​The central government told the Supreme Court on Tuesday not to view the power of states to tax mineral rights as a Centre-state fiscal tussle but from the larger perspective of public interest and India’s economic development.

In its arguments before a nine-judge constitution bench, which is examining the scope of royalty charged on minerals being a tax and whether states are restricted to impose any further tax beyond the royalty, solicitor general Tushar Mehta said royalty was not in the nature of a tax but a charge payable for the privilege of extracting minerals, and allowing states to levy anything on top of this will render mining “financially unviable”.

Read here: Centre opposes states’ levy on minerals, says will lead to inflation, hurt economy

“The present matter does not raise any issue of a fiscal tussle between Centre on one hand and the states on the other, as has been tried to be portrayed by the appellants,” Mehta said. “The exploration, extraction and management of minerals have to be guided by national goals and perspectives, to be integrated into the overall strategy of the country’s economic development. The endeavour shall be to promote domestic industry and reduce import dependency, which makes domestic industry resilient and self-sustainable.”

The 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.

Earlier, the Centre had filed an affidavit claiming that giving states the power to tax will harm the industry and lead to inflation as supply of minerals such as coal, iron ore, bauxite, magnesium and others is crucial to key sectors of economy such as steel, power, aluminum and infrastructure, among others. Some states rich in minerals cannot be unjustly benefitted, it had said, claiming that differing levies across states would discourage investment and stem the inflow of foreign exchange.

The field of development and regulation of minerals lies solely with the Centre under Entry 54 of the Union List of the Constitution, Mehta pointed out on Tuesday. Under the Mines and Mineral (Development and Regulation) Act, 1957, the Centre fixes a uniform rate of royalty to be charged on minerals in consultation with states, and every penny of it goes into the state coffers, he added. Since 2016-17, states have received a total of ₹1.6 lakh crore as royalty from major minerals, the Centre stated.

The states have justified their laws under Entry 50 dealing with tax on mineral rights and Entry 23 (regulation of mines and mineral development), both under the State List of the Constitution, which are subject to any law related to List 1 (Union List) or law made by Parliament.

“The Union only fixes the rate of royalty for uniformity which goes directly to the states and not a single rupee is retained by the Union… the fixation of rates is not a unilateral process. It is a cooperative process involving the states, while also considering the supervening objective of mineral development in public interest, keeping nation as the unit,” Mehta said.

The loading of a state levy on top of the royalty and auction premium payable to state under the MMDR Act may render mining financially unviable, the Centre said. “It is precisely this outcome that Parliament has legislated comprehensively under the 1957 Act to prevent,” it said.

“A law must impose limitation. Even if there is no specific limitation prescribed (under MMDR Act), it should be made out from the architecture of the law,” the bench headed by Chief Justice of India Dhananjaya Y Chandrachud said. “How do you read MMDR Act to impose limitation on state’s power to tax?”

Mehta took the court through the Constituent Assembly debates that discussed Entry 54, placing mineral development and regulation under Union List. “No statute provides for a negative provision prescribing that the state cannot tax under a certain head,” he said. “Within the limitation, a prohibition has to be read.”

“In the name of regulation, can the power of a sovereign to tax be taken away by another sovereign? The Act talks of limitation not a ban,” observed the bench, also comprising justices Hrishikesh Roy, AS Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma and Augustine George Masih

“Fixation of royalty is not agnostic to levy of tax. The limitation under the Act is only on the rate to be fixed,” it further remarked. “Just as you are fixing rate of royalty, is it not possible to fix a ceiling on the rate of tax to have uniformity?”

Mehta pointed to the danger of allowing states to tax on minerals will lead to a situation where they will be free to impose huge taxes on mines and minerals, forcing domestic industry to import cheaper minerals. “Somewhere we need to have a national perspective in these matters keeping in mind the global scenario,” he said. “The issue cannot be left to narrow provincial interests of states.”

“If a state is so foolish to impose such high taxes, they will lose out on revenue. No state will want to be in a position where it overprices products as that will lead to more imports,” the bench reasoned. “Ultimately, it will affect state revenues.”

This was the position prior to the judgment in the India Cements case (1989), whose validity is in question in the present proceedings, Mehta said. Before the top court held in this case that royalty is a tax under MMDR Act, states used to impose heavy taxes on minerals such as iron ore and coal, up to 200% to 300% of the royalty, he added.

“It is not just overpricing but even underpricing through state tax on minerals that is a possibility,” the central government argued, stating that by the time things settle down, the damage to minerals, which are precious resources of the country, will be done.

Read here: Mining companies oppose state tax on minerals in Supreme Court

“Natural resources, including minerals, are a shared inheritance where the State is a trustee on behalf of the people and therefore it is imperative and constitutionally mandated that allocation of mineral resources is done in a fair and transparent manner….It is crucial for the country and it is in public interest, the framers of Constitution reserved this right solely with Union,” Mehta said.

Senior advocate Abhishek Manu Singhvi, appearing for mining companies in support of the Centre, began arguments as the court posted the matter for further hearing on Wednesday.