Royalty Reform Undone By Tax Design: The Interplay Of GST And MMDR In Indian Rare Earth Mining Sector

Abstract

India holds the third largest rare earth reserves in the world. Rare earth elements power electric vehicles, wind turbines, defence avionics, MRI scanners, semiconductors, and 5G infrastructure, making them the material foundation of the modern industrial economy. For India, developing domestic processing capacity is not simply an economic choice. It is a condition of technological self-reliance. A country that mines rare earths but ships them abroad for refining remains a raw material exporter regardless of the size of its reserve base. India has historically done exactly that: IREL (India) Limited has mined monazite sands since 1950, yet the country produces only about 2,900 tonnes of rare earth oxides annually against China’s 270,000 tonnes and over 90 per cent of global refining capacity. The strategic cost of that gap is no longer theoretical. China’s April 2025 export licensing requirements for rare earth magnets demonstrated how quickly supply chains for defence and clean energy technologies can be disrupted when processing capacity is concentrated in a single jurisdiction. Building domestic separation, refining, and magnet manufacturing capacity is therefore a question of national security as much as industrial policy. India’s rare earth governance reflects successive legislative shifts. The Atomic Energy Act 1962 confined extraction to state entities for over six decades. The MMDR Act 1957 was amended in 2015 to introduce competitive auctions and again in 2023 to give the Central Government authority to auction 24 critical minerals. The Cabinet notified a 1 per cent royalty rate for rare earth elements on 12 October 2023. The MMDR Amendment 2025, Finance Bill 2026 corridor scheme, and the National Critical Mineral Mission are the latest phase of this effort. The MMDR 2025 reduced royalty rates from 12% to 1% under Entry 50, List II, to attract mining investment. The Central Board of Indirect Taxes and Customs simultaneously charges 18% GST on those royalties through the Reverse Charge Mechanism, while output GST on mineral sales sits at 5%. The 13% working capital gap absorbs most of what the royalty cut was supposed to free up. This structural contradiction raises questions under Articles 39(b) and (c) of the Constitution: the burden falls disproportionately on smaller operators, and concentration of the field in large integrated companies follows as a direct consequence. The constitutional analysis engages with Property Owners Association v State of Maharashtra (2024), which refined Article 39(b)’s scope, and Mineral Area Development Authority v Steel Authority of India (2024), which confirmed royalty is contractual consideration rather than a tax, opening retrospective state cesses from April 2005. The article draws on the EU Critical Raw Materials Act (2024), Australia’s Critical Minerals Strategy 2023–2030, and China Rare Earths (2014) to argue India’s fiscal incoherence is a self-inflicted disadvantage where other jurisdictions have aligned their tax and industrial policy. This article argues the regulatory framework is working against the very goals these reforms were designed to serve.