SC ruling brings cheer to states while mining companies count losses

Setback for miners as they will have to pay levy from 2005

The Supreme Court on Wednesday empowered states to levy taxes on mining and related activities retrospectively from April 1, 2005, prompting miners to speak about a financial burden, impediments to investments, and an inflation spike in end products.

On July 25, the Court had upheld state government’s rights to levy cess on mining lands and quarries while ruling that the royalty paid by mining operators to the Central government was not a tax. On Wednesday, a nine-judge Constitution Bench headed by Chief Justice of India D Y Chandrachud decided that the judgement will apply retrospectively, although the Central government had pleaded for a prospective implementation.

The Nifty Metal index ended 1.2 per cent down on Wednesday as the benchmark Nifty was flat. Among its components, NMDC and Hindustan Copper fell the most, by 6 per cent and 4.6 per cent, respectively.

In some relief to the industry, the Court said the payment of taxes would be staggered in instalments over a period of 12 years starting April 1, 2026.

However, the industry has started counting its losses. “This is bound to have a crippling impact not only on the mining industry but on the entire value chain and will lead to unprecedented inflationary rise in all the end products,” said B K Bhatia, additional secretary general, Federation of Indian Mineral Industries.

The states, on the other hand, are cheering the judgement, as it promises a boost to their revenues. “The verdict is a positive step, ensuring that states receive their rightful share, which belongs to the local population. While retroactive actions are often contentious, mining companies have historically underpaid what is due. This decision will ensure they contribute their fair share,” said an official from the mining department of a major central Indian state, speaking on the condition of anonymity.

The secretary to the Union ministry of mines did not respond immediately on the matter. Senior officials in the nodal ministry however indicated that more clarity was required, especially to the extent to which states could tax mineral companies.

“The ruling will have financial implications not only for the mining sector but also for steel, metals, and other manufacturing sectors. This move could hinder investment in these sectors,” said an official from the ministry of mines requesting anonymity.

The July 25 judgement had provided clarity on the blurred division of power between the states and the Centre over taxing minerals by citing tenets of fiscal federalism. “Taxation is among the important sources of revenue for these states, impacting on their ability to deliver welfare schemes and services to the people. Fiscal federalism entails that the power of the states to levy taxes within the legislative domain carved out to them and subject to the limitations laid down by the Constitution must be secured from unconstitutional interference by Parliament," Chandrachud had said in the majority judgment.

Experts are divided on the matter of balancing welfare measures by state governments and the financial implications for the mining industry.

“The specifics of these taxes, once clarified, will undoubtedly lead to increased mining costs and, consequently, higher metal costs — potentially triggering broader inflationary trends,” said Rakesh Surana, Partner, Deloitte India.

Despite some mitigations, such as the staggering of payments, he said the judgment arrived at a challenging time.

“Globally, the steel industry is struggling, with a sluggish recovery in the Chinese economy leading to significant imports into India and putting downward pressure on the market. This external pressure, coupled with the new financial burdens imposed by this judgment, does not bode well for the sector in the short term,” he added.

With the top Court restricting the recovery of past tax dues to the period after April 1, 2005, S R Patnaik, Partner (Head-Taxation), Cyril Amarchand Mangaldas, said the judgement at least ensured that the liabilities did not become unmanageable and mining companies could assess and try to manage their liabilities.

“This cut-off date offers partial relief, as it limits the retrospective tax exposure, but still imposes significant financial obligations,” Patnaik said.