Levy on Royalty Paid on Mining Lease- an Analysis

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.

Legal provision levy of Royalty:

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.

Levy of Royalty in pre-GST Period: 

The levy of tax on royalty is the disputed issue in the pre-GST period and there was conflicting decision of the Apex Court on the matter of tax on royalty.

The Hon’ble Supreme Court in the case of India Cement Ltd. & Ors. v. State of Tamil Nadu & Ors. – [(1990) 1 SCC 12], (Seven judge Bench of Supreme Court) held that royalty is a tax and royalty is separate and distinct from land revenue and that it is not related to land as a unit. on the other hand, royalty is payable on the proportion of the minerals extracted and it has relationship to mining as also to the mineral won from the mine under a contract by which royalty is payable on the quantity the mineral extracted. In this sense royalty was viewed as a kind of tax linked either directly or indirectly to the intrinsic economic value of a mineral realized through sale by the lessee.

The Apex Court in the case of State of West Bengal v. Kesoram Industries Ltd. & Ors. [(2004) 10 SCC. 201], (Five Judge Bench of Supreme Court) held that Royalty on mineral rights is not a tax on land but a payment for the user of land. Royalty is paid to the owner of land who may be a private person and may not necessarily be state. A private person owing the land is entitled to charge royalty but not tax. The lessor receives royalty as his income and for the lessee the royalty paid is an expenditure incurred. Royalty cannot be tax.

Further, the Supreme Court in its decision in Mineral Area Development Authority v. M/s. Steel Authority of India & Ors., (2011) 4 SCC 450 has referred to a Bench of nine learned Judges, the core issue as to whether royalty is in the nature of a tax and whether the majority decision in the State of West Bengal v. Kesoram Industries Ltd. & Ors., (2004) 10 SCC 201 could be read as departing from the law laid down in the seven Judge Bench decision in India Cement Ltd. & Ors. v. State of Tamil Nadu & Ors., (1990) 1 SCC 12.

In view of two conflicting decisions of the Apex Court, aforesaid two conflicting decisions rendered in case of India Cement Ltd (supra) and Kesoram Industries (supra) and made request to the Hon’ble Chief Justice of India to constitute a Nine judge Bench to answer the reference, one of the reference referred there to is whether the royalty is in the nature of a tax. The reference has not been answered as yet by the nine judges Bench and the answer whether the royalty is a tax has not been conclusively decided. So the matter is res integra.

Levy of Royalty in GST regime:

With the legacy of erstwhile tax law dispute on applicability of tax on royalty, levy of GST on royalty payment made to the mines owners in respect of leasing of mines for extraction of minerals is also matter of litigation in the GST regime. But the applicability of GST on royalty so far not disputed or not challenged of statute of levy and collection of GST on royalty like erstwhile  tax regime. But there is dispute about the rate of GST on royalty collected by the mines owners by granting of license or right to use extraction of minerals from mines.

The classification of Services has been provided under GST. The Scheme of Classification of Services adopted for the purposes of GST is a modified version of the United Nations Central Product Classification. Explanatory Notes to the Scheme of Classification of Services and royalty paid on leasing of mines for extraction by obtaining license as provided:

99733 – Licensing services for the right to use intellectual property and similar products. This group includes permitting, granting or otherwise authorizing the use of intellectual property products and similar products.

997337 – Licensing services for the right to use minerals including its exploration and evaluation. This service code includes licensing services for the right to use, mineral exploration and evaluation information, such as mineral exploration for petroleum, natural gas and non-petroleum deposits.

Thus above classification clearly shows that licensing services for right to use, mineral exploration and evaluation is falling under leasing or rental services with or without operator under major heading No. 99733 and sub-heading No. 997337 annexure of scheme of classification services to Notification No.11/2017-C.T.(Rate) , dated 28-6-2017.

The rate of GST by way of leasing of mines and right to extract mineral has been provided vide Notification No. 11/2017-C.T. ( Rate), dated 28-6-2017 as amended.

Sl.No	Chapter , Section or Heading	Description of service	Rate (per cent.)	Condition
(1)	(2)	(3)	(4)	(5)
17	Heading 9973 (Leasing or rental services,  without operator)	(viii) Leasing or rental services, without operator, other than (i), (ii), (iii), (iv), (v), (vi) and (vii) above.	Same rate of central tax as applicable on supply of like goods involving transfer of title in goods	–

In light of the above notification, royalty paid for leasing mines / issuing licensing right to extract mineral was chargeable to GST at such rate as applicable to the supply of mineral extracted from mining.

However, the disputes were going on with regard to GST rate and shall be chargeable to 18% instead of the rate as applicable to supply of mineral. Therefore, there is confusion over rate of GST on royalty with the implementation of GST.

GST rate on royalty notification amended:

In view of confusion with regard to GST applicable rate on royalty, as per recommended made by Goods and Services Tax Council in its 31st meeting held on 22.12.2018,  the C.B.I & C, vide Notification No. 27/2018-C.T.(Rate), dated 31-12.2018 made it clear that royalty shall be paid for obtaining license of lease of mines for extraction of minerals shall be liable to GST @ 18% and amended the earlier Notification No. 11/2017-C.T. (Rate), dated 28-6-2017 by substituting of item (viii) where the service of leasing of mines and right to extract minerals was classified and provided rate as applicable to supply of minerals. Further, amended by Notification No. 20/2019-C.T (Rate), dated 30.09.2019. The relevant portion of amended notification is reproduced as under:

Sl.No	Chapter , Section or Heading	Description of service	Rate (per cent.)	Condition
(1)	(2)	(3)	(4)	(5)
17	Heading 9973 (Leasing or rental services,  without operator)	“(viia) Leasing or renting of goods. ………………………… (viii) Leasing or rental services,  without operator, other than (i), (ii), (iii), (iv), (vi) , and (viia) above.	Same rate of central tax as applicable on supply of like goods involving transfer of title in goods. ……………………. CGST 9% + SGST 9%

The Government has amended the earlier notification no. 11/2017 to overcome dispute and confusion regarding the rate of GST on royalty paid for obtaining lease of mines / license to extract minerals and finally it is amended as rate of GST shall be chargeable to 18% on amount of royalty paid to the Government.

Advance Ruling:

(Authority for Advance Ruling – Haryana):

In re Pioneer Partners (GST AAR Haryana); Advance Ruling No. HAR/HAAR/R/2018-19/03; 12/04/2018

The before amendment of Notification No.11/2017 and rate of GST has been accepted by Haryana Authority for Advance Ruling in the case of M/s. Pioneer partners, wherein it was held that royalty paid towards mining rights of stone builders is taxable at 5% under reverse charge under “the services for the right to use minerals including its exploration and evaluation as per sr.No.257 of the annexure appended to notification no.11/2017-C.T. (Rate) dated 28-06-2017 is included in group 99733 under heading 9973. Hence, it attracts the same rate of tax as on supply of like goods involving transfer of title in goods as per notification no.11/2017-C.T. (Rate) dated 28-06-2017 under the CGST Act, 2017 and the corresponding State Tax notification under HGST Act, 2017 Schedule-I the stone boulders extracted by the applicant attract 5% GST (2.5% CGST + 2.5% HGST) as covered under HSN 2516 (At sr.No.124 of the notification).

(Authority for Advance Ruling – Chhattisgarh): 

In Re NMDC Limited (GST AAR Chhattisgarh) – Order No. STC/AAR/09/2018, dated 22-02-2019.

Issue involved: “Whether royalty paid  in respect of mining lease can be classified under “ Licensing for the right to use minerals including its exploration and evaluation falling under the heading 9973 attracting GST at the same rate of tax as applicable on supply of like goods involving transfer of title in goods.”

Contention of the Applicants:

The entries prescribing the rate of tax for the service code 9973 does not specifically cover the Licensing services for the right to use minerals including its exploration and evaluation and therefore it will be covered under the residuary entry “ leasing or rental services, with or without the operator , other than (i),(ii),(iii), (iv) and (v) above”,  with applicable tax rate as the same rate of tax as applicable on the supply of like goods involving transfer of title in goods. Accordingly, in such cases, the relevant tax rate as applicable on the underlying natural resource would be applicable on the amount of royalty paid. Since, iron Ore attract 5% GST Rate, royalty paid for mining of Iron Ore will attract 5% GST Rate.

Ruling:

The royalty paid by M/s NMDC in respect mining lease is classifiable under sub heading 997337, ‘Licensing services for the right to use minerals including its exploration and evaluation’ (covered under entry no. 17 of Notification No. 11/2017-C.T. (Rate), dated 28-06-2017, attracting GST at the same rate as applicable for the supply of like goods involving transfer of title in goods under reverse charge basis.

(Authority for Advance Ruling – Rajasthan):

In Re Wolkem Industries Limited (GST Rajasthan), Order dated 25.3.2019,

The Applicant stated to be engaged in business of mining of Wollastonite, Calcite, Feldspar and Quartz. The said products are classified under Tariff Chapter 25 and are taxable at the rate of 5% under GST. The applicant has been granted a mining lease for extracting the above products by the state government on various terms and conditions. The applicant is required to pay Dead Rent/Royalty/Surface rent as per rate notified by the state government of Rajasthan.

Contention of the Applicants:

The Rate of tax applicable on such services provided by the state to the applicant for which Royalty is being paid would be the same rate of tax as applicable on the supply of like goods involving transfer of title in goods as specified in Notification No. 11/2017 dated 28.06.2017 at @5% .

The Applicant seeking rulings on the followings:

1. What is the classification of service provided in accordance with Notification No. 11/2017-CT (Rate) dated 28.06.2017 read with annexure attached to it, by the State of Rajasthan to M/s Wolkem Industries Limited for which royalty is being paid?

2. Whether said service can be classified under 9973 specifically under 997337 as Licensing services for the right to use minerals including its exploration and evaluation or as any other service?

3. What is the rate of GST on given services provided by the State of Rajasthan to M/s Wolkem Industries Limited for which royalty is being paid?

Rulings:

• The Mining lease is governed by the Rajasthan Minor Minerals Concession Rules, 2017 (RMMCR). As per RMMCR, this activity of payment of dead rent/royalty is a supply of service (Licensing services for the right to use minerals including its exploration and evaluation) wherein the government of Rajasthan is supplier and the applicant is
• The said Service is classifiable at Serial no. 257, Heading 9973, Group 99733, and sub heading 997337 of annexure “Scheme of classification of services to Notification 11/2017 dated 28.06.2017.
• As the service undertaken by the applicant falls under (viii) of Serial No. 17 of Notification No. 11/2017 this attracts 18%
• Further, applicant is receiving leasing/licensing service from the government hence, the provision of RCM are applicable under the Notification 13/2017 dated 28.06.2017.

Conclusion: 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”.

The Author is a practicing Advocate at Orissa High Court and can be reached at rameshjena2009@gmail.com.