GST on Royalty Payments for Mining Concessions Declared Valid

[Kamal Aggarwal]

In a recent judgement of M/S MATRI STONE CRUSHER & ORS. VERSUS UNION OF INDIA & ORS. - 2024 (11) TMI 375 - HIMACHAL PRADESH HIGH COURT has held that the revenue is well within their rights to levy GST on the royalty paid by the mineral concession holder for any mining concession granted by the State Government.

The issue before the hon’ble High Court was whether GST would be applicable on royalty paid by the mineral concession holder for any mining concession granted by the State Government.

The GST demand on royalty was stayed by the Hon’ble High Court based upon the ruling of Hon’ble Supreme Court in the matter of INDIA CEMENT LIMITED VERSUS STATE OF TAMIL NADU - 1989 (10) TMI 53 - SUPREME COURT wherein it was declared that royalty itself is a tax.

The hon’ble High Court dismissed the petition and held that the judgment rendered in India Cement Ltd. (supra) has now been overruled by the Hon’ble Supreme Court in MINERAL AREA DEVELOPMENT AUTHORITY & ANR. VERSUS M/S STEEL AUTHORITY OF INDIA & ANR ETC. - 2024 (7) TMI 1390 - SUPREME COURT (LB), wherein it has been held that royalty is not a tax. The relevant extract of the judgement is reproduced below: -

“5. It is not in dispute that the judgment rendered in India Cement Ltd.’s case (supra) has now been overruled by Nine-Judge Bench of the Hon’ble Supreme Court in MINERAL AREA DEVELOPMENT AUTHORITY & ANR. VERSUS M/S STEEL AUTHORITY OF INDIA & ANR ETC. - 2024 (7) TMI 1390 - SUPREME COURT (LB),, wherein it has been held that royalty is not a tax. Therefore, the respondents are well within their rights to levy GST on the royalty paid by the mineral concession holder for any mining concession granted by the State.

From a legal perspective, the High Court's reliance on the Supreme Court's recent ruling marks a crucial shift in the judicial interpretation of royalty payments. The previous India Cement (supra) judgment had granted royalty an exemption from GST, arguing that it was a tax. However, with the Supreme Court's ruling in Mineral Area Development Authority (supra), this position has been overturned, categorizing royalty as a consideration for the grant of mining rights rather than a tax.

The implications of this judgment are far-reaching, particularly for the mining industry. Mineral concession holders now face the dual challenge of adhering to existing royalty obligations and managing the additional burden of GST payments. For the mining sector, especially smaller operators, this could mean an increase in operational costs, as GST will apply not only to the royalty but potentially to other charges and payments related to mining activities. While this may be seen as a necessary step to broaden the tax base and increase government revenue, it would impact a large number of industries which uses the minerals as inputs, for the reason that mining industry would try to pass on this additional burden to its customers.