All You Need To Know On Apex Court's Verdict On Mining Royalties And Its Broader Impact

The origin of this controversy dates back to 1989, when a seven-judge bench of the court mistakenly held 'royalty' to be in the nature of tax. The error was so manifest that certain top court judgements by smaller benches raised doubts on the correctness of the principle laid down in the 1989 verdict.

In 2004, a five-judge bench of the court analysed the nature of royalty and held that royalty is not a tax but a payment made to the owner of the land.

The divergence on the point of law between two full benches of the top court prompted the court to refer the case directly to a nine-judge bench so that the issue could be settled once and for all.

By virtue of the nine-judge bench judgement that has now been pronounced, the issue has attained finality. In holding that royalty is not a tax, the court also expounded that the power to tax mineral rights rests with the state legislatures, and the Parliament cannot use its residuary powers to levy tax on this subject matter.

Notably, the court has said that the Mines and Minerals (Development and Regulation) Act of 1957, as it stands today, does not impose any limitations on the power of the state legislatures to impose taxes on mineral rights. However, this does not preclude the Parliament from coming up with fresh legislation to limit the state’s power.

Apart from the obvious—that the states will be able to impose taxes over and above the royalty that is received by them from the mining leaseholders—experts believe that this ruling might have implications on the indirect tax front as well.

Crucially, the issue of GST or service tax, on royalty paid by mining leaseholders is pending before the top court and is likely to be taken up next month.

While there are arguments to say that royalty should not be liable to service tax or GST, the industry would be dealing with it with a significant handicap, considering that the top court in its nine-judge bench decision has held it to be fees for parting of privilege, Senior Advocate Sujit Ghosh told NDTV Profit.

However, Senior Advocate Tarun Gulati said that the states have the power to levy taxes on mineral rights under Entry 49 of the state list. Therefore, to categorise royalty as a payment for a service so that the Union can impose a service tax on it would open up a debate as to whether the Union is trying to make a backdoor entry to levy a tax on minerals, which is not in its domain.

Ghosh said that if royalty is found to be a consideration provided to the government for a service, then such a service will be liable to GST, and that too on a reverse charge basis. In short, the mining companies will have to pay GST to the government.

This will create a significant demand from mining companies and many such cases are currently pending before various high courts and the top court, Ghosh said.

As soon as the judgement was pronounced in open court last week, lawyers questioned the court on its applicability, meaning whether the judgement would be applied prospectively or retrospectively.

The court agreed to consider this aspect, as giving it a retrospective operation might be disastrous for a lot of mining companies.

Normally, every judgement, unless stated to have prospective application, applies retrospectively. The top court doesn't make new law; it only finds law and interprets it. It is presumed that the interpretation given by courts existed from its inception, Gulati said.

Ghosh said that this judgement, if made retrospective, as is the case with most of the top court judgments, then it will result in a significant windfall for states, act as a catastrophe for the industry, and have huge financial implications for the country.

Gulati added that if the judgment is made retrospective, then it could spell a lot of trouble for the mining companies, just like it happened when the top court came out with its verdict in the Entry Tax fiasco in 2016. The top court overruled its own judgment after 50 years and the taxpayers were saddled with huge liabilities, he said.