By Gopal Mundhra, Rajath Bhardwaj, Priyadarshini Shekhawat
The nine-judge Constitution Bench of the Supreme Court of India, with a decisive 8:1 majority, ruled on July 25, 2024 that royalty on minerals is not a tax but a contractual consideration. As a sequitur, the bench clarified on August 14, 2024, that the said ruling would have a retrospective application as, it is a settled legal principle that the court only ‘declares’ what the law has always been and does not ‘make’ a new law. In effect, the court has upheld the perennial power of the states to recover tax in respect of mining leases.
The Court’s pronouncement sent shockwaves through the mining community which was anxiously hoping for a prospective application given the fact that the earlier decision of the constitutional bench in the case of India Cements was holding the field for more than three decades.
This judgment resuscitates tax demands on mining leases under various state legislature which were either declared ultra vires or kept in abeyance pursuant to the India Cements judgment in 1989 declaring royalty to be a tax.
The attempt to strike a balance
However, considering the multi-fold implication of such a retrospective application, the constitutional bench sought to strike a balance by granting the relaxation at three fronts. Firstly, it was directed that the state authorities can only recover past tax dues from April 1, 2005, probably for the reason that the ratio of India Cements judgment was doubted for the first time by another bench of Supreme Court in Kesoram Judgment in the year 2004. Secondly, the Apex Court also waived interest and penalties on tax demands for the period between April 1, 2005, and July 25, 2024. Thirdly, a facility for staggered payment over 12 years starting from April 2026 has been extended to reduce the impact of mammoth tax obligation on the miners over a single stroke.
The Court's pronouncement has been met with considerable alarm and disappointment from the industry stakeholders. While the provision for staggered payment over 12 years offers some respite, the persistence of a 20-year tax liability represents a considerable financial obligation on miners which is likely to have an adverse impact on all the downstream industries such as power and metal sector using minerals as raw materials.
Will it lead to more litigation?
Generally, the incidence of every indirect tax is passed on to the buyers who in turn pass on to the subsequent buyers and the impact has to borne by the ultimate consumer. However, in the present case, how such passing of incidence would be achieved in the entire value chain from miners to the ultimate consumers is a baffling question. A lot would depend on the fine reading of the contractual clauses and the possibility to invoke the clause of ‘change in law’. Undoubtedly, this would result in many parties entering the battlefield over contractual disputes.
The stakeholders now face the task of adapting to these new financial realities while maintaining their crucial role in India's economic landscape. Not only the mining community but the other players in the entire value chain, must approach this situation with a strategic foresight, balancing their operational needs with this new financial blow.
Impact on GST
Furthermore, this ruling will have significant weight for the pending writ petitions in various High Courts across India wherein the validity and legality of service tax and GST levied on mineral royalties under the reverse charge mechanism, has been challenged primarily on the ground that mineral royalty is a tax and that in absence of any consideration against a supply, the question of levy of Service tax/ GST on royalty would not arise.
Given the clarification that royalty is a payment towards contractual consideration, the primary argument of the taxpayers, which hitherto found favour with the courts, may no longer be available. The issue would require a fresh deliberation at the end of the taxpayers to fight the levy of Service tax/ GST on all other possible fronts.
The mining community may have to make a representation before the central government to regularise the situation in view of the industry practices that had prevailed earlier and the uniformly adopted tax position by exercising its powers under the recently introduced Section 11A of Central Goods and Service Tax Act, 2017. Whether the government would consider such a representation as a fit case to invoke the said power is a question which will entangle all the stakeholders in the state of anxiety and anticipation.
(Gopal Mundhra is Partner, Rajath Bhardwaj is Senior Associate and Priyadarshini Shekhawat is Associate at Economic Laws Practice)
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