Mining Royalties in India: Understanding the System, Challenges, and Reforms

Introduction

The recent ruling by the Supreme Court of India on 25 July 2024, clarifying that mining royalties are not taxes, has reignited debates about India’s mining royalty system. This decision has significant consequences for both mining companies and mineral-rich states. Mining royalties are payments made by companies to the government in exchange for extracting mineral resources. Unlike taxes, which are imposed by the government without direct compensation, royalties are contractual payments for the right to exploit natural resources.

India has a complex mining royalty regime that has evolved over the years, incorporating different methods such as ad valorem (value-based) and tonnage-based calculations. However, many argue that India’s royalty rates are among the highest in the world, which affects the competitiveness of its mining industry. At the same time, resource-rich states remain economically disadvantaged despite the wealth generated from mining activities. This essay explores India’s mining royalty system, its challenges, and possible reforms to ensure a fair and sustainable model for mineral extraction and revenue generation.

What Are Mining Royalties?

Mining royalties are based on the concept of economic rent, which refers to the excess revenue generated beyond the minimum required to make an economic activity viable. In simpler terms, royalties ensure that states benefit from the mineral wealth extracted from their lands.

Globally, different countries use various models to calculate royalties:

1. Ad Valorem System – A percentage of the mineral’s sales revenue. For example, India uses this method for iron ore, coal, and other high-value minerals.
2. Tonnage-Based System – A fixed rate per unit of mineral extracted. This system is common for minerals like limestone, which are extracted in large volumes.
3. Profit-Based System – A royalty based on the profits made after deducting operational costs. This system is used in Canada and some other mining-friendly nations.

Many countries, including Australia and India, use a hybrid approach to balance revenue generation with business sustainability. However, India’s royalty rates are among the highest, raising concerns about their impact on mining sector competitiveness.

India’s Mining Royalty Regime

India’s mining royalty system is governed by the Mines and Minerals (Development and Regulation) Act (MMDR), 1957. The government updates royalty rates periodically, usually every three years, to reflect market conditions. However, the current system has several issues:

1. High Royalty Rates – India has some of the world’s highest royalty rates. For instance, the 15% royalty on iron ore is higher than in many other mining-rich nations.
2. Multiple Levies and Charges – Besides royalties, mining companies must pay auction premiums, contributions to the District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET), and corporate and state taxes. This increases the effective tax burden to nearly 50%, compared to a global average of around 30%.
3. Inflexible and Outdated Calculation Methods – While India primarily uses an ad valorem system, the rates are not always adjusted to reflect market changes. Some minerals have had fixed royalty rates for years, leading to revenue losses for the government during price booms.
4. Revenue Utilisation Issues – Despite high royalty collections, mineral-rich states like Jharkhand, Odisha, and Chhattisgarh remain economically backward. Funds meant for development are often mismanaged or diverted to general budgets rather than being used for local infrastructure, healthcare, or education.

Implications of the Supreme Court Ruling

The Supreme Court ruling clarified that mining royalties are not a form of taxation but rather payments made under a contractual agreement. This means:

• States Can Continue to Collect Royalties – The ruling upholds state governments’ rights to levy royalties on mineral-bearing lands. This benefits states like Odisha, Chhattisgarh, and Rajasthan, which rely heavily on mining revenues.
• Potential Revenue Windfall – The judgment allows states to collect pending royalty dues dating back to 1 April 2005. This could provide significant financial relief to resource-rich states.
• Encouragement for Further Legal and Policy Reforms – The verdict has intensified discussions on revising royalty rates, improving revenue utilisation, and making India’s mining industry more competitive.

Challenges in India’s Mining Royalty System

India’s current royalty system faces several challenges that need to be addressed through structural reforms.

1. The Competitiveness Problem

With one of the highest royalty rates in the world, India’s mining industry struggles to compete globally. Higher costs make Indian minerals less attractive in international markets and discourage foreign investment in the sector.

2. The Resource Curse: Why Are Mineral-Rich States Poor?

Despite generating significant mining revenue, states like Jharkhand and Odisha rank low in human development indicators. This phenomenon, known as the resource curse, occurs due to:

• Poor Revenue Distribution – A large portion of the royalties collected is controlled by the central government, limiting states’ autonomy in using these funds effectively.
• Misallocation of Funds – Funds meant for community development often do not reach the intended beneficiaries. For example, less than 20% of DMF funds in Odisha are used for healthcare and education.
• Environmental and Social Costs – Mining displaces communities and causes environmental degradation, yet a significant portion of royalty revenue is not reinvested into mitigating these effects.

3. Lack of Transparency and Accountability

Corruption and inefficiency in royalty collection and distribution reduce the benefits that should reach local communities. There is a growing demand for greater transparency in the process.

Structural Reforms: The Way Forward

India’s mining royalty system requires a balanced approach that fosters economic growth while ensuring fair resource distribution. A key reform is the adoption of sliding-scale royalty rates that adjust with global commodity prices, allowing the government to capture higher revenues during price surges while easing the burden on companies during downturns. Additionally, reducing the excessive tax load on mining firms would make India more globally competitive, attracting investment and preventing capital flight to nations with more favourable tax regimes.

Expanding the royalty base is another critical reform that can diversify revenue sources and strengthen the sector. Including minerals like rare earth elements, which are increasingly valuable in modern industries, can generate additional income. Environmental levies should also be introduced, ensuring that a portion of mining revenues is allocated to land restoration and community welfare projects. This would help mitigate the environmental degradation caused by mining and support the livelihoods of those affected by mineral extraction.

Enhancing governance and transparency in royalty collection is essential to ensuring equitable distribution and minimising corruption. Establishing an independent Royalty Commission would prevent politically motivated rate-setting, promoting fairness and stability. Implementing blockchain technology could further enhance transparency by creating a tamper-proof system for tracking royalty payments. Additionally, a fixed percentage of mining revenues should be legally earmarked for essential public services such as healthcare, education, and infrastructure in regions most impacted by mining activities.

Sustainability must be at the core of India’s mining royalty reforms to ensure long-term environmental and economic viability. Offering tax incentives to companies that adopt eco-friendly mining practices would encourage responsible resource extraction. Simultaneously, stricter environmental regulations and rigorous enforcement would prevent over-extraction and ecological damage. By integrating sustainability into the mining framework, India can create a system that not only generates revenue but also protects natural resources and uplifts communities reliant on the mining industry.

Conclusion

The Supreme Court’s ruling on mining royalties has provided an opportunity to rethink India’s royalty regime. While high royalties contribute to state revenues, they also affect the competitiveness of the mining sector. Furthermore, despite earning substantial mining revenues, many mineral-rich states remain economically backward due to poor revenue utilisation.

A well-balanced royalty system should ensure:

1. Fair compensation to states for mineral extraction.
2. Competitive tax rates that encourage investment.
3. Efficient use of royalty revenues for local development.
4. Sustainable and responsible mining practices.

If India can achieve these objectives, its mineral wealth can be transformed into a driver of inclusive economic growth, benefiting both mining companies and local communities. Only through a combination of policy reforms, transparent governance, and sustainable mining practices can the country truly capitalise on its rich mineral resources.

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The Source’s Authority and Ownership of the Article is Claimed By THE STUDY IAS BY MANIKANT SINGH