GST on Royalty and the Brick-Kiln “Regulating Fee”: A Post-MADA Reassessment

Summary: The GST treatment of the Regulating Fee collected from brick-kiln operators in Uttar Pradesh raises a classification issue distinct from the taxation of mining royalty. Following the Supreme Court’s nine-judge decision in Mineral Area Development Authority v. Steel Authority of India, which held that royalty is not a tax but consideration for mineral rights, the question is whether a capacity-based fee paid by a brick kiln without a mining lease can be treated as consideration for licensing mineral rights under GST. The article examines the Uttar Pradesh Minor Minerals (Concession) Rules, the March 2019 substitution of royalty with a Regulating Fee, and the distinction between mining concessions and regulatory payments calculated according to kiln capacity and district classification. It considers the scope of GST on mineral rights, SAC 997337, Entry 5 of Notification No. 13/2017-Central Tax (Rate), and CBIC Circular No. 164/20/2021-GST. The central issue is whether the required supply of licensing services exists when the operator holds no mining concession.

Allahabad High Court · Tax & Mineral Law September 2026

For close to five years, brick-kiln owners across Uttar Pradesh have been receiving a near-identical notice from the State Tax Department. The amount is almost always the same, or a close variant of it — a demand for eighteen per cent GST under the reverse charge mechanism, computed on a sum the kiln owner paid, months or years earlier, to the Directorate of Geology and Mining. The department’s description of that payment is unfailingly the same as well: royalty. And on that single word, an entire structure of tax liability has been built.

The difficulty is that, in Uttar Pradesh, brick kilns have not paid royalty on brick earth since March 2019.

1. The Levy the Department Is Actually Collecting On

Rule 3 of the U.P. Minor Minerals (Concession) Rules, 1963 carried forward in materially identical terms in Rule 3(1) of the 2021 Rules contains an Explanation of some consequence:

“For the purposes of this rule, manual digging or manual extraction of ordinary clay or ordinary earth for making bricks and pottery shall not be treated as mining operations: Provided that the pit created by such digging or extraction shall not be deeper than two metres.”

Extraction within that depth is, in other words, not mining at all. No mining lease, no mining permit, no concession of any description is granted to, or required by, a brick-kiln owner digging within two metres. This ought to have settled the matter. It did not, because Rule 21 of the same Rules carried a non obstante clause preserving royalty notwithstanding Rule 3 until the State Government, exercising the very proviso built into Rule 21, chose otherwise.

By Notification No. 306/86-2019-153(Sa)/2017 dated 6 March 2019, read with the accompanying executive order of the same date, the Government of Uttar Pradesh recorded, in terms that leave little room for the department’s later characterisation:

“ईंट मिट्टी पर देय रायल्टी के स्थान पर विनियमन शुल्क (Regulating Fees) लगाये जाने का प्राविधान किया गया है” — in place of royalty payable on brick earth, a Regulating Fee shall be levied.

The Regulating Fee locally, Viniyam Shulk — is fixed by slab, keyed to two variables alone: the number of paya (kiln flues) and the category of the district. It bears no relationship whatsoever to the volume of earth dug, the number of bricks fired, or any other measure of the mineral actually extracted. A kiln with twenty flues pays a fixed sum for the season regardless of whether it works one bigha or fifty. This is not how royalty is computed anywhere in Indian mineral law; royalty is, definitionally, a payment per unit of mineral removed. A capacity-based annual charge, quantified by kiln architecture and geography, is a different creature altogether and the State’s own First Schedule confirms as much, fixing the royalty rate on ordinary earth for brick-making at Nil.

The Core Contradiction

Show-cause notices issued as late as years after the substitution — continue to describe the Regulating Fee as “भट्ठा रायल्टी” (brick-kiln royalty), and proceed to tax it under Entry 5 of Notification No. 13/2017-Central Tax (Rate) as consideration for “licensing services for the right to use minerals.” The State Government’s own instrument, addressed to every District Magistrate, says the opposite of what its own tax department is asserting in adjudication.

2. What the Circular Actually Covers — and Does Not

The department’s authority for the classification is CBIC Circular No. 164/20/2021-GST, dated 6 October 2021, which followed the 45th GST Council meeting. It holds, uncontroversially, that the grant of mineral exploration and mining rights is classifiable under Service Accounting Code 997337 — “licensing services for the right to use minerals including its exploration and evaluation” — and is taxable under reverse charge at eighteen per cent by virtue of Entry 5 of Notification 13/2017-CT(R), the tax being payable by the lessee, not the State.

None of this is in dispute as a general proposition. What is missing, entirely, is the premise on which it rests: a grant. SAC 997337 licenses a right. A brick kiln operating within the two-metre exemption receives no right from the State to license; it is not a lessee, holds no mining permit, and could not hold one even if it wished to, extraction at that depth being expressly excluded from the definition of a mining operation. The Circular addresses the taxability of a payment made by an actual concession-holder for an actual grant. It says nothing — because it was never asked to about a capacity-based fee paid by an operator who holds no concession of any kind.

This distinction has a second consequence that is easy to overlook. Entry 5 fastens reverse-charge liability specifically on the recipient of the government’s service the concession-holder. Where no concession exists, there is no recipient within the meaning of the Entry, whatever the department’s books might record as an expense head. RCM demands in this sector appear, on the pattern visible across dozens of notices, to be raised mechanically wherever a payment to the mining department appears in a kiln’s accounts, without any inquiry into whether that payment corresponds to a lease at all.

3. What MADA Actually Decided — and the Argument It Does Not Rescue

It would be tempting, and it is a temptation several draft petitions in circulation have not resisted, to reach for the Supreme Court’s nine-judge ruling in Mineral Area Development Authority v. Steel Authority of India, 2024 INSC 554, decided on 25 July 2024, and argue that because royalty was there held not to be a tax, there can be no GST on it. The argument inverts the actual holding.

The majority overruled India Cement Ltd. v. State of Tamil Nadu and held, in terms, that royalty “is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights.” That is precisely the finding the Revenue needs to sustain a GST “supply” a grant of rights, by a supplier, to a recipient, for consideration. MADA did not decide, and was never asked to decide, any question of GST law. Reading it as having done so, in either direction, is a misreading that has circulated widely enough to merit correction.

The judgment that closes the “royalty is a tax” argument is the same judgment that, read correctly, supplies the missing element of the Revenue’s case for an actual lessee.

For the brick-kiln industry, however, this reversal is close to irrelevant, because the industry’s argument was never that royalty is a tax. It is that no royalty is being paid at all. MADA‘s characterisation of royalty as consideration for a mining lease has no bearing on a fee levied on an operator who holds no lease. The two questions are simply orthogonal, and a pleading that leans on MADA for the wrong proposition invites a correction from the bench that could unsettle the sounder arguments pleaded alongside it.

The Regulatory-Fee Cases, and Their Limits

The classical Indian test for distinguishing a fee from a tax — the requirement of quid pro quo articulated in Kewal Krishan Puri v. State of Punjab — has an obvious appeal for an operator paying a compulsory, non-negotiable, schedule-fixed sum with no discernible service rendered in return. But the test was developed to police legislative competence between “fee” and “tax” entries under the constitutional lists; it does not automatically translate into the Section 7 CGST “supply” analysis, which asks a different question — whether there is a supply for consideration, not whether a payment is validly a fee rather than a tax. The two frameworks can be made to speak to each other, but only as a supporting characterisation of the payment’s regulatory nature, never as a substitute for the statutory test GST itself imposes.

A more direct line lies in the Regulating Fee’s own textual character. On the face of every Brick Kiln Certificate issued by the Directorate of Geology and Mining, the payment is described, without exception, as being “for transportation and storage of Brick Earth” nothing about extraction, nothing about a right to the mineral. A charge levied to monitor and permit the movement and stocking of material already lawfully dug is an exercise of the State’s policing power over illegal removal, not the grant of a benefit. It has no more in common with a mining lease than a transit pass has with land title.

4. No Code for What Is Being Taxed

A classification argument gains force from a fact that is, in a sense, an absence rather than an authority: nowhere in the Scheme of Classification of Services annexed to Notification No. 11/2017-Central Tax (Rate) does a Service Accounting Code exist for a regulatory fee on the transportation or storage of a mineral. SAC 997337 is confined, in its own words, to the right to use minerals.

No circular, no notification, no classification instrument assigns the Regulating Fee any code at all. Adjudication orders across the sector do not identify what service, precisely, the State is said to have rendered in exchange for the fee they assume the label “royalty” is correct and apply 997337 mechanically. A charge answering to no identifiable governmental function, and assigned no code under the very scheme meant to be exhaustive, sits uneasily with the proposition that it is a taxable supply at all.

What Remains Genuinely Untested

No High Court, Authority for Advance Ruling, or Appellate Authority has yet ruled on the GST treatment of the brick-kiln Regulating Fee specifically. The classification argument is, at the time of writing, open ground an opportunity for a reportable first-impression ruling, but also an argument without a directly supporting precedent to lean on.

5. The Argument That Does Not Need the Rest

Running alongside the classification dispute, and entirely independent of it, is a narrower point that several adjudication orders in this sector have handed to the taxpayer without the department appearing to notice. A pattern recurs across a number of orders: the “Demand Details” table records the assessed rate of tax as zero per cent, the turnover as nil, and the tax itself as nil and then proceeds, in the same order, to confirm a demand for interest running into thousands of rupees.

Interest under Section 50 of the CGST Act is not a free-standing liability. It is accessory to a principal, and it cannot outlive a principal the very order assessing it has fixed at zero. The proposition is not new to GST; it restates a principle the Supreme Court settled under the Customs Act in Pratibha Processors v. Union of India, holding interest to be “a mere accessory of the principal” such that “when such principal amount is nil… interest payable is also nil… [it] has no independent or separate existence.” An order that assesses nil tax and nil turnover has, on its own arithmetic, nothing for interest to attach to.

This ground asks nothing of the tribunal on the harder question of royalty, regulating fees, or mineral rights. It asks only that an order be read against its own numbers. Where it is available on the facts of a particular case — and it recurs often enough in this sector to be worth checking in every file — it is the least contestable ground available, and the one on which relief is least likely to depend on how a court eventually resolves the broader classification dispute.

6. Where the Broader Question Stands

The Supreme Court’s own docket keeps the door open for the wider argument, even as its recent trend runs against it. The question of GST or service tax on mining royalty, as distinct from the constitutional character settled in MADA, remains pending in a separate batch led by Udaipur Chambers of Commerce & Industry v. Union of India, deliberately kept apart from the MADA bench and listed the day before it was decided. Since MADA, however, High Courts have not been receptive to the “no supply” argument for an actual lessee: the Himachal Pradesh High Court in Lakhwinder Singh Stone Crusher and the Chhattisgarh High Court in Mahesh Sharma have both upheld GST on royalty, reading MADA‘s characterisation of royalty as consideration in precisely the direction sketched above.

None of these decisions concerns an operator without a lease. The brick-kiln question — whether a capacity-based Regulating Fee, substituted for a royalty fixed at Nil, paid by an operator holding no concession, can be taxed under an entry that presupposes one —

Authorities

• Mineral Area Development Authority v. Steel Authority of India, 2024 INSC 554 (9-Judge Bench, decided 25.07.2024).
• India Cement Ltd. v. State of Tamil Nadu, (1990) 1 SCC 12 — overruled by MADA.
• Kewal Krishan Puri v. State of Punjab, (1980) 1 SCC 416.
• Pratibha Processors v. Union of India, (1996) 11 SCC 101.
• Lakhwinder Singh Stone Crusher v. Union of India, HPHC, CWP 8637/2023 (05.11.2024).
• CBIC Circular No. 164/20/2021-GST, dated 06.10.2021.
• Notification No. 306/86-2019-153(Sa)/2017 dated 06.03.2019, U.P. Upkhanij (Parihar) (46th Amendment) Rules, 2019.
• Rules 3 and 21, U.P. Minor Minerals (Concession) Rules, 1963/2021.