Mining is one of the core sectors for revenue generation for the government especially from the taxes on royalty. Under the Rajasthan Minor Minerals Concession Rules, 2019, the term 'royalty' means the charge 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. The mineral sector in India is the most taxed among all countries with effective tax rate between 60%-64%, surpassing all other mining territories.
Before we indulge in the issue of taxability of royalty paid on mining operations, it is essential to first discuss the moot question whether royalty itself is in the nature of tax. This question fundamentally exerts influence on tax implications, which has been at stretch from a long time now as there cannot be levy of tax on tax which cannot be attached to the value of the goods/services. Although various judicial decisions to all intents and purposes explored the matter's clear position in law, yet its tax implication still remains unclear with the taxpayers and the tax levying authority. The Supreme Court in India Cement Ltd. vs. State of Tamil Nadu case has held that royalty is not a tax and its payment is for the user of the land. Royalty on mineral rights is not a tax on land but a payment for the user of land. Although the intent and the missive were clear as set out in the judgement determining that royalty is a "tax" though not a "tax on land" as this was the question before them that whether Royalty is tax on land.
NATURE OF ROYALTY
A five-member bench in the case of State of West Bengal vs. Kesoram Industries Limited and Others was of the view that in the decision of India Cement, it was a typographical error in drafting the judgement either attributable to the stenographer's devil or to sheer inadvertence. It held that what the actual meaning and intent of the statement was that royalty was not a tax on land as it was not directly related to the land as required by Entry 49 but a different kind of tax that is to say, a tax on mineral extracted by individual which would be indirectly related to land. The five-member bench in Kesoram Industries Ltd. subsequently, to examine whether royalty is a tax or otherwise, referred the matter of Mineral Area Development Authority etc. vs. Union of India and Ors. to a nine-member bench of the Supreme Court. Further, the Supreme Court in the matter of Mineral Area Development Authority etc. vs. UOI and Ors. held that royalty paid may not be tax under common parlance but going by the definition of 'taxation' under Article 366(28) of the Constitution, royalty payable on extraction of minerals being in the nature of statutory impost comes under the purview of taxation.
The mining sector in India has been opposed to levying of tax on royalty paid on mining operations. In the Service Tax Regime after introduction of negative list regime, all services provided by the government were brought under the tax net and were subjected to reverse charge. This issue continued into the GST regime as well since the statutory liability for payment of tax on such government services fell on the recipient of such services under reverse charge mechanism (RCM) in terms of Entry 5 of Notification 13/2017-CT(R) dated 28.06.2017. The applicable rate on services by way of grant of mineral exploration and mining rights is 18% in terms of entry 17 (viii) (Leasing or rental services, without operator) of Notification No. 11/20171 w.e.f. January 1, 2019.
However, dispute arose whether royalty can be classified under entry 17 (viia) of Notification No. 11/2017 wherein any transfer of right in goods or of undivided share in goods without the transfer of title thereof attracts same GST rate as the supply of like goods prior to January 01, 2019, due to divergent rulings passed by various advance rulings authorities.
The Central Board of Indirect Taxes and Customs vide Circular dated 06.10.20212 has clarified that the intention of the government has always been to levy tax services by way of grant of mineral exploration and mining rights @18% and therefore, cannot be considered as leasing or renting of goods in terms of entry 17(viia) of Notification No. 11/2017 as mining rights is entirely different activity. Hence, the department's stand was clarified that there was no separate rate of tax specified under GST for service provided by way of grant of mineral exploration and mining rights, and that such service remained taxable @18% during period July 1, 2017, to December 31, 2018.
The clarification issued vide the Circular was challenged by the industry and consequently the Supreme Court has imposed a stay on GST on royalty paid to the States for mining rights in the matter of Lakhwinder Singh Vs UOI.
VALIDITY OF TAX LEVY, ULTIMATUM AND WAY FORWARD
Relying upon the judicial decisions under the erstwhile regime, royalty cannot be termed as a consideration received by the government to grant rights over for mineral extraction. Further, it cannot also be said that State Government has provided any service of granting rights for mineral extraction to bring it under the ambit of supply and thus no GST can be levied on royalty, dead rent and DMF charges paid towards mineral rights. It is a settled position of law that Royalty paid under a mining lease is in the nature of tax and thus, the contention that GST could not be imposed on royalty since royalty itself is a tax becomes very strong.
The instant issue is an impending matter in the judicial system of India which needs resolution or settlement as the same will have incomparable effects for the mining industry and also the government.
Footnotes
1. Notification No. 11/2017-CT(R) dated June 28, 2017
2. Circular No. 164/20/2021-GST dated 6.10.2021
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