Royalty Is Not Tax, But A Contractual Consideration: Supreme Court

Clarifying the extent of powers of the state regarding mineral taxation, a nine-judge constitution bench of the Supreme Court on 25 July ruled that the states have the authority to levy taxes on mineral-bearing land. The top court also ruled that the royalties on mining did not fulfil the characteristics to be called a tax.

The apex court upheld the power of states to levy taxes on mineral-bearing lands by an 8:1 majority, ruling that the 1989 decision of its seven-judge constitution bench is incorrect. The 1989 decision of the apex court decreed that royalty on minerals to be called a tax.

The court examined whether the royalties on mining leases be considered as tax and if the states have the power to levy royalties on mineral rights. Supreme Court ruled that the state's power would not be limited by the Mines and Minerals (Development and Regulation) Act 1957 (MMDR Act). The court also ruled that royalties did not fulfil the criteria to be called tax and therefore did not come under the MMDR act, according to a report by LiveLaw.

The court said that royalty is not within the nature of the tax as it is a contractual consideration paid by the lessee under the mining lease. The issue is related to a dispute between the Tamil Nadu government and India Cements. The Supreme Court, back then, ruled that royalty is a form of tax under the Mines Act and the states did not have the legislative competence to impose cesses on such royalty. 

Chief Justice of India DY Chandrachud headed the nine-judge bench which includes Justices Hrishikesh Roy, Abhay Oka, BV Nagarathna, JB Pardiwala, Manoj Misra, Ujjal Bhuyan, SC Sharma and AG Masih. Justice BV Nagarathna was the only judge to provide the dissenting opinion.