GST on Royalty/Mining Lease treating it as Licensing Services─ Legality of Levy of GST on Royalty

Background

The Govt. is sending “Intimation on DRC-1 for payment of 18% GST on Reverse charge basis on Royalty paid on mining lease”, under HSN code 997337.

In this regard our submissions are as under;

Definition of certain terms in the GST Act.─

Goods.─S.2(52). “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

Supply.─S.7. Scope of supply.─(1) For the purposes of this Act, the expression “supply” includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

Explanation.––For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;

(b) import of services for a consideration whether or not in the course or furtherance of business and;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration;

(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Sch. II.

(2) Notwithstanding anything contained in sub-section (1),––

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

(3) Subject to the provisions of 5 [sub-sections (1), (1A) and (2)], the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as-

(a) a supply of goods and not as a supply of services; or

(b) a supply of services and not as a supply of goods.

Reverse Charge─S.9. Levy and collection.─(1)Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

(4) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

(5) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.

Definition

Reverse Charge.─S.2(98). “reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of the IGST Act;

Conclusion of above provisions ─ In all the above definitions of the GST Act, the GST is leviable on “supply of goods or services” and is not leviable on “immovable property”.

Nature of Royalty on Mineral Deposits ─ Mining operations in India are regulated under the Mines and Minerals (Development and Regulation) [MMDR] Act, 1957. Per Entry 50 of List-II, Constitution of India, the State Government, derives power to grant Lease/License for excavation of minerals under the MMDR Act, 1957.

In terms of powers conferred by section 15, MMDR Act, 1957, Rules were framed by the Rajasthan Govt.

Per S.2(x1iv), The Rajasthan Minor Mineral Concession Rules, 2017, “Royalty” means the charges payable to the Government in respect of the ore or mineral excavated, consumed or removed from any land granted under these rules as specified in Schedule II.

Royalty on excavation/movement of material excavated from Mines ─ Under the terms of a Lease/License granted under the provisions of the MMDR Act, 1957, the assessee was liable to pay dead rent at a particular rate for each hectare comprising the lease, irrespective of the carrying on, of the mining operations. Royalty was also payable on the minerals at a particular rate on each ton. In case the amount of royalty exceeded the dead rent, royalty alone was payable.

Moreover, three different High courts of India have also granted stay on Levy of GST on Royalty, detailing as under;

Since the matter of payment of GST on Royalty is sub-judice, before 3 High courts of India, therefore, until & unless all the above three High Courts vacates the Stay order, the Govt. can not demand GST on Royalty.

When the Goods excavated from mines after payment of Royalty are sold, the applicable GST on the sale price is required to be paid since at that stage there is a ‘Supply of Goods’ u/s 7, GST Act, 2017.

Note.─ For analysis of Supreme Court Judgements in favor of the parties, refer following magazines;

i) (2022) 37 J.K.Jain’s GST & VR, Pages R-43 to R-46

ii)(2022) 37 J.K.Jain’s GST & VR, Pages R-53 to R-56,

CA Om Prakash Jain s/o J.K.Jain, Jaipur

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