The Article “Centre Lacks Authority to Levy GST on Mining Royalty Until MMDR Amendment Takes Effect” has been drafted based on the inputs of GST Advocate Raghavendra Rao.
A fresh legal argument has emerged against the levy of Goods and Services Tax on royalty paid by mining lessees to State Governments, contending that the Centre cannot impose GST on such payments without a clear statutory and constitutional foundation covering mineral-bearing land and mineral rights.
The contention draws support from the Supreme Court’s nine-judge Bench ruling in Mineral Area Development Authority v. Steel Authority of India, delivered on July 25, 2024, which held by an 8:1 majority that royalty payable under the Mines and Minerals (Development and Regulation) Act, 1957 is not a tax.
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According to the argument, royalty is contractual consideration paid by a mining lessee to the lessor for the right to extract and remove minerals. It arises from the mining lease and represents payment for the privilege of exploiting mineral rights; it is not a sovereign tax imposed by the State.
On that basis, mining assessees may contend that GST cannot be imposed merely because royalty constitutes consideration. They argue that the first and more fundamental question is whether the underlying grant of mineral rights by the State is a taxable supply within the legislative and statutory scope of the GST regime.
Royalty Forms Part of the Cost of Mineral Extraction
The challenge also raises the issue of cascading tax. Royalty, dead rent, auction premium and other statutory payments form part of the cost incurred in extracting minerals. When the extracted mineral is subsequently supplied, GST is ordinarily charged on the transaction value of that outward supply.
The taxpayer-side argument is that levying GST once again on royalty increases the tax burden at the extraction stage, even though royalty has already entered the cost base of the taxable mineral. This is described as an instance of economic double taxation or cascading, particularly where input-tax credit is unavailable, restricted, disputed or incapable of fully neutralising the levy.
Legally, however, the mere inclusion of an expense in the cost of a taxable final product does not by itself invalidate a separate GST levy on an independently taxable supply. The decisive issue remains whether the grant of mining rights in return for royalty satisfies the charging and supply provisions of the GST enactments.
State Government’s Role Under Section 10 of the MMDR Act
Reliance has also been placed on Section 10 of the MMDR Act, which deals with applications for mineral concessions over land in which minerals vest in the Government.
Under the provision, an application is made to the State Government concerned. Subject to the Act, the applicable rules and the statutory selection process, the State Government may grant or refuse the permit, licence or mining lease.
This statutory scheme is cited to argue that the mining lease originates from the State Government and concerns rights in State-controlled mineral-bearing land. Therefore, according to the contention, the Centre could not assume taxing authority over the royalty paid for such State-granted rights unless Parliament had validly occupied the relevant constitutional field through an operative law.
At the same time, Section 10 cannot be read in isolation. The MMDR Act is a Parliamentary enactment, the Union regulates mines and mineral development under its provisions, and the Central Government exercises significant rule-making and rate-fixing powers. The fact that a State grants the lease does not, by itself, answer whether Parliament may tax a transaction connected with that lease under the GST framework.
Supreme Court: Royalty Is Not a Tax
In Mineral Area Development Authority, the Supreme Court overruled the contrary proposition attributed to India Cement Ltd. v. State of Tamil Nadu and held that royalty under Section 9 of the MMDR Act is not in the nature of a tax.
The majority treated royalty as a contractual consideration flowing from the mining lease. A tax, in contrast, is imposed by sovereign authority and does not depend upon a contractual relationship. The ruling consequently recognised the distinction between royalty payable under the lease and a tax that a competent legislature may separately impose on mineral rights.
This finding is central to the present challenge. If royalty is not itself a tax but consideration for rights created by the mining lease, the argument goes, the GST authorities must establish that the State’s grant of the right to extract minerals is a “supply” taxable under the CGST and corresponding State GST enactments.
The 2024 judgment did not, however, directly decide the validity of GST on mining royalty. Its principal questions concerned the nature of royalty and the States’ legislative competence to tax mineral rights under Entry 50 of List II. The ruling therefore supplies a doctrinal foundation for the challenge, but it cannot by itself be described as a binding declaration that mining royalty is exempt from GST.
Aerocom Cushions Ruling Invoked on Immovable-Property Rights
Support is further sought from the Bombay High Court’s ruling in Aerocom Cushions Pvt. Ltd., Nagpur v. Assistant Commissioner, decided on January 9, 2026.
The dispute involved the assignment by an industrial unit of its long-term leasehold rights in an MIDC plot to a third-party assignee. The GST department treated the consideration received for the assignment as consideration for a taxable service and issued a show-cause notice under Section 74 of the CGST Act.
The High Court held that the transaction was an assignment, sale or transfer of benefits arising from immovable property. The original lessee’s rights stood extinguished and passed to the assignee; the transaction was neither a lease nor a sublease. The Court also found that the transaction lacked the necessary nexus with the petitioner’s business and could not be classified as a miscellaneous service.
Following the Gujarat High Court’s view in Gujarat Chamber of Commerce and Industry v. Union of India, the Bombay High Court held that the transfer of leasehold rights in the industrial plot was not subject to GST. It consequently quashed the show-cause notice. The Supreme Court later declined to interfere with the Bombay High Court’s decision while dismissing the department’s special leave petition.
Mining lessees may rely on this reasoning to argue that valuable rights arising from land cannot automatically be treated as taxable services merely because consideration is paid. They may submit that the right to extract minerals is inseparably connected with the mining lease and mineral-bearing land.
There is, nevertheless, a material distinction. Aerocom Cushions dealt with an assignment by an existing lessee to a third party, not the original grant of mining rights by a State Government in return for recurring royalty. The ruling therefore strengthens the broader immovable-property argument but does not directly settle the GST treatment of mining royalty.
Reverse Charge Does Not Create a Charge Where None Exists
GST authorities generally treat the licensing or grant of the right to use natural resources by the Government as a supply of service. Where the notified reverse-charge mechanism applies, the recipient is required to discharge the tax.
The counterargument is that reverse charge identifies the person liable to pay tax; it does not independently create a taxable supply. Consequently, if the underlying State grant is outside the scope of supply, or beyond the relevant legislative competence, the reverse-charge notification cannot cure that foundational defect.
The legal question is therefore not answered merely by stating that services supplied by Government to a business entity are generally taxable under reverse charge. It first has to be shown that the particular grant of mineral rights constitutes a taxable service under the charging statute.
MMDR Amendment, 2026 and Proposed Section 9D
Parliament passed the Mines and Minerals (Development and Regulation) Amendment Bill, 2026 on August 13, 2026. As introduced, the measure proposed to expand the Union-control declaration in Section 2 to include the regulation of “mineral bearing lands”. It also proposed inserting Section 9D.
Proposed Section 9D provides that no State Government may impose any tax, cess or other levy on mineral rights or mineral-bearing land—whether computed with reference to mineral quantity, mineral value, royalty or otherwise—except in accordance with conditions or restrictions prescribed by the Central Government.
It further provides that a covered State levy which had not been deposited with or recovered by the State before commencement of the amendment would be deemed invalid at all material times. Amounts already deposited or recovered before commencement would not be refundable.
The commencement clause states that the amendment will take effect on a date appointed by the Central Government through a notification in the Official Gazette. Accordingly, its operative status must be assessed by reference to the final enacted text and the commencement notification, and not merely from passage of the Bill.
Taxpayers opposing GST may argue that Parliament’s decision to extend the Union-control declaration to mineral-bearing lands confirms that the earlier statutory framework did not sufficiently cover that field. On this reading, the Centre cannot rely on the later amendment to support tax demands for an earlier period or for any period before the amendment commences.
That argument will likely face resistance. Section 9D is directed at restrictions on taxes and levies imposed by State Governments; it does not expressly impose GST on royalty, amend the CGST Act, or declare that the earlier GST levy was invalid. The Government may therefore contend that the amendment responds to State mineral taxes after Mineral Area Development Authority and has no bearing on the pre-existing GST treatment of Government grants of natural-resource rights.
Is GST on Royalty Beyond the Centre’s Authority?
The constitutional challenge may be framed through the following propositions:
- Royalty is consideration under a mining lease and is not a tax, as held in Mineral Area Development Authority.
- Mining leases are granted by State Governments under the statutory scheme of the MMDR Act.
- Mineral rights and mineral-bearing land have a distinct constitutional character and cannot automatically be converted into a taxable Central service merely by using the expression “licensing service”.
- The reverse-charge mechanism determines who pays tax but cannot enlarge the scope of the charging provision.
- The 2026 amendment’s express extension of Union control to mineral-bearing land may be relied upon to question the Centre’s authority before its commencement.
- Aerocom Cushions recognises that a transfer of benefits arising from immovable property is not necessarily a taxable service, though its facts differ from a State’s grant of mining rights.
The Revenue, on the other hand, is likely to argue that GST is imposed not on the land or minerals as such but on the supply of the right to exploit natural resources; that Article 246A gives Parliament and State legislatures concurrent power to enact GST laws; and that the classification of royalty as non-tax consideration makes it capable of forming the value of a taxable service rather than immunising it from GST.
Conclusion
The case against GST on mining royalty presents substantial questions concerning legislative competence, the scope of “supply”, the legal character of mineral rights and the relationship between the GST enactments and the MMDR Act.
The taxpayer position is that royalty paid to a State for a mining lease lies outside the Centre’s authority and should not attract GST until a valid and operative Parliamentary amendment clearly covers mineral-bearing land and the relevant transaction. The reasoning in Mineral Area Development Authority, Section 10 of the MMDR Act and Aerocom Cushionsmay all be deployed in support of that challenge.
However, none of those authorities presently constitutes a direct Supreme Court ruling that GST on mining royalty is invalid. Mineral Area Development Authority did not adjudicate GST; Aerocom Cushions concerned the assignment of industrial leasehold rights; and proposed Section 9D addresses State taxes and levies rather than expressly authorising Central GST.
Accordingly, “no GST on mining royalty until the amendment comes into force” should be stated as a taxpayer’s legal contention requiring authoritative adjudication—not as an already settled exemption. Mining businesses considering non-payment or a challenge should examine the operative commencement notification, applicable GST notifications, place and time of supply, availability of input-tax credit and binding jurisdictional precedent before taking a position.
Case references: Mineral Area Development Authority & Anr. v. M/s Steel Authority of India & Anr., 2024 INSC 554, decided July 25, 2024; Aerocom Cushions Pvt. Ltd., Nagpur v. Assistant Commissioner (Anti-Evasion), CGST & CX, Nagpur-1, Writ Petition No. 2145 of 2025, 2026:BHC-NAG:348-DB, decided January 9, 2026.
