Explore the complexities of the Goods and Services Tax (GST) regime on India’s mining sector. Understand the impact on royalty, taxation, and compliance, with insights on recent legal developments.
The Indirect tax regime in India provides for a complex tax environment due to multiplicity of taxes, complicated compliance obligations and tax cascading. Under the GST regime, all the key Indirect tax legislations would be subsumed except for few taxes such as duty on Electricity, Royalty on the extraction of minerals from mines, etc. In Goods and Service Tax Act the tax is levied on the supply of goods and supply of services which is different from the taxable events of the current regime that is manufactured, sale or provisions of service. The mineral sector in India is the most taxed among all countries with effective tax rate between 60%-64%, surpassing all other mining territories.
The minerals and mining sector in India is governed by the Mines Act, 1952 along with the Mines and Minerals Development and Regulation Act (MMDR), 1957. The mines and minerals development and regulation are undertaken as per the MMDR Act under the control of the union. As per Section 9 of the MMDR Act, 1957 the holder of a mining lease granted before or after the commencement of this act shall pay royalty in respect of any minerals removed or consumed. The Mines Act,1952 lays down the rules and regulation in relation to the safety of the labour, regulation for carrying out mining activities and the management of mines.
Mining in India
India currently produces around 89 minerals under different groups, with fuel minerals, metallic minerals, non-metallic minerals, atomic minerals and minor minerals. The country has immense potential for mining resources and reserves and is currently among the top 10 global producers of many minerals.
India’s global position in mineral production
Taxation system on Mining
Under the GST regime, all the key Indirect tax legislations would be subsumed (except for few taxes such as duty on Electricity, Royalty on the extraction of minerals from mines, etc.).
As per Section 9 of the MMDR Act, 1957 the holder of a mining lease granted before or after the commencement of this act shall pay royalty in respect of any minerals removed or consumed.
whether royalty itself is in the nature of tax. This question fundamentally exerts influence on tax implications, which has been at stretch for a long time,as there cannot be levy of tax on tax which cannot be attached to the value of the goods/services. Although various judicial decisions are there and explored the matter’s clear position in law, yet its tax implication still remains unclear with the taxpayers and the tax levying authority. The Supreme Court in India Cement Ltd. vs. State of Tamil Nadu case has held that royalty is not a tax and its payment is for the user of the land. Royalty on mineral rights is not a tax on land but a payment for the user of land. Although the intent and the missive were clear as set out in the judgement determining that royalty is a “tax” though not a “tax on land” as this was the question before them that whether Royalty is tax on land.
Before the GST:
The mining sector incurs service tax and royalty as the procurement costs:
> The mining companies may attract service tax for the services relevant to the mining industry such as exploration, mineral production, handling, transportation etc. A manufacturer and/or service provider paying service tax on procurement of services are allowed to take credit of same and it is set off against
> their Service tax or Excise liability. However, no credits are available to primary producers or miners, who are neither service providers nor manufacturers but simply a trader. Exporters are allowed to claim a refund of tax paid on procurement in various forms.
> Royalty on mining is collected by the State Government from the business entities in relation to the lease of the mines granted to them.
The Supreme Court, in India, Cement Ltd. v. State of Tamil Nadu and others (AIR 1990 SC 85) had held that royalty is a tax and its payment is for the use of land. The judgment had relied on the concept that royalty was attributed to the extracted mineral created due to interaction among land, capital and labour, each of which possesses some definite intrinsic economic value. In this sense, royalty was viewed as a kind of tax linked either directly or indirectly to the intrinsic economic value of a mineral realised through sale by the lessee. Though the Hon’ble Supreme Court subsequently doubted the correctness of the above referred judgements and referred the case as to “whether royalty is tax or not” to a larger bench of nine judges and the same is yet to be pronounced and therefore the judgement of India Cement Limited can be considered as the law as on date. If the Supreme Court decides that royalty is in nature of tax then both excise duty and service tax cannot be levied, since there cannot be taxed on tax.
- The grant for the mining lease rights is one of the methods of assignment of rights to use any natural resources and the consideration that is paid by the leaseholder is royalty as fixed by the State Government at the time of grant of lease. This royalty which is in the nature of the annual amount payable to the state government are seemingly subject to service tax.
- The mining industry incurs an excise duty; value added tax and central sales tax as the output tax liability:
- In case of merchant miners as the extraction does not amount to manufacture there is no excise duty liability as output tax. In case of mining cum manufacturing sector if any further processing of the minerals so extracted from the mines is undertaken in order to remove the impurities from the minerals or any other value addition process are being undertaken then the same would attract excise duty.
- The Value Added Tax (VAT) is levied on the sale of goods within the state. The mines output is subject to VAT, miners are allowed to take the credit of the vat paid on their inputs if any. The VAT cost flows from the mining company to the manufacturer and then to the distributor and reseller.
Analysis under the Goods and Service Tax:
The Constitutional Amendment Bill has deleted only the VAT, Entry Tax and Entertainment Tax from the state lists and Excise duty and Service Tax from the union list. As per Section 3, of the GST Model Law, 2016 the Goods and Service Tax is levied on the supply of goods and services. Various supplies of services such as exploration, mineral production, handling, transportation and the supply of the minerals to consumers would attract GST. Under GST there would be output taxes at the time of supply of output of the mines, but at the same time the input tax cost incurred by the miners would be allowed as credit.
As per schedule IV of the Goods and Service Tax Act, the consideration paid by the lease holder to the State Government for the grant of the lease of the mines in form of royalty would be chargeable to GST. However, as explained earlier, the matter is to be decided by nine-member bench of Hon’ble Supreme Court as to whether royalty is a tax or not. Thus, if it concluded that is it in the nature of tax, GST on same cannot be levied. Thus, as far as GST laws are concerned, there would be GST on the amount of Royalty paid but since Royalty itself is not within the frame work of GST, credit of royalty paid to the State Government becomes a cost of miner, whether merchant or manufacturer.
Royalty on Minerals excavated from Mines Whether liable to GST ─ Constitutional Validity of entry No. 5 of notification 13/2017-CT(R) dated 28.6.2017 (HSN code 9973). Recently, Rajasthan HC, dismissed on 27.9.2022, a Number of writ petitions, seeking relief in payment of GST, on reverse charge basis, on ‘Royalty” in respect of Minerals excavated from Mines: Sudarshan Lal Gupta Contractor & Ors. v. Union of India & Ors.(2022) 38 J.K.Jain’s GST & VR 288 (issue dated 9.10.2022). It resulted into initiation of proceedings for levy of GST on Royalty.
NATURE OF ROYALTY
A five-member bench in the case of State of West Bengal vs. Kesoram Industries Limited and Others were of the view that in the decision of India Cement, it was a typographical error in drafting the judgement either attributable to the stenographer’s devil or to sheer inadvertence. It held that what the actual meaning and intent of the statement was that royalty was not a tax on land as it was not directly related to the land as required by Entry 49 but a different kind of tax that is to say, a tax on mineral extracted by individual which would be indirectly related to land. The five-member bench in Kesoram Industries Ltd. subsequently, to examine whether royalty is a tax or otherwise, referred the matter of Mineral Area Development Authority etc. vs. Union of India and Ors. to a nine-member bench of the Supreme Court. Further, the Supreme Court in the matter of Mineral Area Development Authority etc. vs. UOI and Ors. held that royalty paid may not be tax under common parlance but going by the definition of ‘taxation’ under Article 366(28) of the Constitution, royalty payable on extraction of minerals being in the nature of statutory impost comes under the purview of taxation.
The mining sector in India has been opposed for levying of tax on royalty paid on mining operations. In the Service Tax Regime after introduction of negative list regime, all services provided by the government were brought under the tax net and were subjected to reverse charge. This issue continued into the GST regime as well since the statutory liability for payment of tax on such government services fell on the recipient of such services under reverse charge mechanism (RCM) in terms of Entry 5 of notification 13/2017-CT(R) dated 28.6.2017. The applicable rate on services by way of grant of mineral exploration and mining rights is 18% in terms of entry 17 (viii) (Leasing or rental services, without operator) of Notification No. 11/2017 1 w.e.f. January 1, 2019.
However, dispute arose whether royalty can be classified under entry 17 (viia) of Notification No. 11/2017 wherein any transfer of right in goods or of undivided share in goods without the transfer of title thereof attracts same GST rate as the supply of like goods prior to January 01, 2019, due to divergent rulings passed by various advance rulings authorities.
The Central Board of Indirect Taxes and Customs vide Circular dated 06.10.20212 has clarified that the intention of the government has always been to levy tax services by way of grant of mineral exploration and mining rights @18% and therefore, cannot be considered as leasing or renting of goods in terms of entry 17(viia) of Notification No. 11/2017 as mining rights is entirely different activity. Hence, the department’s stand was clarified that there was no separate rate of tax specified under GST for service provided by way of grant of mineral exploration and mining rights, and that such service remained taxable @18% during period July 1, 2017, to December 31, 2018.
The clarification issued vide the Circular was challenged by the industry and consequently the Supreme Court has given a stay on GST on royalty paid to the States for mining rights in the matter of Lakhwinder Singh Vs UOI.
VALIDITY OF TAX LEVY, ULTIMATUM AND WAY FORWARD
Relying upon the judicial decisions under the erstwhile regime, royalty cannot be termed as a consideration received by the government to grant rights over for mineral extraction. Further, it cannot also be said that State Government has provided any service of granting rights for mineral extraction to bring it under the ambit of supply and thus no GST can be levied on royalty, dead rent and DMF charges paid towards mineral rights. It is a settled position of law that Royalty paid under a mining lease is in the nature of tax and thus, the contention that GST could not be imposed on royalty since royalty itself is a tax becomes very strong.
1. Notification No. 11/2017-CT(R) dated June 28, 2017
2. Circular No. 164/20/2021-GST dated 6.10.2021
POSERS:
Question: As per standard practice, the service tax/GST department called for information from mining department of state (Gujarat) which in turned provided list of firms (quarries) in whose name royalty is paid. Accordingly, the service tax/GST department issued SCN and passed order levying SERVICE TAX ON RCM on royalty paid as per list provided by mining department.
In given case, department had issued SCN and passed order in the name of “A” quarry who had taken land on lease for quarry business from mining department of the state.
But in actual “A” quarry had sub-leased the whole land to “B” quarry who had paid royalty directly to mining department and also claimed royalty expenditure. “A” quarry had neither paid any royalty nor claimed such royalty expense in books.
Only because “A” quarry had originally leased land from mining department, there name was forwarded to service tax/GST department.
What stand should be taken by “A” quarry to avoid service tax demand. As per information that whether royalty is tax or not question is pending before 9 judge benches of SC. What other stand can be taken in given facts?
Answer:
Royalty is a fee or payment made against the license to use minerals including its exploration and evaluation. In other words, royalty is a fee or consideration paid to the property owner for the right to use the property or patentee for the use of a patent or property against money obtained on sold of each patent or value of extract resources during the licensed period.
Royalties are agreed upon as a percentage of gross or net revenues obtained from the use of an asset so authorised by the party assets owns.
In terms of Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 the holder of mining lease shall pay royalty in respect of any mineral removed / consumed.
The Hon’ble Supreme Court in the case of State of Orissa and others v. M/s Steel Authority of India Ltd. (AIR 1998 SC 3052), the Apex Court opined that Section 9(1) of the MMDR Act, 1957 also contemplates the levy of royalty on the mineral consumed by the holder of a mining lease in the leased area, hence processing of mineral amounts to consumption and, therefore, the entire mineral is eligible to levy of royalty.
Thus, levy and applicability of tax on royalty was disputed in the erstwhile Service tax regime. But in GST regime the applicability is not the matter of dispute rather applicable rate of GST on royalty is the matter of litigation, which has been clarified by the CBIC vide Notification No. 27/2018-C.T. (Rate), dated 31-12.2018 as amended and rate of GST on royalty shall be chargeable to 18% on amount of royalty so collected from the license holders of mines under RCM.
Further, it is clarified vide Sectoral FAQ’s by CBEC, is that “ The Government provides license to various companies including public sector undertakings for exploration of natural resources like oil, hydrocarbons, iron ore, manganese, etc. For having assigned the right to use the natural resources, the licensee companies are required to pay consideration in the form of annual license fee, lease charge, royalty, etc to the Government. The activity of assignment of rights to use natural resources is treated as supply of service and the licensee is required to pay GST on the amount of consideration paid in the form of royalty or any other form under reverse charge mechanism”.
In the given case since lease is in the name of “A” ,it is his duty for payment of royalty on lease and not of “B”. In may be considered that the royalty may be paid by “B” in the name of “A”. The liability of payment of GST on royalty will fall on “A” through RCM.
Let’s consider that “B” has also not paid the royalty and GST on RCM, then it is liability of “A” to pay GST on RCM. On other hand if “B” has paid the same then there is not liability of “A” for payment of GST or Service Tax, since double taxation on the same matter cannot be paid.
If such facts exist then reliance can also be made on the judgment of Hon. Bombay High Court in case of United Spirits Ltd. vs. State of Maharashtra (Writ Petition (L) no.10092 of 2020 dt.29.4.2022) wherein High Court has held that when buyer has paid tax, vendor is not liable to pay tax. The factual position be seen accordingly.
The other fact appearing from query is that there is sub-lease. Therefore, on consideration received by A from B, there may be GST liability on A. This aspect should also be examined.
FAQ on GST for Mining sector of India
Question: Can small mining leaseholders with a turnover less than Rs.75 lacs operate under composition scheme
Answer: As per Sec. 10(1) of the CGST Act, 2017, a registered person whose aggregate turnover in the preceding FY did not exceed Rs.75 lakhs, would be eligible for paying GST under the composition scheme.
Question: What is the GST rate for minerals and ores in Composition Scheme
Answer: In a case where the process amounts to manufacture, the rate of tax will be 1% (CGST) and 1% (SGST/UTGST). In any other case, the rate will be %(CGST) and % (SGST/UTGST).
Question: Will they have to deposit GST under SGST/CGST heads separately
Answer: Yes. GST has to be paid separately under CGST and SGST/UTGST by generating a single challan through the common portal under a single return.
Question: Can a small Mine Lease holder undertake inter-State supply if it avails composition scheme?
Answer: No. If a supplier chooses to avail of composition scheme, he shall not undertake inter-State supply.
Question: What is the IGST rate for minerals and ores in case of inter State supply?
Answer: At present, the IGST rate is the sum of CGST and SGST/ UTGST rate. These rates have been notified and are available in public domain.
Question: Can the buyer get input credit on the supply of minerals from a mine owner in composition scheme?
Answer: No, the buyer cannot avail of the credit of tax paid by the supplier who is under the composition scheme as the person paying tax under composition scheme cannot issue a tax invoice and collect taxes on his supplies.
Question: Will the recipient have to pay tax under reverse charge?
Answer: GST on reverse charge mechanism is payable under section 9(4) of the CGST Act, 2017 only in case of purchases from unregistered suppliers. As the mine owner who is paying tax under composition scheme is registered, the recipients need not pay GST on reverse charge mechanism.
Question: What is the threshold limit and conditions when a small mine owner/lease holder under Composition Scheme has to migrate into full GST System?
Answer: As per section 10(3) of the CGST Act, 2017, the option availed of by the small mine owner/ leaseholder shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds Rs. 75lakhs. For details regarding other conditions, section 10 of the CGST Act, 2017 and the rules framed there under maybe referred to.
Question: Is the Return filing and compliance simpler under composition scheme?
Answer: Yes, return filing and compliance is simpler under the composition scheme. The registered person has to file only one return on a quarterly basis in FormGSTR-4.
Question: Will the basic exemption limit from GST be applicable to the tiny & micro segment in mining?
Answer: Yes, the basic exemption limit of Rs. 20 lakhs (Rs.10 lakhs in the case of special category States) is applicable to the tiny and micro segment even in mining. However, a person engaged in making taxable supply and having aggregate annual turnover (more than Rs.20 lakhs in any State other than the special category States) would be liable to obtain registration under GST. The return has to be filed on monthly basis by regular taxable persons and on quarterly basis by the taxable persons registered under the composition scheme.
Question: What is aggregate turnover?
Answer: As per section 2(6) of the CGST Act, 2017, aggregate turnover means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes Central tax, State tax, Union territory tax, integrated tax and compensation cess.
Question: Will the buyer of goods from unregistered person pay reverse tax?
Answer: A registered person receiving taxable goods or services from a supplier who is not registered, would be liable to pay GST under reverse charge mechanism. However, in terms of notification no. 8/2017-Central Tax (rate) dated 28th June, 2017, aggregate value of supplies of goods and/or service received by a registered person from any or all the suppliers, who is or are not registered, up to five thousand rupees in a day is exempt from tax under reverse charge mechanism. This exemption will not apply if the value exceeds Rs.5000/-.
Question: Can a buyer of goods and services pay the value of services / goods to the supplier and deposit the GST component of the invoice in the suppliers account so that when the buyer claims input credit, he may get the same cross entry tallied from the suppliers account?
Answer: No. This option is not available under GST Law.
Question: In case there are disputes regarding quality, weight, etc. between the buyer and the supplier and the goods are returned fully or partially, as found unfit for use, can the excess paid tax component be adjusted from future tax liability?
Answer: In such cases, the supplier may issue a credit note to the recipient in accordance with the provisions of section 34(1) of the CGST Act, 2017.
Question: Whether deduction of Liquidity Damage (LD)/Penalty deduction from contractor’s bills and charging Penalty for non-lifting of coal till targeted minimum level to Annual Contractual Quantity (ACQ) will attract GST?
Answer: Yes, it is a service being tolerating an act as per Schedule II of the CGST Act,2017 thus GST shall apply.
Question: Will GST be payable at the time of raising an invoice for supply of goods from a mining lease holder or it will be applicable on the amount of advance received by the mining company for booking the order?
Answer: No. As per the provisions of section 12(2) of the CGST Act, 2017 the time of supply of goods shall be the date of issue of invoice or the date of receipt of payment, whichever is earlier. Accordingly, GST would be payable on advance payment received prior to issuance of the invoice.
Question: Will the supplier have to issue receipt voucher against each advance received?
Answer: Yes, as per section 31(3)(d) of the CGST Act, 2017the supplier has to issue a receipt voucher for every advance received.
Question: How do I show the advance received in GSTR 1?
Answer: Where against an advance the invoice is issued in the same tax period, the advance need not be shown separately in Form GSTR-1 but the specified details of invoice itself can be directly uploaded on the system. Details of all advances against which the invoices have not been issued till the end of the tax period shall have to be reported on a consolidated basis in Table 11 of FormGSTR-1. As and when the invoices against these advances are issued, they have to be declared in Form GSTR-1 and the adjustment of the tax paid on advances against the tax payable on the invoices uploaded in Form GSTR-1 shall have to be done in Table 11 of Form GSTR-1.
Question: In case no supplies are made against an advance, will the dealer have to issue a refund voucher only for the advance or for advance including GST?
Answer: Refund voucher has to be made for the fullvalue of advance, including the amount of GST.
Question: It will be difficult to link between Advance Receipt Voucher and invoices in case of sales billing on Cash Sale (Rail/Road)/e-Auction etc., especially in case of Rail Cash sale, where purchasers deposit money in advance to the tune of many crores for which lifting of coal has to be made from various loading point and time. In such situation how will the billing person at one point realize how much balance advance is available for adjustment while raising invoice at his end at a specific point of time?
Answer: Under GST gross amount of advance is to be reported and tax has to be paid. Advance can be adjusted in totality. While raising the invoice subsequent to receipt of advance, the tax payable will get reduced by the amount of tax paid on the advance and balance amount of advance may be adjusted against future supplies.
Question: Will GST charged on purchase of all earthmoving machinery including JCB, tippers, dumpers by a mining company be allowed as input credit?
Answer: The provision of Sec. 17(5) (a) of the CGST Act,2017 restricts credit on motor vehicle for specified purposes listed therein. Further, in terms of the provision of Section2(76) of the CGST Act, 2017 the expression motor vehicle shall have the same meaning as assigned to it in Clause (28) of Section 2 of the Motor Vehicle Act, 1988, which does not include the mining equipment, viz., tippers, dumpers. Thus, as per present provisions, the GST charged on purchase of earth moving machinery including tippers, dumpers used for transportation of goods by a mining company will be allowed as input credit.
Question: Whether GST is payable on royalty (to be paid to Government) for Mining Lease granted by State Government?
Answer: Yes, on royalty GST will apply under reverse charge mechanism. Further, such payment of GST under reverse charge mechanism would be eligible as ITC in the hands of the recipient of supply for payment of GST.
Question: Is ITC available on hiring of immovable properties (land, office, warehouse, processing unit, stock yards) for facilitation of mining operations?
Answer: Yes. GST paid on hiring of land, office, warehouse, processing unit, stock yards when these are used in the course or furtherance of business, would be allowed as ITC.
Question: What is the time limit for availing input credit under GST?
Answer: As per provisions of Section 16(4) of the CGST Act, 2017 the ITC is not available after the due date of furnishing the return for the month of September of the next year or furnishing of the annual return, whichever is earlier.
Question: Would the net outstanding amount of unutilized input credit be refunded by the Government?
Answer: In terms of the provision of Section 54(3) of the CGST Act, 2017 subject to conditions, refund of unutilized input tax credit would be available in respect of zero-rated supply or where ITC has accumulated on account of rate of tax on inputs being higher than the rate of tax on the output supply. However, such refund of ITC would not be available if export duty is payable on the goods so exported out of India.
Question: Will GST charged by tax consultants, advocates, Chartered Accountants, environmental consultants, canteen service providers and other service providers to mining companies be allowed as input credit?
Answer: ITC on any input service/ inputs used in the course of furtherance of business would be available subject to restrictions and other conditions as per the provisions of Chapter-V of the CGST Act, 2017. However, tax paid in respect of canteen service providers shall not be available as credit.
Question: Whether free issue of coal to employees paid in course of employment and on the basis of wage agreement with value below Rs.50, 000/- per employee will attract GST?
Answer: Gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both (as per Schedule 1 of the CGST Act, 2017). Free issue of coal based on the wage agreement is not a gift. Therefore, free issue of coal in this case will attract GST.
Question: Can GST charged as per transport bill on movement of mineral from mine to the buyer be allowed as ITC to the buyer irrespective of the ownership of the transporting vehicle?
Answer: In case of an FOR contract for supply of mineral from the mine to the buyer, it is a composite supply where the consideration will be inclusive of the transportation cost. Therefore, GST on forward charge will be payable by the supplier of the mineral and credit will be available to the buyer if otherwise available. The supplier of the mineral will also pay tax on reverse charge basis on the freight charged by the GTA and the credit of the same will be available to the supplier of the mineral. In case of an ex-works contract of supply, where the GTA service has been booked by the supplier at the instance of the buyer and the service is billed by the GTA to the buyer and the minerals are billed by the supplier of the mineral to the buyer, then GTA on reverse charge shall be paid by the buyer who shall be entitled to take credit of the same. The tax on the mineral will be paid on forward charge by the supplier of the mineral and credit will be available to the buyer if otherwise available.
Question: Will the situation as mentioned above be different if the value of mineral is less than the cost of freight in long distance consignments?
Answer: In the aforesaid example relating to FOR contract, the supply under the contract shall be classified as composite supply where there is a principal supply and other supplies are naturally bundled and supplied in conjunction with each other in the ordinary course of business. The GST rate of principal supply shall be applicable in this case i.e. GST rate as applicable to the mineral.
Question: Exploration companies undertake exploration activities for preparing mining blocks for auction in different States in the country. They use rigs for exploration. CENVAT credit was available on rig operations under the existing law. Will the company be eligible to take ITC under GST?
Answer: Rigs, capitalized in the books of accounts as capital goods are used in the course or furtherance of business. Hence, it will be eligible as capital goods and ITCwill be available under GST.
Question: Will ITC be available for holding Environmental Clearance (EC) and Forestry Clearance (FC) meetings and for obtaining consent to operate the Mines?
Answer: Yes, ITC on expenses incurred in the course or furtherance of business shall be available.
Question: Will the mining companies be eligible to take ITC for construction of townships, hospitals and schools?
Answer: No. Mining companies will not be eligible for ITC on such activities even if used in course or furtherance of business. In this connection, the provisions contained in section 17(5) (c) of the CGST Act, 2017 refer.
Question: Are minerals sent for export in processed or raw form fully exempted from payment of GST or IGST?
Answer: In terms of the provision of Section 16(1) of the IGST Act, 2017 export of goods is considered as zero-rated supply. Further, in terms of the provision of Section 16(3) of the IGST Act, 2017 a registered person may export goods (i) without payment of IGST against bond/letter of undertaking and claim refund of unutilized ITC, or (ii) on payment of IGST, utilizing eligible ITC and claim refund of such IGST.
Question: What is the procedure for return of goods under GST?
Answer: In terms of Section 34(1) of the CGST Act, 2017in case of return of goods on which GST was paid at the time of supply, the supplier of such goods may issue a credit note for the full value, including the amount of GST in favour of the recipient, and will be entitled to reduce his output tax liability subject to the condition that the recipient of such supply has not availed credit of such GST and if availed, has reversed his ITC on the same.
Question: How can we take support during filing of returns, as huge mines are located throughout the districts in the country, especially in rural and backward areas, and the problem will be aggravated as the huge number of mines are operating without any IT infrastructure?
Answer: Returns may be filed from the central office of the Company which are usually located in areas with infrastructure required for filing such returns.
Question: Whether GST TDS will be applicable on Works Contract Jobs (to be renamed as Supply of Services) in case of PSUs, since such GST TDS U/s 51 (1) of CGST Act. 2017is applicable on: a) Dept. or establishment of the Central Govt. or State Govt.; or b) Local authority; or c) Govt. agencies; or d) Such persons or category of persons as maybe notified by the Govt. on the recommendations of the Council?
Answer: TDS, under section 51 (1) of the CGST Act, 2017will apply to supplies made to such agencies as may be mandated by the Government for TDS. As of now, this section has not been notified and therefore TDS is not applicable on any supplies.
Question: What is the requirement for E-way bill for companies operating in the sector?
Answer: As per rule 138 of the CGST Rules, 2017, till such time as final rules are issued, the government may, by notification, specify the documents that the person in charge of a conveyance shall carry while the goods are in movement or in transit storage. As and when the new e-way bill rules are notified, the person transporting the goods shall carry the said e-way bill generated from the common portal along with the invoice (challan in the case of movement other than by way of supply).
Question: Whether an Input Service Distributor (ISD)will be eligible to distribute the ITC in respect of services received during April 17 to June 17 even if the invoices are raised and submitted by contractors after appointed date i.e. in July 17?
Answer: In terms of section 140(7) of the CGST Act, 2017the ISD will be able to distribute the available credit even if the invoices are received after the appointed day.
Question: In Table 5(b) of GST-TRAN-1, the details of Form C, F and H/I are to be given for the period April 15 to June 17 (i.e. for 27 months) which would be a voluminous task. Reasons of furnishing the details for last 27 months may please be clarified?
Answer: In cases where sales were covered by Forms C,F,H and I, the input tax credit has remained in the account of the taxpayer because the taxpayer has availed of the benefit of concessional rate/nil rate of tax on the sale/stock transfer under CST Act. The benefit of concessional rate/nil rate is available conditional upon production of the statutory forms. Therefore, allowing migration of the credit that has accrued on account of sale/stock transfer having been made on concessional rate/nil rate should be given only on production of the statutory forms. Even otherwise, the taxpayer would have claimed refund of this ITC and such refund would have been given only on production of the statutory forms. It has been presumed that forms for periods before April 15 would have either been presented or the State would have recovered the additional tax payable on account of non-production of statutory forms. Production of these forms is a statutory liability and the taxpayers have already availed the benefit.
Question: Education Cess and S&H Education Cess carried forward in ER-1 whether eligible for ITC under the CGST Act, 2017?
Answer: No. Credit of Education Cess and SH Education Cess cannot be carried forward.
Question: What will happen to the balance available in the current account (PLA) under Central excise, deposited in cash in advance by any assessee?
Answer: Balance in PLA will not be under transition to GST since that has not been appropriated to the Government account which will be determined post completion of the pending assessment. The same can be claimed as refund under the Central Excise Law.
Question: Whether credit of Green Cess (Clean Energy Cess) paid on coal and available at the time of transition be eligible for being carried over?
Answer: No. Credit of Clean Energy Cess cannot be carried forward on transition.
Question: Whether stock held by mining companies on which Clean Energy Cess has been paid be chargeable to compensation cess in GST regime?
Answer: Yes. Compensation cess will be charged on supply of such stock.
Question: Can supplies of coal under a particular order or under FSA (Fuel Supply Agreement) be eligible under the definition of continuous supply of goods?
Answer: Such supplies are in the nature of continuous supply as the invoices are raised periodically. The individual dispatches may be covered under delivery challans and invoice may be issued for the supplies made during a period as per the contract.
Question: In case of coal, the applicable Compensation Cess is a Fixed Amount of Rs.400/- per MT. Under above situation, how such apportionments possible since in case of FSA Sale, supply of different grade of coal as per availability of stock against single bulk receipt of Advance is to be adjusted?
Answer: If tax rate is not determinable, the tax rate may be determined and paid on the amount of advance at 18%.
Question: Whether Railway siding in mining industry exclusively utilized for effecting dispatch of taxable goods viz. coal (i.e., directly used in the course of furtherance of business) will be treated as Plant and Machinery and ITC under GST will be allowed or treated as civil structure and ITC will be denied?
Answer: ITC will not be available as railway siding is not plant and machinery as defined in section 17 of the CGST Act, 2017.
Question: According to HSN Code 2516 calcareous building stone comes under 5% tax rate, but simultaneously under HSN Code 6802 it comes under28% tax rate. Clarity on the same may be provided by the Government?
Answer: Chapter 68 covers value added articles of sandstone etc. which are further worked other than byway of roughly trimmed or merely cut into blocks or slabs.
Question: Whether supply of HSD free of cost for mining operation would attract GST and whether the input tax credit would be available for GST so charged by the Service provider?
Answer: HSD is outside GST and therefore, input tax credit would not be admissible.
Question: Will ITC be available on steel, timber and sometimes cement which are used in the underground mines to provide a protective device for security purpose?
Answer: Credit will not be available if these goods are supplied for construction of an immovable property. But if these are temporarily placed for protective purposes; credit will be available.
Question: As per Section 54 (3), it is clear that no refund of ITC will be available for export in the cases where product is subject to export duty. Iron Ore export is subjected to export duty. In the earlier regime, the exporters were allowed to take refund of service tax paid on exports. Will not our exports become noncompetitive as no refund of ITC will be available?
Answer: The refund of ITC credit is not admissible in view of the second proviso to section 54(3) of the CGST Act, 2017.
Rulings under GST on mining
The AAR, Chhattisgarh in the matter of M/s Shanti Enggicon Private Limited [Advance Ruling No. STC/AAR/09/2020 dated November 25, 2020] has ruled that the Royalty amount is includable while arriving at the transaction value for payment of applicable Goods and Services Tax (“GST”) on the supply of services rendered by the assessee to the main contractor under Section 15 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) and 18% GST is applicable on Royalty amount under the Reverse Charge Mechanism (“RCM”).
M/s Shanti Enggicon Private Limited (“the Applicant”) was awarded the mining work on back-to-back basis by the M/s KCC-MBBL (“Main Contractor”) with all the terms and conditions and specifications mentioned in the tender allotted to the Main Contractor by M/s NTPC Ltd. All the purchases and execution work were done by the Applicant.
The Government of Chhattisgarh Mining Department vide Notification No. F7-29/2012/12 dated March 5, 2018 (“NN. 29”) imposed royalty on soil used in earthwork and also charged the royalty rate structures of certain minerals to be applicable from April 1, 2018.
The Applicant paid the royalty to State Government from his bank account by selecting the taxpayer’s name of Main Contractor. Further, the Applicant paid all the cost of royalty clearance from the Mining office and also the royalty challan from his bank account and accordingly, the Applicant contended that it is Applicant who has received services from the Government and GST should be paid under RCM by them on the royalty charges to be reimbursed by the Main Contractor. Further, the Applicant stated that the royalty on soil is levied under Chhattisgarh Mining Act which will be recovered from the Main Contractor thus, it should be added in the value of supply of service as per Section 15 of the CGST Act and liable for payment of GST.
Whether the GST is applicable on the royalty amount paid by the Applicant under RCM?
Whether the royalty amount is includable in the value of supply of service as per Section 15 of the CGST Act and liable for payment of GST?
The AAR, Chhattisgarh in Advance Ruling No. STC/AAR/09/2020 held as under:
Noted that, the service received by the Applicant from the State Government is covered under the Service Accounting Code-997337-Licensing Services for the right to use minerals including its exploration and evaluation, as the State Government has been providing the licensing service for the right to use minerals after its exploration and evaluation.
Observed that, as per Sl. No. 5 of the Notification No. 13/2017- Central Tax (Rate) dated June 28, 2017 (“the Services RCM Notification”), services provided by the Government to a business entity attracts GST under RCM by the recipient of those services.
Further stated that, the applicability of GST rate for the service is to be based on the classification of service under the sub heading 997337, covered under Entry No. 17 of the Notification No. 11/2017- Central Tax (Rate) dated June 28, 2017 (“the Services Rate Notification”) attracting the same rate as applicable supply of goods involving transfer of title in goods.
Held that, the business entities availing mining rights including its exploration and evaluation shall be charged to GST at the rate of tax as applicable on supply of like goods being mined i.e. at the rate of 18% under RCM. Further held that, the royalty amount paid by the Applicant is includible while arriving at the transaction value for payment of applicable GST on the supply of services rendered by the Applicant to the Main Contractor as stipulated under Section 15 of the CGST Act.
The CBIC vide Circular No. 164/20/2021-GST dated October 06, 2021 has provided clarification regarding GST rates & classification based on the recommendations of the GST Council in its 45th meeting held on September 17, 2021.
Services by way of grant of mineral exploration and mining rights:
Representations have been received requesting for clarification as to the rate of GST applicable on supply of services by way of granting mineral exploration and mining rights during the period from July 01, 2017 to December 31, 2018. With effect from January 01, 2019, the rate schedule has been specifically amended and it is undisputed since then that such service attracts GST at the rate of 18%.
For the disputed period [July 01, 2017 to December 31, 2018], divergent rulings have been issued by Authorities for Advance Ruling (AAR) and Appellate Authorities for Advance Ruling (AAAR) of various States on the GST rate applicable on the same. AAR, Haryana in case of M/s Pioneer Partners and AAR, Chhattisgarh in case of M/s NMDC have ruled that the service of grant of mining leases is classifiable under Service Code 997337 (licensing services for the right to use minerals including its exploration and evaluation) and attracted, prior to January 01, 2019, the same rate of GST as applicable to minerals, that is, 5% as prescribed against Sl. No. 17, item (viii) of Notification No. 11/2017- Central Tax (Rate) dated June 28, 2017 . The rate prescribed against this entry prior to January 01, 2019 was “the same rate as applicable on supply of like goods involving transfer of title in goods”. In certain other advance rulings, a view has been taken that grant of rights for mineral exploration and mining would be covered under heading 9991 and would attract GST at the rate of 18%.
AAAR, Odisha, on the other hand has ruled vide Order dated November 05, 2019 in the case of M/s Penguin Trading and Agencies Limited that grant of mining lease was taxable @ 18% prior to January 01, 2019. The Appellate Authority in this case observed that GST rate applicable against Sl. No. 17 item (viii) of Notification No. 11/2017- Central Tax (Rate) dated June 28, 2017 prior to January 01, 2019 was not implementable. Unlike leasing or renting of goods, there are no underlying goods in case of leasing of mining area. The rate prescribed for goods cannot be made applicable to leasing of mining area, which confers the right to extract and appropriate minerals. The mining lease by Government, not being a lease of any goods, cannot attract the rate applicable to sale of like goods. Appellate Authority for Advance Ruling, Odisha has further held that the amendment carried out vide Notification No. 27/2018-Central Tax (Rate), dated December 31, 2018, which restricted the “same rate as applicable to supply of goods involving transfer of title in goods” only to leasing or renting of goods was to clarify the legislative intent as well as to resolve the unintended interpretation. It is a settled law that interpretation which defeats the intention of legislature cannot be adopted. It accordingly upheld that “licensing services for the right to use minerals including its exploration and evaluation” falling under service code 997337 were taxable @ 18% during July 01, 2017 to December 31, 2018.
It may be noted that the expression “same rate of tax as applicable on supply of like goods involving transfer of title in goods” applies in case of leasing or renting of goods. In case of grant of mining rights, there is no leasing or renting of goods. Hence, the said entry does not extend to grant of mining rights which is an entirely different activity.
The issue was place before the GST Council in its 45th meeting held on September 17, 2021.
As regards classification of service, it was recommended by the Council that service by way of grant of mineral exploration and mining rights most appropriately fall under service code 997337, i.e. “licensing services for the right to use minerals including its exploration and evaluation”
As regards the applicable rate for the period from July 01, 2017 to December 31, 2018, the council took note of the following facts, namely, –
(i) GST Council in its 4th meeting held on 3rd & 4th November, 2016 had decided that supply of services shall be generally taxed at the rate of 18%.
(ii) More importantly, the GST Council in its 14th meeting held on 18th & 19th May, 2019, while recommending the rate schedules of services (5%, 12%, 18% and 28%), specifically recommended that all the residuary services would attract GST at the rate of 18%.
(iii) The rate applicable on the service of grant of mineral exploration license and mining lease under Service Tax was also the standard rate of 15.5%. Services under this category have been standard rated in GST at 18%
(iv) Therefore, the intention has always been to tax this activity / supply at standard rate of 18%
Accordingly, as recommended by the Council, it is clarified that even if the rate schedule did not specifically mention the service by way of grant of mining rights, during the period July 01, 2017 to December 31, 2018, it was taxable at 18% in view of principle laid down in the 14th meeting of the Council for residuary GST rate. Post, January 01, 2019 no dispute remains as stated above.
Conclusion:
The various activities of mining which is chargeable to service tax under the current regime would attract tax at the rate of 15%, whereas the supply of these services under GST would be taxed at the rate of around 18% which is higher than the current tax rate on the same. Thus, there would be additional cash from of 3%, however, with seamless credit available all across the net tax cost forming part of the final product should decrease.
Royalty paid on mineral is not subsumed under the GST, thus same shall be an additional cost for the business entity. Thus, it is advisable that the Royalty shall be considered as part & parcel of GST enabling business entity to claim its set off against their GST liability to avoid cascading effect.
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