The taxability of royalty paid on mining operations is an old issue continuing from the Service tax regime to GST regime. The intelligence officers of DGGSTI, have gathered information from the State Government offices about the exploration of Minerals from the Mining lease and issuing show cause notices for the recovery of Service Tax on royalty paid to the State Government in the pre GST period.
– Ramesh Chandra Jena
The show cause notices are based on the payment of royalty made to the Government in respect of exploration and disposal appears to be covered under the definition of “Taxable Services” under Section 65B(51) of the Finance Act,1994. The recovery process has been initiated by the department in terms of the provisions of Finance Act, 1994, Central Excise Act, 1944 and rules made thereunder are validated under Section 174(2) of the CGST Act, 2017.
Concept of Royalty
Royalty is fee or consideration paid to the property owner for the right to use the property or patentee for the use of a patent or property against money obtained on sold of each patent or value of extract resources during the licensed period. Royalties are agreed upon as a percentage of gross or net revenues obtained from the use of an asset so authorised by the party assets owns. In terms of Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 the holder of mining lease shall pay royalty in respect of any mineral removed / consumed. The Hon’ble Supreme Court in the case of State of Orissa and others v. M/s Steel Authority of India Ltd. (AIR 1998 SC 3052), the Apex Court opined that Section 9(1) of the MMDR Act, 1957 also contemplates the levy of royalty on the mineral consumed by the holder of a mining lease in the leased area, hence processing of mineral amounts to consumption and, therefore, the entire mineral is eligible to levy of royalty.
Service Tax on Royalty
With effect from 1’st April’2016 amendments have been made to levy of Service Tax on Royalty under Reverse Charge Mechanism, on the Services provided by Government to business entities to bring leasing of Natural Resources like Mining etc. in the Service Tax net. According to the Central Board of Excise and Customs (CBEC), when the Government grants license to a business entity to exploit a natural resources from the mines, it is a taxable service, and hence liable for service tax. In terms of Notification No.30/2012-ST dated 20.06.2012 read with amended Notification No.7/2015- ST dated 01.03.2015, the Central Government imposed the service tax on mining royalty under reverse charge. Under reverse charge, business entities have to pay Service Tax on the amount of mining royalty paid to the Government.
The Central Board of Excise and Customs (CBEC) had issued Notification Nos. 22/2016- ST, 24/2016-ST both dated 13.04.2016 and Circular No. 192/02/2016-Service Tax dated 13.04.2016 dealing with applicability of service tax on services provided by Government or a local authority, whereas the said circular clarifies that any activity undertaken by the Government against a consideration constitutes service, even if such activity was undertaken as a statutory or mandatory requirement under any law. Service tax was also applicable on any payment, in lieu of any permission or license granted by the Government. The said Circular clarified that the service tax will be payable on right to use natural resources in view of rule 7 of point of Taxation Rules’2011 as amended vide Notification No. 24/2016-ST dated 13.04.2016. Thus as per the clarification given under the said Circular and Notification, the royalty to be paid by mining lease holder as per provisions of the Mines and Minerals (Development and Regulation) Act, 1957 was subject to payment of service tax w.e.f. 01.04.2016.
Controversy on Royalty whether it is ‘Tax’ or ‘Service’
Royalty is not a payment in respect of any taxable service at all and it is imposed under Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 in respect of any mineral “removed or consumed” by the holder of a mining lease from the leased area, at the rate specified in the Second Schedule. Clearly, therefore, royalty is a price of wining minerals from the land and represents the State’s share in this respect and the levy of Service Tax is illegal.
The levy of tax on royalty is the disputed issue in the erstwhile Service Tax regime and there was conflicting decisions of the Apex Court on the matter of tax on royalty. The question of mining royalty whether tax or not is pending before the Supreme Court on account of conflicting decisions and the same decisions are summarised as under:
The Hon’ble Supreme Court in the case of India Cement Ltd. & Ors. v. State of Tamil Nadu
& Ors. – [(1990) 1 SCC 12], (Seven judge Bench of Supreme Court) held that royalty is a tax and royalty is separate and distinct from land revenue and that it is not related to land as a unit. On the other hand, royalty is payable on the proportion of the minerals extracted and it has relationship to mining as also to the mineral won from the mine under a contract by which royalty is payable on the quantity the mineral extracted. In this sense royalty was viewed as a kind of tax linked either directly or indirectly to the intrinsic economic value of a mineral realized through sale by the lessee.
The Apex Court in the case of State of West Bengal v. Kesoram Industries Ltd. & Ors. [(2004) 10 SCC. 201], (Five Judge Bench of Supreme Court) held that Royalty on mineral rights is not a tax on land but a payment for the user of land. Royalty is paid to the owner of land who may be a private person and may not necessarily be state. A private person owing the land is entitled to charge royalty but not tax. The lessor receives royalty as his income and for the lessee the royalty paid is an expenditure incurred. Royalty cannot be tax.
The Supreme Court in its decision in Mineral Area Development Authority v. M/s. Steel Authority of India & Ors., (2011) 4 SCC 450 has referred to a Bench of nine learned Judges, the core issue as to whether royalty is in the nature of a tax and whether the majority decision in the State of West Bengal v. Kesoram Industries Ltd. & Ors., (2004) 10 SCC 201 could be read as departing from the law laid down in the seven Judge Bench decision in India Cement Ltd. & Ors. v. State of Tamil Nadu & Ors., (1990) 1 SCC 12.
In view of two conflicting decisions of the Apex Court, aforesaid two conflicting decisions rendered in case of India Cement Ltd (supra) and Kesoram Industries (supra) and made request to the Hon’ble Chief Justice of India to constitute a Nine judge Bench to answer the reference, one of the reference referred there to is whether the royalty is in the nature of a tax.
The reference has not been answered as yet by the nine judges Bench and the answer whether the royalty is a tax has not been conclusively decided. So the matter is res integra.
Therefore, the question of royalty whether a tax is pending before the larger Bench of nine judges of the Supreme Court. If the Supreme Court holds that mining royalty itself is tax there would not be service and again on mining royalty as the tax cannot imposed on it. Once royalty is decided as tax, it cannot be said to be a service simultaneously.
Service Tax on Royalty stayed by the Hon’ble Supreme Court
The Hon’ble High Court of Rajasthan in the case of Udaipur Chamber of Commerce and Industry v. Union of India, reported in 2018(8) G.S.T.L.470 (Raj.) held that “Taking into consideration all these principles relating to “consideration”, we are of considered opinion that the royalty is nothing but a “consideration” to have mining operations in the leased area on execution of a mining lease. It is a part of agreement arrived between the parties to have lease of a mining area to undertaking mining operations. The royalty being “consideration” certainly places assignment of right to use natural resources deposited in the leased area as a “service” as defined under Section 65B(44) of the Act of 1994, according to which, any activity carried out by a person for another for consideration is a service. The finding arrived by us as above is sufficient to say that the notification dated 13-4-2016 is not at all in conflict with its enabling Act i.e. the Finance Act, 1994 and the same does not suffer from any illegality.”
The above judgement of the Rajasthan High Court has been stayed by the Hon’ble Supreme Court in the case of Chamber of Commerce and Industry v. Union of India, reported in 2018(10) G.S.T.L.J167 (S.C.) held that “Until further orders payment of service tax for grant of mining lease/royalty by the petitioners shall remain stayed.”
In another case the Hon’ble Supreme Court in the case of Tamanna Begum v. UOI in Special Leave to Appeal (c) Nos. 3150-3155/2018, held that the decision on 5-02-2018 in the same letter and spirit.
Further, the Hon’ble Supreme Court in the case of Barwala Royalty Co. & others v. The State of Haryana in Writ Petition (C) No.1119/2021, on 20-10-2021 on the same issue has maintained the same letter and spirit and has granted stay on the demand of Service Tax on royalty until further orders.
Service Tax on Royalty stayed by the Various Hon’ble High Courts: Subsequent to the Hon’ble Supreme Court’s Stay Order of Levy of Service Tax on ‘Royalty” other High Courts also issued interim stay order for the levy / collection of Service Tax on Royalty in the following cases:
- The Hon’ble High Court Bombay at Goa in the case M/s Goa Mining Association and Anr v. Union of India vide Writ Petition No.1076 of 2016 dated 22.08.2017.
- The Hon’ble High Court of Gujarat in the Case M/s Gujmin Industry Association v. Union of India, reported in 2019(20) G.S.T.L. 11(Guj.) vide Order dated 19.09.2018.
- The Hon’ble High Court of Karnataka in the case M/s Zeenath Transport Company v. Principal Addl. Director DGGI, in Writ Petition 148059 /2020 and Order dated 25.01.2021.
- The Hon’ble High Court of Jharkhand while disposing a bunch of writ petition on levy of Service Tax / GST on Royalty in quarrying stones for removed or consumed by the holder of a mining lease from the leased area has been stayed reported in 2021 (3) TMI 601-Jharkhan High Court.
GST on Royalty
The taxable event under GST is ‘supply’ of goods or services. The term ‘supply’ has been defined under section 7 of the CGST Act in an inclusive manner and includes all activities undertaken for consideration except activities prescribed under Schedule II and Schedule III.
The issue of taxability of royalty paid on mining operations is continuing into the GST regime as well because the statutory liability for payment of GST on such Government services is covered under Reverse Charge Mechanism. FAQ issued by the CBEC for levy of GST on Royalty has clarified the issue and accordingly it is assumed that the Royalty other charges collected by the Government the consideration for rights granted to use the natural resources is “taxable services”. The activity of rights to use natural resources is treated as supply of services and the licensee is required to pay tax on the amount of consideration paid in the form of royalty or any other form under reverse charge mechanism.
The rate schedule was earlier amended to impose GSTon royalty from January 1, 2019, the tax research unit of the Central Board of Indirect Taxes and Customs (CBIC)clarified that the tax would also be applied from July 1, 2017 and December 31, 2018. GST came into force on July 1, 2017. The rate of tax on royalty prescribed vide Notification No.11/2017- Central Tax (Rate)
, dated against item No.17 under Heading No.997337 @ 18% as rate applicable on the rate of goods i.e. minerals and whatever is the rate of tax on minerals, the same rate has been accepted as tax on Royalty. There are several advance Rulings has passed on GST rate on royalty.
- In Re – M/s KSF -9 Corporate Services Ltd- AAR-Ruling No. KAR ADRG 03/2020, reported in 2020-TIOL-65-AAR- GST, held that “we find that Kuvempu University is an establishment of the State Government. Therefore, Kuvempu University is not liable to discharge tax under reverse charge basis. Hence the applicant is liable to discharge GST @ 18% (9% CGST + 9% KGST) on forward charge mechanism on the said supply of manpower services.”
- In Re- M/s NM D C Ltd, AAR-Ruling No.KAR ADRG 69/ 2019-reported in 2019-TIOL-397-AAR-GST, held that “Royalty paid in respect of Mining lease is a part of consideration payable for licensing services for right to use minerals including exploration and evaluation falling under Heading 9973 – is taxable at the rate applicable on supply of like goods involving transfer of title in goods up to 31.12.2018 and taxable at 9% CGST and 9% SGST from 01.01.2019 under residual entries of Sr. no. 17 of 11/2017-CTR as amended: AAR”
- In Re- M/s Raj Quarry Works, AAR- Ruling No. GUJ/GAAR/ R/2020/09.held M/s. Raj Quarry Works, Tulsi Gam, Taluka Savali, Vadodara having a GSTIN : 24AADFR5577NIZN, is a partnership company filed an application for Advance Ruling under Section 97 of VGST ACT,17 and Section 97 of the CGST Act,2917 in FORM GST ARA-01 discharging the fee of Rs. 5,000/- each under the CGST Act and the SGST Act.M/s. Raj Quarry Works is carrying out mining activity on a plot of land leased from the government of Gujarat. The applicant is quarrying “BLACK TRAP” products used for concrete mixing and sells it to the customers. BLACKTRAP material attracts GST at 5% under Heading 2517 in Schedule-I of the CGST Act, 2017.
- In Re- M/s Uttarakhand Development Corporation- AAR- Ruling-reported in 2020-TIOL-123, No.2020-TIOL-123- AAR- GST, held that Royalty payable to Govt. of Uttarakhand in respect of Reta, Bazri & Boulders extracted as per permission of govt. authorities is chargeable to tax under RCM at the same rate as on supply of like goods involving transfer of title in goods i.e. 5% and w.e.f 01.01.2019 @18%: AAR”
- In Re– M/s Penguin Trading and Agencies Limited, AAAR- Ruling No. ARA/Odisha/BBSR/2019/10/11660A dated 23 08 2019, observed that GST rate applicable against Sl.No. 17 item of Notification No. 11/2017 prior to 01.01.2019 is applicable to unlike or leasing of goods and held that the amendment carried out vide Notification No.27/2018 –C.T. (Rate) dated 31.12.2018, which restricted the same rate applicable to supply of goods. we hereby order that licensing services for the right to use minerals including its exploration and evaluation received by the Applicant is taxable @ 18 % [9 % CGST and 9 % OGST] during 07/ 2017 to 12/2018. Thus, the reference from the Odisha Authority for Advance Ruling stands disposed of accordingly.
Due to conflicting views of rate of GST on royalty by the various Advance Ruling authorities, the GST Council in it’s 45th meeting held on 17th September’2021 has recommended the services by way of grant of mineral exploration and mining rights attracted GST rate of 18% w.e.f. 01.07.2017.
GST on Royalty has stayed by the Hon’ble Supreme Court
The Hon’ble Supreme Court in the case of Lakhwinder Singh v. Union of India- reported in 131taxmann.com 168 (S.C.), 18% GST on Royalty has stayed the payment of service tax on mining lease until further orders.
Thus, the taxability of Royalty on mining operations or explorations is the matter of litigation with regard to whether it is “service’ or ‘tax ‘in the pre-GST period. The said issue is pending before the larger Bench of nine judges of the Supreme Court in respect of Service Tax liability in the pre-GST Period. The recovery of the service tax on Royalty on mining lease has been stayed by the Supreme Court. Similarly, whether the taxability of royalty on account of mining operations it is ‘goods’ or ‘services’ is also matter of conflicting views of the Authority of Advance Rulings. The litigation of tax on royalty is very long pending unsettled issue in the Indian taxation system and continuing from Service tax regime into GST regime as well.Under the above circumstances the field formations should not harass to the taxpayers by initiating recovery process of tax on account of royalty on mining operations as service tax or GST when the recovery of service tax or GST has been stayed by the Hon’ble Supreme Court.
(This Article was published in Souvenir of National Tax Conference held on 26th & 27th February 2022 at Kolkata)
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