Why taxing mining companies retrospectively is a retrogressive step

States would do well to exercise the discretion that the Supreme Court has given them to leaven the impact of a judgment that benefits them immensely

With its judgment upholding the states’ powers to tax mineral rights but with retrospective effect from April 1, 2005, the Supreme Court has simultaneously strengthened the principles of fiscal federalism but imposed heavy financial liabilities on mining companies. The July 25 ruling, by a nine-judge Bench headed by the chief justice of India, would have ended a 35-year-old saga involving over 80 petitions, were it not for a ruling on August 14 turning down the Centre’s and mining companies’ submission for prospective application to prevent financial chaos. According to the industry, private and public-sector miners could take a hit of Rs 1-2 trillion as a result of the retrospective application. The Centre told the court that the financial imposition on public-sector miners alone would be of the order of Rs 70,000 crore. The court-mandated cutoff date has come with conditions, such as no interest or penalties and that the payment be staggered over 12 years, which offers partial relief.

The Supreme Court’s explanation for a retrospective date is that it would be “iniquitous” to apply the judgment prospectively. Its reasoning is a reflection of the consequences of the glacial pace and inefficiency of the justice system, even at the highest levels. In 1989, a seven-Bench court had ruled in India Cements vs State of Tamil Nadu and Others that royalty on mineral extraction was not a tax; only the Centre could impose taxes whereas the state could impose only royalty. In 2004, a five-judge Bench reversed the ruling, pointing to a typographical error. It said while royalty was not tax, cess on royalty (which is what the Tamil Nadu government had imposed and India Cements was opposing) was a tax and states were within their rights to impose additional levies. As a result, several states exercised their rights to impose taxes on their mineral-bearing lands, even as legal challenges abounded. Finally the apex court set up a Bench to examine all these challenges. It argued that a prospective application of its ruling would result in a situation in which laws enacted by states for mineral levies would be invalidated and would force them to refund the amounts they collected as tax through enabling legislation.

Beyond the specifics of the financial burden, the principle of retrospective taxation has had a contentious history in India and stifled foreign direct investment in the past. Retrospective tax on capital gains imposed by the Finance Act of 2012, following Vodafone’s acquisition of Essar Telecom from Hutchison in 2007, was struck down by the Permanent Court of Arbitration in 2022. Indeed, the damaging fallout of the 2012 law caused the government to scrap it in 2021. The Supreme Court’s ruling will undoubtedly transform the finances of mineral-bearing states. On August 2, the Jharkhand Assembly became the first state to pass a Bill to impose a cess on minerals within its borders — coal, iron ore, bauxite, and manganese. Odisha, Rajasthan, and Chhattisgarh are other states that stand to benefit. But given the cascading inflationary impact of this aspect of the ruling — the impost on coal alone could jack up electricity prices — the states would do well to exercise the discretion that the apex court has given them to leaven the impact of a judgment that benefits them immensely.