NEW DELHI: The Supreme Court on Wednesday observed there would be a “grave danger to federal structure” if states are prohibited from imposing tax on minerals and that the right to impose a tax on mineral rights has been given to states subject to limitations to be imposed by the Centre.

“A limitation on state’s powers under Entries 23 (regulation and development of minerals) and 50 (tax on mineral rights) of State List does not transfer the entire taxing power to the Union government. Look at the grave danger to the federal structure by this argument. If this limitation is taken as prohibition, states can be prohibited by the Union. Also, Parliament can say I have limited the states so my power is unlimited,” a nine-judge constitution bench headed by Chief Justice of India (CJI) Dhananjaya Y Chandrachud said on Wednesday.

The bench, also comprising justices Hrishikesh Roy, AS Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih, will continue the hearing on Thursday.

The top court is hearing a batch of more than 80 appeals dealing with the question whether royalty charged on mining is a tax and whether states have legislative competence to levy taxes on minerals and mineral-bearing lands in addition to the royalty imposed by the Centre.

The matter was referred to a nine-judge bench in March 2011 following conflicting verdicts by the courts. In 1989, a seven-judge bench of the top court held that royalty was a tax but a five-judge bench in 2004 ruled that there was a typographical error in the 1989 verdict and that royalty was not a tax.

On Wednesday, senior advocate Abhishek Manu Singhvi, appearing for a group of mining companies and certain companies of the Tata Group, argued that the royalty payable by mining leaseholders was a tax and “tax on minerals” falls exclusively with the Centre under Entry 54 (regulation of mines and mineral development) and additionally Entry 97 (residuary powers) of the Union List. For the sake of argument, Singhvi added, even if it was assumed that the states had the power to tax mineral rights under Entry 50, the same can only apply to the grant of mining lease and not extraction of minerals.

Singhvi said Parliament enacted the Mines and Minerals (Development and Regulation) Act 1957 by virtue of this power. This law provides for the charge of royalty which is “clearly a tax”. This royalty is paid to states and not Centre and the royalty rate is fixed by Centre without consulting the mining leaseholders and can be coercively recovered.

The bench told Singhvi, “Parliament cannot prohibit states from levying tax. The entire field of mineral rights is given to states subject to limitations to be imposed by Centre. It is not that tax on minerals is given to Parliament and tax on mineral rights is given to state subject to limitations.”

Further, the court observed that though the argument that Centre can tax on minerals through Entry 97 is a “weighty point”, such residuary powers cannot be brought in to levy tax. “You are abolishing the power of state to tax. That cannot be the scheme of Constitution….Money (from royalty) going back to state cannot be the logic to deny state the right to tax,” the bench reasoned.

In response, Singhvi told the court that Entry 50 of State List clearly recognises that the power to tax is subject to a superior authority which is Centre. “This 9-judge bench must lay down that mineral rights cannot be equated with minerals. It will be a subterfuge where a taxable event can be changed by a measure completely,” Singhvi submitted.

He said that Parliament’s competence under Entry 54 is not limited only to legislate on “regulation of mines and mineral development” but also extends to taxing mineral rights. “It is settled that taxing entries in the State List cannot tax the subject matter of a general entry which occurs in the Union List. Once the general subject lies within the exclusive domain of the Parliament, states cannot exercise taxing powers with respect to the same,” Singhvi said.

Parliament has plenary powers under Article 248(2) read with Entry 97 of List I, to levy tax on any subject not mentioned in any of the lists. Article 248 states, “Parliament has exclusive power to make any law with respect to any matter not enumerated in Concurrent or State Lists. Such power shall include the power of making any law imposing a tax not mentioned in either of the two lists.”

“It is therefore clear, that at the very least, the Parliament would have the exclusive competence to levy a “tax on minerals” as the same is not mentioned in any of the lists,” he said. He added that the expression “tax on mineral rights” contemplates levy of taxes only on minerals that are still embedded in the earth i.e., on the right of extraction and implies a tax on the grant of mineral concession/lease.

A host of senior advocates including Arvind Datar, AK Ganguly and Darius Khambata among others questioned the state’s power to tax on minerals.

On Tuesday, the Centre argued that the exploration, extraction and management of minerals have to be guided by “national goals”, integrated into the overall strategy of the country’s economic development, besides being in public interest.

It argued that the limitation on states to tax minerals was envisaged in the Constitution to promote domestic industry and reduce import dependency, to make domestic industry resilient and self-sustainable.