; and
3. royalty generally flows from the lease deed as compared to tax which is imposed by authority of law.

Hence, it can be said that royalties are payments to a lessor for the right to extract minerals, they are paid for specific actions like mining and is based on a lease agreement, whereas taxes are imposed by the government as per the law on particular taxable actions.

In an eight-judge verdict, it was ruled that royalties are a form of contractual payment from the lessee to the lessor, and not a tax. It stated that Parliament lacks the authority to tax mineral rights under Entry 50 of List I. Additionally, the Chief Justice clarified that neither royalty nor debt rent qualifies as a tax. The verdict also noted that the does not restrict states from taxing minerals.

When royalty was considered as a tax, the central government used to levy a uniform royalty taxation for the states and the states were not allowed to levy any additional charges. Now, with royalty being not a tax, it will empower state legislatures to levy royalty as per their wish, giving a greater rise to fiscal federalism.

The Dissenting Opinion
Justice B.V. Nagarathna was the sole dissenter in the case and determined that the royalty charged under Section 9 of the MMDR Act is essentially a tax.

She remarked how this judgement will lead to a disintegration of federalism and collapse of Indian mining economy and mineral rights. It would start a detrimental competition between the states in critical sectors like mining, which may lead to an unprecedented price rise across states. Growth in mining would be influenced by an unregulated and disorganized sector, which would further harm the mining and mineral economy of India.

If royalty is not considered a tax and is covered under the MMDR Act, then states will be able to charge additional taxes on top of the royalty paid by mining companies. This would go against the limits set by Parliament on the states' power to tax mineral rights, which is clearly stated in Entry 50 – List II.

She argued that Section 9 should be interpreted in conjunction with Schedule 2 and Section 2 of the MMDR Act. Section 2 declares the central government's intention to oversee the regulation of mines and mineral development throughout India. Schedule 2 lists the royalty rates for various minerals, which the Union can set under Section 9. She concluded that the MMDR Act clearly covers royalty, making it a matter for the Union to handle.

She emphasized that the inference of a typographical error made in the Kesoram Industries judgement was drawn without taking into account the court's observations properly, highlighting the observation, "royalty on mineral rights is not a land tax, but a payment for the user of the land."

She expressed her displeasure with the Kesoram judgement's use of "sensible reading" as justification. She said, 'A judgment of a Court of law is not a piece of legislation but one pregnant with reasoning and it becomes the duty of a succeeding Bench considering a precedent to be cautious in opining something contrary on the premise of a "typographical error" in a judgment of a larger Bench by failing to understand the import of the reasoning.'

She further pointed out that this situation would result in 'double taxation' by two different legislative bodies. Under Entry 49 - List II, the State legislature would tax mineral-bearing land, while Section 9 of the MMDR Act, 1957, a Parliamentary law, would impose taxes on mining operations. Both of these taxes would ultimately be paid to the State Government. Furthermore, she recognized that Section 9 is not worded like a normal tax provision, but as its functionality is similar, it should be considered as one.

Implications and Discussion
The judgement can have far-reaching implications for the workings of the Indian mining industry, state legislatures, and the Indian economy.

The judgement is a big win for the states. It has opened up a new revenue stream for mineral-rich states like Jharkhand, Madhya Pradesh, Odisha, Chhattisgarh, etc., who may be in need of additional funds. It will enable them to fund development projects, improve infrastructure, and enhance public services.

Autonomy is provided to the states in a crucial economic sector. Now, states can independently decide their royalty rates based on their own specific needs and priorities, instead of relying on the central government for it. States can potentially attract investments by offering competitive royalty rates, stimulating economic growth and job creation.

Fiscal independence in sectors like mining is a significant development and may lead to positive outcomes. But non-regulation and less scrutiny in such critical sectors also opens it up to adverse effects and new negative externalities.

With different royalty rates, a market distortion due to competitive prices will occur. It will lead to an uneven competition among mining states and will affect the overall cost of production. Mining companies will face increased compliance costs due to the need to calculate and remit different royalty amounts to various state governments. Highly competitive practices like keeping royalty at almost nil or keeping unreasonably high rates also have chances of happening from some fronts.

To prioritize revenue, states may attract increased mining practices through royalty rates, overexploiting resources and harming ecosystems in the process.

As Justice Nagarathna observed:
'… this would result in mineral development in the country in an uneven and haphazard manner and increase competition between the States and engage them into what has been termed by Louise Tillin in a 'race to the bottom' in a nationally sensitive market'.

If the royalty rates are not set reasonably, it will lead to an increase in mineral prices of not only minerals but of everything made from them. Such an increase may encourage the import of products by companies and people. Exporting highly-priced goods will also become a difficult task.

Furthermore, irregular pricing may lead to increased black marketing and illicit trading of minerals. Traders might exploit the price differences between states with high and low royalties by illegally transporting minerals.

Conclusion
Considering that in India, the mineral-rich states are not rich in revenues, the judgement will massively help them. Each state may have different priorities and conditions, and royalty structures can now be tailored as per these requirements. Fiscal autonomy is favorable, however, the mining and mineral sector is one of the foundations of the Indian economy, and the question arises, whether the negative implications of the judgement as discussed, are really necessary for such a sector to deal with? Or should it be avoided when it can?

First of all, some regulations will be required to avoid anti-competitive practices like unreasonably high or unreasonably low royalty rates, which can ultimately fuel black marketing and illicit trade. Black marketing shouldn't be considered as a suspicion, but a fact that it will occur, therefore, stringent laws and security measures should be in place. Justice Nagarathna's opinions regarding unhealthy competition and price increase due to the judgement are genuine concerns and it should be dealt with through a balance of regulation and autonomy.

The judgement should be celebrated as a win for the mineral-rich states, but the government will have to play its part to ensure that fiscal autonomy is properly and safely practised.