Mining in India is one of the core sectors from where the Government is getting good revenue whether it be in the nature of license fees royalty or leases for mining to private entities. The minerals and mining sector in India is governed by the Mines Act, of 1952 and the Mines & Minerals Development and Regulation Act (MMDR), of 1957.

 

As per section 9 of the MMDR Act 1957, the holder of a mining lease granted before or after the commencement of this Act shall pay royalty in respect of any minerals removed or consumed from the leased area. Various activities of mining were earlier chargeable to service tax.

 

Royalty in general terms, royalty is a fee or payment made against the license to use the minerals including its extraction and evaluation. Levy of tax on royalty under service tax regime under the earlier regime, service tax is not levied in case of royalty in my view.

 

However, it is a very disputed issue and there were conflicting judgments in respect of this matter. Under the state list of the Constitution and GST applicability on it Entry 50 of the List-II i.e. State List enumerates “Taxes on mineral rights subject to any limitations imposed by the parliament by law relating to mineral development.

 

a) If royalty is supposed to be covered under Entry 50 of List II of the Constitution, then GST would not be applicable to this.

b) If royalty is supposed to be not covered under Entry 50 of List II, then GST may apply to it.

 

Still, there was no concrete answer to it, but still, the Government was collecting goods and services tax (GST) on it on the basis of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended from time to time at the rate of 18%.

As per Entry No. 5 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017, on services supplied by the Central Government, State Government, Union Territory, or local authority to a business entity, GST shall be paid by a business entity as a service recipient under reverse charge.

 

Registration under the GST Act

Small mining leaseholders may also take registration under the composition scheme if the aggregate turnover in the preceding financial year does not exceed Rs.1.50 crores. Other than small mining leaseholders, they can register under the normal scheme.

 

Returns under the GST Act

Leaseholders shall file the returns just as other taxpayers like GSTR-1, and GSTR-3B whereas the Government company would have to deduct TDS on the services supplied to the private leaseholders and will file GSTR-7 and the leaseholder recipient will take the benefit of such deduction of tax.

 

Input Tax Credit (ITC)

One of the major concerns of the mining industry/government mining is input tax credit. The reason is that the output tax on coal or other minerals is 5% whereas most of the input tax credit is of rate 18% which gives rise to an inverted duty structure and the amount is huge.

 

The GST council should look after such huge amounts of inputs pending due to the inverted duty structure since they are unable to get the refund of the same. Further, as per FAQ issued by CBIC, credit will not be available if steel, timber, and cement are supplied for the construction of an immovable property. However, if these goods are temporarily placed for protective purposes, credit will be available.

 

Conclusion

Levy of tax on royalty was earlier disputed in the service tax regime and now under the GST regime, the applicability is not a matter of dispute but the GST rate on royalty is a matter of dispute, where the government has clarified vide Notification no. 27/2018-Central Tax (Rate), as an amendment to Original Notification No. 11/2017-Central Tax (Rate).

 

This clears the rate of tax on the said matter as 18% which is to be paid under RCM since the service provider here is the government and the service receiver is the one who pays royalty on the license of the leaseholder of mines.

 

The Government also provides licenses to various companies for the exploration of various minerals such as Manganese, Iron Ore, Bauxite, etc., and for providing the rights to use these natural resources, they are required to pay annual license fees, lease charges, royalty, etc. to the Government.

 

The said assigning of rights to use natural resources is treated as a supply of services under GST and hence the licensee is required to pay GST on the same under reverse charge.

 

Now, Taxes on mineral rights come under List-II of the Constitution of India which deals with the states. It means that states have exclusive rights over taxing mineral rights. It is of concern now whether royalty paid for a license to use minerals including its exploration and evaluation would come under GST.