Simplified Explanation of the Judgment

The Patna High Court recently delivered a significant ruling in a batch of writ petitions concerning the applicability of Goods and Services Tax (GST) on royalty paid for sand mining rights in Bihar. Several petitioners, including mining leaseholders and contractors, had approached the Court challenging the levy of GST on the royalty amounts they pay to the State Government for the right to extract sand from designated river ghats.

Background
The dispute arose from contracts awarded by the Department of Mines and Geology, Government of Bihar, granting petitioners the right to operate sand ghats for a fixed term. The petitioners secured these rights through competitive bidding and were required to pay annual amounts—referred to as “royalty”—in instalments to the State. Initially, under the Bihar VAT regime, only Value Added Tax at 5% applied.

After GST came into effect from July 1, 2017, the State treated royalty payments for mineral rights as taxable under GST, classifying them as “licensing services for the right to use minerals” (Service Accounting Code 997337). The Central Board of Indirect Taxes and Customs (CBIC) clarified in its Circular dated 06.10.2021 that such services attracted 18% GST from 1 July 2017 to 31 December 2018, and continued at the same rate thereafter, with a change in notification reference.

Some petitioners sought an Advance Ruling to confirm that their tax liability was only 5% prior to 31.12.2018 and that an exemption applied under Notification No. 12/2017 (Sl. No. 64). The Advance Ruling Authority initially agreed partially but fixed a higher rate post-2019. The Department appealed, and the Appellate Authority for Advance Ruling held that 18% GST was applicable for the entire period from 01.07.2017 onwards and denied the exemption.

Petitioners’ Arguments
The petitioners challenged the decision on several grounds:

1. Equality and Non-Discrimination:
   They argued that the liquor industry had been given special exemption from GST on licence fees (via Notification No. 25/2019 dated 30.09.2019), even though liquor licences and mining leases were comparable as both involved the conferment of exclusive rights by the State. Denying a similar exemption to mining rights amounted to unequal treatment in violation of Article 14.
2. Lack of Legislative Competence:
   Petitioners contended that Entry 50 of List II in the Seventh Schedule grants exclusive power to States to levy taxes on mineral rights. Article 246A, which introduced GST, could not be used to override this exclusivity when the taxable event was the exercise of mineral rights. They relied heavily on the Supreme Court’s Mineral Area Development Authority (MADA) judgment (2024) to argue that royalty is integrally linked to mineral rights, which fall under State jurisdiction.
3. Royalty as a Hybrid Charge:
   Royalty, according to petitioners, is not purely consideration for a service; it also includes a compensatory component for depletion of natural resources—a regulatory fee outside GST’s scope. Without a statutory mechanism to separate these two components, taxing the entire royalty under GST was improper.
4. Taxable Event Occurred Before GST:
   Since the agreements for sand mining were executed before GST came into force (in December 2014), the petitioners argued that any tax liability arose before July 2017. The subsequent periodic payments were merely instalments of a pre-existing liability and could not attract GST.
5. Misclassification and Exemption:
   Petitioners claimed that their transactions fell under residual entries with lower GST rates before 31.12.2018 and that exemption under Notification No. 12/2017 applied.

State’s Stand
The State of Bihar defended the levy, arguing that:

• GST is a destination-based tax on supply of goods or services, and the grant of mining rights is a taxable service.
• The classification under SAC 997337 was correct, and CBIC’s circular clarified the applicable rate as 18% from the start of GST.
• Article 246A grants concurrent power to the Centre and States to levy GST, overriding other provisions, and thus applies to mineral rights transactions.

Court’s Findings
The Patna High Court examined the statutory framework, constitutional provisions, CBIC circulars, and the MADA judgment. It concluded that:

• GST Applicability: The grant of mining rights against payment of royalty is a “supply” under Section 7 of the CGST/BGST Acts. Such supply is taxable under reverse charge mechanism, with the recipient (lessee) liable to pay GST.
• No Parity with Liquor Licences: The liquor licence exemption was a special policy decision taken in GST Council meetings and cannot automatically extend to mining rights.
• Legislative Competence: Article 246A’s non-obstante clause allows both Centre and States to tax supplies, even if they relate to mineral rights. The MADA judgment did not exclude GST from applying to royalty.
• Royalty Composition: Even if royalty contains compensatory elements, in absence of statutory separation, the entire consideration for the grant of mining rights is taxable as service.
• Pre-GST Agreements: The taxable event is the supply of rights, which continues throughout the lease term. Payments after July 1, 2017, attract GST regardless of agreement date.

Accordingly, the Court upheld the Appellate Authority’s order imposing 18% GST on royalty from 01.07.2017 onwards and rejected the plea for exemption.

Significance or Implication of the Judgment

This decision has wide-ranging implications for mining contractors and other natural resource concessionaires in Bihar and across India. It affirms that:

• GST applies on mining royalty under reverse charge, irrespective of when the lease agreement was signed.
• No automatic parity exists between different industries even if the nature of rights granted by the State appears similar.
• The State and Centre have concurrent powers under Article 246A to levy GST on transactions involving mineral rights.

For the government, the ruling strengthens revenue collection from the mining sector and clarifies legal challenges around GST applicability. For the industry, it reinforces the need to factor in GST liability when bidding for mineral concessions.

Legal Issue(s) Decided and the Court’s Decision with Reasoning

• Whether GST applies to royalty paid for sand mining rights?
  ✔ Yes — classified as “licensing services for right to use minerals” under SAC 997337, taxable at 18% from 01.07.2017 onwards under reverse charge.
• Whether liquor licence GST exemption applies to mining rights?
  ✘ No — exemption is a special dispensation for liquor trade, not extendable to other sectors.
• Whether Entry 50 List II excludes GST levy on mineral rights?
  ✘ No — Article 246A’s concurrent taxing power covers such transactions, even if they relate to mineral rights.
• Whether royalty is partly a regulatory fee and thus non-taxable?
  ✘ No — in absence of statutory bifurcation, entire amount is taxable as service consideration.
• Whether pre-GST mining leases escape GST liability?
  ✘ No — GST applies to supplies and payments post-implementation, regardless of agreement date.

Judgments Referred by Parties

• State of Gujarat v. Shri Ambica Mills Ltd., (1974) 4 SCC 656
• Ayurveda Pharmacy & Anr. v. State of Tamil Nadu, (1989) 2 SCC 285
• S.R. Bommai v. Union of India, (1994) 3 SCC 1
• Calcutta Gas Co. v. State of West Bengal, AIR 1962 SC 1044

Judgments Relied Upon or Cited by Court

• Mineral Area Development Authority & Anr. v. Steel Authority of India Ltd. & Ors., (2024) 10 SCC 1 (MADA Judgment)

Case Title

Batch of Writ Petitions led by CWJC No. 3531 of 2022 — Petitioner vs. State of Bihar & Ors.

Case Number

CWJC No. 3531 of 2022 and connected matters

Coram and Names of Judges

Hon’ble Mr. Justice Rajeev Ranjan Prasad
Hon’ble Mr. Justice Sourendra Pandey

Names of Advocates and who they appeared for

For Petitioners:
Mr. Sujit Ghosh, Sr. Advocate with Mr. Suraj Samdarshi, Mr. Avinash Shekhar, Mr. Vijay Shanker Tiwari, Ms. Abhilasha Jha, Ms. Simran Kumari
(Other connected matters represented by Mr. D.V. Pathy, Mr. Anurag Saurav, Mr. Mohit Agarwal, Mr. Gautam Kumar Kejriwal, and others)

For State of Bihar:
Mr. Vikas Kumar (SC-11), Mr. Vivek Prasad (GP-7), and others

For Union of India:
Dr. Krishna Nandan Singh, Sr. Advocate with Mr. Anshuman Singh, Sr. SC (CGST & CX), Mr. Shivaditya Dhari Sinha

Link to Judgment

080a7af9-0f8e-4e8b-b3b8-01dbed524251.pdf

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