The Supreme Court on Wednesday reserved its order on the contentious issue of whether the enforcement of its July 25 judgment, which holds that states have the right to tax lands bearing mines and mineral resources, should be retrospective or prospective. The central government advocated for making the judgment effective prospectively across the country, with states neither insisting on recovering outstanding dues from companies nor refunding royalty already collected.

A nine-judge bench headed by Chief Justice D.Y. Chandrachud reserved the order as Solicitor General Tushar Mehta, appearing for the central government, told the bench that the amount recoverable by states from both public sector undertakings and private sector companies would run into 70 to 80 thousand crores of rupees. He noted that in many cases, this amount would be multiple times more than the net worth of a company and would adversely impact existing domestic and international contracts.

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Solicitor General Mehta told the bench, also comprising Justice Hrishikesh Roy, Justice Abhay S Oka, Justice B.V. Nagarathna, Justice J B Pardiwala, Justice Manoj Misra, Justice Ujjal Bhuyan, Justice Satish Chandra Sharma, and Justice Augustine George Masih, that any retrospective levy of the tax by the state would have a cascading effect as the entire burden would eventually pass on to the common man.

Solicitor General Mehta cited the instance of a Maharashtra-based PSU, which is also listed on the stock market, stating that if the tax were made retrospective, the burden on the company would be four times its present net worth.

Also speaking for the BJP-ruled Rajasthan and Madhya Pradesh, Solicitor General Mehta said that both the states have taken a “citizen-centric” position by favouring the prospective implementation of the July 25 judgment by the nine-judge bench.

Besides Solicitor General Tushar Mehta, those who favoured making the July 25 judgment effective prospectively included senior advocates Abhishek Manu Singhvi, Arvind Datar, Harish Salve, Mukul Rohatgi, and Vijay Hansari, among others.

However, senior advocate Rakesh Dwivedi, appearing for Jharkhand, argued that a balance must be struck, considering the principles of fiscal federalism, and the recoveries by the states should be staggered over the years to avoid imposing the entire burden in one go. Senior advocate Dwivedi said that the huge outstandings that the Solicitor General was referring to also included the component of interest and the same could be looked into for moderation.

Senior advocate Rakesh Dwivedi told the court that companies that have benefitted from mines and mineral resources of the states could not be allowed to “pocket the money”. He argued that it cannot be the case that the July 25 judgment, which restored the states’ right to tax their resources, is upheld, while an earlier judgment that has now been overruled prevails when it comes to recoveries.

Dwivedi said that another way could be to reduce the period of recoveries from 1999 and brought to 2004, thereby abridging the time span to 20 years.

In a significant judgment, a nine-judge bench of the Supreme Court by a majority of 8:1 had ruled that the states have competence and power to levy tax on their mineral-bearing lands.

The majority judgment said that the payments made to the government by way of royalty cannot be deemed to be a tax merely because a statute provides for its recovery in arrears.

“Royalty is not in the nature of tax. We conclude that the observation in India Cements’ judgment stating that royalty is tax is incorrect. Payments made to the government cannot be deemed to be a tax merely because a statute provides for its recovery in arrears… ruled that royalty on extracted minerals is not a tax,” the majority judgment had said.

“The legislative power to tax mineral rights lies with the state legislature and the Parliament does not have the legislative competence to tax mineral rights,” the top court had said in the majority ruling.

The top court also made it clear that the Parliament could not use its residuary power regarding this subject matter. So, the State legislature has the legislative competence under Article 246 read with Entry 49 of List 2 to tax mineral-bearing lands.

However, Justice Nagarathna in her dissenting judgment said, “I hold that royalty is in the nature of the tax. States have no legislative competence to impose any tax or fee on mineral rights. Entry 49 is not related to mineral-bearing lands. I hold India cement decision was correctly decided.”