‘Royalty’ is not the same as ‘Tax’: Supreme Court held that States have the power to levy tax on mineral rights

Today (July 25, 2024), the Supreme Court (SC) of India held that ‘royalty’ is not the same as ‘tax’ and the States have the power to levy tax on mining and mineral-use activities. The bench elaborated that the royalty paid by the mining operators to the Central Government is not a tax. The nine-judge bench with a majority ratio of 8:1 delivered the judgment. The bench consists of Chief Justice of India DY Chandrachud, Justice Abhay S Oka, Justice JB Pardiwala, Justice Ujjal Bhuyan, Justice Augustine George Masih, Justice Hrishikesh Roy, Justice BV Nagarathna, Justice Manoj Misra, and Justice Satish Chandra Sharma. Justice BV Nagarathna dissented on all conclusions drawn by the majority judges. The SC said that the Mines and Minerals (Development & Regulation) Act will not denude the power of the State to levy tax on mineral rights. It overruled its 1998 judgment in the India Cements case holding royalty to be a tax. The majority bench stated that “The legislative power to tax mineral rights lies with the State legislature and the Parliament does not have the legislative competence to tax mineral rights under Entry 50 of List 1 since it is a general entry and Parliament cannot use its residuary power regarding this subject matter ... State legislature has the legislative competence under Article 246 read with Entry 49 of List 2 to tax mineral bearing lands.” In a dissenting opinion, Justice Nagarathna said, “I hold royalty is in nature of the tax. States have no legislative competence to impose any tax or fee on mineral rights. Entry 49 is not related to mineral-bearing lands. I hold India cement decision was correctly decided.”

During the proceedings, the majority also elaborated its views on the difference between a tax and a royalty. It said, “Royalty flows from mining lease, it is generally determined from the basis of the quantity of minerals removed. The compulsion of royalty depends on the contractual conditions of the mining lease agreed between the lessor and lessee ... The payment is not for public purposes but it is a consideration paid to the lessor for parting with exclusive privileges in the minerals ... Pertinently, contractual payments due to the government cannot be deemed to be a tax merely because the statute provides the recovery as arrears. There are major conceptual differences between royalty and a tax. One, a proprietor charges royalty as a consideration for parting with rights to minerals while tax is an imposition of a sovereign. Two, royalty is paid in consideration of doing a particular action, that is extracting minerals in the soil while tax is generally levied with respect to a taxable event determined by law. Three, royalty can be foreclosed from the lease deed as compared to tax which is enforced by law.” 

Solicitor General Tushar Mehta, Senior Advocate AM Singhvi, and Senior Advocate Arvind P Datar requested the SC to clarify whether the judgment will apply prospectively or not. This was asked after the judgment was pronounced and the bench agreed to hear the parties on this question on Wednesday (July 31, 2024).