Taxability of Royalty payable to State Government on extraction of natural resource
Prior to 1st April, 2016, “Support services” provided by Government or Local Authority to Business Entities were taxable, as it was specifically excluded from the negative list. [Section 66D(a)(iv)] [Section 66D(a)(iv)].
“Support Service” had been defined under Section 65B(49) which means:-
“Infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property,security,testing and analysis;”
However, the Finance Act 2015 substituted the words “Support Services” by the words “Any services”. This change has been made effective from 1st April, 2016 vide Notification No. 6/2016-ST, dated 18th Feb, 2016.
In the light of above changes, question arises as to whether “Royalty payable to the State Government on extraction of natural resource” shall be considered as Service and accordingly service tax shall be applicable to a business entity on a reverse charge ? In this note we have analyzed the aspect of service tax payable on royalty with in-depth analysis as below :
Section 65B(44) defines service to mean “any activity for consideration carried out by a person for another and includes a declared service”.
The activity here can be considered as renting of immovable property, being mines. On carefully reading the definition of renting under Section 65B(41) it means “Allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property“ Definition of immovable property under old section of Service Tax includes a vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes” .On reading the two definition in consonance the “right of extraction of natural resource is an activity” and Royalty is a consideration in return.
While analyzing term Royalty in different perspective, two different school of thoughts exist, while one says that Royalty is a Tax and other says it is not a Tax. The Supreme Court in the case of the India Cement Ltd., etc. vs. State of Tamil Nadu, etc. (AIR 1990 SC 85) held that royalty is a tax, whereas in Hingir Rampur Coal Co. Ltd. vs. State of Orissa (1961 (2) 3 CR 537) Justice Wanchoo stated that right to receive royalty is a mineral right and cannot be considered as tax. Of course both these judgment dealt by Hon’ble Supreme Court was in respect of MMDR Act, however, the principal arising out of the said judgment can always be applied in the present scenario. This is simply for the reason that service tax cannot be levied on any tax levied by State or Central Government, hence, if royalty is considered as tax, there is no application of service tax and if otherwise, it may be taxed as renting of immovable property. We understand that the divergent views of Supreme Court is presently pending before the larger bench and hence subjudice.
With specific clarification being made by CBEC vide its circular 192/02/2016-St dated 13th April, 2016, whereby they have specified that service tax shall be payable on Royalty.
In the light of above, we understand that a business entity have couple of choices i.e. a) pay service tax on royalty under RCM and enjoy its Cenvat credit resulting in minor cash flow impact or b) not to pay service tax considering royalty as tax and make necessary representation before the Board to obtain clarification.
Liability to pay Service Tax.
Service Tax shall be payable by the Service Recipient under Reverse Charge Mechanism [Notification no. 30/2012- ST dated 20th June,2012 as amended by Notification no. 18/2016-ST dated 1st March, 2016]
Point of Taxation [POT]
| Scenarios | Payment Date | Relevant Rule of POT Rules,2011 | Taxability |
| Scenario-1 | Before 1.04.2016 | Rule5 | Not taxable. |
| Scenario-2 | After 1.04.2016 | Rule 7 | Taxable. |
Availment of Cenvat Credit.
Cenvat Credit shall be availed after payment of Service Tax in terms of 1st proviso to rule 4(7) of Cenvat Credit Rules,2004.
-CA Nikhil Agarwal
if the royalty is deducted in bill of government department(NHRDC,MPRRDA,PWD,RES ETC.) Then what, is it rcm payable under service tax or not ?
In my view, the Works Department royalty deduction from contractual bills is not for providing any services to the contractors but for the receipt of construction services having composite supply of services with raw material, construction minerals (including its royalty in form of deposit), labor, engineering and such other technical services which is mostly come under Exemption Notifications. Hence, the deduction of royalty with such other dedution (i.e., Income Tax – TDS, Labor Welfare Charges, Security deposit, etc.) from bill is in the nature of deposit which will be return to the contractor on submitting Royalty Clearance Certificate to the Works Department. In other word, to be taxed under RCM one should be a receipent of taxable services, in this matter the contractor is not a service receipent of right to use natural resouces but a service provider of Construction services.
I agree with the views expressed by Mr. Amit Jain.
A lessee’s intention is only to own the natural resources which was owned to Government before the lessee extracted the ore. Thus it cannot be a rending of immovable property service. The royalty payment is truly a payment of sale consideration inasmuch as the lease condition for payment of royalty against transfer of title satisfies the definition of ‘sale’ under the Sales Tax/ VAT Act. In the case of State of MP Vs Orient Paper Mills Ltd 1977SCR(2) 149 it is held Royalty is a euphemism for the price of the timber.
I have one argument with respect to the above article.
It has been mentioned in the article that “if royalty is considered as tax, there is no application of service tax and if otherwise, it may be taxed as renting of immovable property”.
My point of argument is that if Royalty is not a tax and is taxed under service tax as renting of immovable property then why the question of payment of service tax arising under reverse charge mechanism when in terms of Notification No 30/2012, renting of immovable property services provided by Government is specifically excluded from reverse charge mechanism. If the same is renting of immovable property, let Government charge raise an invoice charging service tax on the same.