Implication of GST on Royalty paid under MMDR Act. 1957 for the right to use minerals including its exploration and evaluation.
Mine operators are required to obtain license from government for undertaking mining activity for which an amount is required to be paid in the form of ‘Royalty’. The license are regulated the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act).
Article 245 read with Article 246 of the Constitution of India grants the Parliament with the powers to make laws on subjects enumerated in List I (Union List) and List III (Concurrent List) of the Seventh Schedule of Constitution of India. The regulation of mines and mineral development is a subject matter enumerated in List I of the Seventh Schedule. In accordance with this power vested in the Parliament, the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and the rules made thereunder came into existence.
As the ownership in the land on which mining activity is undertaken and the minerals arising out of such activity vests in the Union as constitutionally recognised by Article 297, the Government grants a lease to persons undertaking mining activities for which an amount is required to be paid in the form of ‘Royalty’. The machinery to levy the said amount flows from the section 9 of the MMDR Act.
Now, the moot question arises is whether royalty paid under MMDR Act. 1957 for the right to use minerals including its exploration and evaluation is a tax or not. This question is relevant because If, ‘royalty’ levied and collected in accordance with the MMDR Act has the qualities of being a ‘tax’, the same cannot be said to be a consideration for the mining lease granted by the Government and thereby, not liable to either Service Tax or GST as it is a settled position of law that there cannot be a ‘tax on tax’.
“A tax“, as Latham, C.J. put it in in Matthews v. Chicory Marketing Board (1938) 60 C.L.R. 263 ” is a compulsory exaction of money by public authority for public purposes enforceable by law, and is not payment for services rendered”. Therefore, there is no element of quid pro quo between the person who pays tax and the public authority who imposes it.
In the case of India Cement Ltd. vs. State of Tamil Nadu, etc. (AIR 1990 SC 85), the actual question before the Hon’ble Supreme Court was the constitutional validity of the cess levied on such royalty. It was held that if royalty is a tax or an imposition or a levy, it is not on land alone but it is a levy or a tax on mineral (land), labour and capital employed in extraction of the mineral. It was further held that royalty, imposed by Parliament, could only be a tax not only on land but on these three things stated above.
However, the judgement of the Hon’ble Apex Court in the case of Kesoram Industries [Appeal (civil) 1532 of 1993] subsequently examined the aforesaid case of India Cement Ltd. and observed that the holding of the Court in India Cement Ltd. was a typographical error and what the court wanted to say was that cess on royalty is in the nature of a tax. The Hon’ble bench further held that royalty is not a tax and rather is income for the lessor granting the lease. The Court drew an analogy to an individual granting such rights and held that to such person the payment of royalty would be consideration for the rights granted and merely because the rights are granted by the State does not mean that the nature of the sum collected stands altered to tax.
Due to contradictory judgements of India Cement Ltd and Kesoram Industries, the issue whether `royalty’ determined under the Mines and Minerals (Regulation & Development) Act, 1957 (Act 67 of 1957, as amended) is in the nature of tax is sub-judice before nine bench member in the case of Mineral Area Development Authority &Ors. vs. Steel Authority of India &Ors (2011) 4 SCC 450.
Principal would come out from nine bench member judgement in the case of Mineral Area Development Authority &Ors. vs. Steel Authority of India &Ors (2011) 4 SCC 450 can well be applied to levy of Service Tax / GST on the Royalty. This is simply for the reason that Service Tax or GST cannot be levied on any tax levied by State or Central Government, hence, if royalty is considered as tax, there would be no application of service tax or GST on the same and if it is held otherwise, Service Tax/GST may be levied on the same.
The levy of Service Tax on Royalty has also challenged in different courts of law and the Hon’ble Union of India [2018 (10) GSTL J167 (SC)] has stayed levy of Service Tax on royalty paid by mining lease holder for undertaking mining operation in the leased mining area.
As the underlying principle for levy of GST is same as that of Service Tax, therefore, in our humble view, the judgement of Honorable Supreme Court in the case of Udaipur Chambers of Commerce and Industry vs. Union of India [2018 (10) GSTL J167 (SC)] would squarely apply in the case of GST as well.
The levy of GST on Royalty would be settled only post the judgement of nine bench member in the case of Mineral Area Development Authority & Ors. vs. Steel Authority of India & Ors (2011) 4 SCC 450.