The issue of GST (Goods and Services Tax) applicability on royalties paid to the government for mining rights has been a subject of debate and legal scrutiny. In this article, we will delve into the complexities of this matter, examining whether royalties should be treated as a tax, rent, or consideration for services. We will also explore the implications for miners and the best approach to manage their tax liabilities under the GST regime.
1. Nature of Royalty: Tax or Rent?
The government collects royalties for mine leases and mining rights granted to private parties. According to the central and state Goods and Services Tax departments, the royalty is in the nature of government services, resulting in GST applicability on a reverse charges basis under Notification No 13/2017-Central Tax (Rates) Dated 28.06.2017.
However, in many cases, the Supreme Court referred to royalties and taxes as rent.
The Royalty is not the service costs miners pay to the government; instead, it is in the form of a state levy and taxes. The Supreme Court plainly said in the case of India Cements vs. State of Tamil Nadu (1990 AIR 85 1989 SCR Supl. (1) 692) that royalties paid for mineral extraction are a type of tax or levy. “Whether royalty is a tax is not very material for the “purpose of determination of this question in this case. It is admitted that royalty is charged on the basis of per unit of minerals extracted. It is no doubt true that mineral is extracted from the land and is available, but it could only be extracted if there are three things:
(1) Land from which mineral could be extracted.
(2) Capital for providing machinery, instruments and other requirements.
It is therefore clear that unit of charge of royalty is not only land but land + Labour + Capital. It is therefore clear that if royalty is a tax or an imposition or a levy, it is not on land alone but it is a levy or a tax on mineral (land), labour and capital employed in extraction of the mineral. It therefore is clear that royalty if is imposed by the Parliament it could only be a tax not only on land but no these three things stated above.”
2. The Perspective of High Courts:
The Allahabad High Court also in the matter of Amorous Trading India Private Limited V. State of U.P., Writ Tax No. 606 of 2023 Dated; 11/05/2023 stayed the payment of GST for grant of mining lease/royalty by the petitioner.
3. GST Exclusion for Renting Immovable Property:
If royalty is treated as lease rent because it is being paid for the land and land being is the immovable property , there is no question of GST under reverse charges because Sl. No. 5 of Notification No. 13/2017-Central Tax(Rate) says as Services supplied by the “Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, -(1) renting of immovable property, and (2) services specified below-(i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers” (relevant extract mentioned below. Because the government does not provide any services in the case of mining leases and simply receives royalties for the use of immovable property, this provision does not apply because the notification itself excludes the government from renting immovable property).
4. Input Tax Credit (ITC) and Revenue Implications:
Even if considered government services, Miners are allowed to claim an input tax credit on taxes paid on a reverse charges basis. As in this scenario, most Miners tax liability exceeds their input, and there will be no revenue loss to the government because this just considers the procedural lapse.
5. Royalty as a Purchase Price:
In another way royalty paid for minerals is the indirect purchase price paid for purchasing goods (minerals) from the government. In such scenario the reverse charges mechanism for goods purchased is not applicable. It is well articulated in publication “Mineral Royalties” by Government of India Ministry of Mines INDIAN BUREAU OF MINES Nagpur.
In page 2 “The rationale for royalty is that it is a payment to mineral rights holder from mineral producer in consideration for the extraction of valuable and non-renewable natural resource” ;in this sense, it becomes a transfer of goods rather than a service.
6. Legal Precedent:
The case of State of West Bengal v. Kesoram Ltd and others, SC, CA. No. 1532-1533 of 1993, Judgement dated 15th January, 2004, decided by the Supreme Court, argued that royalties are in the nature of rent. Legal precedents like this can influence the interpretation of GST applicability on royalties.
The GST applicability on royalties paid for mining rights is a complex issue with multiple perspectives and legal interpretations. Miners facing this dilemma can choose to pay GST on a reverse charge basis, claim Input Tax Credits, and seek refunds if there is an excess. Alternatively, they can argue that royalties should be treated as taxes or rent, potentially exempting them from GST. Given the evolving nature of GST regulations and legal interpretations, miners should consult with tax experts and consider the best approach to manage their tax liabilities efficiently while complying with the law.