GST Rate of residual entry is attracted on royalty paid for Coal mining at rate of 18%: AAR

M/s. Singareni Collieries Company Limited is entering into contracts with a host of vendors/suppliers for the extraction of coal. The applicant is of the opinion that these contracts are for leasing or renting of goods and are desirous of ascertaining the rate of tax applicable to the royalty paid. Hence this application.

The main question that whether royalty paid in respect of Mining Lease can be classified under “Licensing services 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 the transfer of title in goods?” Also, to determine liability to pay tax on contributions made to District Mineral Foundation (DMF) and National Mineral Exploration Trust (NMET) as per MMDR Act, 1957.

The main question in the issue raised was whether the lease of land for mining constitutes ‘leasing or renting of goods’. The Hon’ble Supreme Court of India in the case of State of H.P & Ors Vs Gujrat Ambuja Cement Limited & Ors. (2005) 142 STC 1 held that, mining lease is an interest in immovable property and therefore does not constitute lease of goods. The right conferred by the lease deed to extract and remove the minerals is a ‘profit a prendre’. A consideration of mining is the rent for the areas leased i.e., dead rent and royalty. Royalty is the payment made towards minerals extracted in proportionate to the quantity so extracted.

Therefore, it was held that the contract for mining lease cannot be classified as ‘Leasing or Renting of goods’. Further, the CGST Act or rules made there under or Notifications issued do not create a legal fiction for mining to be classified as ‘Leasing or Renting of goods’.

As to the other questions, at Serial no. 17 of the Notification No. 11/2017 chapter heading no. ‘9973’ of SAC enumerates. Under this group, the tariff item ‘997337’ enumerates ‘licensing services for the right to use minerals including its exploration and evaluation’. This is the appropriate entry concerning royalty on mining. Hence the rate of tax of the residual entry is attracted on the royalty paid for mining at the rate of 9% CGST & 9% SGST.

Further the holder of mining lease shall also pay, to the District Mineral Foundation of the district in which the mining operations are carried under Section 9B of the MMDR Act, 1957 a sum in addition to the royalty either 1/3rd of such royalty or any other such amount in terms of Second Schedule of the MMDR Act.

Similarly, the holder of the mining lease shall also pay an amount of 2% of the royalty payable to the National Mineral Exploration Trust under Section 9C of the MMDR Act, 1957.

Both amounts are paid in addition to the royalty payable and in a proportion to the royalty paid for extracting minerals from a contract of mining lease. Therefore, they are consideration for the service of right to use minerals including its exploration and evaluation which is enumerated as tariff item ‘997337’, this is same as royalty and hence attract tax at the rate of 9% CGST & SGST each.

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