Whether GST is payable on the Royalty Payments to State for mining under RCM is well know disputes between Taxpayers and Department from Service Tax period. Now the dispute is being referred to Nine Judge Bench of Hon'ble SC.
In this article, we will discuss complete details about the issue including:
Legal Provisions for seeking GST on Royalty
As per Section 9(3), Government may notify Goods or Services for which GST is payable under RCM by the recipient of such goods or services. Accordingly, Government has issued Notification No. 13/2017 as amended from time to time for prescribing Services on which GST is payable under RCM. Among others one is "Supply of Service by Central Government, State Government, UT and local authority to business entity".
Accordingly, Department is seeking GST on Royalty payments to State Governments by Taxpayers alleging that Royalty is nothing but a consideration for provision of mining rights (a service) by the State Government to the Taxpayer.
What is Royalty and under which provisions it is payable
Royalty is payable under Section-9 of the Mines and Minerals (Development and Regulations) Act, 1957 which says that :
The holder of a mining lease granted on or after the commencement of this Act shall pay royalty in respect of any mineral removed or consumed by him or by his agent, manager, employee, contractor or sub-lessee from the leased area at the rate for the time being specified in the Second Schedule in respect of that mineral.
What is the Dispute & Arguments both in favour and against the dispute
Dispute is regarding nature of Royalty. Department is alleging that it is a Consideration for allocation of mining rights by the Government to the Taxpayer which is nothing but a Supply of Service by the Government to the Taxpayer.
On the other hand, Taxpayers are saying it is in nature of "Tax" so there is no supply of service by the Government to the Taxpayer. Further, there can not be Tax on Tax.
Arguments in the favour of Taxpayer
a. Constitution Bench decision of the Hon'ble Supreme Court in India Cement Ltd. and Others vs. State of Tamil Nadu and Others (1990) 1 SCC 12, wherein, nature of royalty payment was considered and it was opined to be in the nature of tax.
b. For Supply of Service, there should be existence of relationship of Supplier and Receiver between State and Taxpayer, however no such relationship exists.
c. Royalty is a statutory obligation payable under the provisions of a statute not under any service agreement/arrangement. The payment of royalty by a lessee is also a statutory obligation and i.e. to be paid in proportion to the mineral excavated for sale, use or consumption.
Arguments Against the Taxpayer
The State Government, while granting mining lease, enables a lessee to excavate minerals subject to payment of royalty/licence fee and as such i.e. nothing but “service” provided by the Government to the lessee.
The payment of royalty is necessary for continuing to hold mining lease and, therefore, the Government subject to payment of royalty grants mining lease assigning lessee a right to explore and exploit minerals in an area and such assignment of immovable property is a service.
RCM is applicable even if service is provided by the Government even if in lieu of some Statute as there is not such demarcation regarding this in law.
Legal Position as on date
As mentioned earlier, the case is sub-judice in the Hon'ble SC. Further, since the matter is sub-judice many High Courts have granted stay on payment of GST till decision of Hon'ble SC. For instance, Hon'ble Allahabad HC has stayed payment of GST by order dated 11 May, 2023 in the case of M/S Amorous Trading India Private Limited.
However, at the same time, Hon'ble Rajasthan HC has held in the case of Udaipur Chambers of Commerce and Industry that Royalty is a consideration for service provided by the Government. Accordingly, Tax is payable. Based on this Order, Hon'ble HC has not stayed the demand. Hon'ble HC has reaffirmed its view recently in case of Shrimati Rasal also vide order dated 20-12-2023.
Copy of Order
Status in GST
Besides dispute over taxability there was also dispute regarding Rate of GST on Royalty which has been clarified by the Circular No. 164 /20 /2021-GST. Circular provides in summary that:
Rate of GST from 01.01.2019 onwards: 18% in lieu of Service Code 997337, i.e. “licensing services for the right to use minerals including its exploration and evaluation".
Even up to 31.12.2018, Rate of GST has been prescribed at 18% in view of principle laid down in the 14th meeting of the Council for residuary GST rate.
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Disclaimer: We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. While due care has been taken by Fab Gyan in preparing this article, certain mistakes and omissions may creep in. The Fab Gyan or its Author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.