Subject: Federal System

Why in the News

Parliament passed the Mines and Minerals (Development and Regulation) Amendment Bill, 2026 last week, barring States from imposing specified levies on mineral rights and on mineral bearing land. The bar removes the very taxing power the Supreme Court had affirmed for States on 25 July 2024. Mineral bearing States say the change strips out a revenue stream they control fully, while the Centre says uncapped State levies raise the cost of minerals for the whole economy.

What is the Mines and Minerals (Development and Regulation) Amendment Bill, 2026?

1. About: It amends the Mines and Minerals (Development and Regulation) Act, 1957, the parent law governing grant of mineral concessions and regulation of mines.
2. Core bar: It restricts States from imposing specified levies on mineral rights and on mineral bearing land.
3. Extinguishment of past dues: It wipes out unpaid or unrecovered dues arising from such levies imposed before the amendment comes into force.
4. Scale of the dues: Estimates place outstanding dues of this kind across the mining sector at about Rs 2 lakh crore.
5. Ceiling design: Mines Ministry officials state that about 14 levies in the mineral sector will survive, subject to a combined percentage ceiling.
6. Stated purpose: The Centre frames the measure as fiscal certainty for mining companies over their total statutory burden.

What is royalty on minerals?

1. About: Royalty is the payment a lease holder makes to the State government for every unit of mineral extracted under a mining lease.
2. Who fixes it: Rates are specified in the Schedules to the Mines and Minerals (Development and Regulation) Act, 1957 and revised by the Union government, not by the State that receives the money.

What is the District Mineral Foundation?

1. About: A non profit trust set up in every mining affected district, funded by a statutory contribution from lease holders, created by the 2015 amendment.
2. Use of funds: Money is spent on people and areas affected by mining under the Pradhan Mantri Khanij Kshetra Kalyan Yojana.

What is the National Mineral Exploration Trust?

1. About: A trust created by the 2015 amendment and funded by a contribution equal to 2 per cent of royalty paid by lease holders.
2. Use of funds: It finances regional and detailed mineral exploration through accredited agencies.

What is the current status of State powers to tax mineral rights in India?

1. Judicial position: A nine judge Constitution Bench held on 25 July 2024 that States hold legislative competence to tax mineral rights and mineral bearing land.
2. Precedent overruled: That ruling overruled India Cement Ltd v State of Tamil Nadu (1989), which had treated royalty as a tax and placed the subject beyond State competence.
3. Statutory position now: The 2026 amendment bars the specified levies, so a power the Court restored stands narrowed by ordinary legislation.
4. Levies that survive: About 14 levies continue, including environmental and pollution cesses, subject to a combined ceiling still to be fixed.
5. Centrally fixed payments: Royalty, District Mineral Foundation contributions and National Mineral Exploration Trust contributions remain set under central law.
6. Effect on accrued claims: Levies imposed before commencement lose their recoverability, so demands already raised become unenforceable.

Constitutional Provisions Related to taxation of mineral rights

1. Article 246: Distributes legislative power between Parliament and State legislatures through the three lists of the Seventh Schedule.
2. Entry 54, Union List: Regulation of mines and mineral development to the extent Parliament declares expedient in the public interest.
3. Entry 23, State List: Regulation of mines and mineral development, expressly subject to Entry 54 of the Union List.
4. Entry 49, State List: Taxes on lands and buildings, the entry States have relied on for a mineral bearing land cess.
5. Entry 50, State List: Taxes on mineral rights, subject to any limitations imposed by Parliament by law relating to mineral development.
6. Article 265: Bars the levy or collection of any tax except by authority of law.
7. Article 300A: Bars deprivation of property save by authority of law, the provision invoked when accrued statutory dues are extinguished.
8. Article 39(b): Directs the State to ensure that ownership and control of material resources are distributed to subserve the common good.

Why does the 25 July 2024 ruling sit at the centre of the dispute?

1. What was decided: The Court upheld the power of States to tax mineral rights and mineral bearing land as a distinct field from royalty.
2. What was overruled: The 1989 India Cement position, that royalty is itself a tax, had blocked States from taxing the same subject for 35 years.
3. What States did next: Several mineral bearing States began framing fresh cesses on mineral bearing land after the judgment.
4. What the Centre saw: Mines Ministry officials describe the resulting levies as excessive cesses stacked on top of existing statutory payments.
5. How Parliament responded: The amendment uses the limitation power built into Entry 50 to restrict what the Court had permitted.

Why do mineral bearing States say the Bill damages their finances?

1. Dependence on mining: Mining revenue accounted for about 84.9 per cent of Jharkhand’s own non tax revenue in the 2024 to 2025 financial year.
2. Forgone cess: The Mineral Bearing Land Cess was expected to yield about Rs 11,000 crore a year for Jharkhand alone.
3. Dues written off: Outstanding dues across the mining sector estimated at about Rs 2 lakh crore cease to be recoverable.
4. Fiscal capacity argument: The Jharkhand Chief Minister wrote to the Prime Minister that mineral revenues are a critical component of the State’s fiscal capacity and not marginal receipts.
5. Federal objection: The Kerala Chief Minister has raised concerns over the implications of the amendment for India’s federal structure.
6. Political response: Jharkhand has threatened protests against the amendments.

What is the Centre’s case for restricting State levies?

1. Cost of key minerals: Unchecked State levies raise mineral prices and feed into inflation and infrastructure costs.
2. Predictability for industry: A single combined ceiling gives mining companies certainty over their total fiscal burden across States.
3. Cumulative burden: Companies already pay royalty, District Mineral Foundation and National Mineral Exploration Trust contributions and environmental and pollution cesses.
4. The largest single addition: Industry assessment identifies the mineral bearing land tax as the biggest additional burden of the recent levies.
5. A ceiling, not abolition: About 14 levies survive, with the combined percentage to be fixed after consulting all States.
6. Limited realised loss: Industry view holds that most of these levies were legally contested for decades, so little was actually collected.

Does fiscal certainty for industry justify overriding a power the Court has just affirmed?

1. Two legitimate claims: Investment certainty in a capital heavy sector sits against the fiscal autonomy of the States that hold the minerals.
2. A judicial gain reversed: States won the power in 2024 and lost its practical use in 2026 without any change in the constitutional text.
3. The retrospective element: Extinguishing accrued dues removes revenue already claimed, which goes further than limiting future levies.
4. Sequence of consultation: The ceiling is to be fixed after the bar is enacted, so States negotiate the number after losing their leverage.
5. Who gains and who pays: The saving accrues to mining companies and mineral consuming States, the loss falls on a small group of mineral bearing States.
6. Cost borne locally: Land loss, displacement and pollution stay with the producing State even after its claim on the rent is narrowed.

Major debates surrounding taxation of mineral rights

1. Royalty as tax or as consideration: India Cement treated royalty as a tax, the 2024 ruling treated it as contractual consideration, and that classification decides State competence.
2. Reach of the Entry 50 limitation: How far Parliament may hollow out a State taxing entry through a limitation clause remains legally contested.
3. Recovery of past dues: The 2024 ruling allowed staggered recovery of past demands, the amendment extinguishes them outright.
4. Producer against consumer States: Mineral bearing States argue they carry the ecological and social cost while value addition and tax revenue accrue elsewhere.
5. Cooperative against unilateral federalism: The Centre frames the change as integration of a national market, States frame it as unilateral action on their own revenue base.
6. Deepening vertical fiscal imbalance: Non tax mineral revenue is one of the few sources States control fully, so its removal raises dependence on central transfers.

Challenges to the Mines and Minerals Amendment Bill

1. Litigation risk: States can challenge the bar and the extinguishment of accrued dues as a colourable exercise of legislative power. e.g. Jharkhand and Kerala both registered formal objections within days of the Bill’s passage in August 2026.
2. Concentrated revenue shock: A small set of States carries almost the entire loss. e.g. Odisha and Jharkhand together account for the bulk of India’s iron ore and coal output.
3. Undecided ceiling: The combined percentage is unfixed at the point of enactment, leaving States unable to plan budgets. e.g. the Mines Ministry states only that the figure will follow consultation with all States.
4. Weak district level spending: Money already collected for mining affected areas is poorly used. e.g. audits have repeatedly flagged large unspent District Mineral Foundation balances in mining districts.
5. Unpriced ecological damage: Removing land based levies weakens the price signal for land degradation. e.g. the Shah Commission findings preceded the suspension of iron ore mining in Goa in 2012.
6. Certainty alone does not unlock supply: Fiscal predictability does not resolve clearance and land bottlenecks. e.g. several auctioned coal blocks remain unoperationalised for want of forest clearance.
7. Weak consultation machinery: Resource disputes between the Union and States lack a standing forum for settlement. e.g. the Inter State Council has met only rarely since its creation in 1990.

Conclusion

The dispute is about who captures the rent from a fixed natural resource, not about the rate of any single cess. Parliament has passed the Mines and Minerals (Development and Regulation) Amendment Bill, 2026, and the measure now moves to Presidential assent and commencement. The next concrete step named by the Mines Ministry is fixing the combined percentage ceiling on the roughly 14 surviving levies after consulting all States. Until that ceiling is notified, mineral bearing States carry a quantified loss against an unquantified entitlement.

What is Fiscal Federalism?

1. About: Fiscal federalism is the division of taxing powers, spending responsibilities and intergovernmental transfers between levels of government in a federation.
2. Rationale: Revenue raising capacity concentrates at the Centre while service delivery obligations sit with States, so the system needs a transfer mechanism to close the gap.
3. Vertical imbalance: The Union collects far more revenue than it spends directly, and States spend far more than they collect.
4. Horizontal imbalance: States differ in fiscal capacity and in need, corrected through the Finance Commission’s devolution formula.
5. Third tier imbalance: Panchayats and municipalities depend on State transfers and raise very little of their own revenue.

Key Concerns Regarding Fiscal Federalism

1. Shrinking divisible pool: Cesses and surcharges are not shareable with States, so headline devolution overstates what States actually receive.
2. Erosion of State tax autonomy: The Goods and Services Tax subsumed most State indirect taxes into a Council driven rate structure.
3. Conditionality in transfers: Centrally sponsored schemes carry matching share and design conditions that crowd out State priorities.
4. Asymmetric borrowing limits: Article 293 lets the Union set conditions on State borrowing with no equivalent constitutional check on Union borrowing.
5. Weak third tier finances: State Finance Commissions are constituted irregularly and their recommendations are frequently not acted upon.
6. Narrowing of own revenue: Removing State levies on natural resources further reduces the small set of taxes States control fully.

Constitutional Framework Governing Fiscal Federalism

1. Article 246 and the Seventh Schedule: Allocate legislative and taxing subjects across the Union, State and Concurrent Lists.
2. Article 246A: Gives Parliament and State legislatures concurrent power to levy the Goods and Services Tax.
3. Article 265: Bars any tax except by authority of law.
4. Article 268: Provides for duties levied by the Union but collected and appropriated by the States.
5. Article 269: Provides for taxes levied and collected by the Union but assigned to the States.
6. Article 270: Governs distribution of net proceeds of Union taxes, excluding cesses and surcharges from the divisible pool.
7. Article 271: Allows the Union to levy a surcharge on taxes for its own purposes.
8. Article 275: Provides statutory grants in aid from the Union to States in need of assistance.
9. Article 279A: Constitutes the Goods and Services Tax Council.
10. Article 280: Constitutes the Finance Commission every fifth year to recommend devolution and grants.
11. Article 282: Permits discretionary grants by the Union or a State for any public purpose.
12. Article 293: Regulates State borrowing and requires Union consent where the State is indebted to the Union.

Laws and Rules Governing Mining in India

1. Mines and Minerals (Development and Regulation) Act, 1957: The parent law for grant of mineral concessions and regulation of mines and mineral development.
2. Landmark change under the 2015 Amendment: Made auction the compulsory route for granting concessions and created the District Mineral Foundation and the National Mineral Exploration Trust.
3. Amendment of 2021: Removed the distinction between captive and merchant mines and allowed sale of a share of captive production.
4. Amendment of 2023: Created the exploration licence and empowered the Centre to auction critical and strategic minerals listed in Part D of the First Schedule.
5. Mines Act, 1952: Governs safety, health and working conditions of persons employed in mines.
6. Coal Mines (Special Provisions) Act, 2015: Provides for reallocation of coal blocks cancelled by the Supreme Court in 2014.
7. Offshore Areas Mineral (Development and Regulation) Act, 2002: Governs mineral concessions in territorial waters and the exclusive economic zone.
8. Mineral Concession Rules, 2016: Prescribe the procedure for grant, renewal and transfer of concessions outside the auction route.
9. Mineral (Auction) Rules, 2015: Prescribe the electronic auction process for mining leases and composite licences.
10. Mineral Conservation and Development Rules, 2017: Prescribe scientific mining, progressive mine closure and conservation obligations.
11. Atomic Minerals Concession Rules, 2016: Govern concessions for the atomic minerals listed in Part B of the First Schedule.

Back2Basics: Mines and Minerals (Development and Regulation) Act, 1957

1. Enactment and ministry: Enacted in 1957 and administered by the Ministry of Mines.
2. Constitutional hook: Made under Entry 54 of the Union List, declaring Union control over regulation of mines expedient in the public interest.
3. Classification of minerals: Divides minerals into major minerals regulated by the Centre and minor minerals regulated by State governments.
4. Concession types: Provides for the reconnaissance permit, prospecting licence, exploration licence and mining lease.
5. Royalty and dead rent: Rates are set out in the Second and Third Schedules and revised by the Union government.
6. Lease tenure: A mining lease granted through auction runs for 50 years, after which the area is re auctioned.
7. Institutions created: The District Mineral Foundation and the National Mineral Exploration Trust, both introduced by the 2015 amendment.

Government Initiatives

1. National Mineral Policy, 2019: Sets the policy frame for exploration, sustainable mining and a transparent concession regime.
2. National Critical Mineral Mission, 2025: Covers domestic exploration, overseas asset acquisition, recycling and stockpiling of critical minerals.
3. Pradhan Mantri Khanij Kshetra Kalyan Yojana: Channels District Mineral Foundation funds into drinking water, health, education and livelihoods in mining affected areas.
4. Khanij Bidesh India Limited: A joint venture of NALCO, Hindustan Copper and Mineral Exploration and Consultancy Limited to acquire mineral assets abroad.
5. National Mineral Exploration Trust: Funds regional and detailed exploration carried out by notified and accredited agencies.
6. Mining Tenement System: Provides a single digital registry of concessions, production and statutory payments across States.
7. Star Rating of Mines: Rates operating mines on scientific mining, environmental management and community engagement.

Key Facts about India’s Mineral Sector

1. Global standing: India is among the largest global producers of coal, iron ore, bauxite and chromite.
2. Leading States: Odisha, Jharkhand, Chhattisgarh, Rajasthan and Karnataka account for the bulk of major mineral production value.
3. Critical minerals list: The Ministry of Mines released a list of 30 critical minerals in 2023, of which 24 were brought under central auction.
4. Auction regime: Auction has been the only route for granting major mineral concessions since the 2015 amendment.
5. Geological Survey of India: Established in 1851, it is the principal agency for baseline geoscience and regional exploration.
6. Sector share: Mining and quarrying contribute a little over 2 per cent of India’s gross value added.

Challenges in India’s Mineral Sector

1. Exploration deficit: Only a small share of India’s obvious geological potential has been explored in detail. e.g. India’s annual greenfield exploration spending is a fraction of what Australia and Canada commit each year.
2. Land and forest clearance delays: Mineral bearing districts overlap heavily with forest and Fifth Schedule areas. e.g. the Hasdeo Arand coal blocks in Chhattisgarh have faced sustained opposition over forest loss.
3. Displacement without title: Mining displaces communities whose land rights are unrecorded, so compensation does not reach them. e.g. Gond families in the Panna belt cannot claim compensation for want of recorded patta.
4. Import dependence in critical minerals: India imports nearly all its lithium, cobalt and rare earth requirements. e.g. a Khanij Bidesh India led consortium lost the Mt Marion and Wodgina lithium bids in Australia to POSCO.
5. Illegal mining and revenue leakage: Unauthorised extraction of minor minerals such as sand is widespread and poorly policed. e.g. the Shah Commission documented large scale illegal iron ore mining in Goa and Karnataka.
6. Mine safety and abandoned workings: Unscientific closure leaves permanent hazards near habitations. e.g. the 2018 flooding of a rat hole coal mine at Ksan in Meghalaya killed fifteen workers.
7. Value addition gap: India exports ore and imports processed material. e.g. the absence of domestic spodumene concentrate capacity means lithium ore cannot be processed within India.

Way Forward

1. Notify the ceiling before commencement: Fix the combined percentage in consultation with mineral bearing States so the fiscal loss is quantified in advance.
2. Create a transition window: Route a defined share of central mineral revenue back to affected States for a fixed period to absorb the shock.
3. Fund exploration at scale: Expand National Mineral Exploration Trust outlays and open exploration licences to specialised junior explorers.
4. Tighten District Mineral Foundation spending: Impose outcome linked utilisation targets and publish district level expenditure against them.
5. Build downstream processing: Support refining and concentrate capacity so critical mineral ore is processed within India.
6. Streamline clearances: Provide a single window with statutory timelines for forest, environment and land approvals in auctioned blocks.
7. Institutionalise consultation: Route Union and State disputes over resource taxation through the Inter State Council before legislating on them.

Matching Previous Year Question

“[2025, GS2, 15 marks] Examine the evolving pattern of Centre-State financial relations in the context of planned development in India. How far have the recent reforms impacted the fiscal federalism in India?”

Why in the News

Parliament passed the Mines and Minerals (Development and Regulation) Amendment Bill, 2026 on 13 August 2026, restricting the power of States to levy taxes on mineral rights and mineral bearing lands. The measure reverses in statute the fiscal gain that a nine judge Bench of the Supreme Court gave mineral rich States in 2024, and it has united ruling and opposition parties in Kerala, Odisha and Jharkhand against it.

What is the Mines and Minerals (Development and Regulation) Act, 1957?

1. About: The Mines and Minerals (Development and Regulation) Act, 1957 is the central law regulating the grant of mineral concessions and the development of mines in India.
2. The declaration it carries: Section 2 declares it expedient in the public interest that the Union take control of the regulation of mines and mineral development, which activates Entry 54 of the Union List.
3. Royalty setting: Section 9 empowers the Central Government to fix and revise royalty rates, and revision is permitted not more than once every three years.
4. Concession route: Since the 2015 amendment, mineral concessions are granted by States through competitive auction rather than by discretionary allotment.
5. Local sharing: Section 9B requires a District Mineral Foundation in every district affected by mining, funded by a contribution linked to royalty.

What is a royalty on minerals?

1. Definition: Royalty is the payment a lessee makes to the owner of the mineral for the privilege of extracting and removing it, calculated on the quantity or value produced.
2. Legal character: The Supreme Court has held royalty to be a contractual consideration flowing from the mining lease, not a tax levied by the state.

What is a cess?

1. Definition: A cess is a levy imposed for a specified purpose, with its proceeds earmarked for that purpose rather than merged into general revenue.
2. Why it matters here: Mineral bearing States had imposed cesses on royalty and on mineral bearing land, and it is this class of levy that the amendment restricts.

What is the District Mineral Foundation (DMF)?

1. Definition: The District Mineral Foundation is a non profit trust established in every mining affected district to work for the benefit of persons and areas affected by mining.
2. Funding: Lessees contribute a share of royalty to the Foundation, and the money is spent through the Pradhan Mantri Khanij Kshetra Kalyan Yojana on health, education, drinking water and livelihood in mining affected areas.

What is the current status of State taxing power over mineral rights in India?

1. Constitutional entry: Entry 50 of the State List gives States the power to tax mineral rights, expressly subject to any limitations imposed by Parliament by law relating to mineral development.
2. Judicial position since 2024: A nine judge Bench held that royalty is not a tax and that States retain legislative competence to tax mineral rights and mineral bearing land.
3. Retrospective effect: The Court permitted recovery of dues from 1 April 2005, to be paid in staggered instalments over twelve years beginning 1 April 2026, without interest or penalty for the earlier period.
4. State levies in force: Mineral rich States including Odisha, Jharkhand and West Bengal had enacted or revived levies on mineral rights in reliance on that ruling.
5. The new limitation: The 2026 amendment now exercises the limitation power in Entry 50 to restrict those levies and vests sole authority to frame rules in the Centre.
6. Central levies unaffected: Royalty under Section 9, the District Mineral Foundation contribution and the National Mineral Exploration Trust contribution of 2 per cent of royalty continue to be fixed centrally.

Constitutional Provisions Related to Mineral Rights and State Taxation

1. Article 246: Distributes legislative power between Parliament and State legislatures through the three lists of the Seventh Schedule.
2. Entry 54, Union List: Gives Parliament power over the regulation of mines and mineral development to the extent that such control is declared by law to be expedient in the public interest.
3. Entry 23, State List: Gives States power over the regulation of mines and mineral development, expressly subject to Entry 54 of the Union List.
4. Entry 18, State List: Places land, including rights in land and land tenures, within the exclusive competence of the States.
5. Entry 49, State List: Gives States the power to tax lands and buildings, which covers mineral bearing land as a class of land.
6. Entry 50, State List: Gives States the power to tax mineral rights, subject to limitations imposed by Parliament by law relating to mineral development.
7. Article 265: Provides that no tax shall be levied or collected except by authority of law.
8. Article 254: Governs repugnancy between a central and a State law on a concurrent subject, and gives the central law primacy.

What does the 2026 amendment actually change?

1. Restriction on State taxes: The Bill restricts the power of States to levy taxes on mineral rights and on mineral bearing lands.
2. Restriction on cesses: The restriction extends to cesses and other levies imposed on the same subject matter.
3. Rule making centralised: An amendment grants sole authority over the framing of rules to the Centre.
4. The Centre’s stated purpose: The government has argued that the amendment will promote mineral production, ensure mineral security and create a more uniform regulatory framework.
5. Passage: The Bill was cleared by the Rajya Sabha and passed by Parliament on 13 August 2026 amid Opposition protests.

How did the 2024 nine judge ruling set up this legislative response?

1. The question referred: Whether royalty under the 1957 Act is a tax, and whether States retain independent power to tax mineral rights and mineral bearing land.
2. The holding: By a majority of eight to one the Court held that royalty is not a tax, and that State competence under Entry 50 survives.
3. The precedent overruled: The 1990 ruling that had treated royalty as a tax, and had thereby denied States a separate taxing field, was overturned.
4. The fiscal consequence: Mineral rich States became entitled to arrears accumulated since 2005, an amount running into more than a lakh crore rupees across States.
5. The opening the Court left: The judgment expressly preserved Parliament’s power under Entry 50 to impose limitations on State taxation of mineral rights, and the 2026 amendment uses exactly that power.

Why do mineral rich States say the Bill strips their revenue base?

1. Encroachment on land: The Kerala Chief Minister described the legislation as a serious encroachment on the State’s constitutional powers over land and a grave threat to India’s federal structure, and said the State would mount political and, if necessary, legal opposition.
2. Land is a State subject: The Leader of the Opposition in Kerala argued that land falls under Entry 18 of the State List and that taxation of land is also a State subject, so the restriction enters the States’ constitutional domain.
3. Disproportionate impact: Odisha’s former Chief Minister wrote that the provisions would disproportionately impact mineral rich States and cause massive revenue losses that would stifle the State’s developmental agenda.
4. What the revenue funds: He stated that mining revenue finances healthcare, education, welfare schemes and infrastructure development across the State, and demanded a special Assembly session and a unanimous resolution.
5. Fiscal autonomy claim: He described fiscal autonomy as a constitutional principle built into the federal system, and said stripping States of the power to tax their own mineral bearing lands strikes at cooperative federalism.
6. Protest in Jharkhand: The Jharkhand Chief Minister called it a black Bill and warned of protests in every district, block, panchayat and town of the State.
7. The privatisation charge: The Kerala Opposition alleged that the larger objective was to weaken the public sector and create opportunities for corporates to earn windfall profits.

How was the Bill carried through Parliament?

1. Passage amid protest: The Bill was passed while the Opposition was protesting, and the concerns raised about federalism were not addressed on the floor.
2. Rights of affected people: The legislation overlooks the rights of those living on resource rich land, who are the first to bear the cost of expanded extraction.
3. A pattern, not an exception: The amendment follows an established pattern of hurried lawmaking and continuing expansion of central powers at the cost of States and local communities.
4. Session context: The monsoon session that began on 20 July 2026 passed several Bills with inadequate deliberation.
5. What deliberation would have required: An all party meeting, circulation of the draft and consultation with State Chief Ministers were available and were not used.

Can a Bill be constitutionally valid and still weaken federalism?

1. The text supports the Centre: Entry 50 has always made State taxation of mineral rights subject to limitations imposed by Parliament, so the amendment uses a power the Constitution itself confers.
2. The Court anticipated it: The 2024 judgment recognised that parliamentary limitation was available, so the amendment is a legislative answer within the space the ruling left open.
3. The effect side: A limitation that removes the entire field converts a qualified State power into no power at all, which is a different thing from regulating its exercise.
4. Who bears the loss: The States that lose most are the poorest resource States, whose own tax base is narrow and whose transfers do not compensate for mineral revenue.
5. The federal principle at stake: Fiscal autonomy is not merely a revenue question, because a State that cannot tax its own resource base cannot plan expenditure independently of central transfers.
6. The objection is not uniformly principled: The Kerala Opposition itself pointed out that the State government’s Revised Budget and White Paper on State finances proposed full privatisation of beach sand mining, which is the same direction it attacks in the Centre.

Major Debates Surrounding Mineral Taxation and Federalism

1. Royalty as tax or consideration: The 1990 ruling treated royalty as a tax, the 2004 five judge ruling read that as a drafting error, and the 2024 nine judge ruling settled it as a contractual consideration.
2. How far a limitation may go: Whether Parliament’s power to impose limitations under Entry 50 extends to extinguishing the State’s taxing field altogether remains contested.
3. Retrospective recovery burden: The staggered recovery of arrears from 2005 falls heavily on public sector miners and steel producers, and industry has argued it will be passed into input costs.
4. Uniformity against autonomy: The Centre’s case for a single national regulatory framework for mineral security runs directly against the States’ claim to price their own resource endowment.
5. Resource curse: Mineral rich States record among the highest poverty rates despite the highest extraction, which raises whether royalty and District Mineral Foundation flows compensate the host population at all.
6. Community consent: The rights of Scheduled Area residents under the Fifth Schedule and the 1996 Panchayats Extension to Scheduled Areas Act sit uneasily with a centralised concession regime, as the Samatha and Niyamgiri rulings demonstrated.
7. District Mineral Foundation utilisation: Large unspent balances and expenditure outside mining affected areas have raised the question whether local sharing works in practice.

Challenges to the Mineral Taxation Framework after the Amendment

1. Revenue substitution gap: No mechanism replaces the levies the States lose, e.g. Odisha’s mining revenue funds a large share of its own tax receipts and no equivalent central transfer has been announced.
2. Litigation risk: The amendment invites a fresh constitutional challenge, e.g. the Kerala Chief Minister has already said the State will consider legal opposition to the Act.
3. Investment uncertainty: Repeated changes to the fiscal regime deter long lead mining investment, e.g. bidders in mineral auctions price in future levy changes through lower premium bids.
4. Local community exclusion: Centralised rule making distances the decision from those displaced, e.g. Niyamgiri in Odisha showed that consent of gram sabhas can defeat a project cleared at higher levels.
5. Auction premium distortion: High auction premiums already compress operating margins, e.g. several iron ore blocks won at premiums above 100 per cent of sale value have remained unoperated.
6. Enforcement of illegal mining controls: Restricting State fiscal powers does not address extraction outside the legal framework, e.g. illegal sand and iron ore mining continues to be reported across multiple States despite the auction regime.
7. Environmental cost transfer: The framework does not price ecological damage into the concession, e.g. mining in the Aravallis and in central Indian forest belts has continued alongside contested clearances.

Conclusion

Entry 50 always made State taxation of mineral rights subject to limitation by Parliament, so the amendment uses a power the Constitution grants. Its effect is to reverse in statute the fiscal gain that a nine judge Bench gave mineral rich States in 2024. What remains unresolved is whether a formally valid limitation that removes an entire revenue base is compatible with fiscal federalism, and that question is now headed back to the courts.

What is Fiscal Federalism?

1. About: Fiscal federalism is the division of taxation powers, expenditure responsibilities and transfer mechanisms between the Union and the States in a federal system.
2. Rationale: Revenue raising capacity is concentrated at the centre while service delivery responsibility sits with the States, so a transfer system is required to close the gap.
3. Vertical fiscal imbalance: The mismatch between the Union’s revenue powers and the States’ expenditure responsibilities, corrected through tax devolution.
4. Horizontal fiscal imbalance: The mismatch between States of differing income and need, corrected through the Finance Commission’s inter se distribution formula.
5. Third tier imbalance: The mismatch at the level of panchayats and municipalities, whose own revenue is minimal and whose transfers depend on State Finance Commissions.

Key Concerns Regarding Fiscal Federalism

1. Shrinking divisible pool: Cesses and surcharges are not shared with States, so a growing share of central revenue sits outside the devolution formula.
2. Loss of taxation autonomy under GST: States surrendered most of their independent indirect taxing power, leaving mineral rights and land among the few residual fields.
3. Conditional transfers: Centrally sponsored schemes come with matching share and design conditions that constrain State expenditure choices.
4. Weak third tier finance: Local bodies remain dependent on State transfers because property tax and user charge collection is under exploited.
5. Borrowing limits: State borrowing under Article 293 requires central consent where the State is indebted to the Union, which constrains counter cyclical spending.

Constitutional Framework Governing Mineral Rights and State Taxation

1. Article 246: Distributes legislative competence between the Union and the States through the Seventh Schedule.
2. Seventh Schedule: Contains the Union List, the State List and the Concurrent List that operationalise Article 246.
3. Entry 54, Union List: Regulation of mines and mineral development to the extent declared by Parliament by law to be expedient in the public interest.
4. Entry 23, State List: Regulation of mines and mineral development, subject to Entry 54 of the Union List.
5. Entry 18, State List: Land, rights in land, land tenures and the relation of landlord and tenant.
6. Entry 49, State List: Taxes on lands and buildings.
7. Entry 50, State List: Taxes on mineral rights, subject to any limitations imposed by Parliament by law relating to mineral development.
8. Article 265: No tax shall be levied or collected except by authority of law.
9. The Mineral Area Development Authority line of cases: India Cement in 1990 treated royalty as a tax, Kesoram Industries in 2004 read that as a drafting error, and Mineral Area Development Authority in 2024 held by eight to one that royalty is not a tax and that Entry 50 competence survives.

Laws and Rules Governing Mining in India

1. Mines and Minerals (Development and Regulation) Act, 1957: The parent statute for mineral concessions; its Section 2 declaration is what brings mineral regulation under Union control.
2. MMDR Amendment Act, 2015: Introduced auction as the only route for granting mineral concessions and created the District Mineral Foundation and the National Mineral Exploration Trust.
3. MMDR Amendment Act, 2021: Removed the distinction between captive and merchant mines and allowed transfer of statutory clearances with the lease.
4. MMDR Amendment Act, 2023: Created the exploration licence and moved twelve critical and deep seated minerals, including lithium and beryllium, to central auction under a new Part D.
5. Mines Act, 1952: Governs worker safety, working hours and welfare in mines, enforced through the Directorate General of Mines Safety.
6. Offshore Areas Mineral (Development and Regulation) Act, 2002: Governs mineral rights in territorial waters and the exclusive economic zone, amended in 2023 to introduce auctions.
7. Mineral Conservation and Development Rules, 2017: Prescribe scientific mining, mine closure and conservation obligations for lessees.
8. Forest (Conservation) Act, 1980 and Forest Rights Act, 2006: Govern diversion of forest land and require settlement of individual and community forest rights before diversion.
9. Panchayats (Extension to Scheduled Areas) Act, 1996 (PESA): Requires consultation with the gram sabha before granting a mineral concession in a Scheduled Area.

Back2Basics: Mineral Area Development Authority v. Steel Authority of India (2024)

1. Bench strength: It was decided by a nine judge Constitution Bench of the Supreme Court, the largest bench to sit on the question.
2. Majority: The ruling was by a majority of eight to one.
3. Core holding: Royalty payable under Section 9 of the 1957 Act is a contractual consideration and not a tax.
4. Competence upheld: States retain legislative competence under Entry 50 of the State List to tax mineral rights, and under Entry 49 to tax mineral bearing land.
5. Precedent overruled: It overruled India Cement Limited v. State of Tamil Nadu (1990), which had treated royalty as a tax.
6. Limitation preserved: The Court recorded that Parliament may impose limitations on the Entry 50 power through a law relating to mineral development.
7. Prospectivity ruling: In a separate order the Court allowed recovery of dues from 1 April 2005 in instalments over twelve years starting 1 April 2026, and waived interest and penalty for the period before the judgment.

Government Initiatives for the Mineral Sector

1. National Mineral Policy, 2019: Sets the policy framework for sustainable mining, exploration expansion and a right of first refusal in auctions for existing lessees.
2. National Critical Mineral Mission: Launched to secure supply of critical minerals, targeting 1,200 domestic exploration projects by 2030 to 2031, production of 15 critical minerals and acquisition of 50 overseas assets.
3. Khanij Bidesh India Limited (KABIL): A joint venture of three public sector undertakings to acquire mineral assets abroad, including lithium acreage in Argentina.
4. Pradhan Mantri Khanij Kshetra Kalyan Yojana: Spends District Mineral Foundation funds on drinking water, health, education, sanitation and livelihoods in mining affected areas.
5. National Mineral Exploration Trust: Funded by a levy of 2 per cent of royalty, it finances regional and detailed exploration by notified agencies.
6. Mining Tenement System and Star Rating of Mines: Digitise concession records and grade operating mines on sustainable development performance.

Key Facts about India’s Mineral Sector

1. Production base: India produces 95 minerals, comprising fuel, metallic, non metallic, atomic and minor mineral categories.
2. Global standing: India is the world’s second largest producer of coal and among the largest producers of iron ore and crude steel.
3. Leading States: Odisha, Chhattisgarh, Jharkhand, Karnataka and Rajasthan account for the bulk of the value of mineral production.
4. Critical minerals list: India notified a list of 30 critical minerals in 2023, of which twelve were moved to central auction under the 2023 amendment.
5. Foundation contribution: Lessees contribute 10 per cent of royalty to the District Mineral Foundation for auctioned leases and 30 per cent for older leases.
6. Sector share: Mining and quarrying contribute roughly 2 to 3 per cent of gross value added, well below the share in comparable resource economies.

Challenges in India’s Mining Sector

1. Exploration deficit: Only a small fraction of the obvious geological potential area has been explored in detail, e.g. India still imports the bulk of its lithium, cobalt and rare earth requirement despite favourable geology.
2. Land and forest clearance delays: Concession holders wait years for statutory clearances, e.g. blocks auctioned in central India have remained unoperated pending forest diversion approval.
3. Displacement and rehabilitation: Mining displaces tribal populations without durable resettlement, e.g. the Niyamgiri hills case turned on the Dongria Kondh community’s rights over the proposed bauxite site.
4. Illegal mining: Extraction outside the legal framework persists in high value and low value minerals alike, e.g. river sand mining continues to be reported across States despite auction and monitoring rules.
5. Environmental damage: Overburden, dust and water table impact are inadequately priced, e.g. coal mining in the Singrauli belt has produced sustained air and water contamination.
6. Occupational safety: Accident rates in mines remain high, e.g. rat hole coal mining in Meghalaya has caused repeated fatal flooding incidents despite prohibition.
7. Value addition gap: India exports ore and imports processed metal, e.g. iron ore fines have historically been exported while high grade steel inputs are imported.

Way Forward

1. Compensate the fiscal loss: Route a defined share of central mineral levies back to producing States to replace the revenue the amendment removes.
2. Legislate the limitation narrowly: Define the scope of the Entry 50 limitation in the statute so that the residual State field is stated rather than left to litigation.
3. Institutionalise consultation: Refer contested federal legislation to a Joint Parliamentary Committee and consult State Chief Ministers before introduction.
4. Strengthen local sharing: Audit District Mineral Foundation spending and restrict it to a defined radius around mining affected habitations.
5. Expand exploration: Use the exploration licence route to bring private and junior exploration capital into deep seated and critical mineral search.
6. Build processing capacity: Support domestic refining and separation of critical minerals so that concession reform translates into value addition rather than ore export.

Matching Previous Year Question

“[2025, GS2, 15 marks] Examine the evolving pattern of Centre-State financial relations in the context of planned development in India. How far have the recent reforms impacted the fiscal federalism in India?”