Why 'Royalty' Is Not 'Tax'? Supreme Court Explains

The Supreme Court, in its decision upholding the power of states to to levy tax on mineral rights, observed that royalty set under S.9 of the Mines and Minerals (Development and Regulation) Act 1957 (MMDR Act) does not qualify as tax.A 9-judge Constitution Bench (by 8:1 majority) held that royalty on a mining lease is a contractual payment given by the lessee to the lessor of the mineral land which is conceptually different from government-imposed tax for public welfare. As per S. 9 of the MMDR Act, the holders of mining leases must pay royalties on minerals removed or consumed from the leased area at rates specified in the Second Schedule. The Central Government has the power to amend the royalty rates through notification, but such changes cannot occur more than once every three years. The three main reasons for the Court to hold that royalty rates set under S.9 cannot be called tax were : (1) the obligation to pay royalty arises from the mining lease agreement and not a legal mandate; (2) the demand for payment of royalty comes from the lessor (can be either the state government or private party) but not a public authority; (3) the payment of royalty is intended to be a consideration to the lessor for permitting access to the mineral reserves and is not utilised for public purposes. "The fact that the rates of royalty are prescribed under S.9 of the MMDR Act doesn't make it a compulsory exaction by public authority for public purposes because (1) the compulsion stems from the contractual conditions of the mining lease agreed between the lessor and lessee; (2) demand is not made by the public authority but the lessor which can either be a state government or a private party and (3) the payment is not for public purposes but a consideration paid to the lessor for parting with parting with their exclusive reserve in the minerals,” the majority judgment authored by CJI DY Chandrachud stated.The majority decision was given by a bench led by CJI DY Chandrachud comprising Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih. Justice BV Nagarathna however in her dissenting opinion held royalty to be in the nature of tax. What Is Royalty On Minning Leases? How Is It Different From Tax? The Court first analysed the essential characteristics of Royalty to include the following : (1) Royalty is the consideration paid by the proprietor of minerals either to the government or a private person; (2) It flows from a statutory agreement - a mining lease between a lessor and the lessee; (3) It represents a return of the grant of a privilege of the lessee of removing or consuming the minerals; (4) It is generally determined based on the quantity of the minerals removedThe Court then drew the key difference between royalty and taxes as separate concepts.(1) Nature of Payment: A royalty is a payment to a property owner (lessor) in return of the lessee's right to use the resources on the lessor's property. While tax is a mandatory payment imposed by the Government(2) Reason for Payment: Royalty is paid for the specific act of mineral extraction from the land, while tax is imposed as per various events or activities outlined by a law(3) Legal genesis: Royalty arises out of an established lease agreement between two parties, while a tax is a creation of legislation.“There are major conceptual differences between a royalty and a tax : (1) the proprietor charges royalty as consideration for parting its right to the minerals; while a tax is an imposition by the Sovereign; (2) Royalty is a due for a particular action that is extraction of minerals from the soil while tax is generally levied on a taxable event determined by law; (3) royalty is foreclosed by a lease deed as compared to a tax that is imposed by law.” Considering the above dissimilarities, the Court proceeded to conclude that royalty and debt rent under S.9 and S.9A of the MMDR Act cannot be classified as a tax. It additionally held that the decision in India Cement Ltd. and Ors. v. State of Tamil Nadu and Ors. In India Cement, the 7-judge bench held that royalty paid on the extraction of minerals is tax and that the authority to levy such tax is vested with the Union under Entry 54 List I. “We hold that royalty and debt rent do not fulfill the characteristics of tax so imposed. We conclude that the observation in India Cement that royalty is a tax is incorrect.” On Justice Nagarathna's Dissent Justice Nagarthna, disagreeing with the majority, held that royalty is in the nature of a tax. Hence, the provisions of the MMDR Act regarding levy of royalty denude the States of their power to levy taxes on minerals. She reasoned that S.9 has to be read from the standpoint of Schedule 2 and S.2 of the MMDR Act. S.2 essentially serves as a declaration of the central government's intent to control the regulation of mines and the development of minerals across India. Schedule 2 provides royalty rates for different...

Why 'Royalty' Is Not 'Tax'? Supreme Court Explains

Anmol Kaur Bawa

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Why 'Royalty' Is Not 'Tax'? Supreme Court Explains

Anmol Kaur Bawa

This is a premium content Available exclusively to Our subscribers

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This is a premium content
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