Himachal Pradesh High Court backs GST on mining royalty

In a significant ruling, the Himachal Pradesh High Court has upheld the state’s authority to impose Goods and Services Tax (GST) on mining royalties, adding clarity to the legal framework surrounding mineral concessions in the state. The verdict came in the case of M/s Lakhwinder Singh Stone Crusher v. Union of India & Ors., where a bench comprising Acting Chief Justice Tarlok Singh Chauhan and Justice Satyen Vaidya dismissed the writ petition, validating GST on royalties paid by mineral concession holders.

This decision is poised to have a considerable impact on mining operations in Himachal Pradesh, confirming that royalty payments made to the state are subject to GST.

The court’s ruling draws upon the Supreme Court’s landmark judgment in Mineral Area Development Authority & Anr. v. M/s Steel Authority of India & Anr. (2024), a nine-judge bench decision that reinforced states’ constitutional power over mineral rights taxation. The Supreme Court held that royalty payments do not constitute a tax but are instead a contractual consideration paid by the lessee to the lessor under the terms of a mining lease. This distinction is crucial, as it redefines royalty payments not as tax obligations but as payments for the rights to extract minerals, thus making them subject to GST as a service fee.

Justice Chauhan and Justice Vaidya, interpreting this precedent, concluded that royalty payments fall within the ambit of GST, which is applied to goods and services. By characterizing royalties as part of the “supply of services” from the state to the lessee for granting extraction rights, the court validated the respondents’ position that GST could indeed be levied on such payments. The court clarified that the imposition of GST on mining royalties aligns with the contractual nature of these transactions, where royalties are paid as part of an agreement between the mining operator and the state for mineral extraction rights.

This ruling comes as the Supreme Court prepares to address the question of whether GST or Service Tax applies to royalties in an upcoming case. This impending decision could have further implications for the legal interpretation of royalties nationwide, but the Himachal Pradesh High Court’s judgment stands as a definitive interpretation of the state’s authority to levy GST on royalties in its jurisdiction.

The court’s judgment brings clarity to a key revenue source for Himachal Pradesh, enhancing its ability to generate funds from mineral resources within its borders. For mining operators, the decision signifies that GST will likely be an integrated part of their financial obligations on royalty payments to the state. The ruling is expected to influence similar cases across other states, as it reinforces the interpretation that royalty payments under mining leases are subject to GST, establishing a contractual and service-based framework for understanding these payments within the Indian tax system