The Supreme Court has recently held that the regular entries under List I and List II of the 7th Schedule of the Constitution cannot be interpreted to include taxation powers, which are covered under distinct tax entries in the same schedule.
The 7th schedule of the Indian constitution specifies the allocation of powers and functions between the Union and states. Article 246, which is under the 7th schedule of Indian constitution, is one such article. Under this, the legislative powers of the Union and the State are demarcated.
The 9-Judge Constitution Bench, led by Chief Justice DY Chandrachud, observed that states have the authority to levy taxes on mineral rights under Entry 50 of List II. The Mines and Minerals ( Development and Regulation ) Act of 1957, enacted under Entry 54 of List I, does not limit this power.
Read More: “Royalty is not Tax”, Supreme Court Affirms States’ Right to Levy Tax on Mining Rights
The entries in question are:
Entry 50, List II: Grants states the power to tax mineral rights, subject to any limitations imposed by Parliament concerning mineral development.
Entry 54, List I: Allows Parliament to regulate mines and mineral development as necessary in the public interest.
The Court clarified that Entries 50 and 54 are regulatory and not taxing entries, which are separately listed. Expanding the scope of regulatory entries to include taxation would give arbitrary and unconstitutional authority to both Union and States.
The Court emphasised that Entry 54 in List I does not include taxation powers, and Parliament cannot use residuary powers to claim legislative competence for taxing mineral rights not mentioned in Entry 54. Respecting the constitutional distribution of federal powers is essential.
The ruling further explained that the power to tax, as detailed in Entry 50 of List II, is a specific constitutional entrustment to states. This means taxation powers cannot be derived from general regulatory legislative entries but must come from specific taxing entries, a principle well-established in constitutional jurisprudence.
The Court also noted that the state’s power to tax mineral rights under Entry 50 of List II is unaffected unless explicitly limited by a Parliamentary law on mineral development. The Mines and Minerals ( Development and Regulation ) Act does not contain provisions that curtail the states’ taxation powers on mineral rights.
Regarding the MMDR Act, the Court concluded that it does not restrict the state’s ability to tax mineral rights. Although the Act stipulates royalty payments on minerals, this is not considered a tax on mineral rights, and limitations on royalty rate enhancements do not equate to limitations on states’ taxing powers.
Furthermore, the Court held that states could tax mineral-bearing lands under Entry 49 of List II, which pertains to taxes on lands and buildings. This includes all land uses, such as growing crops or extracting minerals. The term “lands” encompasses everything above and below the surface, including subsoil minerals, for taxation purposes.
In referencing the decision in Spencer & Co. v. State of Mysore, the Court affirmed that state legislatures have broad discretion in classifying lands for taxation. The MMDR Act’s legislative declarations affect state powers under Entry 23 of List II but do not impact the states’ authority to tax lands and buildings.
In summary, the Supreme Court upheld that the power to tax mineral rights is constitutionally entrusted to states and cannot be derived by widening the interpretation of Seventh Schedule entries. The MMDR Act does not limit this power, reinforcing the states’ authority to impose taxes on mineral rights and mineral-bearing lands under the relevant entries of List II.
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