Mint Explainer: The importance of the sole dissenter in the retroactive resolution of the mining tax

The dissenting judgement by Justice BV Nagarathna in the case, in which an 8-1 majority of the Constitutional benches ruled in favour of the states, may prompt the legislature to rethink the current framework. It could lead to legislative and policy changes in the future, particularly with regard to the division of royalty revenues between the central and state governments.

Mint analyses the significance of the judgment and the implications of Nagarathna’s dissenting opinion.

The ruling majority

On July 25, the Supreme Court, headed by Chief Justice DY Chandrachud, ruled that states have the power to tax mining lands and quarries independently of the Mines and Minerals (Development and Regulation) Act, 1957, and determined that royalties are not taxes. On August 14, the court decided that this ruling would be applied retrospectively, allowing states to tax mining companies from 2005.

This retrospective application has caused significant stress for companies in the mining and cement sectors, potentially leading to tax demands totalling up to ₹2 billion, imposing a substantial financial burden on mining operators.

The 8:1 majority decision was based on three key points:

• Royalties arise from mining lease agreements and not from legal requirements
• Payments are made to landlords (whether state governments or private parties) rather than to public authorities.
• Royalties compensate for access to mineral reserves rather than serving public purposes.

Dissent by Justice Nagarathna

While the majority view holds that royalties are distinct from taxes and arise from contracts between mining lessees and lessors, Nagarathna argued that royalties should be considered a form of tax. He bases his argument on the Mines and Minerals (Regulation and Development) Act, 1957, stating that this Act provides a comprehensive framework for mineral development.

He cited the 1989 India Cements case, suggesting that if royalties are not treated as taxes, states could impose additional taxes or surcharges on top of royalties, distorting mineral development and creating unhealthy competition between states.

Nagarathna also supported his dissenting view by referring to the Sarkaria Commission report, which advocated a unified approach to mineral resource development. He said that only central legislation can prevent states from imposing excessive additional charges, ensuring a balanced and coherent strategy for managing mineral resources across the country.

The collapse of the federal system

A critical aspect of Nagarathna’s dissent is his concern that if royalties are not treated as taxes, states could impose additional levies on mining concessionaires on top of royalty payments. He warned that this could lead to unhealthy competition among states and disrupt federalism.

“This would further imply that despite such a parliamentary limitation, states could pass laws imposing taxes, levies, surcharges on levies, etc., on the basis of royalties which are added to the payment of royalties,” he said. Nagarathna further explained that such a scenario could lead to “uneven and haphazard mining development in the country” and make states engage in a “race to the bottom” in a nationally sensitive market.

Rising mineral prices could lead to higher costs for industrial products that rely on these materials, potentially causing economic disruption, he added. Nagarathna foresaw a “collapse of the federal system,” noting that such conditions could lead non-extractive states to import minerals, affecting foreign exchange reserves and leading to a decline in mining activity in mineral-rich states.

Will Justice Nagarathna’s dissent affect future legislation?

Experts suggest that if Nagarathna’s idea (treating mining royalties as taxes) gains acceptance, it could significantly alter the way royalty revenues are divided between the central and state governments. This could lead to new or revised laws to clearly define the distribution of revenues.

“The judgment may warrant a rethink by the legislature to clarify the situation once and for all and may therefore lead to introduction of new laws or amendments to existing laws to determine the distribution of royalty revenues between the central government and state governments. Such changes are very likely to be in the offing,” said SR Patnaik, Partner (Head of Tax) at Cyril Amarchand Mangaldas.

Gopal Mundhra, partner at the Economic Law Practice, noted that dissenting judgments can influence lawmakers to consider changes to existing legislation or create new laws:

“All these observations may lay the groundwork for future legal arguments. If the majority judgment is revised in the future, the dissenting judgment will undoubtedly serve as a basis for reinterpreting the law, which could lead to the reversal or modification of the original judgment,” Mundhra said.

“Dissenting opinions may influence legislators to consider amending existing legislation or even creating new legislation. In particular, since the mining sector is negatively affected by the majority decision, the dissent could prompt industry leaders to urge legislators to propose legislative reforms that conform to the reasoning of the dissenting opinion.”

Can mining companies take advantage of this ruling?

Mining companies could use Justice Nagarathna’s dissenting opinion to push for reforms in tax and regulatory policies. However, experts point out that the dissenting judgment cannot be used as a precedent until there is a change in the law or a new Supreme Court judgment.

“Mining companies may try to use Justice Nagarathna’s dissenting opinion as a tool in their future legal battles. However, the chances of success are slim in any court of law as the decision is handed down by a 9-judge Constitutional bench. However, this dissenting opinion could serve as a basis for pushing for reforms in tax and regulatory policies for the mining sector,” Patnaik said.

Ketan Mukhija, senior partner at Burgeon Law, stressed that while the dissenting judgment provides sound reasoning, it cannot become precedent without legal changes:

“Mining companies can rely on this dissenting judgment, as the reasoning and logic contained therein is sound, persuasive and compelling. However, the dissenting judgment cannot be used as a precedent and the majority decision will continue to prevail, unless there is a change in the law or until the Supreme Court issues a contrary judgment.”

This is not the first time that Justice Nagarathna has dissented

In 2023, Justice Nagarathna had opposed the 4-1 majority judgment on the validity of the Union’s 2016 demonetisation scheme. In her dissenting opinion, Justice Nagarathna held that the demonetisation exercise was illegal on purely legal grounds, despite acknowledging the “noble objectives” of the scheme.

Why dissenting judgments are important

Dissenting judgments are considered crucial to uphold judicial independence and democratic integrity. Under Article 145(5) of the Indian Constitution, while the majority opinion is binding, judges can issue dissenting opinions if they find the majority decision erroneous.

According to the 2011 paper “Interpreting the Constitution: Constitutional Benches of the Supreme Court of India since Independence,” which analyzed constitutional court decisions from independence to the end of 2009, there has been a probability of about 5.2% of a judge dissenting in any given vote of a court.

Recent dissenting judgments include Justice DY Chandrachud’s in the Aadhaar case, criticising the law’s classification as a “money bill” and its impact on the right to privacy. Chandrachud was not the Chief Justice at the time of this judgment. Another example was Justice Indu Malhotra’s dissenting note in the Navtej Singh Johar case, which decriminalised homosexuality.