GST on Royalty on Minerals Excavated from Mines

The royalty on minerals excavated from the mines has been a controversial issue in India both legislative and in the courts of law. The payment of GST on the royalty paid by mining companies to the State Governments has given rise to questions about its constitutionality and other legal frameworks. This article analyzes the impacts of GST on royalty, its legal standing, and the effects of the Supreme Court on the matter.

Understanding Royalty in Mining Industry

Royalty is a payment that the government charges to a business or an individual who exploits the natural resources from a piece of land. In the mining industry, royalty is charged on companies that mine and extract coal, limestone, iron ore and other minerals. The royalty that the mining companies pay to the government of the state is a recurrent revenue of the state. This obligation is statutory and it is not a license fee. A license fee is usually a tax, however, this payment is made to the government in return for the right to mine and obtain minerals.

Applicability of GST on Royalty

The royalty fee is charged GST under the Reverse Charge Mechanism (RCM), where users such as mining leaseholders are the ones who pay the tax instead of the supplier (the government). This is considered as a part of “services supplied by the government” and hence, it attracts the applicable GTS rate.

According to the Notification No. 13/2017 – dated June 28 2017, services facilitated by the government to a business entity for assigning the right to use natural resources are liable for GST. In royalty cases such as mining, where mining firms pay royalties to state governments, the payment is regarded as a service and is taxable under GST.

GST Rate on Royalty for Mineral Excavation

Excavation Mining right royalty has an applicable tax rate of 18% (9% CGST + 9% SGST or 18% IGST). Check the table below to see the GST on other mining services.

Service Description	GST Rate
Assignment of right to use natural resources (mining rights)	18%
License fees and other charges for mining leases	18%
Supply of coal, lignite, and peat	5%
Supply of iron ore	5%
Other minerals (e.g., limestone, bauxite, gypsum)	5%

The mining company that is the lessee under the mining lease is liable to pay GST under the reverse charge mechanism. In this case, all lessees engaged in mining activities are obligated to pay GST on the royalty and are entitled to claim input tax credit, if eligible.

Legal Problems And Supreme Court Decisions

The charging of GST on royalty has been challenged multiple times legally, by businesses and state parties on what has now become a controversial issue. One of the primary issues is, whether the royalty payment is a form of tax or payment for some form of service.

Supreme Court Judgement on Royalty

The Supreme Court rulings pertaining to the issue of royalty taxes have shaped how it is understood tax-wise. Several rulings have scrutinized royalty payments done by mining companies to the Government and if such payments are to be treated as taxes or as fees. In the case of India Cement Ltd. vs State of Tamil Nadu (1990), the Supreme Court observed that royalty is not a tax as it is payment done for the exploitation of minerals.

Another critical ruling is the one in the case of the Mineral Area Development Authority vs. the Steel Authority of India Ltd. (2011). The Supreme Court, once again, stated that royalty remains a payment in consideration of the right granted by the Government to exploit the minerals. The court concluded that it is not a direct tax; it is a fee that accompanies the commercial profits gained from the mineral mining operations.

The introduction of the GST regime has provided new insight into the discussions of whether Royalty tax with the new GST is Constitutionally permissible. The matter had further come up for discussion in Lalitpur Power Generation Co Ltd vs Union of India where, once again, the Supreme Court did not decide on the application of GST, but it was accepted that the payments of royalty ought to be analyzed in the context of the GST legislation.

Effects of Industry and Legal Compliance

When it comes to royalty, GST imposition has dire effects on the financial and operational aspects of businesses associated with mineral extraction. The direct consequences are experienced by mining firms, cement producers, power generation companies, and so forth. The royalty is associated with the following categories of industries:

1. Industries dealing in the extraction of oil and mining of minerals

2. Cement producing industries

3. Companies generating electric power

4. Producers of steel and other metals

5. Builders and construction companies and other allied fields

These classes of businesses have a duty to fully comply with GST rules and regulations by keeping adequate books of accounts, making timely tax payments, and filing for input tax credits that are rightfully theirs to reduce the tax burdens imposed on them.

Controversies and Way Forward

Debate on GST imposition on royalty continues, as plenty of experts in the industry defend their notion that there should be no GST on royalty since royalty is a legal payment and not a commercial service offer. Formal legal proceedings have been initiated to contest the application of GST on the basis that the impact of double tax burden will negatively affect businesses.

Though the Supreme Court ruling on royalty has shed some light on the issue, it has only deepened the unfocused problem over the balance between GST laws and its treatment in future. Companies shall comply with the current law due directive until such time as there is clear direction like law guidance to the existing GST provisions.

Conclusion

In India, the royalty paid for mineral excavation comes with GST regulations that are rather complicated. Regardless of the many disputes, the government continues to collect GST through the Reverse Charge Mechanism, which places tax obligations on the relevant businesses. Although the Supreme Court’s judgement on royalty made it clear that royalty payments do fall under the fee jurisdiction as opposed to a tax, there is still ambiguity on the levying of GST on these payments.

Businesses now have the challenge of keeping track of ongoing legislation and decisions made by the Supreme Court of India to avoid breaking the law while attempting to promote a more effective GST system.

FAQs

1. What is GST on royalty for mineral excavation?

GST on royalty for mineral excavation is a tax that has to be paid by mining companies who, in exchange for extracting minerals from selected mines, pay royalties to the government. It is charged at 18% and is collected under the Reverse Charge Mechanism.

2. Why is GST applicable on royalty payments in the mining sector?

The Government of India regards a royalty as a service, hence the reason why this particular royalty is subjected to GST on Royalty via the Reverse Charge Mechanism, which places the obligation to tax on the recipient of the service, in this case the mining company.

3. What did the Supreme Court conclude in its judgement regarding taxation of royalties?

The Supreme Court judgement on royalty has stated that royalty splits into a fee category and only for extracting minerals which can be withdrawn and not a tax. However, its application under GST is still open to question.

4. What industries are impacted by GST on royalties?

Those industries which are associated with royalties and include Mining, Cement, Power, Steel, and Infrastructure industries are affected.

5. What is the GST rate for royalty payments?

The applicable GST rate for non-refundable mining leases is 18% (9% CGST + 9% SGST) or 18% IGST).

6. Do businesses have the right to an Input Tax Credit (ITC) on the GST paid on the royalty?

Yes, businesses can take credit for tax paid on royalty on mining leases provided the services are utilized for their business activities.

7. Is there a GST on royalty cases in the Supreme Court?

The Supreme Court ruling regarding royalty has established that royalty is not a form of taxation, however, none have done away with GST on royalty payments for any existing statutesа.

8. Mineral royalty: Is that subject to GST?

Yes, coal, iron ore, and limestone royalty for GST applies for all minerals extracted from the mines, even bauxite.

9. How do mining companies pay GST on royalty?

Mining companies have to use the Reverse Charge Mechanism to pay Royalties and are also responsible for filing the returns for GST payments.

10. What is the status of GST on royalty payments in law?

The legal standing of GST on royalties is yet to be established and remains a subject matter of debate with concerned parties in the industry eagerly anticipating the final word from the Supreme Court on royalty in the context of GST.