Summary: The 9-judge bench of the Supreme Court recently clarified that mining royalty is not a tax but a contractual consideration between the mining lessee and the state for mineral extraction rights. This decision distinguishes royalty from taxes under India’s constitutional framework. The case arose from conflicting decisions about whether royalty could be classified as a tax, which would prevent state governments from imposing additional taxes under the Mines and Minerals (Development and Regulation) Act, 1957. The Court concluded that the power to collect royalty remains with the states, but these do not extend to general taxation, which is Parliament’s domain. As a result, service tax imposed by the Union Government on mining royalties is now deemed unconstitutional. However, this decision leaves ambiguity concerning the application of GST on royalties, given that GST is governed by a separate constitutional provision (Article 246A). This provision allows both the Union and State governments to levy GST, potentially overriding earlier tax distinctions under the Seventh Schedule. The ruling therefore raises questions about whether GST can still be levied on royalties without conflicting with states’ exclusive rights to tax mineral extraction. The Court’s decision implies that GST on mining royalties could also face challenges in the future.
Introduction & Background:
The State Government collects Royalty/Seigniorage charges as per the provisions of Mines and Minerals (Regulation and Development) Act, 1957 (MMDR Act for brevity hereinafter) read with rules framed by the concerned State Government from the lessee of the Mining site.
In our federal constitution framework, Article 246 read with Seventh schedule r/w. list I, II & III resembles that the taxing powers are expressive, exclusive to Union and State governments respectively. In other words, if taxing powers on aspect are given to State Government, Union cannot tax the same subject aspect. In terms of Sl. No. 50 of List II, the taxing powers on Mineral rights are entrusted to the State Government. However, the unique case of taxing powers on Mineral rights are that such rights are subject to law made by Parliament, which gave birth to the MMDR Act, 1957. The provisions of MMDR Act, 1957 inter alia fixes the rates of royalty to be collected on various mineral rights which is popularly known as ‘Royalty’ while the power to collect royalty is still with the State Government. The concerned State Government makes rules to enforce the collection of royalties. Besides the royalty levied on the mineral rights, various state Governments made specific enactments to levy various taxes/cesses on the mineral/mining rights. This is where the dispute arose as to whether State Government can levy & collect tax beyond the royalties levied & collected under MMDR Act, 1957. During the agitation of this issue, the pivotal question arose as to whether royalty is tax or not? If held to be a tax, the MMDR Act, 1957 being law made by parliament fetters the State government to levy & collect any other taxes/Cesses. If royalty held to be not a tax, then the state Government is free to levy and collect taxes/cess besides collecting the Mining royalties.
Earlier judgements of Apex court and origin of reference to 9 judges bench:
7 judge bench of the Hon’ble Supreme Court[1] inter alia held that the royalty is a tax and state legislatures lack competence to levy taxes on mineral rights because the subject-matter is covered by the MMDR Act. The Court also held that royalty cannot be used by the State legislature as a measure of tax on mineral-bearing lands under Entry 49 of List II. Following this verdict, many of the states attempt to levy Cess/taxes over and above the royalty were held to be unconstitutional by various HC’s/SC decisions.
However, 5 judge bench of the Hon’ble SC[2] held that the decision in India Cement (supra) stemmed from an inadvertent error and clarified that royalty is not a tax.
Noting this conflict, Hon’ble Apex court[3] has referred issues to 9 judges bench inter alia framing the issue as to whether ‘royalty’ is in the nature of a tax.
Recently, 9 judge bench[4] in 8:1 majority after discussing the earlier decisions of Supreme court and High Courts, Constitutional provisions under the federal structure in respect of distribution of powers between Centre and State, Article 246 read with Seventh Schedule has inter alia held that:
1. Royalty is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease. The payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears;
2. Entry 50 of List II does not constitute an exception to the position of law laid down in M P V Sundararamier (supra). The legislative power to tax mineral rights vests with the State legislatures. Parliament does not have legislative competence to tax mineral rights under Entry 54 of List I, it being a general entry. Since the power to tax mineral rights is enumerated in Entry 50 of List II, Parliament cannot use its residuary powers with respect to that subject-matter;
The request for prospective overruling was rejected by the Hon’ble SC[5] however held that taxes to be paid in installments over period of 12 years commencing from 01.04.2026 and interest & penalties on demands made for the period before 25.07.2024 are waived off.
Dispute under GST/service tax and its relevance to 9 judge bench decision:
When the Union Government attempted to levy service tax on the mining royalties, it was inter alia agitated stating that ‘royalty’ is a tax and service tax cannot be levied on such tax again. Various HC’s across India stayed the demands of service tax noting that main issue is pending before 9 judge bench. The attempt of levying GST on mining royalty was also gone into same loop. However, Hon’ble HC of Rajasthan[6] held that royalty is a consideration paid for mining operations and accordingly held that the service tax is liable on such mining royalty and followed for GST demands also[7], which were challenged and pending before Hon’ble SC[8] as on date.
Liability of service tax/GST attained finality after 9 judges bench decision? – Interplay of list II u/a. 246 with Article 246A:
The majority decision of Hon’ble SC inter alia vide Para 94 to 100 and in 123 to 130, it was held that royalty is paid for acquiring the mineral rights and the royalty is only statutory prescribed contractual consideration paid for the acquiring the mineral rights and accordingly concluded that ‘royalty’ is not a tax. It was further held that the State Government has exclusive power to Tax on Mineral rights and the Union Government do not have the power to tax except the limiting the rights of State Government wherever required. At Para 187 & 188, it was held that scope of taxes on mineral rights includes taxes on the right to extract minerals. Taxes on mineral rights also take within their fold other aspects relating to the exercise of mineral rights such as working the mines and dispatching minerals from the leased area. However, the legislature has to ensure that the exercise of the taxing powers relatable to the field under Entry 50 of List II does not foray into a duty of excise or a tax on the sale of minerals.
Conjoint reading of the aforesaid conclusions drives a point that when royalty is paid for acquiring the mineral rights and the State Government, besides collecting the royalty from the mine lease holder, has exclusive power to tax such mineral rights which includes the taxes on right to extract minerals which is nothing but the royalty under MMDR act, 1957. As corollary, Union Government is precluded from the levying any kind of taxes on such mineral rights including the right to extract minerals. Thus, any taxes imposed by the Union Government are unconstitutional. Accordingly, the service tax demands under the law legislated by the Union Government (Finance Act, 1994 as amended) would be unconstitutional.
There would be additional issues arise for GST dues to its unique feature of having separate Article in Constitution (Article 246A) granting law making power on GST to both Union and State Government simultaneously and it in its plain language overrides the Article 246 inter alia provides for exclusive taxing powers (VII Schedule read with List I & List II thereto). The pertinent question would arise whether overriding effect given under Article 246A should be stretched to say that exclusive taxing powers are not fully exclusive. It is worth noting that 101st COI amendment carried out certain amendments in the List I & List II of VII Schedule to subsume the taxing powers of State or Union into GST that to be levied under Article 246A. If the plain overriding effect of Article 246A is given, it leads to situation of levying GST on any subject matter despite being specifically covered under Article 246 r/w. List I & list II thereto even after 101st COI amendment. If this analogy is adopted, the entire scheme of removing & subsuming certain taxing powers & subsuming into GST while retaining certain taxing powers with State or Union even after 101st amendment would become meaningless. In a way, it amounts to Union Government encroaching the exclusive taxing powers of State and vice versa taking the shelter of overriding effect of Article 246A. It is well settled law that any interpretation leading to absurd results to be best avoided, and it shall be construed to harmonize that every word and phrase of the legislature is given effect. This interpretation equally applies to interpretation of Constitution also.
Hence, the author strongly believes that constitutionally GST is not permitted to be leviable on the royalty as it is paid for acquiring the right to extract minerals and dispose of.
[1] India Cement Ltd. & Ors. v. State of Tamil Nadu & Ors. – [(1990) 1 SCC 12]
[2] State of West Bengal v. Kesoram Industries Ltd. & Ors. [(2004) 10 SCC. 201]
[3] Mineral Area Development Authority v. M/s. Steel Authority of India & Ors., [2011] 4 SCC 450
[4] Mineral Area Development Authority v. SAIL, 2024 SCC OnLine SC 1796
[5] Mineral Area Development Authority v. SAIL, 2024 SCC OnLine SC 1974
[6] Udaipur Chambers of Commerce and Industry vs. Union of India 2018 (8) G.S.T.L. 170 (Raj.)
[7] Sudershan Lal Gupta Contractor vs. Union of India 2022 (66) G.S.T.L. 4 (Raj.) & Shivalik Silica vs. Union of India 2022 (58) G.S.T.L. 403 (Raj.)
[8] Special Leave to Appeal (C) 37326 of 2017 and its batch
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Author Bio
Sir
Refer my analysis published on Tax Guru site that GST is not leviable on Royalty in terms of SC judgement. Also refer my article published in the magazine (2024) J.K.Jain’s GST & VR, pages A1 to A4 concluding based on SC decision that GST is not leviable on Royalty in terms of SC judgement.
Stay has already been granted on 11.1.2018, by SC on levy of Service Tax (2022) 37 J.K.Jain’s GST & VR 93, which is still continuing & will be heard by SC along with Hanumangarh Int Nirmata Samiti v. Union of India & Ors. (2022) 38 J.K.Jain’s GST & VR 493.
CA Om prakash Jain s/o J.K.Jain, Jaipur
Tel 9414300730/9462749040/0141-3584043