HC upholds levy of GST on royalty paid for mining rights basis SC nine-judge bench ruling

This Tax Alert summarizes the recent Himachal Pradesh High Court (HC) ruling^[1]   regarding levy of Goods and Services Tax (GST) on royalty paid by the taxpayer for mining concession granted by the State.

The writ petition was filed before the HC for quashing of notices demanding tax on royalty paid by the taxpayer. The petition was based upon the judgment of the seven-judge bench of the Supreme Court (SC) in case of India Cement Ltd.^[2]  , wherein it was held that royalty itself is a tax. In this backdrop, the demand of GST on royalty paid by the taxpayer was stayed by the HC.

Subsequently, the above judgement of India Cement Ltd. was overruled by the decision of nine-judge bench of the SC in case of Mineral Area Development Authority^[3] (MADA), which held that royalty is not a tax, but a consideration paid by the lessee to the lessor of mining lease for enjoyment of mineral rights and to compensate for the loss of value of minerals suffered by the owner.

Basis above, HC concluded that Revenue is well within their rights to levy GST on the royalty paid by the taxpayer and upheld the notices demanding tax on such royalty.

Comments:

• The ruling is likely to have a potential impact both under service tax and GST.
• Prior to SC ruling in case of MADA, Rajasthan HC in two separate judgements had held that royalty is a consideration paid for mining rights and hence, service tax and GST is payable on mining royalty. The matter is currently pending before the SC [2024 (8) TMI 254 - SC]..

[1] TS-722-HC(HP)-2024-GST
[2] (1990) 1 SCC 12
[3] Refer our alert “SC upholds legislative power of States to impose taxes on mineral rights” dated 2 August 2024