Introduction
Mining in India is one of the core sector from where the Government is getting good revenue whether it be in the nature of licence fees or royalty or lease for mining to the private entities.
The minerals and mining sector in India is governed by the Mines Act, 1952 and Mines & Minerals Development and Regulation Act (MMDR), 1957.
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 from the leased area. Various activities of mining were earlier chargeable to service tax.
In this article, we will discuss about the applicability of GST on Mining Industry.
Royalty
In general terms, royalty is a fee or payment made against the licence to use the minerals including its extraction and evaluation.
Levy of tax on royalty
- under service tax regime
under earlier regime, service tax is not levied in case of royalty in my view.
However, it is very disputed issue and there were conflicting judgements in respect of this matter.
- Under state list of the Constitution and GST applicability on it
Entry 50 of the List-II i.e. State List enumerates “Taxes on mineral rights subject to any limitations imposed by the parliament by law relating to mineral development.
Now, Taxes on mineral rights comes under List-II of the Constitution of India which deals with the states. It means that states have the exclusive rights over taxing on mineral rights.
It is of a concern now that whether royalty paid for licence to use minerals including its exploration and evaluation would come under GST. Since GST has subsumed most of the central as well as state taxes, some of the taxes such as electricity would not have been subsumed under GST. It is seen that Entry 50 of the List-II has also been not subsumed under GST.
If this would be the case, then there would be two scenarios:
a) If royalty supposed to be covered under Entry 50 of List II of the Constitution, then GST would not be applicable on this.
b) If royalty supposed to be not covered under Entry 50 of List II, then GST may apply to it.
Still there were no concrete answer to it, but still the Government were collecting goods and services tax (GST) on it on the basis of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended from time to time at the rate of 18%.
As per Entry No. 5 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017, on services supplied by the Central Government, State Government, Union Territory or local authority to a business entity, GST shall be paid by business entity as a service recipient under reverse charge.
Registration under the GST Act
Small mining leaseholders may also take registration under composition scheme if the aggregate turnover in the preceding financial year does not exceed Rs. 1.50 crores. While other than small mining leaseholders, they can take registration under normal scheme.
Returns under the GST Act
Leaseholders shall file the returns just as other taxpayers like GSTR-1, GSTR-3B whereas the Government company would have to deduct TDS on the services supplied to the private leaseholders and will file GSTR-7 and the leaseholder recipient will take the benefit of such deduction of tax.
Input Tax credit
One of the major concern of the mining industry / government mining is of input tax credit. Reason being output tax on coal or other minerals is 5% whereas most of the input tax credit is of rate 18% which gives rise to inverted duty structure and the amount is huge. The GST council should look after such huge amounts of inputs pending due to inverted duty structure since they are unable to get the refund of the same.
Further, as per FAQ issued by CBIC, credit will not be available if steel, timber and cement used are supplied for construction of an immovable property but if these goods are temporarily placed for protective purposes, credit will be available.
Conclusion
Levy of tax on royalty was earlier disputed in service tax regime and now under GST regime, the applicability is not a matter of dispute but the gst rate on royalty is the matter of dispute, where the government has clarified vide Notification No. 27/2018-Central Tax (Rate), as an amendment to Original Notification No. 11/2017-Central Tax (Rate), which clears the rate of tax on the said matter as 18% which is to be paid under RCM since service provider here is the government and the service receiver is the one who pays royalty on licence of the leaseholder of mines. The Government also provides license to various companies for exploration of various minerals such as Manganese, Iron Ore, Bauxite etc. and for providing the rights for using these natural resources, they are required to pay annual license fees, lease charges, royalty etc. to the Government. The said assigning of rights to use natural resources is treated as supply of services under GST and hence the licensee is required to pay GST on the same under reverse charge.
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