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“Even with full development of the feasible hydro potential in the country, coal would necessarily continue to remain the primary fuel for meeting future electricity demand”, said by The National Electricity Policy, 2005 drafted by Central Electricity Regulatory Commission. Coal is one the most demanded fuel in the country like India. The pressure on the Coal Mining companies is adverse due to the demand and supply pull of the industry and market. The prices cannot be hiked in the Economy beyond a certain level as the increase in price will adversely affect prices of other commodities.

India’s ninety per cent coal reserves could be found in six states which includes Jharkhand, Orissa, Chattisgarh, West Bengal, Madhya Pradesh and Andra Pradesh while over a quarter is located in Jharkhand alone. The distribution of electricity is more uneven than coal. According to Central Electricity Authority report, 2013 five states which include Maharastra, Andra Pradesh, Tamil Nadu and Uttar Pradesh were among the states which have largest amount of electricity available.

Concerns

For the past many years, some of the major coals bearing states have repeatedly addressed their concerns to the inequality they are facing. Mr Naveen Patnik, the Chief Minister of Odisha, in the year 2011 in May, spoke “that mining activities impose significant economic, environmental and social costs in terms of displacement of people on account of land acquisition, loss of their livelihoods and mounting solution problems.” He clearly identified that, “power and coal consuming states benefit because of low costs of coal and power, revenues from electricity duty on consumption and revenue for sales of surplus power, the host states like Odisha bear most of economic, environmental and social costs.”

Asim Dasgupta, the former Finance Minister of West Bengal, in the year 2011 advised the Chief Minister to demand for Rs. 5000 crore in coal royalty, which he certainly believed to be sum owned by Central Government to the State of Bengal for the coal mined since 1991. Mr Arjun Munda, Chief Minister of Jharkhand in the year 2014 said, “the coal reserves of the state were both a boon and a bane”.

Taxes on Coal

Parliament enacted Minerals and Mines Development and Regulation Act in the year 1957 recognizing that the state owns the resource in question. Section 11 of the Act routes application for exploration permits, prospecting licenses or mining leases through the state government. Section 11A of the Act bars power of the state government in the cases where application is received from certain companies who are engaged in iron and steel or power generation sector. In case of application from these companies central will select and grant permits through bidding process. After the center allocating the permission that state government is bound to give permit for mining activities. Schedule I of the Act gives in details about royalty rates to be given on mining. Only Union Ministry can revise these rules, state ministry has no power to revise these rules. States cannot levy taxes on mining activities. The power is with the Union Government. This power is levying tax is just an interpretation and not expressly provided in any act or statue.

Taxation on Electricity

Under Entry 53 of List II states are empowered to levy taxes on the consumption or sale of electricity.

Consumption

Article 286 of the Constitution of India prohibits states from levying taxes on purchase on sale of goods outside the territory. Entry 92-A List I places taxes on inter-state sale of goods within competence of the Union. Thus, states are only allowed to tax consumption or sale of electricity which is completed within the boundaries of the state. The problem is exacerbated by the nature of electricity-electricity generation, its transfer and consumption is almost instantaneous. This means that the contacts are directly entered between into generators in one state and distributors or even consumers in another.

Generation of Electricity

States in the past have tried to tax generation of electricity. We can see example of Madhya Pradesh Upkar Adhiniyam, 1981 wherein tax of 20 paise was imposed on the captive producer of the total units of electrical energy produced. There is a straight forward limitation on State caused by Entry 84 and the broad interpretation of Entry 92-A List I which leaves State eventually powerless to benefit from the outflow of electricity generated using their resources. We can take example of Orrisa which is being the proposed site for a large number of electricity generation projects for near future, the increased revenue from such projects is unlikely to match their costs to the state.

Policy Options

Coal Sector

State has power under Entry 23 and 50 of List II to regulate and tax mineral and mineral rights subject to the restrictions imposed by the Parliaments. Center will impose restriction in the form of direct tax in the situation where it has imposed either direct tax on royalties or through elaborations on valuation process (which is exclusively a state subject). State can possibly grab this option and could make smart policy to tax its mining activities.

The second option would be tax under Entry 49 List II. In the past State had been busy in developing hybrid model where the Act specifically purports to tax the land but lays down a quantification based on royalties. Instead to developing a hybrid of two systems, the States could simplify the legislation to lay out the broad basis for the land valuation without developing detailed calculations specific to the mineral-bearing lands and leave the actual quantification to the executive.

Electricity Sector

Taking in consideration the extreme limitation on taxation of inter-state electricity flows, the states could collectively urge the center to enact a legislation levying taxes on inter-state in electricity. The tax enacted could authorize the government of the states where the electricity is generated to collect and also keep the tax.