ROYALTY AND TAX
1. Context
In an 8-1 majority ruling 25/07/2024, a nine-judge Constitution Bench of the Supreme Court upheld the power of states to levy royalty on extraction of minerals from their land and said they can also tax the lands which comprise mines and quarries.
2.What are the different lists under the constitution?
The Constitution of India includes three lists that distribute powers between the Central (Union) government and the State governments. These lists are part of the Seventh Schedule of the Constitution and are known as the Union List, State List, and Concurrent List. Here's an overview of each:
- Union List:
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- Contains subjects on which the Central government can make laws
- Has 98 items (originally 97, one item added later)
- Includes matters of national importance like defense, foreign affairs, currency, railways, etc.
- State List:
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- Contains subjects on which State governments can legislate
- Has 59 items (originally 66, some items moved to other lists)
- Includes matters of state and local importance like public order, police, public health, agriculture, etc.
- Concurrent List:
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- Contains subjects on which both Central and State governments can make laws
- Has 52 items (originally 47, some items added later)
- Includes matters like education, forests, marriage, adoption, etc.
In addition to these three main lists, there are two other important lists mentioned in the Constitution:
- List I of the Ninth Schedule:
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- Contains acts and regulations related to land reforms and abolition of the zamindari system
- Laws in this list are protected from judicial review
- Eighth Schedule:
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- Lists the officially recognized languages of India
- Originally had 14 languages, now includes 22 languages
3.What are the constitutional provisions related to the sharing of revenue between the center and the state?
The Constitution of India provides for a system of fiscal federalism, which includes mechanisms for sharing revenue between the central (Union) government and the state governments. Here are the key constitutional provisions related to revenue sharing:
- Article 268: Duties levied by the Union but collected and appropriated by the States.
- Article 269: Taxes levied and collected by the Union but assigned to the States.
- Article 270: Taxes levied and collected by the Union and distributed between the Union and the States.
- Article 271: Surcharge on certain duties and taxes for purposes of the Union.
- Article 272: (Repealed) Used to deal with Union duties of excise.
- Article 273: Grants in lieu of export duty on jute and jute products.
- Article 275: Grants from the Union to certain States.
- Article 280: Finance Commission
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- Establishes the Finance Commission, which is appointed every five years
- The Commission recommends the distribution of net proceeds of taxes between the Union and States, and among the States themselves
- Article 281: Recommendations of the Finance Commission
- Article 282: Expenditure defrayable by the Union or a State out of its revenues
- Seventh Schedule:
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- Union List (List I): Specifies taxes that can be levied by the central government
- State List (List II): Specifies taxes that can be levied by state governments
- Concurrent List (List III): Areas where both can legislate, but central laws prevail in case of conflict
4.What is the Seventh Schedule of the Constitution?
The Seventh Schedule of the Constitution of India is a crucial component that defines the distribution of powers between the Union (Central) government and the State governments. It contains three lists that enumerate the subjects on which different levels of government can legislate and administer
| List | Number of Items | Description | Example |
| Union List (List I) | 98 (originally 97) | Subjects on which only the Central government can make laws | Defense, Foreign affairs, Railways, Currency, National highways |
| State List (List II) | 59 (originally 66) | Subjects on which State governments have exclusive power to legislate | Public order, police, public health, agriculture |
| Concurrent List (List III) | 52 (originally 47) | Subjects on which both Central and State governments can make laws | Education, forests, marriage, adoption |
5. What is the difference between royalty and tax?
Royalties are payments made to the owner of a product for the permission to utilize that product. For instance, if a film studio intends to feature a particular piece of music by an artist in their new movie, they must pay a royalty fee directly to the artist. Most experts agree that royalties differ from taxes due to their “conceptual distinction.” Unlike taxes, which are imposed by government entities, royalties arise from specific agreements or contracts between the leaseholder of a mine and the lessor, who may be a private individual
Differences:
- Royalties and taxes represent different types of financial obligations with distinct characteristics. A royalty is a payment made to the owner of a right or property in exchange for permission to use that right or property, typically based on a specific agreement or contract.
- Royalties often involve payments to individuals or entities for using intellectual property, natural resources, or other assets and are usually calculated as a percentage of revenue or as a fixed amount per use or period. They are negotiated between private parties and governed by contracts.
- In contrast, a tax is a mandatory financial charge imposed by the government on individuals, businesses, or property to fund public expenditures and services. Taxes are not negotiable and are based on criteria set by tax laws or regulations, such as income, property value, or sales.
- They are compulsory payments collected by government authorities at various levels (local, state, or federal) to support functions like infrastructure, education, healthcare, and defense.
- The key differences between royalties and taxes lie in their nature and purpose. Royalties are voluntary and contractual payments for using specific assets, whereas taxes are compulsory and mandated by law for public revenue.
- Royalties are often based on usage or revenue from the asset, while taxes are calculated based on income, property value, or consumption.
- Furthermore, royalties are agreed upon by private parties and governed by contracts, while taxes are imposed by government authorities and governed by legislation. Essentially, royalties provide income to asset owners or creators, while taxes fund government operations and public services
6. Supreme Court Verdict
- Royalties are payments made to the owner of a product for the right to utilize that product. For instance, if a film studio wants to feature a particular piece of music by an artist in their film, they must pay a royalty fee to the artist.
- The court majority determined that royalties are not considered taxes due to a "conceptual difference" between the two. Royalties are based on specific agreements or contracts between the leaseholder of a mine and the lessor, who may even be a private individual.
- Additionally, the court ruled that Parliament's authority under Entry 54 of the Union List does not include the power to impose taxes, which is a prerogative of state legislatures. However, Entry 50 permits Parliament to impose "any limitations" on state taxation powers, which could potentially include a prohibition on certain taxes.
- The court did not confine states' taxation authority over mineral development to Entry 50 alone. It affirmed that states also have the authority to tax the land where mines and quarries are situated.
- According to the majority decision, a royalty under Section 9 of the 1957 Act is "not akin to a tax."
- It was noted that Parliament can restrict states from taxing mineral rights through Entry 50 of List II (State List), though the 1957 Act lacks a specific provision that limits state powers to tax mineral rights.
- Entry 50 of List II deals with "taxes on mineral rights, subject to any limitations imposed by Parliament through laws related to mineral development."
- Regarding taxes on land with quarries or mines, the majority opinion stated that states can levy such taxes under Entry 49 of List II, which addresses "taxes on lands and buildings."
7.Way Forward
While both royalties and taxes involve financial payments, they serve fundamentally different purposes and operate under distinct frameworks. Royalties are contractual payments made for the use of intellectual property or natural resources, reflecting negotiated agreements between private entities and typically calculated based on usage or revenue. Taxes, on the other hand, are compulsory contributions imposed by the government to support public services and infrastructure, based on legal mandates and calculated through specific criteria such as income or property value. Understanding these differences highlights the distinct roles each plays in economic and financial systems, with royalties supporting private sector interests and innovation, and taxes ensuring the funding of essential public services and governance
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For Prelims: Current events of national and international importance
For Mains: GS-II, III: Government policies and interventions, Economy
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Previous Year Questions
1.With reference to the management of minor minerals in India, consider the following statements: (UPSC CSE 2019) 1. Sand is a ‘minor mineral’ according to the prevailing law in the country 2. State Governments have the power to grant mining leases of minor minerals, but the powers regarding the formation of rules related to the grant of minor minerals lie with the Central Government. 3. State Governments have the power to frame rules to prevent illegal mining of minor minerals. Which of the statements given above is/are correct? (a) 1 and 3 only (b) 2 and 3 only (c) 3 only (d) 1, 2 and 3 Answer (a) |
Source: Indianexpress
