Mining Case: A critical analysis

The nine-judge Constitution Bench of the Hon’ble Supreme Court, with an 8:1 majority, with Justice BV Nagarathna dissenting, in the case of Mineral Area Development Authority & Another vs. Steel Authority of India & Another has finally put an end to the controversy about the nature of royalty paid for the grant of mining licenses.

The Court held that royalty is a consideration for the grant of a privilege for removing or consuming the minerals which is paid in terms of contractual as well as statutory obligations. The mere fact that such payment is made under a statutory obligation would not change the nature of such payment to be ‘tax.’ Thus, the judgment of a seven-judge Constitution Bench of the Hon’ble Supreme Court in the case of India Cement, which had held that royalty constitutes tax and that the State legislatures lack competence to levy taxes on mineral rights because the subject-matter is covered by the MMDR Act, has been overruled.

The Court held that the State is entitled to tax royalty by virtue of Entry 49 which empowers the States to levy taxes on land and buildings as well as by virtue of Entry 50 which empowers the States to levy tax on mineral rights subject to any limitations imposed by the Parliament by law relating to mineral development. The Court held that mineral value or royalty can be a measure of tax for both Entry 49 as well Entry 50.

The Court also examined the scope of Entry 49 of the State List and concluded that Entry 49 contemplates the levy of tax on land and buildings as a unit and it does not allow the State to levy tax on division of interest in the building or land or service rendered on or in connection with lands and buildings.

First, the competence of the State to levy tax or cess on royalty has been upheld. Hence, States are entitled to levy tax on royalty under the law enacted by the State. Now, the issue arises whether States can recover tax on royalty with a retrospective effect. Recently, the Supreme Court vide order dated August 14, 2024, has clarified that the said ruling shall have retrospective application. However, the Court has provided relief by waiving the levy of interest and penalty on demands made for the period before July 25, 2024, for all the assesses.

Here, a doubt arises as to whether States can continue to levy tax on royalty or cess post the insertion of Article 246A in the Constitution for the reason that Article 246A was not before the Supreme Court for consideration while examining the power of the State to levy tax on royalty.

In this regard, it would be appropriate to refer to Article 246A of the Constitution which empowers the Parliament and State Legislature(s) to makes laws with respect to GST to be imposed by the Centre and the States. Further, GST has been defined to mean a tax on supply of goods or services or both, except taxes on the supply of alcoholic liquor for human consumption. Therefore, the power of Centre and State to levy GST shall be restricted to a transaction qualifying to be a supply of goods or supply of services (excluding the supply of alcoholic liquor for human consumption). Further, as upheld by the Supreme Court, States are empowered to levy tax on royalty under Entry 49 as well as Entry 50. Entry 50 deals with tax on mineral rights meaning thereby that it is a tax on the grant of rights for the exploitation of minerals. Further, the Court has held that royalty constitutes consideration. Therefore, it has to be examined whether States are entitled to levy tax in the exercise of powers conferred by Entry 50 of the State List post the introduction of Article 246A in the Constitution. However, there does not seem to be any conflict between Article 246A and taxes to be levied under Entry 49 so far as the power of taxation of States is concerned.

Second, the next issue that arises is whether GST can be levied on the royalty paid for mining licenses. If yes, whether it can be levied with a retrospective effect?

As royalty constitutes consideration towards the grant of a privilege to exploit minerals. Therefore, such transactions would qualify as a supply and hence GST would have to paid on it. GST Authorities have been issuing notices in cases of non-payment of GST on royalty. Further, in several cases, High Courts had provided interim stays against recoveries by GST authorities until the issue is settled by the Hon’ble Supreme Court in the above cases.

It has to be seen whether, for the period prior to the issuance of the above judgement, the assessees would get relief in the light of the decision of India Cement - which was the law of the land until the said decision was overruled.

As far as the recovery of GST in cases where no recovery proceedings have been initiated, it can be contended that the subject issue would get covered under Section 73 of the CGST Act and not under Section 74 of the CGST Act for the reason the Supreme Court in the case of India Cement has ruled that royalty constitutes tax until the said decision was overruled. Therefore, no allegation of fraud, suppression of facts etc. can be alleged in such cases. Accordingly, no proceedings can be initiated under Section 73 of the CGST Act for the recovery of tax for the period up to March 31, 2020 where the limitation period for the issuance of SCN and order has expired. For the period of April 1, 2020, till July 25, 2024, the industry may consider approaching the Council for providing exemption as per the proposed Section 11A in the CGST Act for the reason that it was a general industry practice not to charge GST on the royalty amount in the light of the decision of Supreme Court in the case of India Cement.

Third, this judgement will be a leading case to guide taxability of the transactions related to land and building under service tax and GST (such as renting of immoveable property, transfer of development rights etc. where the power of Centre to levy taxes on such transactions have been questioned). The constitutionality of the levy of service tax as well as GST on renting of immoveable property is pending before a larger Bench of the Hon’ble Supreme Court in Civil Appeal No. 4487/2010 wherein the Court held that the final hearing will take place post the disposal of the royalty case. Hence, the Hon’ble Supreme Court would decide the said issue in the light of the above decision.

Fourth, the Court has primarily decided the power of States to levy tax on royalty in the light of the MMDR Act. It is to be examined whether the the ruling of Supreme Court would equally be applicable on royalties collected under other Acts such the Oilfields (Regulation and Development) Act, 1948.

About the authors: Surbhi Premi is a Partner and Kundan Kumar is a Principal Associate at Lakshmikumaran and Sridharan attorneys.

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