States score major win on financial freedom

It’s only in India that concepts and practices that are well settled elsewhere become matters of prolix interpretation and debate. The latest instance of this proclivity is the 8:1 judgment last week by the Supreme Court on whether a royalty is a tax. This is on par with the debate in Orthodox Judaism on whether electricity is fire.

The current judgment was the result of a long running dispute between some States, which wanted to tax minerals, and the Centre said they couldn’t because it said so. The matter went back and forth for decades. Different issues arising out of some provisions of the Constitution — for example, does a law enacted by Parliament supersede a provision of the Constitution — and the difference between royalty and tax came up for examination. Finally, last week, the Court said in a majority judgment that the difference between royalty and tax is that while the former is a voluntary payment made as a contractual obligation, the latter is quite simply a sovereign imposition and that there is nothing voluntary about the transfer of money that takes place. Done by anyone else other than the sovereign it would be extortion.

The Central government was able to insist that the States could not tax minerals under their boundaries because a 1957 Act of Parliament denied them this right, regardless of what the Constitution says. No, said eight of the nine judges who heard the case; the States had a perfect right to tax their minerals. One said no because this would amount to eroding the “constitutional intent”. Thankfully the matter is settled now. But the question of whether a law made by Parliament supersedes a constitutional issue is still alive and will doubtless crop up again. This is inherent in the constitutional design, which has a concurrent list on which there are items over which both the Centre and the States have jurisdiction. This case once again shows that the logic of a concurrent list needs to be re-examined. The India of 2024 is not the India of 1947-50.

Two consequences could follow as a result of this judgment. One is positive, the other negative. The positive consequence is that there is now an additional source of revenue for the States who have very few such sources. The negative consequence is the possibility, as the dissenting judge pointed out, of tax competition between the States. Only time will tell which of these will have a greater impact on future outcomes. The larger question of State revenues remains. These have continued to be hostage to the political need to ensure the integrity of India. The original constitutional design had a legitimate concern in this regard. Those conditions are no longer there. Hence, the need is for the Centre to delink politics from economics and allow the States greater freedom in matters of revenue.