17 Sep Mining Amendment and Fiscal Federalism: Why Mineral-Rich States Are Concerned

Which Subject is Related to This Topic?

• GS Paper II – Indian Polity & Governance
• GS Paper III – Economy, Mining & Natural Resources
• Important themes: Cooperative Federalism, Fiscal Federalism, Mineral Resources, MMDR Act, Constitutional Taxation Powers, Centre–State Relations
• Prelims: Constitutional provisions, Seventh Schedule, mining legislation, Supreme Court judgments

Why is it in the News?

The issue concerns the Mines and Minerals (Development and Regulation) Amendment Act, 2026, which changes the framework governing taxation and levies related to mineral rights and mineral-bearing land.

A key provision, Section 9D, restricts State governments from imposing taxes, cesses or other levies on mineral rights and mineral-bearing land except according to conditions or restrictions prescribed by the Central Government. The amendment received Presidential assent on August 17, 2026.

The controversy is therefore not merely about mining revenue. It raises a larger constitutional question:

How should India balance national regulation of minerals with the financial and legislative autonomy of mineral-rich States?

Background: Why are Minerals Important for States?

India’s mineral resources are not evenly distributed.

States such as Odisha, Jharkhand, Chhattisgarh, Karnataka and parts of Rajasthan possess significant deposits of coal, iron ore and other minerals.

However, mineral extraction also creates costs for these States. Mining can put pressure on:

• Roads and infrastructure
• Water resources
• Forests and biodiversity
• Public health
• Local communities
• Rehabilitation and resettlement

Therefore, mineral-producing States argue that they need adequate fiscal resources to deal with the consequences of extraction.

At the same time, the Union government argues that multiple State-level levies can increase the cost of mining and discourage investment. The government says the 2026 amendment is intended to create a more predictable and uniform fiscal framework for the mining sector.

What Does the 2026 Amendment Change?

One of the most important changes is Section 9D.

It provides that States cannot impose taxes, cesses or other levies on mineral rights or mineral-bearing lands except in accordance with conditions or restrictions prescribed by the Central Government.

Government’s rationale

The Union government has highlighted three major concerns:

1. Multiple levies increase the cost of mining.
2. Different State-level taxation regimes create uncertainty for investors.
3. Higher mining costs can make extraction of strategically important minerals less commercially viable.

The government has stated that States will continue to receive major streams such as royalty, auction premium, District Mineral Foundation payments and their share of GST.

Why are States concerned?

Mineral-rich States argue that the amendment reduces their ability to independently mobilise revenue from resources located within their territories.

Therefore, the debate has shifted from simply being a question of “mining taxation” to a question of fiscal federalism.

Constitutional Framework: The Most Important UPSC Angle

The Constitution distributes legislative powers between the Union and States through the Seventh Schedule.

Entry 50 – State List

Entry 50 of the State List deals with:

Taxes on mineral rights, subject to limitations imposed by Parliament relating to mineral development.

This provision is extremely important for understanding the present controversy.

Entry 49 – State List

Entry 49 concerns:

Taxes on lands and buildings.

The Supreme Court has held that mineral-bearing land can fall within the scope of this entry as well.

Entry 54 – Union List

Entry 54 gives Parliament power over:

Regulation of mines and mineral development to the extent declared by Parliament to be expedient in the public interest.

Thus, mining involves an important overlap between Union regulatory authority and State taxation powers.

Supreme Court’s 2024 Mineral Rights Judgment

A major background to the present controversy is the Supreme Court’s 2024 judgment in:

Mineral Area Development Authority v. Steel Authority of India Ltd.

An 8:1 majority of the nine-judge Constitution Bench held that States possess constitutional authority to tax mineral rights.

The Court also distinguished royalty from tax, rejecting the earlier understanding that royalty itself was a tax.

The judgment also recognised that mineral-bearing land can come within the State’s taxation power under Entry 49 of the State List.

Why is this important now?

The 2026 amendment has placed restrictions on State levies through Parliament’s legislation.

Consequently, an important constitutional debate has emerged over the extent to which Parliament can limit the exercise of State taxation powers recognised by the Supreme Court.

This makes the issue highly relevant for UPSC Polity.

Fiscal Federalism: The Core Issue

Fiscal federalism refers to the distribution of financial powers and resources between different levels of government.

India follows a system in which:

Union + States → Share responsibilities and financial resources

However, States have argued that greater responsibilities should be accompanied by adequate revenue-raising powers.

The mining debate illustrates this tension particularly well.

A mineral-rich State may face the environmental and social costs of extraction while mineral resources simultaneously contribute to industries and economic activity across the country.

Therefore, the question is not simply:

“Who should collect the tax?”

It is also:

“Who bears the cost of resource extraction and who receives the economic benefits?”

Important Data for UPSC

According to the Union government’s 2026 explanation of the amendment:

• Around 90% of mining-sector revenue accrues to States.
• State mineral revenue has increased significantly over the last decade.
• States received around ₹1.14 lakh crore in 2025–26 from total mineral revenue, according to the government’s figures.
• Since the auction regime began in 2015, States have received more than ₹7 lakh crore, including coal-related revenues.
• The government states that approximately 14 different taxes, charges, fees and levies currently operate around mining activities.

These figures represent the Union government’s position. The concern raised by States is that restrictions on their independent taxation powers could reduce their future fiscal flexibility even if existing revenue streams remain available.

Why is Mining Taxation So Important?

1. Revenue for Mineral-Rich States

Mining can provide substantial revenue to States.

Such revenue can support:

• Infrastructure
• Health
• Education
• Roads
• Local development
• Environmental restoration

2. Environmental Costs

Mining can result in:

• Deforestation
• Land degradation
• Water pollution
• Displacement
• Loss of biodiversity

Therefore, States argue that resource-producing regions should have sufficient fiscal capacity to manage these costs.

3. Investment Climate

On the other hand, multiple taxes and unpredictable levies can increase the cost of mining.

The Union government’s argument is that a predictable taxation framework can improve investment certainty and make domestic mineral production more competitive.

Critical Minerals and National Security

The issue becomes even more important because India is seeking to reduce dependence on imports of critical minerals.

Critical minerals are essential for:

• Electric vehicles
• Batteries
• Renewable energy
• Semiconductors
• Defence equipment
• Advanced electronics

Therefore, making domestic mining economically viable has strategic importance.

However, the expansion of mining must also consider environmental sustainability and the rights of communities living in resource-rich regions.

This creates a policy challenge:

Resource security + Investment + State revenue + Environmental protection + Community rights

Impact on Cooperative Federalism

Cooperative federalism requires the Union and States to work together rather than treating their powers as competing spheres.

The mining issue highlights a potential tension between:

National economic objectives

and

State fiscal autonomy.

The Union government seeks uniformity and investment certainty, whereas mineral-producing States are concerned about their taxation powers.

Therefore, effective consultation between the Centre and States becomes important.

The Inter-State Council, GST Council-type consultation mechanisms, parliamentary processes and structured Centre–State dialogue can help reduce friction.

Why Mineral-Rich States Feel the Issue More Strongly

Consider a State with large mineral deposits.

It may experience:

Mining → Extraction → Environmental pressure → Infrastructure burden → Social costs

while the mineral simultaneously becomes an input for:

Steel → Electricity → Manufacturing → Infrastructure → Defence → National growth

Hence, mineral resources have both a local cost and a national economic value.

This is why the debate has implications beyond taxation.

Way Forward

1. Balance Uniformity with Federal Autonomy

A common framework can reduce excessive variation in mining taxation. However, it should not unnecessarily weaken legitimate State fiscal powers.

2. Strengthen Revenue-Sharing Mechanisms

If restrictions are placed on State taxation, alternative and predictable revenue mechanisms should adequately compensate States for legitimate development and environmental costs.

3. Promote Transparent Consultation

Major changes affecting State taxation powers should involve meaningful Centre–State consultation.

4. Link Mining Revenue with Local Development

District Mineral Foundations and other mechanisms should ensure that mining-affected communities receive visible developmental benefits.

5. Ensure Environmental Accountability

Economic efficiency should not come at the cost of forests, water resources and local communities.

6. Use Constitutional Institutions

The final balance between Union authority and State taxation powers should remain consistent with constitutional principles and judicial interpretation.

Prelims Practice Questions

Question 1

With reference to taxation of mineral rights in India, consider the following statements:

1. Entry 50 of the State List relates to taxes on mineral rights.
2. Entry 49 of the State List relates to taxes on lands and buildings.
3. Entry 54 of the Union List deals with regulation of mines and mineral development subject to the conditions specified therein.
4. The Supreme Court has held that royalty paid for extraction of minerals is itself a tax.

Which of the statements given above are correct?

A. 1, 2 and 3 only
B. 1 and 4 only
C. 2, 3 and 4 only
D. 1, 2, 3 and 4

Answer: A

Explanation:

• Statement 1 is correct. Entry 50 of the State List concerns taxes on mineral rights, subject to limitations imposed by Parliament.
• Statement 2 is correct. Entry 49 concerns taxes on lands and buildings.
• Statement 3 is correct. Entry 54 of the Union List concerns regulation of mines and mineral development to the extent specified by Parliament.
• Statement 4 is incorrect. In the 2024 Mineral Area Development Authority case, the Supreme Court distinguished royalty from tax.

Question 2

Consider the following statements regarding the Mines and Minerals (Development and Regulation) Amendment Act, 2026:

1. Section 9D restricts States from imposing taxes, cesses or other levies on mineral rights and mineral-bearing land except according to conditions prescribed by the Central Government.
2. The Union government has stated that States will continue to receive major mining-related revenues such as royalty and auction premium.
3. The amendment completely transfers all mining-sector revenue from the States to the Union Government.
4. The amendment is partly justified by the government on the grounds of creating greater predictability in the mining fiscal regime.

Which of the statements given above are correct?

A. 1, 2 and 4 only
B. 1 and 3 only
C. 2, 3 and 4 only
D. 1, 2, 3 and 4

Answer: A

Explanation:

• Statement 1 is correct. Section 9D places restrictions on State levies relating to mineral rights and mineral-bearing land.
• Statement 2 is correct. The Union government has stated that States will continue receiving royalty, auction premium, DMF-related revenues and their share of GST.
• Statement 3 is incorrect. The amendment does not transfer all mining revenue to the Centre.
• Statement 4 is correct. The government has presented fiscal predictability and investment certainty as important objectives of the amendment.