By Mukesh Butani & Tarun Jain,
Last week, a nine-judge bench of the Supreme Court, in a 8:1 majority, reversed a decades-old legal position to uphold the substantive powers of states to levy mineral taxes. The court was of the opinion that the “effort of the constitutional court should be to ensure that state legislatures are not subordinated to the Union in the areas exclusively reserved for them” and the pivotal facet of “fiscal federalism is that both the Union government and the state governments ought to have adequate fiscal resources to discharge their constitutional responsibilities”. This undoubtedly gives a significant fillip to the states’ exchequer as such levies are in addition to the royalty charged by mineral-rich states under the respective mining leases. Additionally, states have been empowered to levy land tax on mining leaseholders. Conversely, the minority opinion has canvassed the need to prioritise national growth aspirations, which may be impeded as a result of indiscriminate taxation by a few mineral-rich states. Ostensibly, these opinions conflict inter se. However, both opinions can be reconciled; the majority opinion picturises the constitutional position as it exists, whereas the minority opinion adopts a normative outlook to seek an equilibrium where holistic national growth is not held hostage by narrow regional considerations.
The majority decision is a quintessential constitutional exposition — a legal essay if one may — on Centre-state relations; there can be no qualms about the legal reasoning and the interpretative standards invoked by the apex court. However, as the saying goes, a dissenting opinion is a call (for the future) for course correction. The minority decision does just that, seeking to add a third variable in the governance paradigm — the common citizen. Recognising that the impact of the majority decision will create regional imbalances (given that mineral-rich states are but few) and inhibit the growth aspirations of large sections of the nation’s populace who will suffer the burden of these states’ revenue collection drives. The minority opinion advocates subjecting the states’ mineral taxation rights to constitutional limitations.
The rationale of the majority decision appears to be founded on its premise that “any dilution in the taxing powers of the state legislatures will necessarily impact their ability to raise revenues, which in turn will impede their ability to deliver welfare schemes and services to the people”. There is no doubt that states too need fiscal flexibility. However, this Nelson’s eye approach, even if it is recognised as the foundational philosophy of the constitutional landscape, fails to appreciate the seven decades-long shift in governance standards which advocate a transformation in constitutional paradigm — cooperative federalism.
In today’s scenario, giving effect to a textual reading of the 50s constitutional provisions dilutes the decades of governance experiences which unequivocally establish that criss-cross fiscal policies pursued by the Centre and states bode well for neither, besides being a bottleneck for national growth and an impediment to business enterprises. Indeed, the majority opinion has only interpreted the constitutional provisions. The verdict, however, disconcerts and disorients the quest for a harmonised national market which led to the landmark 2016 constitutional amendment to usher in the goods and services tax (GST). It will not be out of context to envision that emboldened by the decision some states may assert taxing rights on natural resources, which, if conceded to, will fuel inflation and have a cascading effect. In the process, it could disturb the financial equilibrium arising from the successful implementation of the GST. A similar situation had arisen in 2016 when another nine-judge bench of the Supreme Court had upheld the states’ power to levy entry tax. Thankfully, by then, the GST design was in place and state levies and entry taxes were subsumed in the GST. However, the present situation is different, in the sense that on mineral taxes it would require significant cajoling (of the mineral-rich states) by the Centre and other states combined in the GST Council.
The vindication of this separate right of states to tax minerals may hopefully turn out to be a stepping stone to reforming the indirect tax regime. A review of the constitutional remit of the GST Council reveals that it is within its prerogative to subsume additional taxes within the scope of the GST, although a “consensus” approach will not be easy. Thus, buoyed by some degree of political and financial bargain, the members of the GST Council may display statesmanship to support subsuming of such levies within the GST. Such convergence of interests will be conducive not just for Centre-state relations but also protect consumers from the cascading effect (on account of an additional levy) and businesses from the consequences of such levies.
The fact that this levy affects national priorities finds an acute resonance in the minority opinion; it clearly reveals that the ramifications of the states’ assertion of an independent taxing right are not a figment of imagination and, instead, perceived even by trained judicial minds who are otherwise impervious to the economic consequences of their decisions. One would hope that the overriding priorities of national growth and citizens’ aspirations are weighed in by the stakeholders to maintain economic tranquillity, notwithstanding the judicial elocution on the mineral taxation rights of states.
Author Mukesh Butani is managing partner, BMR Legal, and Tarun Jain is an advocate.
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