Royalty Vs Tax – Tax on Mineral Rights – Impact on GST Levy?

Royalty Vs Tax – Mineral Rights - One More Litigation Area in GST?

Editor:

1. The Nine Member Bench of the Supreme Court in Mineral Area Development Authority & Anr Vs M/s Steel Authority of India & Anr. Etc. (Civil Appeal Nos. 4056-4064 of 1999) decided on 25^th July 2024 through a majority view of 8:1 in a case pertaining to distribution of legislative powers between the Union and the States on the taxation of mineral rights, has concluded that royalty is not a tax.

2. 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; Using royalty as a measure of tax on lands “does not stamp it as a tax on either the extraction of the mineral or on the mineral right.

3. Royalty would not be comprehended within the meaning of the expression “taxes on mineral rights.” The 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.

4. The natural meaning of the expression “mineral rights” will include the entire bundle of rights that follow ownership of minerals, including rights which can be transferred to a lessee through a mining lease. These rights will include the right to extract minerals by working the mines, winning the minerals, and monetizing the minerals obtained by removing or consuming them. Mineral rights do not culminate with the extraction of minerals, but include the right to dispatch the extracted minerals as well.

5. The legislative domain to tax mineral rights vests with the State. The legislative power of Parliament to impose “any limitations” is traced to Article 246(1) read with Entry 54 of List I. Parliament can impose limitations, and not levy taxes on mineral rights itself. The subject of taxing mineral rights continues to remain with the States.

6. The field of taxation cannot be derived from regulatory legislative entries and has to be derived from a specified taxing entry. This principle has now been well-entrenched in our constitutional jurisprudence. A legislature has incidental and subsidiary powers with respect to a legislative entry. However, the power to tax is neither incidental nor subsidiary to the power to legislate on a particular matter in the nature of a regulatory entry. Parliament cannot resort to its residuary powers to tax mineral rights when the subject matter is specifically enumerated in Entry 50 of the State List.

7. The main entries under dispute were entries 54 of List I of Seventh Schedule and 50 of List II of the said schedule reproduced below –

54. Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.

50. Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.

In addition to the above we have entry 49 in said List II going as follows – “49. Taxes on lands and buildings.”

8. The Court has confirmed that 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 MMDR Act as it stands has not imposed any limitations as envisaged in Entry 50 of List II. Even otherwise, presuming the “limitations” imposed by Parliament in a law relating to mineral development with respect to Entry 50 of List II, the same would not operate on Entry 49 of List II because there is no specific stipulation under the Constitution to that effect;

9. The State legislatures have legislative competence under Article 246 read with Entry 49 of List II to tax lands which comprise of mines and quarries. Mineral bearing land falls within the description of “lands” under Entry 49 of List II. The yield of mineral bearing land, in terms of the quantity of mineral produced or the royalty, can be used as a measure to tax the land under Entry 49 of List II. The machinery selected by the legislature to assess the tax cannot determine the true nature of the tax. The issue of selecting the appropriate measure of tax is a matter of fiscal policy. Sometimes, the method selected by the legislature to measure a tax may be imperfect, but that does not imply unconstitutionality.

10. The transfer of right to enjoy the property under a mining lease commences from the specified day of commencement. Resultantly, the rights and interests in the minerals specified in the mining lease are transferred from the State Government to the lessee on the specified day of the commencement of the lease deed. Once the interest in the minerals is transferred under a mining lease, the lessee acquires the right to work the mine and win the minerals. It is through this process of working the mine and winning of minerals that minerals are extracted or obtained from the earth. The transfer of interest in the minerals is distinct from the exercise of the mineral rights.

11. It remains to be seen how this verdict would impact GST as there is reverse charge liability for business entities receiving such services from Government. If the tax on mineral rights happens to be within the domain of the States and such rights can be distinguished from actual usage of mines, can GST be made applicable at all? Can service of right to use for GST be distinguished from mineral rights that is taxable in the hands of the State? These are the questions which could come up before the Judiciary moving forward.

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