What is the Difference Between Tax and Royalty? This question has been answered by the Supreme Court in its recent Judgment.
A division bench comprised of Justices UU Lalit and Vineet Saran observed that ‘Royalty’ is founded on an agreement between parties and has a connection to the benefit or privilege conferred on a grantee. Whereas “Tax” is imposed under statutory authority without regard to any special benefit conferred on the taxpayer.
The Court made these observations while deciding a dispute brought by two Kerala companies against the Kerala State Electricity Board’s royalty demand for allowing the companies to use the water released from hydel power plants to generate electricity for their own use.
The companies had filed SLP before the Supreme Court seeking to overturn the decisions of the Kerala High Court, which had dismissed their Petitions.
The Court cited Justice Banumathi’s decision in the case of Jindal Stainless Limited and others vs. Haryana State and others (2017) 12 SCC 1.
“The essential characteristics of a tax are that:
- it is imposed without the taxpayer’s consent under a statutory power and the payment is enforced by law;
- it is an imposition made for public purposes without reference to any special benefit to be conferred on the taxpayer of the tax; and
- it is part of the common burden.”
The Court held that there is no “quid pro quo” in taxation, whereas it can be Royalty.
Based on the principles discussed in the precedents, the Court concluded that the demand in the current cases cannot be considered a tax.