Levy of GST on Mining Royalty

INTRODUCTION

There has been a constant tussle since long among the mining lease holders and the government whether royalty paid for excavation of minerals from the mining area is liable to service tax or GST? Whether it is in the competence of state legislature or in the competence of the Parliament. We try to understand the meaning of ‘Royalty’ and whether it is a ‘service’ or ‘supply of Goods or Service’ for a consideration. Whether ‘Royalty’ is a ‘Tax’ or it is a ‘Sovereign or Statutory Function’ of the Government. Whether ‘Sovereign or Statutory Function’ can be termed as ‘service’ and subjected to tax. There are various judicial rulings on this issue some are in favour of the Revenue and some are in favour of the assessee. In view of the judicial pronouncements available and in light of the provisions of law we try to analyze this issue to come to the position that now what the way forward is?

Legislative background behind collection of Royalty, Dead Rent and DMF Charges

Section 9 of the MMDR Act 1957 provides that the holder of mining lease shall pay royalty to the government in respect of the minerals removed or consumed from the leased area.

Section 9A of the MMDR Act 1957 provides that the mining lease holder shall pay ‘Dead Rent’ or ‘Royalty’ to the State Government whichever is higher.

And section 9B of the MMDR Act 1957 provides all the State Government is required to set up District Minerals Federation (DMF) which shall work in the interest of persons and for the development of mining area and the mining lease holder shall also pay DMF charges to the DMF Trust formed by the State Government in addition to the royalty as a percentage of royalty.

Section 15 of the said Act provides that the State Government is empowered to make rules for grant of quarry leases, mining leases or other mineral concessions in respect of minor minerals and the purposes connected therewith. Sub-section (1A) of the said section provides that such rules shall also provide for various matters listed thereunder which include the fixing and collection of rent, royalty, fees, dead rent, fines and other charges. Under the said Act, Central Government retains the power to make rules in connection with all other minerals.

Meaning of the word ‘ROYALTY’, ‘DEAD RENT’ AND ‘DMF’?

In view of the aforesaid provisions the granting of mining lease is subject to payment of ‘Royalty’, ‘Dead Rent’ and ‘DMF’ Charges. Though all the charges are connected with mining but there is a subtle difference among them.

The Mining Lease confers a right upon the lease holder to enjoy the land and to extract the minerals out of the land and appropriate the same for his own use and benefit and the mining lease holder is required to pay certain amount with respect to the quantity of minerals extracted and the same is called ‘Royalty’. Royalty is the variable part of charges payable to the state government for granting of Mining Lease that varies with the quantity of mineral extracted, removed and consumed from the mining lease.

Dead Rent is a fixed rent and it is fixed with reference to the area of land leased. The fixed amount of rent is required to be paid to the State Government whether the mine is worked or not. It ensures a fix income to the Lessor.

DMF Charges are collected by a Trust namely DMF (District Mining Federation) formed by the State Government for the welfare of the mining workers and development of the mining and it is charged in addition to the Royalty at a percentage of Royalty.

With the understanding of the term Royalty. Dead Rent, and DMF Charges we shall examine the implication of service tax and GST on Royalty referring all the three as ‘Royalty’.

POSITION UNDER SERVICE TAX – LEVY OF SERVICE TAX ON MINERAL RIGHTS / ROYALTY

Unless someone appreciates what has happened in service tax era it may not be very easy to appreciate what is likely to happen in GST era, because both the laws are intertwined and woven together and the essence of a service has not gone under a change and what was the service backbone is likely to remain same. After the introduction of negative list under service tax regime the definition of ‘service’ has gone a roof change and that width of definition continued in GST, therefore whatever discussion we are going to do under service tax will be equally relevant in GST era also.

• With effect from 01.04.16 by an amendment in the negative list all Government services were brought into service tax under RCM basis except the one that of renting of immovable property.
• With this amendment significant service tax liability triggered inter alia on:
  • Oil and Gas exploration
  • Mining Operation
  • Telecom Services
  • Liquor services
• Several writ petitions were filed in various High Courts on multiple grounds
• This presentation seeks to reflect upon the key issues relevant to the levy and draw a balanced view.

Relevant legal provisions regarding chargeability to tax the services

• Section 65B(44) – service means any activity carried out by one person for another for a consideration.
• Section 66D (a) – Negative List of services includes services provided by Government but excludes:

> Prior to 01.04.16 – support services provided by Government

> After 01.04.16 – any service provided by Government to business entity

• Notification 30/2012 dated 20.06.2012 – Reverse Charge Liability on recipient of services provided by the Government excluding renting of immovable property service.
• Rule 7 of Point of Taxation Rules – POT – services provided by the Government to be taxable on earlier of the following :

> Date on which payment qua services becomes due

> Date on which payment for services is made

• Rule 5 of the Point of Taxation Rules – in case of new services – tax to be payable if – > Payment received after the new services have become taxable

> Payment received prior to levy coming into force though invoices are issued after 14 days from the new service becoming taxable.

Exemption from Service Tax

• Notification No. 25/2012 dated 20.06.12 – Inserting Entry 61 w.e.f 01.04.16 – exempting Government Services of ‘assignment of right to use natural resources’, subject to two conditions:

>  Such assignment of right to use happened prior to 01.04.16

> Exemption restricted to one time charge payable (in full upfront or in installments)

Consequences of Exemption Notification

• Creates a charge of tax on the service provided on the basis of payment received/or date of invoice raised;
• The charge is not connected in any way with the date of service or the taxable event;
• Even if the taxable event falls prior to levy coming into force – tax is payable –
• If the payment is received after the levy coming into force; or
• If Invoice is raised after 14 days of levy coming into force, though the payment may have been received even prior to the levy coming into force
• Exemption not applicable to periodic payment, in any case

By the enactment of Finance Act 1994 the Central Government got power to levy service tax on services under residual Entry -97 of Union List-I. it was litigated in the courts that the Central Government was not competent to levy such tax without any specific Entry in the Constitution. To overcome this anomaly an Article 268-A was introduced in the constitution by 88^th Constitutional Amendment Act 2003 and a specific Entry 92-C was also inserted in Union List-I for levy of tax on services.

Till 01.04.16 only support services provided by the Government were taxable under service tax but with effect from 01-04-16 all the services provided by the Government including the assignment of right to use minerals were brought to service tax under RCM basis except service tax on renting of immovable property. And the service tax department started issuing show cause notices for levy of service tax for the entire period since 01-04-16 till 30-06-2017 i.e. the day immediately before the introduction of GST.

The levy of service tax on mining royalty was challenged on multiple grounds. One of the ground was that royalty itself is a tax, therefore tax cannot be imposed on tax. Another ground was that levy of tax on royalty is a subject of State Legislature under Entry 50 of State List –II and therefore it cannot be imposed by Central Government.

Service tax can be levied if taxable event takes place when the law is in force however for the administrative convenience payment of tax can be deferred. But can it be levied for an event which took place before the law came into existence and the payment in respect thereof received after the enactment of the law on the basis of delegated powers of rules i.e. Rule 5 of the Point of Taxation Rules 2011 as clarified by circular No.192/02/2016 dt 13.04.16 . In case of mining lease the taxable event is assignment of right to use natural resources and it happens on the date when the lease agreement is executed. As per this Circular even if the lease agreement is executed before 01-04-16 i.e. the date when the levy of service tax on mining royalty was introduced, still the service tax will be leviable on the installments received thereafter. All these issues are under dispute before various High Courts and Supreme Court.

Whether the assignment, by the government, of right to use natural resources is a service for consideration or it is a sovereign or statutory function of the Government. The assignment of lease is a statutory function of the government and the payment of royalty is a compulsory impost and it goes to consolidated fund of the State, hence it is a sovereign and statutory function of the government and therefore it is not a provision of service not liable to service tax. This fact was also clarified by the Circular No. 89/7/2006 dt 31.12.2006. This circular No.192/02/2016 dt 13.04.16 again started a controversy that services provided by the government are subject to service tax irrespective of the fact whether the activities undertaken are statutory or mandatory requirement under the law and irrespective of whether the amount charged for such services are laid down in statue or not.

However the million dollar question is that whether the royalty paid for extraction of minerals is a consideration or a tax has to be decided by the Court of Law which is going to impact the revenue of the government to a great extent and the financial position of the mining lease holders. However the answer to this question will also put the dispute to rest.

Whether Royalty is a ‘Tax’?

The mining industry is of the view that ‘Royalty’ is a tax and therefore further tax cannot be levied on tax. However the department is of the view that Royalty is a consideration for grant of mineral rights and therefore it is liable to service tax or GST.

This issue has been a matter of big debate in Courts earlier in Service Tax Regime and now it continued in GST Regime also. Until the judgment of the seven member bench of Supreme Court given in the case of India Cement Ltd. v State of Tamil Nadu & Ors, all the judicial decisions were of the view that royalty was not a tax. It influenced various High Court and Supreme Court decision and started the conflict, whether ‘royalty’ is really a tax. To understand this issue we try to analyze the entries in the Constitution and rulings of Hon’ble Supreme Court and High Courts in this regard.

Constitutional framework governing levy of tax on minerals/ royalty

Entry/Article	Particulars
Entry 53 to the Union List-I of VII Schedule	Regulation and development of Oil fields and mineral oil resources; petroleum and petroleum products; other liquids and substance declared by Parliament by law to be dangerously inflammable
Entry 54 to the Union List-I of VII Schedule	Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.
Entry 97 to the Union List-I of VII Schedule	Any other matter not enumerated in List-II and List –III including any tax not mentioned in either of those Lists
Entry 23 to the State List-II of VII Schedule	Regulation of mines and mineral development subject to the provisions of List I with respect to regulation and development under the control of the Union.
Entry 50 to the State List-II of VII Schedule	Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development.
Article 246, 246A & 248	Legislative power of Centre and State and residuary power

In view of the above fields of legislature of Seventh Schedule the Parliament has been given powers to make laws to regulate Oilfields and mineral oil resources under Entry-53 of the Union List-I and to regulate mines and minerals development under Entry-54 of the Union List. Both the entry confers a regulatory powers to the Parliament to legislate qua regulation and development of Oilfields, Mineral Oils and Mines and Minerals. Entry 97 as we all know is a residuary entry and gives powers to the Parliament to impose any kind of tax and to frame any kind of legislature in respect of the fields which are not covered by State List-II and Concurrent List-III.

Now we come to Entry-23 of the State List-II, it gives similar powers to the State Legislature to make laws to regulate mines and minerals development as has been given to the Parliament under Entry 53 and 54 of the Union List but the powers of the State Legislature are subject to any limitations imposed by the Parliament in this regard.

Entry 50 of the State List is very important, it confers powers to the State Legislature to make law to levy tax on mineral rights subject to limitations if any imposed by the regulations made by the Parliament under Entry 54 of the Union List. It suggests that the State Legislature has exclusive power to tax mineral rights subject to any limitation imposed by the Parliament. If the Parliament imposes any restriction or limitation on the States power to tax mineral rights by way of regulation made under Entry -54 of the Union List then the States are debarred from levying tax on mineral rights and States will be helpless.

So what is to be appreciated is that whether the levy of service tax on mineral rights sits either in Entry 97 of the Union List or in Entry 50 of the State List or does it draw its power from Entry 53 or Entry 54 of the Union List.

Article 248 is the residual Article, Article 246 provides the fields of legislature in respect of which Parliament and State can make the laws and Articles 246A speaks about the Goods and Service Tax.

Legislative Competence of State Government to levy service tax on mineral rights

• Entry 50 of State List-II of Seventh Schedule – State Government has powers to levy tax on mineral rights;

+ Legislative competence of the State Government is subject to the limitations, if any, imposed by the Parliament,

+ ‘Mineral Rights’ defined as – ‘…right to receive royalty based on production of minerals’, Blacks Law Dictonary,

+ Tax on Mineral Rights is = Tax on royalty as per –

 Hinger Rampur Coal co. Ltd. v State of Orissa & Ors; [1961) 2 SCR 537

 Orissa Cement Ltd. and Ors. v State of Orissa & Ors; AIR 1991 SC 1676

• Kesoram Industries Ltd. (5 Judges Bench of SC) – As long as Central Legislature does not limit State’s power to tax, State Government has exclusive power to tax royalty.
• Detailed inquiry needed to ascertain whether the Parliament has put any limitation
• If not, the Centre is incompetent to impose service tax.
• Can service tax be justified under Article 248 read with Entry 97 of Union List-I of Seventh Schedule ?

> As per Entry 97 Parliament can make laws to tax what is not covered in List –II and List-III of the Seventh Schedule. Since the power to tax mineral rights specifically covered by Entry 50 of the State List-I of Seventh Schedule, Parliament is not justified to make laws for taxing mineral rights.

• Can it be said that Finance Act imposing service tax is a hybrid instrument seeking to tacitly limit State’s power under Entry 50 by exercising power under Entry 97 ?

> Is there a doctrine of implied limitation similar to implied repeal ?

All of us know that there is a concept of implied repeal. So you do not have to specifically say that this legislation has been repealed if you come out with a subsequent legislation which by and large in form and substance seeking what was earlier thereon, then by virtue of the doctrine of implied repeal stands to repeal what was legislated in the past. Similarly is there a doctrine of implied restriction or limitation and the Union Government can stand up and tell the court by virtue of enacting Finance Act imposing service tax on mineral rights it has impliedly put restriction on the State’s power to tax the mineral rights. But in my opinion whenever a repeal is made there has to be a reference to the old position of law or the law which it intends to overturn but there is no reference in the Finance Act about the imposition of service tax on mineral rights, no inference can be gathered directly or indirectly that it was so implied.

• Can the Legislature enacted under Entry 53 or Entry 54 of List-I of Union (dealing with Oilfields/ mines etc.) can be construed as a limitation on State’s power to tax mineral rights;

> The taxing power of the Centre are given in Entry 82 to 92B – Regulatory powers separately listed in Entry 53/54.

> Entries in Seventh Schedule should be given widest amplitude

But even if a widest meaning is given to Entry 53/54, these entries give powers to the Centre only to regulate mines/ Oilfields etc., but it does not give powers to tax mineral rights. There are separate entries for imposing any kind of tax i.e. from Entry 82 to 92B and there are separate entries for regulations i.e. from Entry 1 to 81. Whether by possessing powers to regulate mines and minerals under Entry 53 can it be said that the Union has powers to tax the mineral rights also, I do not believe so. If it had been so then there was no need to have separate entries for levying tax and all those Entries 82 to 92B would be redundant. It would not be an appropriate construction to give width to Entry 53/54 beyond what the purpose was. The purpose was to regulate. Therefore in the garb of regulation imposition of tax may not be wise, may not be fair and may not be justifiable. Therefore it for judiciary to figure out whether power to regulate ipso facto give power to tax.

• Regulatory legislation imposing royalty – is it a tax and thus is a limitation on the State’s power to tax on mineral rights/royalty?
  • India Cement Ltd. v. State of Tamil Nadu (1990 AIR 85) (7 Judge)

 Key findings:

–   Royalty is a tax.

–   Cess on royalty is not a tax directly on land as a unit, therefore the levy cannot be sustained under Entry 49 of the State List being a tax on land.

–   The cess being a tax on royalty is beyond the competence of State Legislature as Section 9 of the Central Act covers this field and the State Legislature is denuded of its competence under Entry 23 of List-II.

• Cases referred

–   Laxminarayan Mining Co. Banglore v Taluk Dev Board Case, Mysore HC AIR 1972 Mys 299– held the proposition that royalty is a tax.

–   Laddu Mal v State of Bihar (Air 1965 Pat 491) – stated that royalty is a tax.

• Subsequent position – after India Cement Case but before Kesoram Industries

–   Orissa Cement Ltd. v State of Orissa & Ors. AIR 1991 SC 1676 – in this case the typographical error was contemplated in India Cement case but the Court was quick to reject this argument finding no merit and said that if the royalty was a tax it would be a tax on mineral right.

–   State of MP v Mahalaxmi Fabric Mills Ltd. AIR 1995 SC 2213 – In this case the Division Bench laid down the fact the royalty is a tax “logically flowed” from the arguments laid down in the previous paragraphs.

• State of West Bengal v Kesoram Industries & Ors [AIR 2005 SC 1646] (5 Judges)
• In this case the honorable Supreme Court disagreed with the decision of India Cement Ltd (7 judges) that royalty is a tax and took the view that there was an error in drafting the said judgement either attributable to stenographer’s devil or to sheer inadvertence. This court opined that majority wished to say and in fact said is ‘cess on royalty is a tax’ but not ‘royalty is a tax’. As the Kesoram Industries being a smaller bench it could not overturn the judgment of India Cement Ltd., it resulted into conflict between both the judgments.
• The relevant paragraph in India Cement which was supposedly have a typographical error is reproduced below:

“34. In the aforesaid view of the matter, we are of the opinion that royalty is a tax, and as such a cess on royalty being a tax on royalty, is beyond the competence of the State Legislature because Section 9 of the Central Act covers the field and the State Legislature is denuded of its competence under entry 23 of list II. In any event, we are of the opinion that cess on royalty cannot be sustained under entry 49 of list II as being a tax on land. Royalty on mineral rights is not a tax on land but a payment for the user of land.”

• The Court held that in the first sentence the word ‘royalty’ occurring in the expression – ‘royalty is a tax’, is clearly an error. The correct words to be printed in the judgment should have been ‘cess on royalty’ in place of ‘royalty’ only. The words ‘cess on’ appear to have been inadvertently or erroneously omitted while typing the text of judgment. What their

Lordship have intended to record is ‘ that the cess on royalty is a tax, and as such cess on royalty being a tax on royalty is beyond the competence of the State Legislature..’. That makes correct and sensible reading.

• The author is of the view that the two sentences in paragraph 34 by themselves are not contradictory to each other, and are to be viewed as two different legs to an argument.

“22. It was also contended on behalf of the respondent State of Tamil Nadu by Mr. Krishnamurthy Iyer that it (cess on royalty) could also be justified under entry 49 of list II of the 7th Schedule as taxes on lands and buildings. This, however, cannot be accepted.”

(same paragraph) “But in the instant case, royalty being that which is payable on the extraction from the land and cess being an additional charge on that royalty cannot, by the parity of the same reasoning, be considered to be a tax on land.”

(same paragraph) “Construing the said entry, this Court observed that entry 49 list II contemplated a levy on land as a unit and the levy must be directly imposed on land and must bear a definite relationship to it.”

The Court, by citing a precedent, established that Entry 49 of List II referred to a tax on land directly as a unit. What Mr. Krishnamurthy Iyer (on behalf of Tamil Nadu State) claimed was that cess on royalty was a tax directly on land.

23. … It is, therefore, not possible to accept Mr. Krishnamurthy Iyer’s submission and that a cess on royalty cannot possibly be said to be a tax or an impost on land. Nariman is right that royalty which is indirectly connected with land cannot be said to be a tax directly on land as a unit. …”

Mr. Nariman observed that royalty was not a tax directly on land as a unit and, as such, would not constitute a tax under Entry 49 of List II (Tax on Land and buildings). The Court further went on to note that there were other types of taxes. Since royalty was payable on a proportion of the minerals extracted, and the impugned tax (i.e. cess on royalty) would consequentially be on that proportion, it would constitute a different tax, and not the same as Entry 49. The Court still had not expressly laid down that Royalty was Tax.

Coming to paragraph 27, the relevant passages are extracted below:

“27. Our attention was drawn to the decision of the division bench judgment of the High Court of Mysore in M/s. Laxminarayana Mining Co., Bangalore v. Taluk Dev. Board, AIR 1972 Mys 299. There speaking for the court, one of us, Venkataramiah J. of the Mysore High Court, as the learned Chief Justice then was..”

(same paragraph) “At p. 306 of the said report, it was held that royalty under Section 9 of the Mines and Minerals Act was really a tax.

28 To the similar effects are the observations of the High Court of Patna in AIR 1965 Pat 491.”

By considering all the paragraphs quoted above, it would now be wise to analyze paragraph 34, which was claimed to have been a typographical error. The first sentence of paragraph 34 was the reiteration of their discussion in paragraphs 27 and 28, and the last sentence is the reiteration of the discussion in paragraph 23, which stated that royalty was not a tax on land. What it meant by the last sentence was that royalty was not a tax on land as it was not directly related to land (as required by Entry 49), but a different kind of tax: a tax on the mineral extracted by the individual/entity, which would be indirectly related to land (fortified by the discussion in paragraph 27 and 28). The word ‘payment’ used in the last sentence was used synonymously with the word tax.

In view of this wide definition given for the term ‘taxation’, the Supreme Court in the case of Kesoram Industries Limited (supra) even though doubted the findings of India Cement Limited (supra) that royalty is a tax in common parlance but concluded that it is a compulsory impost and is in the nature of tax considering the meaning of the word ‘taxation’ under article 366(28) of our Constitution.

• In the matter of Federation of Indian Mineral Industries & Ors v. Union of India & Ors

In this case the Central Government issued direction to all the State Government for establishing DMFs retrospectively and collect DMF charges retrospectively as a percentage of royalty paid. The retrospective validity of collection of DMF charges was challenged in The Hon’ble Supreme Court and the Hon’ble Supreme Court held that DMF charges is a tax and stuck down the levy on the reasoning that essential components necessary for levy of tax i.e. subject of tax, person liable to tax, and rate at which tax is levied are not clearly defined. There is a real ambiguity in levy as the DMF was not established on the date on which levy was brought into effect and the rate of DMF charges was vaguely specified as not exceeding 1/3^rd of the royalty amount.

The Hon’ble Supreme Court held that specification of the rate of tax is an essential component of the tax regime. Fixing the maximum amount by the MMDR Act being not exceeding 1/3^rd of the amount of royalty does not satisfy the requirement of law. What is required by law is certainty and not vagueness, not exceeding one-third could mean one-fourth or one-fifth or some other fraction. It is this uncertainty that is objectionable. Therefore our answer to second question is that the petitioners are not liable to make any contribution to the DMF w.e.f. 12^th Jan 2015.

• • The question whether royalty is a tax is referred to nine judges bench of Honorable Supreme Court in the case of Mineral Area Development Authority etc vs. Union of India & Ors, (CIVIL APPEAL NOS. 4056-4064 OF 1999 ) and the same pending before the Honorable SC.
  • Application of Dawoodi Bohara and doctrine of binding precedence for subordinate judiciary.
• Concluding Remarks: As of now, pending the decision of the nine-judge bench, in the authors’ opinion the current law of the land is the India Cement case and is binding on all the subordinate courts keeping in mind various constitutional principles and the principal laid down in Dawoodi Bohara. Therefore, as of now, ‘royalty’ is a tax, and the law should be applied as it is, until the nine-judge bench overrules the current position and lays down a different one.

It is also worthwhile to mention the fate of recent case of Lakhwinder Singh v Union of India, the Honorable Supreme Court initially granted stay against the recovery of GST on granting of mining lease/ royalty until further order in this regard.

If we assume that GST is leviable on the assignment of right to use mineral rights then what is the position under GST?

• Levy of GST under GST laws is on supply of goods or services. The term ‘supply’ is defined under section 7 of the CT Act in an inclusive manner and it includes all activities undertaken for consideration unless expressly excluded under schedule III. Here we are assuming that assignment of right to use mineral rights by the Government is a supply of service and the payment of royalty is a consideration for the minerals extracted, therefore it shall come within the ambit of GST liability if this service is not covered by Schedule III and not specifically exempted.

• As per Sr. No.5 of the notification 13/2017 dt. 28.06.17 services supplied by the Central Government, State Government, Union Territory or Local Authority to a business entity in respect of leasing services by way of assignment of right to use natural resources is liable to tax under RCM basis as this service is not covered by any of the exclusions mentioned in Sr. 5 of this notification.
• As per the service code the service of assignment of right to use natural resources fall in Group 9973 – “Leasing or rental service with or without operator”, and the service mentioned in Code No. 997337 “Licensing service for right to use minerals including its exploration and evaluation” is the most suitable classification for the service in hand.
• The impugned service is not mentioned either in Schedule III or not covered by the Exemption Notification No. 12/2017 as amended from time to time, hence it is a taxable service.
• Now to find out the rate of tax applicable on this service we shall have to look at the Notification No. 11/2017, and we observe that the service of assignment of right to use natural resources is covered by the Entry No. 17 and the entries related to SAC 9973 is as under:

Since the service of License to extract minerals or the right to use mineral extracted does not fall in either of the clause (i) to (v), it will fall in clause (vi) and therefore the rate of tax would be the same rate of CGST as applicable to supply of like goods involving transfer of title in goods.

 Sr. No. 17 of the Notification No. 11/2017 dt 28.06.17 was amended by Not. No. 31/2017 dt 13.10.17 and the clause (vi) of this entry was replaced by new clause No. (vi) & (vii). The new clause (vi) pertains to leasing of Motor Vehicle and the new clause (vii) pertains to Leasing or rental services with or without operator. Thus the leasing service of assignment of right to use mineral rights now fall in this clause with same rate of GST as applicable to like goods.

• No. 17 of Not. 11/2017 was again amended by Not. No. 01/2018 dt 25.01.18 and now the clause No. (vii) was replaced with two new clauses i.e clause (vii) and clause (viii). The new clause (vii) pertains to ‘Time Charter of Vessels for transport of goods’ and the service of ‘Leasing or rental service’ now shifted to newly added clause (viii) with same rate of gst as is applicable to like goods.
• The Sr No. 17 of Not. No. 11/2017 was further amended by Not. No. 27/2018 dt. 31.12.2018 and now it replaced the clause (viii) and splitted it into two new clauses i.e. clause (viia) and clause (viii) and prescribed separate rate for each clause. One part of this amendment i.e. clause (viia) now pertains to ‘Leasing or renting of goods’ with same rate of GST as is applicable to like goods. The second part of the amendment i.e. clause (viii) pertains to ‘Leasing or renting service with or without operator’, hence the impugned service of ‘Leasing service of assignment right to use natural resources’ shall now fall in this clause and now the rate of CGST on such service has been changed to 9% from the rate applicable to like goods w.e.f. 01.01.2019.
• But with the issue of Not. No. 27/2018 dt. 31.12.18 amending the Not. No. 11/2017 a controversy started that the rate of GST on Leasing services in respect of right to use natural resources will be 18% not only from 01.01.2019 but right from the beginning i.e. from 1^st July 2017. Some AAR has taken the view that the rate applicable to supply of like goods will not be applicable in case of Leasing or Licensing services as the underlying goods was not there in clause (vi), (vii) or (viii) as exited from time to time with respect to the impugned service of Leasing or Licensing.
• Few of the cases are listed below where divergent view has been given in respect of the rate of GST applicable on Leasing or Licensing services in respect of assignment of right to use natural resources :

SRN	Authority	Date	Case	View taken
1	AAR Harayana	14.08.18	M/s United Mining Corporation	5% the rate applicable to supply of like goods
2	AAAR Rajasthan		Aravali Polymers P. Ltd.	18%
3	AAR Gujrat	19.05.2020	M/s Raj Quarry Works	18%
4	AAR Chhatisgarh	22.02.2019	NMDC Ltd.	Same rate as applicable to supply of like goods
5	AAR Rajasthan	17.05.2019	Vinayak Stone Crusher	18%
6	AAAR Odisha	05.11.2019	M/s Penguin Trading & Agencies Ltd.	18% July 17 to Dec 18

• In authors view the view taken by some AAR and by AAAR that in clause (viii) in the service named ‘Leasing or rental services with or without operator’ the underlying goods was not there, therefore this clause would not be applicable and thereby the rate applicable to supply of like goods would not be applicable in respect of assignment of right to use natural minerals, does not seems to be appropriate. The authorities took the view that the intention of the GST Council was to tax the service of Leasing for mining at the rate of 18% as it was also taxable at the rate of 15% in Service tax regime and therefore it was implied and implicit that the clause (viii) was subsuming two clauses in it one is (viia) and another is (viii) and service provided in clause (viia) was taxable at the rate applicable on supply of like goods and clause (viii) was taxable at the rate of 18% and the Not N. 27/2018 was only a clarificatory also does not seems to be on sound footing.

>  First reason is that if there had been no change in the entry then the notification issued with interpretational aspect could be said to be of clarificatory in nature applicable from retrospective date. But in this case the entry or the clause (viii) was splitted into two clauses i.e (viia) and (viii) and in this way the structure of the said clause has been altered or changed altogether. In this situation how the clause (viia) can be said to have been existed since 1^st July 2017 which was placed in Entry No.17 by Not. No. 27/2018 dt 31.12.18.

> Second reason is that the clause (viii) was splitted into two separate and independent clauses and two separate rates of tax were prescribed. Clause (viia) made for ‘Leasing or renting of goods’ and tax rate for this entry was prescribed the rate applicable to supply of like goods and Clause (viii) made for ‘Leasing or renting service with or without operator’ and it was made taxable at the rate of 18%, whereas till 31.12.18 it was taxable at the same rate of tax applicable to supply of like goods. If all these things can be said to be implied or implicit since beginning then CBIC may come change any entry at any time with retrospective date and can say that it was implied and implicit and it was existed from so and so date. Neither It is appropriate, nor fair and nor justifiable to do so in this way.

> If we assume that clause (viii) impliedly included two services i.e. one of ‘Leasing or renting of goods’ as referred to in clause (viia) and the second of ‘Leasing or rental services with or without operator’ as referred to in clause (viii), both of them had only one rate of tax i.e. the rate of tax applicable to supply of like goods till 31.12.18. If the said rate is not workable for both kind of services then no rate can be applied on the second part of services till 31.12.18 as the machinery section fails as no rate of tax was prescribed for that. It is only on 31.12.18 two separate rate of tax were prescribed for these two separate services mentioned in two independent clauses, therefore this cannot be taken as impliedly exited since 1^st July 17. These rate should be applied prospectively.

> It is not an interpretation of a provision of law whose interpretation should be made according to the intent of the law maker. It is a tariff schedule where no rate of tax was prescribed for Leasing or rental services till 31.12.2018, then how an inference can be drawn that it is taxable at the rate of 18%. In authors view either no rate of tax can be applied on leasing or rental services till 31.12.2018 or if it is to be taxed it should be taxed strictly what is mentioned in the tariff schedule i.e. at the same rate of rate of tax applicable on like goods, i.e. at the rate of 5% on extraction of stone boulders.

 It is an ambiguity and therefore the benefit of doubt should be given to the tax payer.

• In authors view the rate of GST, till 31-12-2018, on Leasing or rental services in respect of assignment of right to use natural resources was the rate that was applicable to supply of like goods or say 5% on extraction of stone boulders and w.e.f. 01.01.2019 the rate of GST will be 18% on payment of royalty for extraction of stones. But it is for the courts to decide what the legal position is. Most of the tax payers have discharged their liability at the rate of 5% for the period from July 17 to Dec 18 and if the rate is held to be 18% then it will create typical situation for the mining lease holders.
• In various cases the honorable High Court has granted stay against demand of GST on mining lease:

SRN	Name of Party	Court
1	Lakhwindar Singh   (GST)	Supreme Court -2021
2	M/s Ratan Black Stone & Ors (GST)	Jharkhand HC – 2021
3	Zeeneth Transport   Co. v Principal    Director General (Service Tax)	Karnataka HC – 2021
4	Gujmin Industries Association	Gujrat HC – 2018
5	A.D.Agro Food pvt ltd v Union of India	Allahabad HC – 2021

Is there still possibility that the rate of tax being the same as that on goods even after amendment made on 31.12.2018

• To understand this theory we refer to the following notifications and circulars:
  • 25/2012 wherein following entry was inserted by Not. No. 22/2016 dt 13.04.2016:

“61. Services provided by Government or a local authority by way of assignment of right to use any natural resource where such right to use was assigned by the Government or the local authority before the 1st April, 2016:

Provided that the exemption shall apply only to service tax payable on one time charge payable, in full upfront or in installments, for assignment of right to use such natural resource;”

• • Boards Circular No. 192/02/2016 dt 13.04.16 wherein it was clarified that;

The exemption shall apply only to Service Tax payable on one time charge, payable in full upfront or in installments, for assignment of right to use any natural resource and not to any periodic payment required to be made by the assignee, such as Spectrum…………

• Although after introduction of negative list every activity became taxable service unless it is covered by negative list or mega exemption notification and the concept of service specific entry was done away with. However Not. No. 25/2012 exempted one time charges payable for assignment of right to use natural resources and the same was further confirmed by the Boards Circular No. 192/2/2016. Both these notification and circular testify that the mining lease were taxable as “assignment of right to use natural resources” and an entry similar to that is still there in GST Regime also which reads as under:

17          Heading 9973 (Leasing or rental service…)

(iii) Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration.

Same rate of central tax as on supply of like goods involving transfer of title in the goods

Comparing the language used in service tax regime and that used in GST regime one can argue that the entry (iii) of Sr. No. 17 of GST Not. 11/2017 is very much similar and resembles with the Entry 61 of No. 25/2012 and therefore the rate of tax on royalty should be the rate that is applicable on supply of like goods involving transfer of title in goods. But wait the decisions of Court what they decide.

Conclusion and the way forward

Whether Royalty is a tax or it is a sovereign or statutory function of the government? Can it be taxed or not? It is for the courts to decide. If it is to be taxed, then what is the rate of tax that should be applied? Whether same rate of goods will be applicable during the period from July 17 to Dec 18 or it will be taxable at the rate of 18%? Since 01.01.19 the GST rate of 18% is also correctly classified or not or it also needs further review? These are all the issues before us.

The issue “Whether royalty is a tax” is already pending before nine judges bench of the Supreme Court and in many case the honorable Supreme Court and High Courts have also granted stay on recovery of the payment of service tax/Gst on royalty. The Supreme Court had imposed a stay on the stand taken by the Rajasthan High Court in the matter of Udaipur Chamber of Commerce Vs. Union of India in the erstwhile regime with respect to levy of Service Tax on Royalty paid on mining operations and now in the matter of Lakhwinder Singh Vs. Union of India with respect to levy of GST on Royalty paid on mining operations. And there seems to be a high probability that this issue may get settled in favor of the tax payer in view of the evolving judicial rulings. However there are also chances that the government may come out with a retrospective amendment to nullify the judgment of the Supreme Court. Considering this situation it is advisable to avoid the litigation under the GST regime in all cases where tax paid on RCM basis is entitled for input tax credit. With respect to past transactions where tax has not been paid, one may choose to litigate the issue relying on the above aspect challenging the levy.