Introduction
The levy of Goods and Services Tax (GST) on royalty payments by mining lease holders has emerged as one of the most significant constitutional tax disputes in recent years. At its core, the issue concerns whether royalty—paid by a lessee to the State for enjoying mineral rights—can be brought under the ambit of GST, given that the Constitution expressly confers the power to tax mineral rights upon the States.
The 101st Constitutional Amendment Act, 2016 introduced GST by empowering both Parliament and State Legislatures to legislate under Article 246A. However, the interplay of this new simultaneous power with exclusive entries of List II has become a subject of heated debate. Central to this controversy is the Supreme Court’s Constitution Bench ruling in Mineral Area Development Authority v. Steel Authority of India [(2024) 21 Centax 378 (SC)], which clarified the nature of royalty and reaffirmed the States’ supremacy under Entry 50 of List II.
Royalty: Not a Tax but Contractual Consideration
The Supreme Court in Mineral Area Development Authority drew a clear distinction between tax and royalty:
- Royalty is not a tax, but contractual consideration payable by a lessee for the right to exploit mineral resources.
- Tax on mineral rights, including royalty, falls exclusively within the legislative competence of the States under Entry 50, List II.
Thus, Parliament cannot invoke either Entry 54 of List I (mines and development) or residuary Entry 97 of List I to legislate on mineral royalty. This constitutional demarcation sets the backdrop for evaluating whether GST, as a sui generis tax, can override this exclusivity.
Scope of Mineral Rights under Entry 50
The Court further broadened the understanding of “mineral rights” by holding that it covers the complete bundle of entitlements arising from mineral ownership—including rights to extract, win, consume, and monetize minerals. Royalty is the consideration payable for exercising these rights. Consequently, any taxation of royalty falls squarely under Entry 50, List II, and therefore within the States’ exclusive domain.
Article 246A: Simultaneous but Not Omnipotent
Article 246A bestows upon both Parliament and State Legislatures simultaneous law-making power in respect of GST. Its design differs markedly from the earlier scheme under Article 246, where exclusive and concurrent legislative domains were strictly segregated.
Key features of Article 246A:
1.Simultaneous Authority: Both Parliament and States can legislate on GST.
2. Union Exclusivity: Parliament alone legislates on inter-State GST.
3. No Supremacy Clause: Unlike Article 254, there is no repugnancy rule; both legislatures stand on equal footing.
However, Article 246A does not override exclusive State competence under entries like 49 (land), 50 (mineral rights), 53 (electricity), or 60 (professions). This is reinforced by the fact that during the 101st Amendment, several List entries were explicitly amended or omitted to subsume taxes into GST. Entry 50 was consciously left undisturbed—preserving State dominance over mineral rights.
Federal Balance and Judicial Support
The jurisprudence on legislative competence underscores that States are supreme within their exclusive fields.
- In S.R. Bommai v. Union of India, the Supreme Court stressed that the federal balance must be maintained.
- In Prafulla Kumar Mukherjee v. Bank of Commerce (Privy Council), the principle of confined legislative spheres was affirmed.
- Precedents such as Subrahmanyam Chettiar (1941) and Second Gift Tax Officer v. Nazareth (1970) held residuary powers (Entry 97, List I) cannot be invoked when a subject is specifically provided elsewhere.
Accordingly, taxation of mineral rights remains a reserved and exclusive domain of the States, beyond the sweep of GST.
Implications for GST on Royalty
The Central Government’s attempt to levy GST on royalty has created legal uncertainty, resulting in multiple disputes across High Courts. The thrust of the constitutional argument is that the GST Council lacks the competence to recommend GST on royalty, as the subject falls in an excluded field.
The mining sector, which is already overburdened with multiple levies, has strongly contested GST on royalty. If upheld, the levy would significantly increase compliance costs and operational expenses for mining operators.
Key Takeaways
1.Royalty is not a tax but consideration for transfer of mineral rights.
2. Entry 50, List II vests exclusive taxing power over mineral rights with the States.
3. GST under Article 246A does not override exclusive State subjects.
4. Strong constitutional support exists for excluding royalty from GST.
5. Pending Supreme Court’s verdict, taxpayers have credible reason to expect a favourable outcome.
Implications for Industry
- If the judgment favours taxpayers: GST demands on royalty would be unsustainable, potentially leading to refunds for amounts already paid. States will retain exclusive rights to levy taxes on mineral rights.
- If the judgment supports the levy: GST would remain payable on royalty, raising the effective cost of mining operations, but creating uniformity across States.
- In the interim: Mining businesses are advised to continue paying GST under protest and preserve their rights until the Supreme Court delivers its authoritative verdict.
Conclusion
The constitutional scheme reserves taxation of mineral rights exclusively for the States under Entry 50 of List II. Royalty, being consideration for transfer of such rights, cannot be subsumed under GST without disturbing this federal balance. Article 246A, while introducing simultaneous powers for GST, does not override exclusive State fields that were consciously preserved by the 101st Amendment.
Accordingly, there exists a strong constitutional foundation for excluding royalty from GST, and the Supreme Court is likely to adopt a favourable view in line with the express constitutional allocation of powers.
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( the views expressed in this article are strictly personal and author of this article can be reached at caprudhvigst@gmail.com)
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