GST on Royalty paid to State Government for availing mining rights

Introduction

State Government grants mining rights for extraction of various minerals (i.e. Red Boulder, Soft Boulder and GSB and this  products are classifiable under Tariff Heading 2516 and are leviable to GST on their supply at the rate of 5%)  to business entities. Business entities are required to discharge GST on a reverse charge basis for the mining rights granted by the Government.

This article discusses the rate applicable on such mining rights granted and liability to pay GST on Royalty paid to the State Government for availing mining rights.  

For the purpose of understanding the questions involve, following relevant provisions of the GST law are highlighted:

As per Section 2(98) of CGST Act, 2017, reverse charge means that the liability to pay tax shall be on the recipient of goods/services rather than the supplier. Reverse Charge Mechanism is applicable for certain notified services as mentioned in Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017. Entry No. (5) of the said notification states that the services supplied by the Central Government/State Government to a business entity will come under Reverse Charge Mechanism. Applicability of GST rate for the aforementioned service should be based on the classification of service. In the present case, the mining rights so granted is covered under the sub heading 997337 that specifies – ‘Licensing services for the right to use minerals including its exploration and valuation’. This is covered under entry no 17 of Notification No. 11/2017 – Central Tax (Rate) dated 28.06.2017. However, on careful scrutiny of the notification, the aforementioned service is not covered in any descriptions namely under serial number (i) to (v) of entry no 17, and thereby will fall in the residual serial number (vi) of entry no 17 wherein it has been specified that the rate applicable for such service should be of same rate as applicable for the supply of like goods.

The rate of tax on Red Boulder, Soft Boulder and GSB are classifiable under Tariff Heading 2516 and are leviable to GST on their supply at the rate of 5%) . Therefore, reverse charge should be paid at the rate of 5% on royalty and not 18%.

Authority for Advance Ruling (Pronounced by Haryana AAR):

In a recent advance ruling, the applicant M/s Pioneer Partner was availing mining rights from the State Government of Haryana for extracting stone along with other associated minor minerals. It has been pronounced by the authority that GST on Royalty will attract the same rate of tax as applicable to the supply of material being mined.Here the material being extracted is Stone boulders, which attract 5% GST on its supply. Therefore GST on Royalty being paid by the applicant will be charged at the rate of 5%.

Conclusion

On perusal of the abovementioned provisions, it is evident that the business entities availing mining rights including its exploration and valuation shall be charged to GST at the rate of tax as applicable on supply of like goods being mined. For example, the supply of  Red Boulder , Soft Boulder  attracts 5% GST as specified under Chapter Heading 2516 of GST Tariff Act and thus the royalty on Red Boulder or Soft Boulder or GSB extracted from the mines shall also be taxable @ 5%. Therefore GST should be paid at the rate of supply of like goods being mined on royalty being paid to the Government by business entities for availing mining rights under RCM ( Reverse Charge mechanism)..